0:33 Intro. [Recording date: March 21, 2016.] Russ: Now, we're going to start with fiscal policy; we're going to see where we end up. But it's an issue that a lot of people are very interested in; it's an issue that has been in the news as well as the economic conversation for the last, really, 5 years, with a lot of intensity. So, I want to start with this seemingly simple question, which is: What is austerity? Guest: Austerity [?] simple question, because the word 'austerity' has been used in many, many different ways. But the way I think of austerity is a situation in which, for whatever reason, fiscal policy--budget deficit, government debt--have gotten sort of out of hand in the previous years. And for whatever reason it is decided that now is the time to return to a more rigorous fiscal policy, and reduce the deficit, reduce the growth of debt. In principle, there should never be any need for austerity if government followed the rules of optimal fiscal policy--namely, having deficit during recession or in period of exceptionally high government spending needed for a war or for a natural calamity or whatever; and then having surpluses during booms and periods in which government spending is not high, is not especially high. So, if the government followed these optimal fiscal policy rules, there would never be any need for austerity. Austerity comes about when, for some reason, government has gone out of whack and they increase debt and deficit too much. Or, there were a combination of, say, a financial crisis and government not having had [?] good fiscal policy before the financial crisis. So, the point of what I'm trying to make is that austerity is something that should be considered as something out of the ordinary, something that happens occasionally when government has done something wrong in the past. Russ: You can think of it as, it's described, it's talked about, I think, in two different ways in the press. Which is: Austerity--some people paint it as a strategy: 'Well, we're not doing very well. The economy is not doing well. We need to do something; and we should cut spending, or raise taxes; cut the deficit as a way to engender confidence.' That's one story you hear. I think sometimes you hear it from the critics rather than the supporters of austerity. But that's one story. The other story is: 'We don't have a choice. We're going to have a crisis, and so we're going to have to do something dramatic to return to fiscal sanity.' Are those two cases different? Do you hear them talked about? Do you hear austerity talked about in those two different ways? Am I right? Guest: Yes. I mean, I would say there are even more than two different ways. But certainly these are two of the different ways. I would say, there are many reasons why an economy may not be doing well. I'm talking about the first avenue: There are many reasons when an economy may not be doing well--excessive deficit and excessive public debt is of course one of them. And there are reasons to believe that if, say, government spending is very high, taxes are very high; and the theory is that these are creating a burden on the economy, and therefore you need to do something about that. That's one view about the [?] correcting some imbalances in the economy when rightly or wrongly it is believed that those imbalances are causing problems to the economy. And that has happened--before the financial crisis, there have been many, many, many cases, many examples of austerity exactly along those lines. Countries failed like they were in a difficult situation, partially due to fiscal imbalance and the need to do something about it. Sooner or later they needed to do something about it. And in fact, the more they waited, the more costly would it be to engage in these policies. As you said, the second type of austerity is one in which we are in a crisis: for whatever reason, the market doesn't believe in us any more. Interest rate on the debt going through the roof. And there is nothing else we can do. And then of course there have been several examples of those after the financial crisis. And in some cases, there was no choice. Let me say that, the one interesting aspect of this is, when you have no choice and you have to do something quickly, in most cases it is actually much easier to raise taxes, because you have an immediate effect on the budget. Just ask people: Go to the cash machine of the taxpayer, and you get money out of them. To cut spending: Figure out what to cut, how to cut, how to do it. To minimize social cost takes a while. And when the time is not there, you just raise taxes. A perfect example with my own country of origin, Italy, is that in 2012, and 2011, was in a situation of being close to default on the debt because the interest rate went through the roof. There was contagion from Greece. The previous government, the [?] Silvio Berlusconi government, did not seem to have the situation under control; and a technical government was appointed with a goal of avoiding a second financial crisis in Italy. They had to do it quickly, and the only thing they could do was to raise taxes. The result was another major recession in Italy. So, sometimes the time pressure makes you make the wrong choices about which kind of austerity to do. Russ: And in a little bit, we are going to talk about that different choice between raising taxes and cutting spending as a way to close the deficit and bring about a balance and to reduce the need to borrow.

