The Political Power of Economic Ideas: The Case of ‘Expansionary Fiscal Contractions’

Abstract

This article

• Provides the first systematic analysis of the rise and diffusion of the idea of expansionary 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.