The Political Power of Economic Ideas: The Case of ‘Expansionary Fiscal Contractions'
| Author | Sebastian Dellepiane-Avellaneda |
| DOI | 10.1111/1467-856X.12038 |
| Published date | 01 August 2015 |
| Date | 01 August 2015 |
| Subject Matter | Article |
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doi: 10.1111/1467-856X.12038
B J P I R : 2 0 1 5 V O L 1 7 , 3 9 1 – 4 1 8
The Political Power of Economic Ideas:
The Case of ‘Expansionary Fiscal
Contractions’
Sebastian Dellepiane-Avellaneda
Research Highlights and Abstract
This article
•
Provides the first systematic analysis of the rise and diffusion of the idea of expan-
sionary fiscal contractions (besides Blyth’s book).
•
Uses comparative case studies to assess the actual influence of this policy idea during
the Great Recession.
•
Provides a better understanding of the social construction of the financial crisis.
•
Contributes to the growing scholarship on ideational political economy, including
works documenting the resilience of the neoliberal paradigm.
This article examines the rise and influence of a powerful economic idea: ‘expansionary fiscal
contractions’. The counterintuitive policy belief that severe fiscal adjustments can be expansionary
was originally advanced by economists Francesco Giavazzi and Marco Pagano in the early 1990s.
Over the years, this idea became dominant in certain epistemic communities, mainly through the
literature on lessons from successful consolidations. In the event, the relationship between budget
reduction and economic growth turned out to be one of the most contested issues in the aftermath
of the financial crash of 2008. This article is divided into three main sections. The first section
documents the social diffusion of this singular economic idea, from academia to policy networks. The
second reports the ‘battle of ideas’ over fiscal consolidation during the Great Recession. The third
section assesses the influence of the idea of expansionary contractions on actual policy choices by
examining the politics of austerity in Ireland, Spain and the UK in the period 2008–2012.
Keywords: economic ideas; expansionary fiscal contractions; austerity; politics of
economic crises
Ever since the financial meltdown of 2008, a bitter clash of ideas over the macro-
economic consequences of fiscal retrenchment has been observed. The contested
issue has been whether fiscal contractions have expansionary or recessionary
effects. While some analysts have argued that deficit spending should play a central
role in sustaining demand in a recessionary context, other commentators have
stressed that fiscal consolidation was unavoidable and even advocated growth-
friendly fiscal austerity. At the heart of these conflicting beliefs has been a powerful
economic idea: ‘expansionary fiscal contractions’. This idea, famously introduced
by economists Francesco Giavazzi and Marco Pagano in the early 1990s, has shaped
fiscal policymaking over the last decades. The expectation that severe budget
reductions with focus on spending cuts may foster rather than hinder growth has
© 2014 The Author. British Journal of Politics and International Relations © 2014
Political Studies Association
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been endorsed by influential epistemic communities. Moreover, this set of ideas has
been particularly instrumental in framing public policy debates during the Great
Recession, contributing to the social construction of the economic crisis.
The expansionary-fiscal-contraction hypothesis has been prominent in economic
policy debates, but relatively understudied by political scientists.1 In order to
fill this gap, this article provides a systematic analysis of the origins, diffusion
and actual influence of this policy belief. The discussion is framed around
two core themes: ascendancy and influence. We firstly account for the rise of
expansionary-contractions idea, tracing its diffusion from academic to policy
research. What were the drivers of this ideational innovation? How and why did
this seemingly counterintuitive idea become the received wisdom in policy com-
munities? We secondly provide a preliminary assessment of the impact of this
causal belief on fiscal policymaking during the Great Recession (2008–2012). Has
the expansionary- austerity narrative actually influenced governments’ policy
responses to the crisis? What explains the resilience of this policy paradigm in the
face of disconfirming evidence and apparent policy failures?
The making of economic policy cannot be properly understood without reference to
the world of ideas (Hall 1989). Moreover, economic ideas should be treated as
objects of investigation in their own right (Blyth 2003). Our research on expan-
sionary fiscal contractions speaks to two fundamental theoretical issues in idea-
tional political economy: (1) the factors underpinning the ascendancy of economic
ideas and (2) the mechanisms explaining how a given idea is actually translated into
policy outcomes.
