Ed. note: This is the first post in a TP Ideas symposium on Mark Blyth’s Austerity: The History of a Dangerous Idea. A second and third installment are forthcoming. You can read our previous book symposium here.
Arguably, there is no greater obstacle to progressive change than the idea of austerity. Austerity dominates economic policy discussions in Europe, resulting in policies in country after country that ensure continued slow growth (or outright contraction) and high unemployment. These conditions have produced demoralized electorates that lack faith in all politicians, including those on the left, a cynicism that has only been deepened when left 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 US, things are slightly better. Nevertheless, 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 sequestered spending cuts are slowing it more. Yet with unemployment still 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 jobs created, policy discussion continues to focus on the need to cut the deficit more (despite the fact it has already gone down dramatically) and solve a national debt “crisis” whose effects, if any, are many years away (and may never appear). 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 defusing this mania? Mark Blyth’s timely new book, Austerity: The History of a Dangerous Idea, provides answers to these questions. They are not necessarily comforting ones.
Start with where austerity came from. Austerity’s 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 theorizing and legitimizing market economics and all of whom tended to counterpose the virtues of market economics to the problem of predatory states (states that in those days were controlled by capricious sovereigns rather than elected representatives). 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 and interfere with the market. 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. Hence the need for a state that was as austere as possible.
Building on the work of David Ricardo and others in the 19th century, these anti-state and anti-public debt views eventually became codified into a system of economic thinking we know as classical economics. This system provided a rigorous theoretical gloss to the emerging doctrine of austerity. According to classical economists, the overall economy tended toward a full employment equilibrium where all resources were productively employed. While this equilibrium could be temporarily disturbed by wage and price rigidities, misguided monetary policies and other things that distorted the market, the economy would quickly return to a full employment equilibrium once these distortions were eased. The role for government in responding to recession was therefore to do nothing, letting prices and wages fall to their natural levels or, even better, to do less, since government spending simply crowds out the private spending necessary to get the economy back into equilibrium. That is why, prior to Keynes, the orthodox budgetary approach to recessions was to cut, not increase, government spending so as to create the proper business environment and hasten the arrival of a new equilibrium.
Keynes didn’t buy all this, seeing it as inconsistent with the behavior of real world economies, especially the ones he was observing at the time. 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 creating equilibria with high levels of unemployment — the reverse of the classical precept (Say’s Law) that supply creates its own demand.
Keynes argued that because these equilibria were a natural and recurring tendency of capitalism, 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 fiscal policy — in other words, through government spending.
Keynes’ anti-austerity ideas had their day, and a very successful day it was, lasting from the mid-1930’s to the mid-1970’s. But austerity never went away because, as outlined above, it’s rooted in in a persistent 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 1970’s, austerity-based economics came roaring back and dominated economic thinking for the decades leading up to Great Financial Crisis. Now, after a very brief resurgence of Keynesian economics in 2008–2010, austerity is hot again (see this great 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 under the banner 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.
Turning to the question of whether the austerity doctrine actually makes any sense — that is, works the way the theory predicts it will when implemented in real economies — Blyth does a real service by meticulously reviewing the empirical record of austerity economics 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 of economic history turns up dozens of examples of the abject failure of austerity economics from the 1920’s and 1930’s, the examples that lead Keynes to formulate his famous theories, to the recent attempts to apply austerity in Europe, whose anti-growth effects we are currently observing. Counter-examples of successful austerity 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 error-ridden and fundamentally unsound empirically. But this contemporary contretemps only strengthens his case on the empirical vacuity of academic austerity economics.
This brings us to the question of whether the demolition job on Reinhardt-Rogoff can finally and fatally undermine the current mania for austerity economics. If only it were that easy. As Blyth demonstrates, austerity economics goes back a very long way, connects to powerful conservative ideologies about the state and has proven resistant to wave after wave of predictive failure. After all, 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.
Moreover, it is not just in conservative circles where the austerity idea remains strong. The idea also has significant purchase in progressive circles; for example, German Social Democrats offer some criticisms of austerity, but their standard-bearer in the coming election, Peer Steinbrück, played a key role in undermining the brief period of Keynesian ascendancy and re-establishing the austerity’s hegemony in Europe. Steinbrück 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 US, 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, on top of budget deals that have already cut the deficit and slowed the economy, now seems pre-occupied with striking a Grand Bargain to cut the national debt further in place of solving the far more pressing problem of growth and jobs.
Obviously, Obama is under a lot of political pressure, which can partially explain his susceptibility to the austerity narrative. Yet the effects of proceeding down the current path could be devastating. Without more growth, millions of people will suffer and unemployment will remain high. Without more growth, there will be little room for progressive economic policy, particularly investments in infrastructure, education, research and the like. And without more growth, deepening economic pessimism has an excellent chance of breaking apart the Obama coalition and with it, any chance for progressive governance in the near future.
So the stakes in defeating austerity economics are very high. But how can this be done? Certainly, books like Blyth’s are helpful, as is the takedown of the Reinhardt-Rogoff paper. Progressives should also continue opposing austerity economics at every turn and reminding people forcefully that the doctrine just doesn’t work in practice. But in the end, you probably can’t defeat a bad idea like austerity with just critique; you need a positive alternative that is embraced by the left and develops its own momentum. That is where a contemporary, progressive theory of growth comes in. There is nothing progressives need more than this and yet we still seem far away from it. Time for that to change….and fast. The hour is getting late.