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Austerity: The History of a Dangerous Idea First Edition
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Governments today in both Europe and the United States have succeeded in casting government spending as reckless wastefulness that has made the economy worse. In contrast, they have advanced a policy of draconian budget cuts--austerity--to solve the financial crisis. We are told that we have all
lived beyond our means and now need to tighten our belts. This view conveniently forgets where all that debt came from. Not from an orgy of government spending, but as the direct result of bailing out, recapitalizing, and adding liquidity to the broken banking system. Through these actions private
debt was rechristened as government debt while those responsible for generating it walked away scot free, placing the blame on the state, and the burden on the taxpayer.
That burden now takes the form of a global turn to austerity, the policy of reducing domestic wages and prices to restore competitiveness and balance the budget. The problem, according to political economist Mark Blyth, is that austerity is a very dangerous idea. First of all, it doesn't work. As
the past four years and countless historical examples from the last 100 years show, while it makes sense for any one state to try and cut its way to growth, it simply cannot work when all states try it simultaneously: all we do is shrink the economy. In the worst case, austerity policies worsened
the Great Depression and created the conditions for seizures of power by the forces responsible for the Second World War: the Nazis and the Japanese military establishment. As Blyth amply demonstrates, the arguments for austerity are tenuous and the evidence thin. Rather than expanding growth and
opportunity, the repeated revival of this dead economic idea has almost always led to low growth along with increases in wealth and income inequality. Austerity demolishes the conventional wisdom, marshaling an army of facts to demand that we recognize austerity for what it is, and what it costs
Frequently bought together
"Austerity is an economic policy strategy, but is also an ideology and an approach to economic management freighted with politics. In this book Mark Blyth uncovers these successive strata. In doing so he wields his spade in a way that shows no patience for fools and foolishness."
--Barry Eichengreen, George C. Pardee and Helen N. Pardee Professor of Economics and Political Science University of California, Berkeley
"Of all the zombie ideas that have been reanimated in the wake of the global financial crisis, austerity is the most dangerous. Mark Blyth shows how austerity created the disasters of the 1930s, and contributed to the descent of the world into global war. He shows how European austerity policies have prevented any recovery from the crisis of 2009, while rescuing and protecting the banks and financial institutions that created the crisis. An essential guide for anyone who wants to understand the current depression."
--John Quiggin, author of author of Zombie Economics
"Most fascinating is the author's discussion of the historical underpinnings of austerity, first formulated by Enlightenment thinkers Locke, Hume and Adam Smith, around the (good) idea of parsimony and the (bad) idea of debt. Ultimately, writes Blyth, austerity is a 'zombie economic idea because it has been disproven time and again, but it just keeps coming.' A clear explanation of a complicated, and severely flawed, idea."
-- KIRKUS REVIEW
'One of the especially good things in Mark Blyth's Austerity: The History of a Dangerous Idea is the way he traces the rise and fall of the idea of "expansionary austerity," the proposition that cutting spending would actually lead to higher output. EL As Blyth documents, this idea spread like wildfire.'-Paul Krugman, The New York Review of Books
"Mark Blyth's fascinating analysis guides the reader through 'the historical ideology which has classified debt as problematic.' In doing so he outlin
"One of the especially good things in Mark Blyth's Austerity: The History of a Dangerous Idea is the way he traces the rise and fall of the idea of 'expansionary austerity', the proposition that cutting spending would actually lead to higher output. As Blyth documents, this idea 'spread like wildfire.'" --Paul Krugman, The New York Review of Books
"An important polemic... valid and compelling."--Lawrence Summers, Financial Times
"Essential reading... The economy is much too important to leave to economists. We need to understand how ideas shape it, and Blyth's new book provides an excellent starting point."--Washington Monthly
"Splendid new book." --Martin Wolf, Financial Times
"Austerity is an economic policy strategy, but is also an ideology and an approach to economic management freighted with politics. In this book Mark Blyth uncovers these successive strata. In doing so he wields his spade in a way that shows no patience for fools and foolishness." --Barry Eichengreen, George C. Pardee and Helen N. Pardee Professor of Economics and Political Science University of California, Berkeley
"Of all the zombie ideas that have been reanimated in the wake of the global financial crisis, austerity is the most dangerous. Mark Blyth shows how austerity created the disasters of the 1930s, and contributed to the descent of the world into global war. He shows how European austerity policies have prevented any recovery from the crisis of 2009, while rescuing and protecting the banks and financial institutions that created the crisis. An essential guide for anyone who wants to understand the current depression." --John Quiggin, author of Zombie Economics
"Most fascinating is the author's discussion of the historical underpinnings of austerity, first formulated by Enlightenment thinkers Locke, Hume and Adam Smith, around the (good) idea of parsimony and the (bad) idea of debt. Ultimately, writes Blyth, austerity is a 'zombie economic idea because it has been disproven time and again, but it just keeps coming.' A clear explanation of a complicated, and severely flawed, idea." --Kirkus Reviews
"Informed, passionate." --Dissent Magazine
"Mark Blyth's fascinating analysis guides the reader through 'the historical ideology which has classified debt as problematic.' In doing so he outlines the relevance of century-old debates between the advocates and opponents of laissez faire, and explains why, after a
brief reemergence in 2008-09, and despite the lack of evidence supporting austerity, the world turned its back on Keynesian policies."