The first issue touches the question of what makes an idea’s time come. Kingdon’s
(1984) classical analysis focused on the window of opportunities created by changes
in the ‘policy mood’ and the ‘spirit of the times’. But the question of which ideas
prevail and eventually become dominant in public policy is not only about moods.
It is basically about power. Economic ideas have distributional effects; they imply
winners and losers. They are profoundly political, inevitably. This brings us to the
second issue, the role of ideas in shaping policy choices. To become policy, as Peter
Gourevitch (1986) argued, ideas must link up with politics, more specifically with
‘the politics of mobilization of consent for policy’. According to Peter Hall (1989,
1993), powerful policy ideas should not only be administratively and economically
functional, but also politically viable. Political viability refers to the way economic
ideas are embraced by powerful actors and/or used to build winning political
coalitions. Ideas are disseminated and translated into policy through different
mechanisms, including the agency of powerful ‘epistemic communities’ (Haas
1992). Influential networks of policy experts play a key role in articulating the
causes of and solutions to complex policy problems, including economic crises.
Research design has been the conundrum in the study of ideas. The issue is not
whether ideas matter but ‘how they matter, and how their effects can be system-
atically studied by social scientists’ (Goldstein and Keohane 1993, 6). This work
emphasises research design in three ways. Firstly, it reduces the level of abstraction
by investigating a specific, observable causal belief. We focus on programmatic
ideas, which are ‘precise causal ideas that facilitate policy making among elites by
specifying how to solve particular policy problems’ (Campbell 2002, 28). Secondly,
© 2014 The Author. British Journal of Politics and International Relations © 2014 Political Studies Association
BJPIR, 2015, 17(3)
E X PA N S I O N A RY F I S C A L C O N T R A C T I O N S
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it addresses one problem of ideational analyses, which is ‘the massive selection bias
toward ideas that ultimately become policy’ (Mehta 2011, 31). We study the
evolution of expansionary fiscal contractions; yet, we do not take the success of this
policy for granted. By discussing the clash of ideas over fiscal policy during the Great
Recession, we allow the possibility of policy learning or even paradigm change. We
also moderate selection bias by exploiting the leverage of comparative case studies
(George and Bennett 2005; Gerring 2007). Thirdly, the work is sensitive to the
interactions between ideas and other political economy fundamentals. Ideas should
not play a subsidiary role in politics. Yet, ideational explanations should be
anchored in political economy. The triumph and defeat of economic ideas should be
explored in connection with partisan strategies, coalitional interests, and institu-
tional dynamics, not least in hard times (Gourevitch 1986).
This article is structured as follows. Section 1 looks at the academic roots of
expansionary contractions. Section 2 documents the ascendancy of this idea among
epistemic communities. The ‘battle of ideas’ over expansionary austerity during the
financial crisis is analysed in Section 3. Section 4 presents case study evidence, from
Ireland, Spain and the UK, regarding whether the idea of expansionary contractions
has actually shaped policy choices during the Great Recession. The concluding
section outlines core arguments and issues for further research.
1. Expansionary Fiscal Contractions:
The Intellectual Roots
The idea that fiscal adjustments may have positive rather than negative effects on
employment and growth gained currency in academic research in the 1990s. In a
path-breaking paper in the NBER Macroeconomics Annual, Giavazzi and Pagano
(1990) examined two ‘extreme cases’ of fiscal stabilizations, Ireland and Denmark,
finding strong prima facie evidence supporting the ‘expansionary fiscal contraction’
hypothesis. In a further paper, these scholars found the same pattern in Sweden
(Giavazzi and Pagano 1996). These case studies provided the first empirical test of
the German view or expectations view of fiscal policy, which had roots in the redis-
covery of the Ricardian equivalence and the rise of supply-side economics.
In a seminal work, Barro (1974; see also Barro 1989) challenged the belief that
budget deficits would have expansionary effects on aggregate demand. Contesting
standard fiscal policy models, he suggested that new government debt would
invariably imply future tax liabilities (‘there is no free lunch’), leaving interest rates
and consumption unchanged. While the Barro-Ricardo logic...
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