7:17 Russ: But, I brought up those two examples--the sort of strategic idea of austerity versus the 'Oh, my gosh, we have to do something' view--because I think I've found it fascinating that after Greece, which got most of the attention in its crisis, a lot of people said they made a huge mistake in trying to close the deficit. They needed, in fact, to be borrowing even more. And what would you say to that claim? Guest: I think Greece is a special case. To begin with, they were growing and [?] at a rate in the first 10 years of the Euro, they were doing extremely well. It turned out that they were doing it just because they were borrowing and consuming what they were borrowing. They were even hiding their deficit--at the beginning of the financial crisis was supposed to be 3% of GDP (Gross Domestic Product); instead it was 13% of GDP. Because Greece had sort of hidden their deficit. There was major tax evasion. Productivity was not growing; it was actually declining. It was a country in complete economic disarray. Now, at that point, probably the cleanest solution would have Greece default, and call it a day. The problem was that--it was that Greece is also a very small country relative to the rest of Europe. The problem was that--well, the cynical view is that the German and the French did not want their banks to suffer from a Greek default, because German and French banks held a lot of the Greek debt. The less cynical view would be that the default in Greece would have triggered contagion in other high-debt countries, like Italy, or high deficit countries like Spain and Portugal and Ireland, that may have created a second major financial crisis, perhaps even collapse of the Euro. So, the austerity plan for Greece was, in my opinion, not credible. Nobody really believed, I think, that it would have worked [?] it was extremely large in terms of proposed cuts in terms of--it was unrealistic that they would manage to achieve those cuts. And in fact they were not. And there was a back-and-forth between do this, and the Greeks were doing 1/3rd of what they were supposed to do. They tried [?] pretend that they were doing well enough to give them even more money; and then they were doing 1/2 of what they were supposed to do. And so, going back forth. And then the worst[?] were cut from the debt. So Greece was completely mismanaged. Now, that leads to your second question: the mismanagement of Greece created panic in the markets and countries like Italy, Belgium, Portugal at some point were, the government were borrowing at 6, 7%--an interest rate of 6 or 7%. And there was a sense that if the market completely stopped believing in the ability of the sustainability of these countries' debt, particularly the debt of Italy which is really large, there would be a major, major, major disaster with the bank [?] or bank failures. And perhaps collapse of entire financial institutions of Europe. At that point, to simply say 'We need to borrow even more because we need to support the economy to grow more to get out of the recession,' it was, in my opinion, somewhat short-sighted, in the sense that to simply think about government spending more to get the economy more quickly out of a recession was in my opinion forgetting all of these other aspects, which were a problem of potential financial collapse, bank failures; and then a new and much bigger recession. So, Europe, for all this combination of reasons, European countries were forced to enter in this austerity policy probably sooner than might have been optimal. Some countries had accumulated too much debt before the financial crisis. So, they were in a situation in which they could not [?] they could not prolong morally[?] because that debt was already very high. So they entered in a phase of austerity, perhaps attached too soon than they should have. And, it seemed they were forced by these market forces, they had to do something quickly. And in some cases--not all cases--they ended up raising taxes than cutting spending. But even when you look carefully at the data, once again you find that austerity done by raising taxes has been austerity done by cutting spending. Even after the financial crisis.

12:50 Russ: So, let's talk about that. So, your work focuses on many issues. But that one in particular is one I think is the most interesting. Which is that when you studied this recent episode of European countries trying to reduce their deficits, you found a very different response for the economy as a whole when those changes were done via tax increases versus spending cuts. Try to summarize the range of magnitude and the differences in the two responses. Guest: Okay. So, before the financial crisis, after the financial crisis, there were several papers that I and others had written which had found that, in a way which, in my opinion, is pretty much uncontroversial--people may disagree about the magnitude of this or that coefficient--but any unbiased observer would agree that after the financial crisis, all the episodes of austerity after then were characterized by the fact that those that were based on government spending were much less costly to absorb[?] short-run recessions than those based on tax increases. In fact, in some cases government austerity done with cut in spending [?] no cost. And in some cases, there have been also cases called expansionary austerity, namely the budget cuts, spending cuts have been associated with an increasing growth rather than declining growth. While tax-based austerity has been much more costly. And the differences are quite large. We are talking about the effect of spending-based austerity having close to zero cost on average in terms of output; and tax-based austerity having recession of 2, 3% of GDP for 2 or 3 years. So very large, very large differences. And we can return, then, to that--we can go into more detail later. Now, when the financial crisis occurs and the austerity that followed the financial market happened, there was a period in which some of the--everybody said, 'Oh, look, austerity is terrible. It is causing