The political power of economic ideas: the case of "expansionary fiscal contractions"

This paper examines the ascendancy and influence of a powerful economic idea: ‘expansionary fiscal contractions’ (EFCs). The counterintuitive belief that severe fiscal adjustments, particularly the ones focused on spending cuts, can be expansionary via non-Keynesian effects was originally advanced by Giavazzi and Pagano in the early 1990s and later disseminated by Alesina, Perotti and other influential political economists. Over time, EFCs (also considered the German view on fiscal policy) became a dominant belief in certain epistemic communities, mainly through the lessons-from-successful-consolidations literature. More importantly, the actual relationship between fiscal adjustments and economic growth has become one of the most contested issues in the context of the ongoing financial crisis. This article is divided into three parts. The first part documents the social diffusion of this singular economic idea, from academia to epistemic communities and policy networks. The second part maps out the ‘battle of ideas’ over the economic consequences of fiscal retrenchment in the wake of the global financial crisis. The third and last part assesses the influence of this idea on actual policy decisions by closely examining the politics of austerity and budget consolidation in Ireland, Spain and the UK in the period 2008-2011. By taking the crisis as a ‘natural experiment’, this paper seeks to advance our understanding of how ideas and other elements of political economy, notably power structures, institutions and the international political economy, interact in shaping the making of economic policy.