Austerity: A Dangerous Accident?

Mark Blyth, Austerity: The History of a Dangerous Idea, New York: Oxford University Press, 2013, 288 pp.

(Note: This is an extended, remixed version of a book review I’ve written for a forthcoming issue of New Political Science).

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In the context of the current financial crisis, it is fair to expect that any book taking as its title Austerity: The History of a Dangerous Idea should satisfy at least two criteria. On the one hand, the book should present a robust exposition of the basic genealogy of the concept. On the other, the book should try to offer an argument as to how this idea achieved such a preeminent position in guiding not only the decisions of key policymakers but also the everyday, commonsensical worldview of the very populations for whomthese decisions will have the most serious consequences. It is in terms of the former that Blyth’s book is strong.

Prior to their incarnation in book form, Blyth’s arguments about austerity made a fairly prominent debut in the form of a YouTube video (linked both here and here). With over 100,000 views to date, the video gives us about five and a half minutes of a tweed-vested Blyth, accompanied by dancing chalkboard-style graphics and symbols, expositing many of the key terms we will encounter in the text. Central to his argument is the distinction between debt and leverage, and the idea that while a “balance-sheet” perspective on the events of 2008 might suggest that it is sovereign debt that should primarily be keeping us up at night, we should in the same breath be wary of what he terms “the fallacy of composition.” That is, the idea that not all good things go together. What is good for any one economic actor in a given situation is not necessarily good for the whole. And this, he argues, is especially true of cutting government spending in the midst of a global recession.

Why then have most governments around the world focused so intently on debt? His answer in the book is that austerity has a ring of virtuous commonsense about it. Unsupported by any realistic appraisal of the facts, the global response to the financial crisis is motivated more by an ideological morality play. Austerity is painful, yes, but it is as natural as a hangover. After a decade or more or debt-fueled growth, recession is the ‘pain after the party’ that recalls to us the true cost of the goods and services we enjoy so much.

But there are two reasons we should be leery of this morality play. The first is that it diagnoses the wrong problem. In 2010, the hugely influential economists Carmen Reinhart and Kenneth Rogoff published a paper entitled ‘Growth in a Time of Debt,’ warning of the growth-suppressing effects of high debt-to-GDP ratios. Blyth rejects this argument, however, noting that it conflates correlation and causation. When the ratings agency Standard and Poor’s decided on August 5, 2011, to downgrade US debt, the effect was not to chase up the country’s bond yields. To the contrary, it was equities that took the hit (3). Thus far from being worried about government spending, what markets were essentially signaling was an anxiety about the prospects for domestic growth. The point, says Blyth, it is not that debt does not matter at all. Rather, it is that the resolution of debt is contingent upon the vicissitudes of the business cycle, and has very little to do with the deficit (12).

The second reason is more political. The medicine it prescribes is deflationary, targeting precisely the wrong people. Echoing refrains of the 2011 Occupy movement, Blyth notes that the American economy is characterized by extreme gaps between the haves the have-nots. Fiscal consolidation, he argues, is a shortsighted game in which those at “the bottom 40% of the income distribution,” those who actually rely on government services, stand to lose the most (14). For Blyth then, the sovereign debt framing is a lie riven with class politics. Indeed, it is likely the “greatest bait and switch in modern history” (73). The only mystery is that it has met with such little opposition.

Echoing remarks by George Soros, Blyth argues that a full explanation of the turn to austerity necessarily involves an account the political power of ideas. Economic theory, he says, is a part of the world we live in, and not just a “correspondent reflection” of it (39). To be sure, the 1999 repeal of the Glass-Steagal Act made possible a panoply of new, complex financial instruments. But the core issue was the “epistemic hubris” of the US bankers who failed to see the obviously mounting risk in their portfolios (91).

In this manner, Blyth appears to suggest that the crisis was essentially an accident. It was a case not so much of a lack of regulation, or of moral hazard, but of a way of thinking. Presenting this case, Blyth draws on a number of thinkers, from Friedrich von Hayek to Nassim Nicholas Taleb, all known for their arguments concerning logics of unintended consequences. Keynesianism was the first port of call in Europe, he argues, mainly because by that time most of the world’s neoliberal economists were either in a state of complete denial, or had fled the field of debate completely (54). However, neither the European Central Bank (ECB) nor the German government were so easily dissuaded. Ever-cautious of the risk of inflation, Blyth notes, German policymakers are by nature “ordoliberals.” That is, advocates of a Sozialmarktwirtschaft model, where the state may intervene to regulate, and provide social safety nets, but only insofar as such moves might further the “framework conditions” that “make the market possible” (57). To this end, order and stability are the premium values, not the rewarding of errant behavior.

