Alberto Alesina: The Science of Using Political Economy Concepts to Explain the Macroeconomic Landscape
Hallett, Andrew Hughes, Atlantic Economic Journal
More than anyone else perhaps, Alberto Alesina may be credited for bringing political economy analysis into modern macroeconomic analysis. Perhaps I should say reintroducing it, since political economy concerns clearly influenced the thinking of early economists like Adam Smith, David Hume, and others in the enlightenment tradition, and had always been present as the back-drop to the analysis of Keynes. However, from then on, there seems to have been a parting of the ways. Political economy as a subject for study became increasingly concerned with microeconomic biases and market distortions, or competitive market failures due to the behavior of groups of agents who were able to gather market or political power and exploit it in the interests of their group. Meanwhile, macroeconomic theory, with a few exceptions, has become increasingly pre-occupied with a technical analysis of the behavior of rational but undifferentiated actors (representative agents) and/or monopolistically competitive firms and their impact on economic performance, with the result that there is little scope for introducing political economy factors as we normally think of them.
Nevertheless, even if this is true, there is still the opportunity to introduce political economy factors to macroeconomics, over and above imposing some arbitrary and anonymous objective functions, by considering the role played by institutions and why they are designed the way they are; or by considering partisan politics and different electoral rules; (1) or the quality (as opposed to quantity) of different policies in particular, fiscal policies and stabilization; welfare policies and competitiveness; political cycles and the effectiveness of fiscal or monetary policies; public debt; economic integration vs. political fractionalization; bureaucracy vs. stabilization; and rules and institutions vs. jurisdictions in heterogeneous communities.
Alesina has published papers analyzing all of these problems and many more. (2) However, of the 90+ papers published over the past 25 years, two themes stand out: the quality of fiscal policies (adjustment and consolidation; taxes vs. spending) and the optimal size and number of countries. Since it is not realistic to do justice to such a wide body of work in a restricted space, I shall review the two main themes that I find most useful and which interest me most--not least because they highlight two economic issues that occupy the attention of nearly all advanced economies today: public debt and fiscal sustainability (rather than consolidation per se), and the size and number of economic jurisdictions (nations). The former is important because it is debt (a stock), rather than deficits per se (a flow), which threaten the continued existence of the economy. The latter because, in a world of increasing interdependence and economic integration, it is a key element in any resolution of the tensions between centralizing vs. decentralizing economic policy powers; of federalism vs. confederalism; of globalization vs. localization or even full autonomy.
That said, I need to issue a health warning. In reviewing these topics, I shall not comment on the implementation problems involved in these fiscal sustainability/ consolidation questions: such as, can you really separately identify the strength of discretionary as opposed to automatic fiscal policies? Can you really monitor structural fiscal deficits in real time? How fast should the consolidation/stimulus measure be implemented, and for how long? Although the quality and composition of fiscal consolidation or stimulus packages are clearly of the essence, do we really know which individual components to use and how to combine them for maximum effect in the short term and in the long term? These are also fundamental issues and a great deal has been written on them, not least in the current austerity vs. growth debate. However, to do them justice would mean writing another paper and would divert me from my current purpose. …