A History of Fallacies and Failure: Mark Blyth's New Book on Austerity
The Financial Crisis of 2007-2008, which spawned the Great Recession, the European Sovereign Debt Crisis, and a host of other economic maladies, has been widely analyzed by various experts, yet remains opaque to the general public. Even economists, who on the whole did not foresee the crisis, remain divided on the causes and what the most efficacious economic remedies—both at the initial outbreak and during the continued malaise to the present—might have been.
Demands for answers as to the cause of and remedy to the crisis, from ordinary citizens to various public figures, including Her Majesty Queen Elizabeth II, have produced a variety of different (and sometimes contradictory) policy solutions. More recently a consensus toward policies of austerity has emerged, evident in the deep EU/ECB/IMF-mandated cuts in Greece, voluntary cuts by the Conservative/Liberal Democrat coalition in the UK, and the Sequester in the U.S.
Stepping in at this vital moment is Prof. Mark Blyth, a political economist based at Brown University, with his new book, Austerity: The History of a Dangerous Idea. A project stemming from conversations with colleagues and a popular video he produced on austerity, Blyth offers readers a broad overview of the Financial Crisis, past and present austerity policies, and the intellectual history leading to our present-day policy debates. Refreshingly free of jargon and without the assumption of a graduate degree in economics, the book functions as a veritable survey course on all aspects of contemporary economic policy discussions. Additionally, Blyth provides context for the notion that U.S. banks were "too big to fail," and contrasts this with a Eurozone financial sector that is structurally "too big to bail," with the largest banks in many Eurozone countries having asset footprints many times the size of their home country's GDP. Following a brief "Keynesian moment" in 2008-2009, almost everywhere in the developed world—most paradoxically in Continental Europe, where social democratic ideas remain strong—shifted toward the tightening of fiscal policies and cuts to public budgets. What began as a private banking crisis transformed into a public burden, with increasingly few dissenters from policies of austerity as the solution.
Austerity policies have been a common tool used to respond to inflationary pressures in the midst of economic downturns or banking and debt crises of differing scope and scale, but the historical record of these policies does not impress. In the 1920s and 30s, central banks and many governments valued restoration and maintenance of the gold standard above all else. The French Central Bank defiantly defended the Franc over considering the well-being of the French people, with the disastrous results of human suffering, political turmoil and state collapse during World War II. For an example in the U.S. of the clear cause-and-effect relationship, austerity imposed under Hoover in 1931 and Roosevelt in 1937 directly led to rapid economic slumps and large rises in unemployment.
The cases usually held up as austerity success stories—such as Denmark, Ireland and Australia in the 1980s or Latvia, Romania and Bulgaria today—are in fact not supported either by the empirical data (either because the predicted or claimed growth failed to occur, or it was driven by external factors rather than internal policies), or the deep social problems engendered or exacerbated by these policies. Current events support Blyth's conclusions further, with the recent debunking of the Reinhart/Rogoff study tying high debt-to-GDP ratios to low growth serving as another reminder of the poor methodology used in austerity economics. Given such a record, Blyth borrows John Quiggin’s phrase to declare austerity "zombie economics," as it is an idea that "will not die despite huge logical inconsistencies and massive empirical failures" (p. 10).
Why then is austerity repeatedly instituted by governments in spite these recurring failures? As Blyth notes, it appeals to the prejudices of the founding fathers of economic liberalism—John Locke, David Hume, Adam Smith—which we have internalized. Furthermore, echoing some of the arguments from David Graeber’s Debt: The First 5000 Years, Blyth notes that austerity appeals to our moral sense as well. We take it for granted that "We must pay our debts," just as these supposedly profligate spenders in North America and Europe "need to take their medicine." False stereotypes like those of the lazy and spendthrift Spaniard or Italian compound the problem (Spain had a relatively low public debt of 36% of GDP in 2007 and 75% of Italians still have no net household debt). Blyth demonstrates that only in Greece did was the current sovereign debt crisis directly caused by public spending; by contrast, the remainder of the inaptly nicknamed PIIGS actually maintained levels of debt and public spending that were previously considered unremarkable. It is this disconnect between our deeply held notions and empirical reality that most needs wider exposure and consideration.
If one is willing to forgive Blyth's overuse of certain metaphors and corny jokes, this volume serves as a valuable compendium of today’s most critical economic policy debate. This book makes the most comprehensive appeal I have encountered for us to abandon self-flagellation as sound economic policy. The notion that the remainder of the Eurozone should become like Germany, a dynamic export-oriented economy, may seem to be common sense, but brief reflection reveals this to be illogical and impossible. Just as advocates of the German model need to consider that every country cannot simultaneously run a current account surplus, the Eurozone at large would do well to be reminded that "you can’t run a gold standard in a democracy" (p. 197).
No population will willingly suffer long for the sake of economic orthodoxy; this, along with emerging examples of countries like Iceland which rejected bailouts and austerity in the face of the banking crisis and are doing all the better for it, are what gives Blyth hope. After reading this book, you may feel hopeful, but you almost certainly will add yourself to the growing voices of dissent that refute austerity economics.
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