recession. It's a disaster. Look what's happening.' Some people drawing the conclusion that those costs were unreasonable and we should not have had austerity--and we talked about that before--and some people saying, 'Well, these are costs but they are necessary because austerity is unavoidable.' Now, when you look [?] evidence begins to accumulate and [?] of now, and you look at this recent evidence, you find once again exactly what was true, what we found before: Namely that tax-based austerity has been much more costly than spending-based austerity. And let me give you two examples. One is Italy, that I mentioned before: in the end of 2011, and 2012, they raised taxes by almost 2% of GDP, in a variety of different taxes. And Italy entered another recession; and Italy has been in a recession for, basically, almost until now, and from the beginning of the financial crisis up to now it has lost 9% of GDP per capita, roughly. While other countries were coming out of the recession in 2013 and 2014, Italy was still deep down in the recession, as it is now, to this tax [?] in 2012. The opposite example is England. When the Cameron government came into office, it announced, it implemented spending cuts, in 2011 and so--and in fact it is interesting that the IMF (International Monetary Fund) predicted a major recession for Britain. And there was quite a vocal disagreement between the British government and the IMF about the benefits and costs of their spending cuts. And in the end we discovered them not to be right; and in fact the IMF apologized publicly for having under-predicted the United Kingdom economy, who did quite well in 2012, 2013, 2014. On average they did well. They did not enter in a recession. And they reasonably well. Quite well considering that they were still suffering from the Financial Crisis [of 2008] and they had done pretty sizeable spending cuts. Russ: Did they actually cut spending? Or did they just talk about it? Guest: Well, that's a good question. There was a lot of talk about it. Say, they talked, and they announced 10, and then they did 4 rather than 10. But they certainly did something. And the deficit did go down substantially. The public debt slowed it's growth. So, they talked more than what they did. But they did do something. So, yes, there is a sense in which they--even though, I must say that incidentally--and this is actually another quite interesting point: The announcement of policies may actually have an effect on the economy as well. Russ: Fair enough. Guest: So we may need [?] that effect. But in any case, they certainly did less than what they were saying; but they did indeed do something.

18:57 Russ: I just have to quote--I have to give you two quotes here. One is from Paul Krugman, in November of 2015. And the second is Paul Krugman in April of 2015. Here's the first one: The doctrine of expansionary austerity--the proposition that cuts in government spending would actually cause higher growth despite their direct negative impact on demand, thanks to the confidence fairy--was all the rage in policy circles five years ago. But it brutally failed the reality test; instead, the evidence pointed overwhelmingly to the continued existence of something very like the old-fashioned Keynesian multiplier. The second one is even more pointed: Meanwhile, all of the economic research that allegedly supported the austerity push has been discredited. Widely touted statistical results were, it turned out, based on highly dubious assumptions and procedures--plus a few outright mistakes--and evaporated under closer scrutiny.



It is rare, in the history of economic thought, for debates to get resolved this decisively. The austerian ideology that dominated elite discourse five years ago has collapsed, to the point where hardly anyone still believes it. Hardly anyone, that is, except the coalition that still rules Britain--and most of the British media. Is he talking about your work? Being "discredited"? Or do you think--or is there something orthogonal about that claim to your work? Is there something that--is he talking about some different aspect? Because he makes it sound like this view that cutting spending-- Guest: Well, I think Paul Krugman has rather extreme views. But more importantly, he talks about his views as if they were obviously true, and anybody who would disagree with him was obviously wrong. And he exaggerates. And that I really prefer not to go into a discussion about his quotes. But I think that the idea that the work about austerity that I and others have done has been discredited is wrong. In fact, the IMF, in 2010 wrote a rather pointed criticism about my work, in particular about two points: one, whether spending cuts were less much less costly than tax increases in terms of austerity policy. And when everything, after everything was said and done and written, even the IMF acknowledged--had to conclude that this was indeed the case: that spending cuts were much less costly than tax increases. Now, the reason that not completely clear to me they seemed to underscore this message of their own work was, if you read the published paper of this IMF research, you will conclude that they also agree with this conclusion. Which is the fundamental result about austerity, on which my work is based. So on this point, actually, I think Krugman is completely wrong. I think there is uncontroversial evidence that spending cuts are much less costly than tax increases. Russ: So-- Guest: And this point is exactly the opposite. Now, the second point is whether there are cases where spending cuts accompanied by other policies can be expansionary, and the confidence argument that he makes fun of is actually confidence, one of the many aspects; and we can elaborate on that. But I think that there are several episodes in which fiscal spending cuts have been accompanied not by a recession, but by an expansion. So, I think that those kind of statements by Krugman are trying to push a view which is respectable but they are not proven by the facts. Or at least they are not supported by research.