--Robert Skidelsky, author of Keynes: The Return of the Master
"Among all the calamities spawned by the global financial crisis, none was as easily avoidable as the idea that austerity policies were the only way out. In this feisty book, noted political scientist Mark Blyth covers new territory by recounting the intellectual history of this failed idea and how it came to exert a hold on the imagination of economists and politicians. It is an indication of the sorry state of macroeconomics that it takes a political scientist to expose so thoroughly one of the economics profession's most dangerous delusions."
--Dani Rodrik, Rafiq Hariri Professor of International Political Economy, The John F. Kennedy School of Government, Harvard University
About the Author
Mark Blyth is Professor of International Political Economy at Brown University. He is the author of Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century.
- Publisher : Oxford University Press; First Edition (April 25, 2013)
- Language : English
- Hardcover : 304 pages
- ISBN-10 : 019982830X
- ISBN-13 : 978-0199828302
- Item Weight : 1.04 pounds
- Dimensions : 8.6 x 1.1 x 5.9 inches
- Best Sellers Rank: #1,448,200 in Books (See Top 100 in Books)
- #870 in Money & Monetary Policy (Books)
- #1,162 in Economic Policy
- #1,553 in Economic Policy & Development (Books)
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Blyth shows that the case for austerity does not add up. The US did not pursue austerity during the recession and its economy has been growing. US GDP is 10% higher than it was in 2007. The EU has pursued austerity with vigor, but GDP in the eurozone is still lower than it was in 2007. Blyth shows that countries that cut the most have had lower rates of growth. Blyth claims that all the countries that cut public spending in response to the financial crises had significantly more debt in 2012 than when they started. For example, Ireland’s debt to GDP ratio more than quadrupled, from 24.8% in 2007 to 106.4% in 2012. The other problem is that austerity increased unemployment. Throughout southern Europe, unemployment has been at levels not seen since the Great Depression. It is still over 20% in Spain and Greece. As a result of cutting public expenditure Greece’s GDP dropped by 30% in four years. There is no evidence that austerity improves growth.
Blyth spends a lot of time trashing the pro-austerity thinking that took place in Europe. Germany is driving economic policy for the eurozone and they have never believed in Keynesian economics. Keynes advised that austerity was a bad idea during a recession. German politicians seem to believe that all nations could have trade surpluses if only they tried hard enough, despite the fact that it is impossible for all countries to have a surplus. Only one European country can be Germany. The Germans have often advocated the sort of solutions that failed in the 1930s. They argue that budget deficits and government debt have to be kept under strict control. The Maastricht Treaty, which established the EU, required that national debt should not exceed 60% of GDP and the deficit should not exceed 3.0%. Entry to the euro also requires a budget deficit of 3.0%.
Blyth points out that when you have a deficit, you can either raise taxes or cut spending to fill the gap. The British government of David Cameron favored the latter in 2010. The British deficit had reached 10% in 2010. However, UK government debt went up, not down, despite the cuts, from 52.3% of GDP in 2009 to 90.7% in 2013. The same pattern was repeated throughout the eurozone. Cutting public expenditure shrank the underlying economy.
The German argument is that running large deficits increases the risk of high inflation. Blyth points out that the Germans have selective amnesia about their past. It was the Wall Street Crash in 1929 not hyperinflation in 1924 that led to Hitler. Before the crash, 1.25 million people were unemployed in Germany. Hitler was an accidental Keynesian and by 1937 German unemployment had fallen from six million to one million. Unfortunately, much of his spending was focused on preparing for war. Blyth argues that Germany's continuing insistence on austerity is the biggest threat to the eurozone.