As Blyth explains it, the German view started to rebound in 2010. By summer that year, ‘growth-friendly’ had become the watchword among op-ed writers and in statements from the world’s key financial institutions. Curiously, despite its reputation as a neoliberal evangelist, the US held out on the Keynesian view through much of the year. The Americans were outgunned in the G20, however, and debt-to-GDP ratios were soaring on the European periphery, especially in Greece. By the end of the year there was a burgeoning sense that a fire sale was in the offing.

Enter a crucial variable: the euro. Despite market perceptions, and with the exception of Greece, there was nothing necessarily catastrophic going on amongst the PIIGS. At the end of the day, they were all cases of banking crises causing sovereign debt crises (73). In an ideal world, the solution would have been to write down the debts. In other words, effectively, for the PIIGS simply to have printed money. However, as the common currency effectively denied them such autonomy, the problem necessarily fell back on the good graces of the German taxpayer. And unfortunately, as it happens, the German taxpayer was not feeling especially gracious.

Why then have people acquiesced to the austerity agenda? Blyth’s book is strongest as a kind of field guide to the intellectual pre-history of our current moment. It details for example, the role of the so-called “Bocconi Boys,” Alberto Alesina and Silvia Ardagna, among others, in creating the early case for expansionary fiscal consolidation. These prominent scholars offered examples, like Ireland’s recovery from recession in the late-1980s, as evidence demonstrating the synergistic effect on growth of cuts in expenditure, wage moderation, and currency devaluation.

With this pre-packaged theoretical framework sitting on the shelf, it certainly makes sense that elites would find succor in it. And, to debunk it, Blyth cites a barrage of research showing how growth occurred in spite of these strategies, and not because of them. Surprisingly, however, when it comes to the bigger question of how austerity has achieved such a preeminent place as a discourse of everyday life, the book has little to offer. Blyth opens the text recollecting the opportunities he enjoyed as a child living in poverty, and laments the possibility that such opportunities might not exist for future generations. But he draws no connection between this dismal scenario and its potential function as an outcome in the global economy.

Such oversight is, frankly, astounding. Arguably, austerity is much more than an unhappy material side-effect of epistemic hubris. It is a set of attitudes and practices which contribute to the reproduction of a globe-spanning system of exploitation and value extraction which we may as well call capitalism — a topic of which the book has absolutely nothing to say.

Seeking to understand austerity as a response to a specifically capitalist crisis, we could do worse than conclude with a consideration of another popular online video about the recession from 2010. This one, by Marxist geographer David Harvey, invites us to imagine the crisis less as one bound up in the circulation of financial goods and services and more as one concerning our increasingly globalized sphere of quotidian production.

Why should this distinction matter? Harvey shares the view that austerity is a bait and switch. But it is also an indication of the desperate lengths to which capitalism must go in order to forestall the erosion of profit. Financial innovation, he says, is an intimate part of capitalism’s history — and profits in the financial world have in recent decades come to outstrip profits in manufacturing by a significant degree, thereby giving financial elites an unprecedented degree of clout in the policy world.

Not to say that ideas are irrelevant, but to forgo any systemic analysis and suggest the issue is one simply of mistaken thinking is myopic at best, and politically disabling at worst. Blyth casts scorn over a host of transnational institutions and nation states. The Germans, for example, are said to have ‘cheated’ for most of the postwar period, undervaluing the deutschmark for a competitive edge (76). Greece, for its part, is repeatedly denounced as the bad-faith partner that really does deserve the PIIG mantle (see 51, 73). As Blyth tells it, the hardship we endure today can be blamed on the irresponsible actions of these characters. Yet nowhere is it suggested that, despite their differences, the economic preferences of citizens in these countries are also shaped by the exigencies of a global structure of economic relations. Or that within this observation lies the basis of an argument for political solidarity among them.