23:34 Russ: So, let's talk about the empirical finding itself, and some of the challenges of measuring it. But I want to start with the intuition, if there is any, in the most basic Keynesian model of the role of government spending. It's not a model I'm a particular fan of, but it's the one that I think most students are taught, as undergraduates, still. Government spending, in a recession, adds to aggregate demand and stimulates through the multiplier. Cutting government spending then would be destructive to--would reduce aggregate demand and would reduce income--GDP. And at an even slightly more basic level, you could argue--you don't, but you could argue that it doesn't matter whether you have tax increases or government spending cuts. They both reduce aggregate demand and therefore in a recession they are not productive; they are harmful. And yet you find that they have very different effects. So, I want to talk about two things. We are going to start with the first. The first is going to be: Why might that be true? And the second is: How might one, how have you and your co-authors tried to actually measure that in a world where things are changing at the same time--other policies as you mentioned, reforms as well as certainly monetary policy which is one, I think, the main argument that some people make about trying to make conclusive statements about fiscal policy. So, let's start with the first. What do you think is the reason for why you get such an asymmetric effect from tax increases compared to spending cuts? Guest: The reason is the basic Keynesian model [?] is of course basic because of course Keynes is much richer than what is often referred to, how his views are expressed. But anyway, the basic Keynesian model that you summarized, spending cuts reduces the public part of aggregate demand and increase in taxes reduces the private demand; and in fact, in the basic Keynesian model should actually be even more harmful than tax increases, because spending cuts, entire spending is cut; plus the multiplier effect. While if you raise taxes, people reduce some of their savings, so aggregate demand goes down less with tax increases. Now, there's nothing wrong with that except that there are a ton of things which are left out. When you start putting things which are left out, many other things become relevant. Even when talking only about fiscal policy. If you then add the fact that austerity plans typically are a combination of many, many policies, then the situation is even more complicated. Starting only remaining in strictly confined to fiscal policy, the Keynesian model is static, for example, or at least the simplification of Keynesian thinking is static. So, if you cut government spending today, and people think that this cut is permanent, they will think, 'Okay, in the future taxes will be lower.' So, if I expect the taxes in the future to be lower, then I can consume more today; or, even more relevant, till now that empirically [?] to say even more powerful that if you had an investor or entrepreneur and you see government spending going down and you expect your taxes to go down in the future, and then you invest in and plan for the future, considering that investment takes a while to materialize, the future matters a lot. So you may invest more because you expect taxes to go down in the future. Taxes, on the other hand, have a distortionary effect on the economy, so there is a supply side of the economy that is left out of this model; but if you raise taxes, people may want to work less, may want to invest less, because of [?] effect on investment decisions. And then there are more shadow[?] but I think important effect which have actually turned out to be important in some European countries, which are highly unionized: If government spending means reducing the growth or even the level of public sector wages, that may have an effect on the private sector wages and increase[?] profitability and investment of firms. And all of these effects have nothing to do with confidence, but in addition to this I do think that confidence is important, because we have empirical evidence suggesting that when there are spending cuts, the confidence of investors actually goes up, and the confidence of consumers goes down very little; while with tax increases, confidence of both consumers and business investors goes down quite a bit [?] countries. So confidence has played a role. And then, there are many--as I said, austerity plans are a combination of many, many other policies. So, it matters what monetary policy does. It matters that sometimes, particularly in European countries, when there is a crisis and austerity is called for, then there is a [?] opportunity to engage in other so-called structural reform [?] labor market reform and goods market reform, liberalization of various sectors, which help and that indeed has [?]. And of course monetary policy matters--[?] we are saying in a situation which monetary policy is supportive, expansionary, that helps fiscal adjustment. So, these are just the more important of many other factors which are left out from the basic Keynesian model. So I think that thinking is not that the basic Keynesian model is wrong; it is simply that they focus only on one of the many effects of fiscal policy. So, when you include the richness and the complication of the various [?], which fiscal policy may operate, then you get a picture which is much more complex. Now, on the specific issue of expansionary fiscal policy, expansionary austerity, that does not mean that nobody, including me, has ever said that cutting government spending per se is expansionary. But the notion of expansionary austerity is that in some cases, the Keynesian effect of cutting spending is small and is more than compensated by other effects which we somewhat talked about a moment ago. And, in the 1980s there has been an example in Denmark and Ireland; in the 1990s there has been an example in Canada. And in Belgium the case of--and in Finland if I remember correctly; in the case of England even in the middle[?] of the financial crisis is one example. So that's what the evidence says. And I think it is a complicated issue because many things go on at the same time. There are many interactions that are difficult to disentangle. But I think that this is what a fair reading of the evidence suggests.

