Ask Mark Blyth: “Austerity Doesn’t Work, Period”

Kevin Gallagher

“Austerity doesn’t work. Period.” This quote is the punch line of Mark Blyth’s Austerity: The History of a Dangerous Idea, second edition just out. If that quote was made into bumper stickers and t-shirts it would have been icing on the cake for what was an amazingly well placed and marketed book. As just about every review in the popular press has noted, Blyth’s book is well researched, accessible to a broad array of readers, and right.

For academics and critical thinkers however, there is more to it than that. This is not only a book where an established academic engages with a broader audience and “gives” that audience the tools to understand a contemporary problem. Blyth should be praised for that in and of itself. During this crisis and many others most academics have not been bold enough or too dis-incentivized to enter the fray beyond the water cooler. But Blyth also makes key contributions to the academic literature in international political economy as well. Blyth shows how and why the idea of austerity keeps on living in our politics.

The book starts with an accessible discussion of how the crises in the U.S. and EU were banking crises, not the sovereign debt crises (especially in the European case) that they and their aftermath have been described of in the financial press and media. In two crisp chapters, he shows how banks created the messes in the United States and in Europe—and how government debt became a big issue only after governments bailed out and propped up banks.

The core of the book however is a dismantling of what was the conventional remedy to the problem in Europe and in many quarters in the United States—austerity. Blyth defines austerity 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 the state’s budget, debts, and deficits.” Two chapters trace the intellectual history of austerity. These chapters take us from John Locke to the IMF and the Chicago boys and all the way through 2012. They sum to one thing, that austerity is a patchwork of incomplete economic theories that have never been fully worked out or endorsed.

Then Blyth conducts a “natural history” to look at the cases of austerity in the U.S. and Europe since 1914 and shows that austerity has never really worked. With a quip he summarizes the literature where there is a clear consensus that such action was detrimental as well. If he had examined the literature on austerity programs under the IMF in Latin America and East Asia in the 1990s, he would have the global view and reach the same conclusion.

Blyth pays special attention to the work that “justified” the current rounds of austerity in Europe and that were used to argue for austerity in the U.S. in the wake of the crisis. The idea of ‘expansionary austerity’ most attributed to the work of Alberto Alesina and Silva Ardagna (2009). These authors claim to prove the argument that austerity brings confidence that settles markets and eventually generates growth. Arjun Jayadev and Mike Konczal unpacked that study and found the reverse: “when countries cut in a slump, it often results in lower growth and/or higher debt-to-GDP ratios.” (Jayadev and Konczal, 2010)

The book is a wonderful example of an academic that has something to contribute to policy debates, rises to the call, and inserts him- (or her-) self into the debate. The book couldn’t have come at a better time given that Europe was still mired in the actual debate upon its release. But then the IMF proved Blyth right when they added that for every 1% of GDP in budget cutting, GDP is reduced by close to two-thirds of a percentage point and the unemployment rate increases by one third of a percentage point (Guajardo et al, 2014; IMF, 2012). These IMF findings caused quite a stir, and Blyth weighed right in. He kept rolling upon the death of Margaret Thatcher, and the “breaking news” about Harvard economists’ Kenneth Rogoff and Carmen Reinhardt’s faulty study indicating the need for austerity.

After summing his argument, Blyth ponders whether the banks should have been bailed out in the first place. He doesn’t develop this argument, but others have developed a possible alternative where homeowners could have been bailed out instead (Mian and Sufi, 2014). Surely though, doing nothing would have been worse than what was done.

Okay, a great and timely read. But this is not only a book for policy makers and pundits. It is a book for scholars of IPE as well. Blyth’s book contributes to the emerging political economy literature on austerity by stressing a comparative historical analysis of the political, moral and economic ideas that have lent legitimacy to calls for austerity since the dawn of modern capitalism.

In this regard, the book speaks to contributions that stress the importance of the history of economic ideas. Where Vivien Schmidt and Mark Thatcher’s Resilient Liberalism focuses on the politics of policy ideas rooted in the rise of neoliberal economic thought during the middle of the twentieth century, Blyth’s book probes deeper in history, reaching into the very beginnings of the liberal economic order. To this end, he argues that an adequate explanation of the politics of austerity should take us back to the Scottish Enlightenment and should include an analysis of how the internal tensions of economic liberalism have been reproduced and contested over time. Blyth’s book also complements Florian Schui’s more polemical Austerity: The Great Failure. Schui’s book also looks at the moral and political ideas underpinning austerity over long periods of time, yet unlike Blyth´s perspective, his analysis is constrained by a the lack of a framework that grounds the story of ideas into the politics of contemporary financial crisis management. Indeed, one of the most important strengths of Blyth’s work is that it blends a sophisticated knowledge of intellectual history and political science with a granular analysis of the micro and macro-level dynamics of financial markets and their linkages to fiscal policy.

Blyth’s volume also speaks to scholarship that employs strictly materialist accounts of austerity. Wolfgang Streeck’s Buying Time, for example, connects the politics of austerity not to ideas but to the structural crisis of contemporary capitalism, a crisis that began in the 1970s.

On a somewhat related note, Colin Crouch’s Strange Non Death of Neoliberalism places the emphasis on the material interests and political leverage of the great corporation. While Blyth concedes that the power of corporate interests cannot be divorced from the power of “austerian” ideas, he shows how a strict materialist perspective leaves many puzzles about austerity unsolved. Indeed, Blyth blends these theoretical approaches as he documents how time and again that the argument for austerity is used by interest groups that will benefit from it—or at least be hurt if their fear of inflation occurs if expansionary policies are used over austerity. Blyth reveals how “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.” In the book, he weaves an understanding of how interest groups that stand to be the winners—creditors—reinvent the austerity argument. Interestingly, Blyth shows how creditors and their extended apparati construct arguments for austerity in ways that neatly span across the political spectrum by arguing that the alternative—inflation—hurts the poor. Thus expanding the coalition for austerity. Finally, Austerity both complements and challenges accounts with a more institutionalist sensibility such as the analyses contained in Coping with the Crisis, a volume edited by Nancy Bermeo and Jonas Pontusson and discussed in RIPE READS last year.

Now, in this book one won’t find the meticulous documentation of exactly who used these arguments and how they put together and funded networks of messengers to advance such ideas. Such a detailed process tracing occurred in his first book, Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century. That wasn’t the purpose of the current book, but the same lines of analysis are there. They extend that earlier work to show how interest groups support ideas that fit right in with their interests in order to exert power over the regulatory system in an attempt to make the state pay for their mistakes.

* This is a longer version of a short review that is currently in the new issue of the Review of International Political Economy

References

Alesina Alesina & Silvia Ardagna (2009), “Large Changes in Fiscal Policy: Taxes Versus Spending,” NBER Working Paper No. 15438.

Arjun Jayadev, Mike Konczal (2010), “The Boom Not The Slump: The Right Time For Austerity,” Roosevelt Institute, http://www.rooseveltinstitute.org/sites/all/files/not_the_time_for_austerity.pdf

Guajardo, Jaime, Leigh, Pescatori, Andrea, “Expansionary Austerity: New International Evidence” Journal of the European Economic Association Volume 12, Issue 4, pages 949–968, August 2014.

International Monetary Fund (2012), Fiscal Monitor, Washington, International Monetary Fund.

Mian, Atif and Amir Sufi (2014), House of Debt How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, Chicago, University of Chicago Press.

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