According to Blyth, the current version of the austerity argument was created by a group of Italian economists, originating from Bocconi University, in Milan. He explains why their arguments are deeply flawed. Blyth argues that, apart from Greece, public sector debt in the eurozone countries was not out of control before the financial crises. Blyth rubbishes the theory of “expansionary austerity,” that cutting spending will lead to higher economic growth. The “austerians” believed that large spending cuts would be followed by expansion rather than contraction. The reason, they suggested, was that decisive fiscal austerity created confidence in the private sector. Keynesians agreed that insufficient private spending was the cause of the problem, but only governments could stimulate demand on the scale needed. Austerity failed to stimulate demand in Europe. Blyth also argues that everybody cannot cut the way to growth at the same time. The IMF once went along with austerity but it has recently concluded that austerity has had major adverse economic effects.
Blyth is worried that inequality could become a serious problem in the US. The 400 richest Americans own more assets than the poorest 150 million. He argues that both major parties have written off the bottom 30% of society. He claims that the American working class has not had a pay rise since 1979, and globalization has failed them. He believes this explains the anger behind the Trump phenomenon. Blyth points out that rich Americans and the country’s biggest companies are reluctant to pay tax, so government borrowing has had to go up. Blyth claims that he pays more tax than GE.
Blyth is critical of Republicans who advocated austerity. Republicans in the US also favored balancing the budget and cutting taxes. Keynesians, like Paul Krugman, argued that this is what Herbert Hoover tried to do in the early 1930s and the result was a 25% unemployment rate. Obama inherited an 11.4% budget deficit in 2009. The Republicans wanted to cut government expenditure but Blyth argues the reason the US has recovered faster than Europe is because it cut less. He makes it clear that it is poorer people who usually rely on government services to make ends meet who are the hardest hit when public expenditure is cut. He believes that the rich and corporate America need to start paying more tax. He also argues that the US government should probably have let its banks go bankrupt – as the Icelandic government did – rather than bail them out.
Blyth reminds us that 2008 was a private sector crisis. The debts of the banks landed on the balance sheet of the public sector through bank bailouts and quantitative easing. In other words, taxpayers bailed out the bankers. He calls this the “greatest bait-and-switch in modern history.” The EU is imposing austerity on southern Europe and dismantling the welfare state in Greece in order to protect German banks that made stupid decisions.
Blyth in recent interviews has argued that the EU may have a sinister agenda and it really wants to drag wages in Western Europe down to East European levels so that it can better compete with China. I assumed this must be an exaggeration but it might not be. The Guardian mapped labor costs across the eurozone from 1999 to 2013. What they found is that German workers have barely seen wages rise for that 14-year stretch, despite Germany having massive trade surpluses. We could be in for real trouble.
The three parts of the book arent really equal in importance. The first is a quick introduction to the recent financial history we just lived through, it starts with the US and how the bailing out of the financial industry evolved. It goes through some of the politics and discusses the loss arising from the crisis and estimates on the opportunity cost we have endured as a result. Europe is also discussed but it is noted that the structure of the monetary union without a fiscal union has created a much larger problem in which the member states dont have the resources to individually recapitalize their banks (given the asset base of European banks is much larger share of each member's GDP than a US bank is of US GDP). The inability for the financial system to recapitalize given the lack of fiscal transfers has led to the embracing of austerity as a solution which the author goes on to discuss as failing.
The second part is the heart of the book and the strongest part for me. It discusses economic history through the ages starting with Locke, Hume and Smith. It is rare to read economics with as much focus on political economy these days, but it is refreshing to remind ourselves of the origin of the philosophies we sometimes take for granted. Empowering the individual and merchant classes in these early philosophies is detailed and one gets reminded of classical economic theory detailing that savings are the source of funds for investment which is at the heart of believing in austerity as necessary if government spending is crowding out investment. The book then discusses the 19th century and Ricardo and Mill and then the case studies of the Great Depression are detailed. The accounts are well written and give a sense of the history of the economic policies that were at the heart of the depression and the subsequent outcomes (which did not generate growth). Keynes and Austrian school philosophies are discussed and so is the growth model of Germany that it embraced after the second world war which the author calls ordoliberalism. Through this chapter the stage is set for modern day politics and why the discussions in Europe are framed as they are. The idea that reflation can happen through austerity via the expectations channel of business (believing in future reduced taxes) is debunked and the case examples of contractionary fiscal policy being expansionary are exampled case by case and shown to have been the product of different reasons.