32:33 Russ: So, let's talk about the challenges of that disentanglement. Because macroeconomics suffers I think from this problem generally--that there's too many things going on; it's very hard to attribute changes to only one particular set of things. You've mentioned two of the bigger ones: reforms--structural reforms that take place at the same time; monetary policy is the other obvious one. In your work, try to give the non-technical listener a flavor for how you try to hold those things constant in a world where, not only is there more than one thing changing, but the changes themselves are often endogenous--they are not imposed from the outside; they are responses to those underlying economic variables that we are trying to measure the effects of the policy changes on those variables. So it's a very complex system. So, how in that world do you try to measure the effects of, say, austerity, or changes in spending or cut taxes? And how precise do you think those estimates are with respect to the assumptions you make? How robust are they, I should say? You have about 5 minutes, for that. So, good luck. It's a complicated question, obviously. Guest: Yeah. This is a very difficult question, of course. And there are two, I think, issues which are difficult. One is what we call reverse causality--namely, if you see the deficit-over-GDP going down, and GDP going up, you could not conclude that, think the deficit is going down therefore GDP is going up. The deficit-over-GDP may be going down simply because GDP is going up for whatever reason; and the deficit-over-GDP is going down. So it's the denominator, not the numerator, that determines the decline in the deficit-over-GDP ratio. The first issue goes at I think or covers what is a growth because of fiscal policy, fiscal policy that causes growth. And the second, is that a bunch of things going on at the same time, and how they hold those constant. So, on the first question, one, there have been many, many ways of addressing this problem. The one which I think is more useful for the case of austerity and which is the one that some work at the IMF and then some work that I've been doing is based upon is the so-called narrative approach. So that is a very time-consuming way of looking what government or international organization actually did, announced, did and then may have changed their announcement and did something else. But looking at their doctrine by saying government of Country X in Year Y decided that regardless of the state of the economy they were going to raise the tax rate of x% or cut the spending program by y%. So, you don't look at how government spending over GDP has gone, but you look at what policies have actually been implemented. 'We have cut $30 billion dollars in government salaries,' for example. So you look at the actual policy action. So, in other words you don't look at the behavior of government spending over GDP-- Russ: You are not just looking at data. You are interested in--you are calling this 'narrative,' right--you are trying to figure out what happened. Guest: It is a narrative approach--right--which is both pioneered by Romer and Romer for the United States. They looked at, they said, if you look at the tax-over-GDP ratio in the United States--in their case they were looking at the United States--you are going to get confused because the taxes-over-GDP ratio may go up or down because the GDP moves around, not because the tax rates have moved around. So they identify several episodes in the post-WWII United States in which were actual decisions of government to reduce or raise taxes, for reasons which have nothing to do with the business cycle but for other reasons. So the narrative approach has now been extended both by work done at the IMF and by work that we have been doing on many other OECD (Organization for Economic Co-operation and Development) and not only looking at taxes but also looking at spending and focusing on [?] and we are focusing on period of spending cuts and tax increases. So, the first step is to try to isolate changes in spending-over-GDP and taxes-over-GDP that come from movement in the economy from changes that come from actual policy changes. So that's one piece of the puzzle. The second piece of the puzzle is the idea that many think happen at the same time. So, take, for example, monetary policy. And suppose you are trying to make the argument that spending cuts are less costly than tax increases. How do we know that spending cuts are not accompanied by more relaxed monetary policy and tax increases by less relaxed monetary policy? And that would explain the difference. Two answers. The first one is that you can do that by various measures of trying to hold constant monetary policy; and we have tried to do that, and the IMF has tried to do that. And the answer is that if monetary policy has been indeed slightly more relaxed during spending cuts than tax increases; but not enough, it is not enough to explain the difference. And, in addition, as you also mentioned in your question, monetary policy is itself endogenous. That is, suppose I have a central bank and I see a government that is serious, is cutting spending and announces permanent spending cuts, which will lead to not raising taxes or even reducing taxes in the future. I am relaxed and I can reduce rates. If I see a government that is in a crisis, raising taxes desperately and then raising taxes again in the future because it cannot keep with spending, then I get