Austerity: The History of a Dangerous Idea
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Selected as a Financial Times Best Book of 2013
Governments today in both Europe and the United States have succeeded in casting government spending as reckless wastefulness that has made the economy worse. In contrast, they have advanced a policy of draconian budget cuts--austerity--to solve the financial crisis. We are told that we have all lived beyond our means and now need to tighten our belts. This view conveniently forgets where all that debt came from. Not from an orgy of government spending, but as the direct result of bailing out, recapitalizing, and adding liquidity to the broken banking system. Through these actions private debt was rechristened as government debt while those responsible for generating it walked away scot free, placing the blame on the state, and the burden on the taxpayer.
That burden now takes the form of a global turn to austerity, the policy of reducing domestic wages and prices to restore competitiveness and balance the budget. The problem, according to political economist Mark Blyth, is that austerity is a very dangerous idea. First of all, it doesn't work. As the past four years and countless historical examples from the last 100 years show, while it makes sense for any one state to try and cut its way to growth, it simply cannot work when all states try it simultaneously: all we do is shrink the economy. In the worst case, austerity policies worsened the Great Depression and created the conditions for seizures of power by the forces responsible for the Second World War: the Nazis and the Japanese military establishment. As Blyth amply demonstrates, the arguments for austerity are tenuous and the evidence thin. Rather than expanding growth and opportunity, the repeated revival of this dead economic idea has almost always led to low growth along with increases in wealth and income inequality. Austerity demolishes the conventional wisdom, marshaling an army of facts to demand that we austerity for what it is, and what it costs us.
cut budget deficits as abruptly as the theory said they should. Latvia, Lithuania, and Romania ran much higher budget deficits at the peak of their austerity programs in 2009−2010 than did either Greece or Spain. Austerity is also supposed to reduce debt. In fact, that’s the whole point of it. Yet it didn’t do it in the REBLLs and it didn’t do it in the PIIGS. While all of the REBLLs had extremely low levels of debt—below 20 percent of GDP—going into the crisis, and had the advantage post-Vienna
social democracy to a laissez faire center of international finance was fast and furious. By 2007, average yearly incomes had soared to the equivalent of almost USD 70,000. The value of the stocks of the fifteen firms listed on the Icelandic Stock Exchange increased sevenfold between 2002 and 2007, and the local real estate market more than doubled in value.19 The three Icelandic banks—Glitnir, Landsbanki, and Kaupthing—were behind this bubble. Their financial structure made Anglo-Irish look like
Press, 1998); Nicolas Jabko, In the Name of the Market (Ithaca, NY: Cornell University Press, 2006). 37. Ha Joon Chang, Kicking Away the Ladder: Deveopment Strategy in Historical Perspective (London: Anthem Press 2002). 38. I thank Alex Gourevitch for this point. 39. Martin Wolf, Fixing Global Finance (Baltimore, MD: Johns Hopkins University Press, 2010),197. 40. Schumpeter was Austrian trained, Austrian by birth, and built his career around Austrian ideas. Despite this, he is
be purged] out of the system. … People will … live a more moral life … and enterprising people will pick up the wrecks from less competent people.”70 Adam Smith, it seems, was alive and well on the Potomac. Yet, despite the moral invocations, the Hoover administration did not exactly cleave to Mellon’s “liquidationist” line. America by 1930 hardly looked like a pure laissez faire economy. The Sherman acts of 1912, which regulated monopolies and busted “trusts” were deeply interventionist, and
austerity’s intellectual history takes us on a tour from the general neoliberal turn in economics in the 1970s and 1980s, through the policies of the IMF in the 1990s, to the work of mainstream pro-austerity economists in the 2000s. Part Two: Austerity’s Enablers Crowding out Keynes Globally: Monetarism, Public Choice, and the Dangers of Democracy Despite their finding German homes and American pied-à-terres, appreciating why these decidedly local ideas were able to spring to global