The poverty of austerity exposed

A new book explores the history of a dangerous idea.

A gold coin rests in a bin inside the Gold Standard jewellery store in New York
"Countries uniformly began to recover in the order that they abandoned the gold standard," says Rosenberg [Reuters]

The aftermath of “debtgate” – the revelation of eggregious flaws in the key economic study, “Growth in a time of debt” [PDF], predicting economic doom for countries with debt/GDP ratios over 90 percent – leaves the advocates of fiscal austerity without a proverbial fig leaf, as austerity throughout the eurozone continues to predictably fail. Yet, the political momentum for austerity still seems relatively strong, despite tentative hedging here and there. One just has to wonder – “Why?”

Fortunately, a new book has just been published that can help provide some answers. Austerity, The History Of A Dangerous Idea by Mark Blyth is definitely not the last word on the subject. Rather, it represents a promising beginning of making sense of how we’ve managed to forget so much since the last time we made similar mistakes on such a mammoth scale, back in the Great Depresssion. Austerity proper – the cutting of large state budgets as a response to economic distress – is in itself a relatively recent phenomenon, Blyth explains. There simply wasn’t that much to cut until the 20th century. But the attitudes, assumptions and ideas on which austerity draws, its constituent parts, as it were, have been with us since at least the time in which Locke, Hume and Smith sketched out the basic framework of liberal economic theory. And austerity more loosely defined – belt-tightening for those who can least afford it – clearly derived support from that framework prior to the 20th century growth of state budgets.

Spending economically

Before actually plunging into the subject proper, Blyth devotes two chapters to the current situation. The first examines how problems in the private financial sector caused the financial crisis in America, which was then transformed into a public sector crisis by bailing out the “too big to fail” banks. The problems involved were far too complicated and over-determined to provide an exhaustive account, but Blyth shrewdly focuses attention on key factors that did not simply make things worse, but were absolutely necessary for the crisis to have occurred at all. The second chapter then looks at Europe, where the imperiled banking sector was even larger – “too big to bail” and thus locked in an ongoing burden on the eurozone nations, which subsequently turned to austerity as a supposed way out, even though the public sector clearly was not the source of the problem.

Inside Story – The dark side of austerity

These two initial chapters are crucial in establishing how utterly disconnected from reality the austerian prescription truly is, no matter how powerful its stranglehold on current elite thinking may be. From there, Blyth proceeds to give two histories of austerity – first, an intellectual history of how its ideas developed over time and in different situations, and second a natural history of how austerity has worked in practice – mostly a tale of repeated disaster, but with a few anomolous bright spots, which Blyth shows to be the products of very special circumstances not applicable to the US or the eurozone today.

This impressive scope is handled in under 250 pages. While there may be many more questions out there to be answered than Blyth has thought to ask – or space to explore – he provides a useful framework for further inquiry, bringing many key issues into focus for further scrutiny, along with the curious geneologies leading from one specific nexus of ideas, institutions and challenges to others sometimes strikingly similar, sometimes not.

Just so we’re clear about the subject at hand, Blyth offers the following informal definition:

Austerity is 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. Doing so, its advocates believe, will inspire “business confidence” since the government will neither be “crowding out” the market for investment nor by sucking up all the available capital through the issuance of debt, nor adding to the nation’s already “too big” debt.

There are problems with all this, to be sure – that’s the whole point of Blyth’s book. But the story austerians like to tell is considerably simpler than the messy details of how it all falls apart time after time after time after time. What’s more, there’s a rather compelling moral overtone involved: You’ve got debts? Pay them! It’s what individuals, households and businesses must do, why not governments as well? 

Why not? The anti-austerity case is two-fold: First, as Blyth repeatedly points out, there’s the fallacy of composition: what’s true for any one individual isn’t always true for the whole, and in the case of cutting spending in a recession, it’s exactly the opposite of what’s needed, since one person’s spending cut is another’s drop in income, which only increases the need to cut spending more, creating a vicious downward spiral. Second, governments alone have the ability to resist this self-defeating logic. Governments sovereign in their own currencies – like the US and Britain, and most of Europe before the creation of the eurozone – have the power to borrow as much money as necessary to break the downward cycle of deflationary fear (moreover, Keynes specifically said that governments should pay down debt once the economy recovered, and the US consistently didreduce its debt burden [debt/GDP ratio] throughout the post-World War II period when Keynesian policies dominated. That’s what ensures their long-term ability to keep intervening with expansionary spending when everyone else is cutting back).

