How Progressives Failed To Stop Austerity When We Had The Chance

Adam Smith, godfather of austerity

Ed. note: This is the second post in a TP Ideas symposium on Mark Blyth’s Austerity: The History of a Dangerous Idea. The first installment is here and the third installment is forthcoming. You can read our previous book symposium here.

Mark Blyth’s intellectual history of austerity should be required reading for all progressives -– and in particular, the center-left policy elites who run the country.  There are many good books out there on the origins and aftermath of the financial crisis and the intellectual collapse of neoliberal thought (John Cassidy’s How Markets Fail: The Logic of Economic Calamaties, Justin Fox’s The Myth of the Rational Market, and John Quiggin’s Zombie Economics: How Dead Ideas Still Walk Among Us being standout examples.)  But few books today provide the political context for how a long discredited idea such as austerity gained institutional and political traction in the aftermath of the global financial crisis to become the preferred course of action among leaders despite its manifest failures in producing economic growth and reducing debt.

Blyth provides a clear and digestible historical tour of the ideas behind austerity, defined as “a form of voluntary deflation in which the economy adjusts through the reduction of wages, prices, and public spending to restore competitiveness, which is (supposedly) best achieved by cutting states’ budget, debts, and deficits,” from John Locke and David Hume to Joseph Schumpeter and contemporary advocates of austerity in Germany and the U.S. He also provides some much needed spice and anger when describing how it all works. It’s rare to read a book on economics that distills centuries of neoclassical economics into these choice words about the upside-down morality of those who believed markets could do no wrong prior to the financial collapse: “[Adam] Smith’s invisible hand had just given the public the finger.”

Most importantly, Blyth’s analysis implicitly raises critical points about how the progressive left failed to coalesce around a single solution to the financial collapse in 2007-2008, thus paving the way for the advocates of austerity to turn a private sector banking failure into a “crisis” of public debt and spending after nations such as the U.S. and U.K. intervened to save their banks.

How did this work? Blyth explains:

Before 2008 no one, save for a few fringe conservatives in the United States and elsewhere, were concerned with ‘excessive’ national debts or deficits.  Deficit hawks in the United States, for example, pretty much disappeared in embarrassment as, under the banner of fiscal conservatism, the Bush administration pushed both debts and deficits to new heights while inflation remained steady.  Even in places where fiscal prudence was the mantra, in the United Kingdom under Gordon Brown, or in Spain and Ireland when they were held up as economic models for their dynamic economies – really – deficits and debt did not garner much attention.  Italian public sector debt in 2002 was 105.7 percent of GDP and no one cared.  In 2009, it was almost exactly the same figure and everyone cared.

What changed was of course the global financial crisis of 2007-2008 that rumbles along in a new form today. The cost of bailing, recapitalizing, and otherwise saving the global banking system has been, depending on, as we shall see later, how you count it, between 3 and 13 trillion dollars. Most of that has ended up on the balance sheets of governments as they absorb the costs of the bust, which is why we mistakenly call this a sovereign debt crisis when it fact it is a transmuted and well-camouflaged banking crisis

There was no orgy of government spending to get us there.  There never was any general risk of the whole world turning into Greece.  There is no risk of the United States ever going bust anytime soon…What begins as a banking crisis ends with a banking crisis, even if it goes through the states’ accounts. But there is a politics of making it appear to be the states’ fault such that those who made the bust don’t have to pay for it. Austerity is not just the price of saving the banks.  It’s the price that the banks want someone else to pay.

Blyth’s useful depiction of economic ideas as “instruction sheets” that people grab to figure out how to get out of problems helps to explain how the criminals got away with the crimes in the aftermath of the meltdown. When the financial crisis hit, the progressive left was scattered and politically unfocused about what to do. If you remember back to the fall of 2008, there was no uniform response among center-left economists or political activists about next steps. Then-candidate Barack Obama (and later his entire economic team under Treasury Secretary Timothy Geithner) adopted the theory behind President Bush’s TARP program that “there is no alternative” to bailing out the banks with minimal to no concessions from these interests. Other more mainstream center-left leaders wanted government intervention but with more concessions from banks and protections for taxpayers. More left-leaning economists pushed for an undefined nationalization of the banks, while the more populist-inclined argued for just letting the banks go under and using the Federal Reserve to ensure the proper functioning of the rest of the economy.

In contrast, neoliberals and banking interests, if not conservatives in Congress at first, had their playbook ready to go: threaten the entire economic system with collapse, force the government to intervene with minimal concessions, shift all of the costs of saving the banks onto taxpayers and insist upon full restitution of their own financial positions and compensation, and, finally, use the resultant increase in public debt due to recapitalization and slower economic growth to advance long-sought ideological goals of reducing public spending and social programs through austerity.  Presto! The failure of market fundamentalism and banking became the failure of government to balance its budgets.

It’s no wonder the left failed to stop the private sector from outsourcing costs to government and then to adequately combat the inevitable calls for austerity. The progressive instruction sheet at the time of the crisis provided blueprints for four different models: full bail-out with no concessions; partial bailouts with haircuts; full takeover of banks; and no bailouts at all. As Tim Geithner famously stated, “a plan beats no plan,” even if the neoliberal/austerity plan was one of the least desirable options. Blyth himself admits the theoretical and political disarray of progressives in his final chapter, saying that although he originally believed there was no alternative to bailing out the banks, in hindsight, the costs of long term austerity in lost jobs and shattered lives may have been worse than the original costs of allowing the banks to fail.

Blyth’s book is an excellent primer on the causes of the financial crisis and the intellectual history of the austerity ideology that followed.  But above all, it’s a cautionary lesson for progressives about what needs to be done now to update, improve, and better understand our own economic instruction sheet so the next time the banks threaten to implode the world economy, we know how to respond intellectually and are better prepared for the oncoming austerity train from the other side.