worried, and then monetary policy has to be different because I am afraid of a crisis. So, even monetary policy is endogenous; but in any event, even forgetting this second order effect on the endogeneity of monetary policy, all the constant monetary policy in the best way you can, the difference in the effect of spending and taxation remains very strong and actually surprisingly large. Now, structural reform, labor market reform, these are clearly much more difficult to measure than monetary policy. And so, two ways of answering your question. One is to hold them constant, of course; to say there are measures--in fact we are collecting measures of structural reform. And you can hold them constant. And the results survive. So that one way of answering your question is to say, as best as we can we can hold these structural reforms constant. But then the second way is actually to embrace, rather than holding them constant to embrace them and to see: Suppose I am an adviser to a government and I tell it, especially a European government, what is the best way to do an austerity plan that is going to work and be least costly as possible? By looking at the data, we should cut spending and engage in this structural reform, because it would appear from the evidence that the combination of spending cuts and structural reform is the one that works best. So, you can try to hold them constant if you are interested in the [?] to measure as well as possible versus tax increases; or you can embrace them from the point of view of policy recommendation and saying it would appear that the best austerity is the one that is based on spending cuts and structural reform. Russ: Well, structural reforms-- Guest: They are variable--the other variable we even talk about is the exchange rate, which is also of course endogenous. And sometimes they move. And there has been some discussion whether an exchange rate devaluation has helped or not helped this or that type of adjustment. And again, exchange rates are endogenous, like everything else, so you cannot say, 'Let's hold constant the exchange rate,' because changes in government spending or taxes. But a simple look at correlation does not show that the difference between tax increases and spending cuts is explained by exchange rate movement. Which is a different statement than saying that exchange rate devaluation may in some case help. That's a different statement than, say, it's only of exchange rate movement that taxes and spending are different. Russ: So, I was just going to say, structural reform always sounds like a good thing, because we assume reform is positive. Of course, it's really changes in policy, some of which might work, some of which might not work. I think it's extremely clever, both on the monetary policy and the structural reform to argue that it may be good policy advice. It does make it harder to assess the independent impact of spending, obviously. Which you've conceded. It's not a criticism. But it's hard to know how much of it is due to spending. Obviously, even with the best empirical techniques it's challenging, and not everyone agrees with you. But you are suggesting there is something of a consensus.

44:21 I want to challenge you in a different way. Given that--let's assume this is true, which you are confident that it is, that spending cuts reduce, have a smaller impact on output than tax increases. Does that have implications for other aspects of economic policy and economic life, given the mechanisms by which you think those changes have those effects? You talked about expectations of the future. I think one of the things about the current debates over so-called Keynesian stimulus or monetary policy is that it's very hard to know the longer-term effects, the difference between short run and permanent. A lot of people have argued that short-run changes don't have much of an effect no matter what. So, given those claims about the differences in--I should say temporary, not short-term--temporary changes have little or no effect--have you thought about the implications of that finding for other aspects of policy? Guest: Well, let me make a couple of points. One is on the temporary versus permanent effect. The conversation about austerity that we are having and the debate that is going on mostly has to do with the short-term impact of austerity policy. I think nobody would--I don't know, some extreme people may argue that you can run budget deficit and the debt growing ad infinitum. But most people would agree that sooner or later you have to bring deficit and debt under control. The question is: What are the costs of doing that in the short run? Now, in the medium and long run, eventually another result of this research that I've been doing is that fiscal adjustment based on spending cuts has been more successful at keeping debt-over-GDP ratio constant rather than spending adjustment based on tax increases. And the reason is pretty obvious: that, both in the United States and in Europe, there are various entitlement programs--Social Security, pensions--that are increasing at the rate that if you don't stop them, you are forced to raise taxes forever and ever; and that has a negative impact on the economy and on the budget. So, even talking about fiscal policy, the medium and long-run implication is not trivial, because we are talking about OECD countries with taxes-over-GDP ratios on the order of 50%. If you don't stop the growth of certain entitlements you will always be running