BOOKS MAY 1, 2013
There is no greater obstacle to progressive change than the idea of austerity. It has dominated economic policy in Europe, resulting in continued slow growth (or outright contraction) and high unemployment. These conditions have produced demoralized electorates that lack faith in all politicians—a cynicism that has only deepened when leftist parties have attained power and failed to revive growth. In such an environment, progressive change is not possible, and the left is reduced to purely defensive actions.
In the U.S., things are slightly better, but our economic policy discussions are still dominated by variants of austerity. The fiscal cliff deal at the beginning of this year slowed the economy, and the sequester is slowing it more. Yet even with unemployment at 7.6 percent, growth projections for the year halved to 1.4 percent, and the latest jobs report coming in at an anemic 88,000, policy discussion continues to focus on the need to further cut the deficit. Of course, such a focus precludes any progressive economic policies, including, critically, spending programs that would help revive the economy and invest in our economic future.
How did we get into such a pickle? Does the current mania for austerity make any sense whatsoever? And could the recent discrediting of Carmen Reinhart’s and Kenneth Rogoff’s influential pro-austerity paper provide any hope for the defusing of this mania? Mark Blyth’s timely new book, Austerity: The History of a Dangerous Idea, provides answers to these questions, and they are not necessarily comforting ones.
Start with where austerity came from. The lineage goes back to the early liberal (in the European sense) economic thinkers—John Locke, David Hume, and Adam Smith—all of whom played a role in creating the theory of and legitimizing market economics. These thinkers tended to counterpose the virtues of market economics to the problem of predatory states.1 The state was, at best, a regrettable necessity whose powers of taxation and debt issuance made it highly likely to be a parasite on the economy. Locke and Hume were particularly strong on this point, seeing little role for government beyond national defense and almost all government debt as bad. Smith had a somewhat more balanced view but in the end saw government’s ability to accumulate and issue debt as inevitably eroding the private savings that lead to dynamic economic growth.
Building on the work of David Ricardo, Jean-Baptiste Say, and others in the nineteenth century, these anti-state and anti-public debt views eventually became codified as classical economics. This system provided a rigorous theoretical gloss to the doctrine of austerity. According to the classical economists, the overall economy tended toward full-employment equilibrium in which all resources were productively employed. While this equilibrium could be temporarily disturbed by wage and price rigidities, misguided monetary policies, or other things, the economy would quickly return to full-employment equilibrium once these distortions were eased. The role for government in responding to recession was therefore to do nothing. Prior to John Maynard Keynes, the orthodox budgetary approach to recessions was to cut, not increase, government spending.
Keynes didn’t buy all this, seeing such policies as inconsistent with the behavior of real world economies. In his view, the normal state of capitalist economies was not full employment because total demand in the economy could easily fall short of total supply, thus creating high levels of unemployment. Keynes argued that there was no natural adjustment process that would lead a market economy back to full employment. Nor could monetary policy—lowering interest rates or increasing the money supply—always be relied upon to jolt businesses back into action and increase employment. Instead, government must frequently step in to make up shortfalls in demand through government spending.
Keynes’s anti-austerity ideas had their day of course—and a very successful day it was, lasting from the mid-’30s to the mid-’70s. But austerity ideas never went away because, as outlined above, they are rooted in an entire philosophy about the state and public debt that is not subject to disproof, especially among the conservative forces and big economic interests who embrace it. As a result, when Keynesian economics appeared to falter in the 1970s, austerity-based economics came roaring back and dominated economic thinking for decades.
Now, after a brief resurgence of Keynesian economics in 2008-2010, it is back again. (See this paper by Henry Farrell and John Quiggin for a blow-by-blow description of how this happened.) Austerity dominates today’s economic discussions, this time with the chimera of “expansionary fiscal austerity”—the idea that the way out of an economic slump is to cut spending which will lead to rising business confidence, more investment and strong growth.
It is not just in conservative circles that the austerity idea remains strong. The idea also has significant purchase in progressive circles. For example, in Germany, while the social democrats offer some criticisms of austerity, their standard-bearer in the coming election, Peer Steinbruck, played a key role in undermining the brief period of Keynesian ascendancy and re-establishing the hegemony of austerity economics. Steinbruck is a particularly appalling example, but the ranks of European social democrats are full of politicians who subscribe to some variant of austerity economics or at least find it expedient not to oppose it.
Here in the U.S., of course, the Democratic Party has many prominent politicians and supporters who embrace a sort of “soft” austerity economics and fixate on bringing down the national debt. Indeed, the most prominent Democrat of them all, President Obama, now seems more pre-occupied with striking a grand bargain to cut the national debt further than with solving the far more important—and pressing—problem of growth and jobs.
Turning to the question of whether the austerity doctrine actually makes any sense, Blyth does a real service by meticulously reviewing the empirical record from the early twentieth century to the present day. He covers both the economic history of countries where austerity was applied and the academic literature that purports to show its effectiveness. The review turns up dozens of examples of the abject failure of austerity economics from the 1920s and 1930s—the examples that led Keynes to formulate his famous theories—to the recent attempts to apply austerity in Europe, whose dire anti-growth effects we are currently observing. Counter-examples are few and far between. As for the academic literature, it is and has been long on theory and short on solid empirical evidence, as Blyth convincingly demonstrates. Of course, his analysis was conducted before the Reinhardt-Rogoff paper promoting budget austerity was shown to be fundamentally unsound. But these new findings only strengthen his case. Will all this finally and fatally undermine the current mania for austerity economics? If only it were that easy. There is no better disproof of the austerity idea than its current egregious failures in a number of European countries, yet the idea persists and the policies remain in place.
The effects of proceeding down the current path could be devastating. Without more growth, millions of people will suffer and unemployment will remain high.2 Compelling evidence of this suffering is collected in the new book, The Body Economic: Why Austerity Kills, written by epidemiologists David Stuckler and Sanjay Basu. Stuckler and Basu provide a capable summary of the basic problems with austerity economics as economics, but their signal contribution in this book is to focus on the health effects of austerity. Looking at data from states during the New Deal, Asian countries in the 1990s East Asian financial crisis, and European countries in the Great Financial Crisis that started in 2008, they find that, the more austerity was practiced in a state or country, the more people got sick and the more people died.3 In short, “Austerity Kills” is more than just a slogan. Austerity doesn’t work as economics, and it kills people in the bargain. It’s time we came up with an alternative.