The discovery of an error in an academic economics paper – even one authored by a pair of Harvard dons – is hardly most people’s idea of a headline grabbing news story. But that’s exactly what happened, in April, when a professor at the University of Michigan and an undergraduate student published data that revealed a serious coding mistake in a spreadsheet in Carmen Reinhart and Kenneth Rogof’s paper 2010, ‘Growth in a Time of Debt’.
Why was this headline news? Because Reinhart and Rogof’s research – which putatively showed that economic growth falls off a cliff once a state’s debt exceeds 90 per cent of Gross Domestic Product – provided the intellectual ballast for the on-going waves of ‘growth friendly fiscal consolidation’. That’s austerity, to you and me.
But, as Mark Blyth shows in this timely, authoritative account of the history of ‘cuts for growth’, the economic rationale for austerity was pretty diaphanous long before Reinhart and Rogof’s Excel boo-boo was unearthed.
For Blyth austerity (‘voluntary deflation’) is ‘a dangerous idea’ because ‘it doesn’t work in practice, it relies on the poor paying for the mistakes of the rich, and it rests upon the absence of a large fallacy of composition that is all too present in the modern world.’
After World War I, austerity was the policy of choice on both sides of the Atlantic, a process accelerated after the Wall Street Crash of 1929. The result, as any Junior Cert student can tell you, was, eventually, war. (In Germany, the Nazis were the only party opposed to austerity policies being pursued in the interwar years. They pledged to take the country off the gold standard and to actively increase employment. They did this — by building a war economy.)
Why then, 80 years later, when the global financial system went into meltdown, did world leaders turn again to austerity? The answer is that in narrow (but influential) circles, particularly in the US, the core ideas of austerity, inspired by rightwing Austrian economists – a minimal role for the state, cutting government spending, relaxing labour laws – never went out of fashion. And in one European state a version of austerity was being practiced for decades: Germany.
Tracing the lineage of the ‘the German ideology’, in Blyth’s homage to Karl Marx, is one of the book’s most useful contributions. Teutonic ‘Ordoliberalism’ has become the economic dogma of the continent, and particularly in the Eurozone. Which is great, as Blyth notes, ‘so long as you are the late-developing, high savings, high-technology, and export-driven economy in question’. For the peripheral PIGS, it’s awful and, worse, pointless. No matter how much it drives down wages and cuts back government services, Greek exports will never be able to compete with German exports.
Blyth has a terse explanation for the current economic travails: they ‘started with the banks and will end with the banks.’ The crisis unleashed in 2008 had nothing to do with government spending – Ireland’s net debt was 12 per cent GDP in 2007, this year it is expected to top 117 per cent – but arose from negligently over-leveraged banks hitting the wall. The cost of bailing out the banks was a sovereign debt crisis that we are still wading through with little prospect of shore in sight.
Austerity is often presented as TINA: ‘there is no alternative’. Blyth, however, has no truck with the ‘we all partied’ line and the moral puritanism that sees a post-bing purge as necessary purification. Instead he draws on reams of economic history to show that austerity as a road back to growth has seldom, if ever, worked.
He also has a good rummage around in austerity’s ideological baggage, from its roots in the Scottish parsimony of John Locke, David Hume and Adam Smith (the author himself hails from a working class household in Dundee) through to the impassioned anti-statism of Milton Friedman and Friedrich Hayek. Economically austerity is self-defeating, since if we all reduce spending at the same time we all grow poorer. What it has done is consolidate wealth in the hands of the already rich: in the United States, the top seven percent saw their average net worth increase by 28 percent between 2009 and 2011. For the remaining 93 per cent it dropped by 4 per cent.
So if austerity makes most of us poorer and only prolongs recessions, what is the alternative? Blyth is a respected academic economist, as the pages of footnotes attest, and he wisely counsels against pain-free solutions. His proposals – higher taxes and ‘financial repression’, such as capping interest rates on government debt – would not be without their opponents. But, as this timely book shows, austerity isn’t working, and it’s not about to start.
This review originally appeared in the Sunday Business Post