From the Washington Monthly's March/ April 2013 issue, "Slaves of Defunct Economists: Why politicians pursue austerity policies that never work," by Henry Farrell -- On January 25, the British statistics office announced that the United Kingdom’s economy had shrunk by 0.3 percent in the last quarter of 2012. After enduring two recessions in the last four years, Britain is now well on its way into a third. The pain has been compounded by a succession of austerity budgets, in which Britain’s Conservative-led government has tried to hack away at spending. Repeated rounds of cuts have battered the British economy. However, Britain’s chief economic policymaker, Chancellor of the Exchequer George Osborne, wants still more pain. He is pushing the government to identify £10 billion more in cuts this year.
This makes no economic sense. Olivier Blanchard, chief economist at the International Monetary Fund, has pleaded for Britain to start focusing on growth rather than fiscal virtue, claiming that “we’ve never been passionate about austerity.” It doesn’t make any political sense, either. Voters like vague proposals for “reducing government waste” in the abstract, but hate cuts to programs that they care about. Why do so many members of the political elite disagree with Blanchard in their visceral passion for austerity? Why do they keep on pushing for pain when it threatens economic ruin and hurts their election chances?
Mark Blyth’s new book, Austerity: The History of a Dangerous Idea, gives us some important clues. Many books have been published in the last few years explaining why some economic ideas (the efficient markets hypothesis; the Black-Scholes option pricing model) are dangerous. Blyth, a professor of international political economy at Brown University (and a friend of mine), explains why a blind fixation on austerity is one of these terrible ideas. However, his book does two additional things that other books in this genre do not. First, it asks why bad economic ideas, like austerity, have such powerful consequences. Economists themselves do not think that ideas are powerful, and their models usually assume that people are motivated by straightforward self-interest rather than complicated notions. Second, it asks why these ideas keep on coming back. Every time governments have experimented with austerity, it has led to disaster, and yet a couple of decades later, their successors try again, with equally dismal consequences.
Blyth cares about bad ideas because they have profound consequences. We do not live in the tidy, ordered universe depicted by economists’ models. Instead, our world is crazy and chaotic. We try to control this world through imposing our economic ideas on it, and sometimes can indeed create self-fulfilling prophecies that work for a while. For a couple of decades, it looked as though markets really were efficient, in the way that economists claimed they were. As long as everyone believed in the underlying idea of underlying markets, and believed that everyone else believed in this idea too, they could sustain the fiction, and ignore inconvenient anomalies. However, sooner or later (and more likely sooner than later), these anomalies explode, generating chaos until a new set of ideas emerges, creating another short-lived island of stability.
This means that ideas are fundamentally important. The world does not come with an instruction sheet, but ideas can make it seem as if it does. They tell you which things to care about, and which to ignore; which policies to implement, and which to ridicule. This was true before the economic crisis. Everyone from the center left to the center right believed that weakly regulated markets worked as advertised, right up to the moment when they didn’t. It is equally true in the aftermath, as boosters of neoliberalism have moved with remarkable alacrity from one set of bad ideas to another.
After the initial shock wore off, American neoliberals interpreted the economic crisis as a morality tale about the need to reduce government debt by ending entitlements and hacking away at out-of-control government spending. Their European counterparts used Greece’s travails to tell another morality tale—one about the dire consequences of dishonesty and political corruption. As Blyth argues, by interpreting the problem as one of government failures, they sedulously overlooked the bad behavior of the private sector and made taxpayers liable for banks’ morally hazardous behavior.
These twin mythologies of austerity reinforced each other. American Republicans took up dubious academic claims and turned them into a variety of economic know-nothingism. During the presidential debates, Mitt Romney warned that Barack Obama was turning America into a second Greece. European politicians, for their part, took comfort from the arguments of U.S.-based economists and commentators such as Kenneth Rogoff, who argued against economic stimulus.
The consequences for American politics were bad enough: without austerianism, the Obama administration might have gotten a proper second stimulus through. In Europe, however, the impact of austerity has been crippling. Some countries have had austerity imposed upon them, by European Union officials who were apparently convinced that austerity would increase business confidence and help these countries pull themselves by their own bootstraps out of the quagmire. Others, like the United Kingdom, have embraced it voluntarily. None of them have had a happy experience. The countries held up as examples of the benefits of austerity, such as Ireland and Latvia, have in fact suffered brutally. For sure, things would have been even worse if rich countries such as Germany had not helped. However, the conditions accompanying this assistance have led to an explosion of anger and resentment. Austerity— especially austerity imposed at the demand of foreigners—is not a vote winner.
Given all of this, why did politicians ever think that austerity was a good idea in the first place? They should have known that it hadn’t worked in the past. Every few decades, politicians implement austerity programs in response to some economic shock, and every time, it is a disaster—from the gold standard crunches of the nineteenth century to the idiotic response of German Social Democrats to the Great Depression. And then, after a couple of decades, politicians begin to forget how bad it was. Blyth doesn’t have a complete explanation for this peculiar form of recurring amnesia. He does, however, have the beginnings of an intellectual history.
Blyth argues that austerity had its beginnings in the inability of classical liberal theorists like David Hume, Adam Smith, and John Locke to think straight about the state’s role in the economy. While their intellectual heirs recognized that economic crises happened, they thought of them as an inevitable hangover from previous economic exuberance. All that the state could do was balance the budget, and perhaps even raise taxes, to restore economic confidence. Under this theory, austerity was something like the apocryphal vomitorium at Roman feasts, allowing the economy to purge itself between successive bouts of overindulgence
These arguments acquired ever fancier mathematical trappings. Economists came up with toy models under which austerity could actually expand the economy by restoring business confidence. And this general wisdom seeped down into politics. In 2009, Alberto Alesina and Silvia Ardagna wrote a paper arguing that austerity was a signal that politicians sent to entrepreneurs, guaranteeing that tax increases would not happen in the future so that they would have the confidence to invest in the present. When the crisis hit, they were invited to deliver a version of this paper to the gathered economics and finance ministers of Europe. Likely, many of these ministers now regret having listened to its recommendations, but the hurt is done.
Austerity: The History of a Dangerous Idea; by Mark Blyth
Blyth’s book is not perfect. It veers between entertaining polemic and detailed analysis, and sometimes overstates its case. To take one example, states like Ireland were more profligate than Blyth suggests. As the political scientists Niamh Hardiman and Sebastian Dellepiane have shown, they maintained budget surpluses only through unsustainable tax policies, which assumed that the property bubble would keep on expanding forever. Blyth’s indictment of banks and private finance sometimes lets government off a little too lightly. And the book isn’t as well organized as it might be; Blyth tries to stuff 400 pages of analysis into 200 pages of prose, leading to some unseemly bulges.
Nonetheless, it’s essential reading. John Maynard Keynes famously argued that politicians are the unwitting slaves of the ideas of defunct economists. Blyth’s book is a practical application of Keynes’s dictum, asking what those ideas are, why they are so important, and where they came from in the first place. If Blyth is right, we are only going to get out of the mess we’re in by developing new ideas that work better than austerity and can shape a new economic order, at least for a while. He doesn’t know any better than I do where those ideas will come from, but at least he has some understanding of why and how they are important. 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. (source: Washington Monthly)
Mark Blyth: Austerity - The History of a Dangerous Idea