Eurozone sinks into longest recession

The logic involved is fairly simple and straightforward – provided that you begin in the right starting point, unencumbered by misleading assumptions which might make sense for individual ecoonomic actors, but make no sense at all for whole economies. It’s a weakness of Blyth’s book that he doesn’t spend more time clarifying this point and hammering it home. Instead, he spends most of his time taking us through various permutations of error that have unfolded over the years. Much of this may be necessary underbrush clearing, although it does tend to submerge the larger connections. But then there are passages of supreme lucidity, like a sunny clearing in the midst of a dark wood, and suddenly the patterns in the underbrush begin to emerge.

Turning away from TINA

Blyth is particularly good at making the historical connections that austerity cheerleaders desperately don’t want you to make – and at explaining why they apply. Perhaps the most potent of these connections is between the role of austerity economics in the Great Depression and its role in the eurozone today. After describing both the “logic” of the gold standard and why it had such a disastrous effect in the 1930s (although he doesn’t say so, countries uniformly began to recover in the order that they abandoned the gold standard), Blyth goes on to say the following:

If you think this [the gold standard system] sounds a lot like the eurozone at the moment, you would not be wrong. Swap “convertability into gold” with “the integrity of the euro” and it’s the same system. The basic problem of running as gold standard and the eurozone are one and the same, As was noted in chapter 5, there are (mainly) four ways to get out of a financial crisis – inflate, deflate, devalue and default. In both the gold standard and the eurozone states can neither inflate nor devalue, because the system in both cases was designed to remove exactly these options on the grounds that you can’t trust politicians with the printing press. That leaves default – which you want to avoid – and deflation (austerity) as the only remaining ways to adjust in both cases.

This not only clarifies the fundamental similarity between two different international austerity frameworks, it’s also about as concise an explanation as you will ever find about how austerians manage to create the illusion that there is no alternative (TINA) to the disastrous policies that they propose, which inflict so much pain on so many.

Indeed, one of the evident subtexts of Blyth’s book which cries out for futher systematic study is the ways in which socio-political power relations are first mystified, and then magically transformed into psuedo-natural laws, which in turn leads directly to TINA-style arguments. Or, more simply: how the golden rule works out in metaphysical practice: those with the gold make all the rules, not just about how the world does work, but about how it possibly can work.

Blyth explicitly highlights some examples of this. Most notably, he points out how the US and Britain as early developing industrial states adopted and promoted “free market” economic models as universally valid economic law. Later, he points out how later-developing nations needed the state to help their industries compete internationally, and they, too, developed pseudo-universal models based on their own specific situation. This is the framework in which he describes how the Germans adopted a variant of classical liberalism known as ordoliberalism, which accepts a much larger role for the state, but still one that’s directed toward similar competitive market ends.

Counting the Cost – Austerity debunked

Yet, despite this promising and clearly articulated example, and despite the fact that Blyth identifies several different forms of TINA arguments, he never systematically explores the underlying process of creating pseudo-universal truths in order to generate and justify TINA arguments. To do so might lead, for example, into realms explored by Harvard law professor Jon Hanson in his critique of the classic liberal subject in its more recent incarnation as the “rational actor” at the heart of the law and economics movement, among other places. As an alternative, Hanson proposes the “situational character”, based on evidence from across the behavioural sciences (see, for example, “The Situation: An Introduction to the Situational Character, Critical Realism, Power Economics, and Deep Capture“).

This is hardly the only loose thread in Blyth’s book. But loose threads do have a way of leading to the unexpected, and it’s precisely the unexpected which we should have learned to expect after all the different times that economic certainties have been smashed. Thus, it’s as much a strength as a weakness that Blyth doesn’t supply us with all the answers as to why we’re continually lead astray by the austerians.

The lesson here is not that there are no universal rules of economics, but rather, that one must be extremely sceptical of anyone who claims to have found one. Perhaps someday we shall have such rules in hand – or maybe even just one. But in the meantime, we should be content to ask ourselves who exactly benefits from this or that supposed universal law, and what the world would look like if some other law turned out to be true instead.

For now, at least, TINA does not exist. Only Tinker Bell does. And Tinker Bell only lives so long as we clap for her. So ask yourself: What would you clap for? What sort of world do you want to see live? That’s not to say that wishing is enough to make something so. The austerian experience clearly shows how wrong that is. But if wishing leads our questioning, rather than our answers, then we might really be onto something.

Paul Rosenberg is a California-based writer, senior editor for Random Lengths News, where he’s worked since 2002. He’s also written for Publishers Weekly, Christian Science Monitor, LA Times, LA Weekly and Denver Post. In 2000/2001, he was a principal editor/writer at Indymedia LA. He was a front-page blogger at Open Left from 2007 to 2011.

Follow him on Twitter: @PaulHRosenberg