Alberto Alesina, RIP: One of the best economists of the last generation

Few in India have heard of Alberto Alesina. He was one of the best economists of the last generation. He died suddenly on May 23 when on a hike in the mountains with his wife. A massive heart attack felled him. He was 63, which is no age to go. 

Two days earlier, another great economist, Oliver Williamson, the man who analysed transaction costs had died at the age of 88. In just two days the world has lost two champions of small government. I will write separately about him. Both have huge relevance for India. 

But first Alesina. He was a professor at Harvard. Along with Joseph Stiglitz, Paul Krugman and a few others he should have become a popular icon.

Instead, he remained an icon for economists only. There was a strong reason for this: He showed, empirically, that the Keynesian tax-and-spend orthodoxy was no good. So, he didn’t quite get the lift that brilliance needs to get recognition. 

Alesina’s prescription was not a broad-spectrum antibiotic. He knew that sometimes only government could help by spending more

He was the perfect response to Keynesian political economy. Governments did not achieve best results by spending more money, he showed, but by spending less. Now which democracy that depends on the popular vote was going to buy that? 

Alesina was cited by his fellow economists more than 120,000 times. He had that kind of technical virtuosity. He had shown, for example, that state-made institutions have to compete with traditional institutions that rely on custom. Remember khap panchayats? 

In 2009, he showed that it was better to cut taxes to reflate the economy than to increase them to fund government expenditure. Mr Modi, who is in a tight spot fiscally, should pay heed. 

Alesina’s prescription was not a broad-spectrum antibiotic. He knew that sometimes only government could help by spending more. But this extra spending should be just that, an antibiotic that isn’t to be taken forever. 

Adam Smith had also said that if prudence was a virtue for households how could it become a vice for governments? There has not been an adequate riposte to this other than the silly sentimentality that politicians drip, to which the economists who are looking for fame and money, lend respectability. 

Some even get ‘Nobel’ prizes. 

Politics and economics 

Alesina was to post-1945 political economy what Einstein was to physics. If Einstein showed that light bends near a very heavy object, Alesina showed that economic good sense bends near intensely competitive politics. 

His paper on why reforms get delayed is a classic. Consider a contest between political parties representing many groups represented by two political parties. 

Alesina showed how "each group would like to charge to the other a large fraction of the additional taxes needed to stabilise the budget. By assumption one of the groups has to pay more than half of the costs of stabilisation". 

Each group has a veto. Neither is certain about the other's costs, although it knows its own costs. When this happens, said Alesina, there is no alternative but to wait to see which group is weaker. 

How long each group will wait depends on the marginal cost of waiting. If it is lower than the marginal benefit of waiting, it will. 

"The game, wrote Alesina, “ends when for one of the groups the marginal benefit becomes less than the marginal cost, and this will occur sooner for the group with the higher cost of waiting. So, in the end the weaker group (i.e. the one that suffers more from the delays) will concede." We have seen this play out in India since 2013. 

We know it as that ‘suit-boot’ thing.