after a moving target that is always increasing. So that is another aspect which is unrelated to the short-run output cost of austerity, but is related to a longer run expectation and reality of fiscal balance. So, that's an important implication. Regarding other variable that austerity affects, I think one very important and interesting debate is to take whether austerity, particularly austerity based on spending cuts, has a negative effect on inequality, social programs, welfare of the less wealthy, and so on. And this is of course an important question that we need to understand better. But I think that when we think about those of Keynes and Keynesian policy and so on, we should not forget that when Keynes was writing in the 1920s, government spending over GDP was a fraction of what it is today--10, 15%, and I forget the right number, but certainly a fraction of what it is today. Now, in the countries we are talking about, we have government spending over GDP about 40-60%. And the question is--and here we are not talking about cutting government spending by half. We are talking about a few percentage points of GDP, say from, I don't know--Germany is 45%, France is close to 60%--we are talking about a few percentage points. Now, are we really saying, those who are worried about inequality and so forth, are they really saying that if we reduce government spending by 3 or 4 percent of GDP, we are throwing hundreds of thousands of Europeans into poverty? I think frankly my answer is No. I think there are many ways in which you can do it without throwing people into poverty. There are lots of programs which are not means tested, [?] in which a lot of rich people receive a lot of benefits, public goods and services that are not means tested. There are a lot of things that the private sector could do even better than the public sector. So, there is a lot of room for achieving these kind of budget cuts preserving the wealth of the very poor, if that's your goal. When we talk about tax increases, we are not saying anything about the progressivity of the tax system. Taxes [?] already progressive; but if you are talking about tax cuts, nobody is saying that it should be the rich that should get tax cuts. You can have tax cuts on the middle class and not on the rich. So, the level of spending and the level of taxation per se, they say very little about [?] of consequences. And in fact, countries like in southern Europe--Greece, Italy, Portugal, Spain--who were facing the biggest problem in terms of debt and the need for austerity are also the countries that have the worst welfare systems in Europe. Namely, despite the fact that they spend not that much less than northern Europe, all the evidence shows that welfare is very poorly provided in those countries. The welfare systems are very inefficient. So, despite spending so much they are not doing a lot of good in terms of reducing inequality. And the northern European countries, who are actually more fiscally responsible, they have a large government but they are much more efficient at redistributing wealth. So, the level of spending and the level of taxes says relatively little about redistribution. So, of course, one should go much more in detail. But there's no reason why you cannot spend 4 or 5% of GDP less in European countries without--and by doing so creating an enormous increase in poverty. Or even a small increase in poverty, for that matter.

51:48 Russ: So, I just want to make an aside, because I think it's important in current economic debate, as the Presidential election is moving along here in the United States. When you said you don't have to cut taxes for the rich, you cut taxes for the middle class--I think a lot of people might think, 'Well, the middle class doesn't pay a lot of taxes.' And I think that's true, relatively true, for the rich for income taxes. But a lot of people forget, we have a substantial payroll tax in the United States that's paid by any worker. And it's roughly 15%--it's 7.5% or so on each side, the worker and the employer. And most economists seem to believe that the employer's side is paid by the worker and[?] the more lower wages. So, somehow that tax burden just gets forgotten--because "That's for Social Security." But it's not. It's just another tax. It's got a name tying it to Social Security and disability payments, etc. But it just goes into the same pot. So, it's important to remember that when we think about the tax burden in the United States, you shouldn't just look at the income tax. You need to look at the income tax combined with the payroll tax. That's just an aside. Guest: Absolutely. Let me add that in fact, the tax systems even in Europe are quite different from each other. So, the word 'cutting taxes' may mean a host of different things in different countries. And in fact--but you make a very important point, which I'd like to generalize--namely that, when you talk about cutting taxes, incidentally people, increasingly people say, 'Only the rich pay taxes, and therefore cutting taxes means doing a favor for the rich.' But I think there are other ways of doing it without the perhaps corrections in the tax structure that is not necessarily the case. Russ: Yeah. My personal preference would be that we abolish the payroll tax--because I think it confuses and makes opaque what is actually happening--and raise the income tax so that we can see what's going on a little more clearly. And for a lot of reasons, I think that would be a good thing.