The conclusion tries to wrap things up. It does argue convincingly that austerity does not create growth and the economic system we have been living in and the product of has increased wealth inequality and the build up in debt is a function of the financial crisis not profligacy. The policies are mentioned casually and not really worked through in detail but provide food for thought. All in all the book is a worthy read and gives a good historical account of why the paradox of thrift is true and the fallacy of composition is important to remember. I think it is important to note that austerity is not always about cutting expenditure as a means to create growth it is that certain forms of expenditure might be unsustainable and therefore government spending needs to be cut where unproductive. This idea doesnt lead to specific deficit or surplus targets but if all government expenditure was spent on paying somebody to dig a hole and another to fill it, clearly that is something that should be cut. The author focusing on the expansionary contractionary policy is important to debunk (ie that government expenditure always crowds out private investment and therefore reducing government spending spurs investment) but that is the tip of a much more important discussion. European economies diverged as the nontradeable side in Spain and Ireland (for example) ballooned as money flowed between economies without risk aversion. To reallocate labour from construction to the tradeable side is difficult and requires fiscal expenditure to average out but thats not about austerity or not austerity, its about structural reform and institutional arrangement. The world has its problems and the solutions are complicated and dont boil down to austerity or not austerity - most people dont believe that is the only issue that is up for debate. The history is excellent but the trivialization of facilitation of the real economic reforms needed and how best for fiscal authority to smooth that cycle are glossed over and as a result this should be read for its history, not its policy.
Top reviews from other countries
As is apprent from the title, there is not a neoliberal bone in the author's body. While some may call him an unashamed Keynesian, he has the (to some) annoying characteristic of working both the economic literature and the real life factual examples down to the bottom line, which often leaves the austerity arguments severely wanting. He also clearly points out the redistribution aspects of the austerity message - and not in a Marxist manner - and how those affect the popularity of the policy.
The book is built up around several main facets. The first one being that the current predicament came about as a result of a banking crisis and not of public spending running amok (with the exception of Greece). This then led to the 'too big to fail' meme in the US and the consequent state bailout. In Europe some countries drew the same conclusion, however the banking sector is different - being accoridng to the author very much in the 'too big to bail' category. The moral hazard that played out is covered next - but make no mistake - the author by no means attacks the integrity or morality of bankers, just points out how the structure of the system encouraged certain behaviour, which turned out to be very counterproductive for society as a whole in the long run.
Following that the intellectual history of the austeriy idea is covered from Hume, Hobbes, Smith and Ricardo to the present day, with the Austrian school, the German ordoliberal thinking and the Bocconi support all getting appropriate air time. The author is openly critical of most of their approaches from both a theoretical and empirical point of view but makes a good case for a reasonable debate (as in not being uniformly and rabidly against on ideological grounds).
All the real life poster children for austerity working are examined next, including a short rerun of the austerity approaches in the post WW1 world (US, UK, Sweden, France, Germany and Japan being amongst the cases), the 1980s, where the standard cases of Ireland, Sweden, Denmark and Australia are examined and the currently popular Irish case and the REBLL alliance. As a counterpoint from today's world he brings the case of Iceland, a rare example of banks being allowed to fail and which alone amongst the examples has a truly positive development to show post crisis.
Where I find the book earns the last star is in the author doing an excellent job in distinguishing the cases, where austerity may work from those, where we only have rhetoric at play. Another reason for the high score in my opinion is that the author manages to pull off something of a Heilbroner (famous for his The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers (Penguin Business Library) ) here - namely ensuring that complex concepts are broken down to be both understandable to the regular reader, while at the same time not sounding inane to someone familiar with the topic.
The only slight fly in the ointment is the relative paucity of advice how alternative solutions could look like. Sure enough, the author presents some plausible next steps but these are nowhere as comprehensively covered as the subjects in the rest of the book.
Irrespective, this is a very important book and one would do well to read it and understand the consequences of where current policies are likely to lead the countries implementing the austerity mantra. Not perhaps for the hardcore neoliberal but thoughtful enough to let the other readers seriously reconsider the current path the world is following.
However his talkative style gets out of hand when he's being technical, because it can be very hard to follow, and you find yourself having to re read segments because your brain has almost given up on deciphering when you're reading
Why do we suffer the austere government policies and why the public was left footing the bill for the risky money practices of a few fat cats at the top?
This book covers all that and more, from the bailout of the US and the EU, to the neoliberal politics that brought that about. How the Euro compounded that problem in the EU and why the rich got away with the greatest Ponzi scheme ever at the taxpayer's expense.
Mark Blyth shows us the folly of austerity and the nonsense of expansionary austerity. Well worth reading and should be compulsory for everyone who wishes to understand governments economic policies.
As a former external advisor To President Barack Obama, it is a shame how the Republican party blocked some of his most ambitious plans. Aimed to improve life for American Families.