Demand Shocks and Firm Investment: Micro-evidence from fiscal retrenchment in Italy

We study the effect of a persistent demand shock on corporate factor utilization. Our identification strategy leverages a legislative change designed to permanently reduce spending in certain targeted municipalities. This change generates an arguably-exogenous drop in the revenue of procurement firms, which differs depending on each firm’s reliance for its revenue on procurement in the targeted municipalities. We find that firms responded to the demand shock by cutting capital rather than labor. We propose a theoretical mechanism based on the irreversibility of capital investment.

Austerity Effects on National Output and Income Inequality: A Systematic Literature Review

Fiscal sustainability issues over rising national debt concerns and the consequent expansionary fiscal retrenchment hypothesis has fuelled the contentious austerity vis-à-vis stimulus debate which has spawned a large empirical literature of conflicting findings on the economic effects of austerity – with particular emphasis revolving around equity and distributional issues. In this paper we attempt to summarise the growing literature on the recent developments regarding the theoretical as well as empirical approaches on national output and distributional aspects of austerity. By exploring the existing evidence in the literature on the effect of consolidation programs, we offer a more holistic overview of the subject matter through a synthesis of the extant literature and, by so doing, propose directions for future research pertinent to both academic researchers and policymakers.

The Medicalization of the Los Angeles County Jail System, 1978–2015

This chapter presents the historical transformation of the Los Angeles County jail system in order to explain why medicine has becomes a useful tool for jailers. Jails were successfully pressured into providing expanded healthcare by various legal agencies at the exact same time that they faced unprecedent budget constraint. In response, jails began thinking of their inmates less as violent gang members and more as mentally ill, substance abusers, and less threatening homeless persons. Doing so allowed them to draw in funding from other agencies and to release thousands of inmates. In total this resulted in the mere circulation of inmates between general housing and medicalized space as the key solution to the jail’s fiscal retrenchment and legal demands.

Angola

The economic outlook has substantially deteriorated since the Second Review, driven by the negative effects of the COVID-19 pandemic on global economic activity and oil prices. The adverse impact of the shock on the Angolan economy, which is highly dependent on oil (95 percent of exports, two-thirds of government revenue), adds to the hardship from five consecutive years of recession. Rapid exchange rate depreciation and the decline in oil prices have pushed the public debt-to-GDP ratio to a very high level. However, continued fiscal retrenchment, prudent debt management, and debt reprofiling are expected to improve debt dynamics progressively.

Financial Stabilization in Meiji Japan

With a new look at the 1880s financial reforms in Japan, this book overturns widely held views of the program carried out by Finance Minister Matsukata Masayoshi. The book shows, rather than constituting an orthodox financial-stabilization program—a sort of precursor of the “neoliberal” reforms promoted by the IMF in the 1980s and 1990s—Matsukata's policies differed in significant ways from both classical economic liberalism and neoliberal orthodoxy. The Matsukata financial reform has become famous largely for the wrong reasons, and the book sets the record straight. It shows that Matsukata intended to pursue fiscal retrenchment and budget-balancing when he became finance minister in late 1881. Various exigencies, including foreign military crises and a worsening domestic depression, compelled him instead to increase spending by running deficits and floating public bonds. Though he drastically reduced the money supply, he combined the positive and contractionary policies of his immediate predecessors to pull off a program of “expansionary austerity” paralleling state responses to financial crisis elsewhere in the world both then and now. Through a new and much-needed recalibration of this pivotal financial reform, the book demonstrates that, in several ways, ranging from state-led export promotion to the creation of a government-controlled central bank, Matsukata advanced policies that were more in line with a nationalist, developmentalist approach than with a liberal economic one. It shows that Matsukata Masayoshi was far from a rigid adherent of classical economic liberalism.

From “Ōkuma Finance” to “Matsukata Finance,” 1873–1881

This chapter examines the transition from the expansionary policies of Ōkuma Shigenobu to the contractionary ones of Sano Tsunetami as background to the Matsukata reform, which in large measure ended up combining his predecessors' approaches. It shows the critical difference between the Ōkuma and Matsukata approaches to financial policy. Ōkuma sought to engineer a rapid currency reform using the proceeds from overseas bond issuance while applying the savings from austerity to continue the expansionary economic policies he had pursued as finance minister. The adoption of his new foreign-borrowing scheme in the summer of 1881 signaled a softening of official commitment to fiscal retrenchment. Matsukata intended to continue the Sano initiatives with the exception of borrowing abroad and founding a British-style central bank. Yet in practice he would diverge from much of the Sano austerity program in ways that differed from both classical and neoliberal orthodoxy.

Angola

The economic outlook has deteriorated since the First Review. Real GDP is expected to contract in 2019, driven by lower-than-expected oil production. Disinflation is expected to halt, inter alia because of increases in regulated prices. Beyond 2019, lower oil prices and slower recovery in oil production are expected to weigh on oil exports and put pressure on the external current account and international reserves. While the rapid depreciation of the exchange rate has led to a sizable increase in the debt-to-GDP ratio, the ongoing fiscal retrenchment will help shield public expenditure from oil-price volatility and reverse the public debt trend.

The Rise and Fall of the Stamp Act

This chapter shows why the same politicians who concluded that Pitt's war was an expensive boondoggle also pushed for the taxation of the American colonies. The Stamp Act was part of their broader program of authoritarian reform, which promised to restore Britain's finances and trade through fiscal retrenchment and moral improvement. But it prompted angry denunciations on both sides of the Atlantic. Radical and establishment Whigs accused their leaders of abandoning both the British constitution and the mutually beneficial relationship that had long sustained the empire. When Grenville's ministry fell in July 1765, Britain's new establishment Whig prime minister, the Marquess of Rockingham, seized on the postwar recession to denounce the economic consequences of authoritarian reform. Forging a broad and popular coalition with radical Whigs, Rockingham's administration rolled back Grenville's program, including the Stamp Act.