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Austerity: The History of a Dangerous Idea, by Mark Blyth
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Selected as a Financial Times Best Book of 2013
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 austerity for what it is, and what it costs us.
- Sales Rank: #129339 in Books
- Published on: 2015-01-02
- Released on: 2015-01-02
- Original language: English
- Number of items: 1
- Dimensions: 5.50" h x 1.10" w x 8.40" l, .0 pounds
- Binding: Paperback
- 336 pages
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. 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
"Blyth makes a compelling case that governments should give pause before embarking on
a course of austerity. He approaches the subject with a seriousness that is to be welcomed and applauded." --Benjamin Grob-Fitzgibbon, University of Arkansas, International Social Science Review
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.
Most helpful customer reviews
29 of 31 people found the following review helpful.
An interesting Keynesian view of the current EU austerity programs
By Metallurgist
I found this to be a very interesting and thought provoking book. The author makes his viewpoint very clear with the book's subtitle "The History of a Dangerous Idea". The essence of the author's argument is that austerity is unfair because it makes workers pay for the mistakes of banks, and even more importantly, dangerous because it does not lead to prosperity, but only to decreased economic growth and increased unemployment. This thesis is backed up by an analysis of the banking crisis of 2008, how it spread from the US to the EU, why the single currency Euro has made the problem worse for the EU and why using austerity to solve the problems will not work. It also discusses the history of the idea of austerity, both in terms of the economic theory that promotes it and the economic history that does not. Conservatives, who find Keynesian economics to be not only wrong, but also the road to economic ruin, will likely be turned off by the book's subtitle and many of the arguments that Professor Blyth utilizes. However, there is a lot of data in this book that they should look at, if only to criticize it. I found this book very enlightening and while I do not agree with all of Professor Blyth's ideas (particularly those of the last chapter), I learned a lot, so for me it was 5-stars.
What is in the book?
The book is divided into 7 chapters, which cover the following:
Chapter 1 - A Primer on Austerity. This is a short chapter that summarizes the main thesis of the book (mentioned above), and sets the stage for the more detailed discussions in subsequent chapters.
Chapter 2 - America: To Big to Fail? This is an excellent chapter that summarizes the origins and unfolding of the 2008-banking crisis in the US. This is a very complicated story, which Professor Blyth tells in a clear manner. The story revolves around repurchase agreements (Repos), mortgage backed securities (MBS), collateralized debt obligations (CDO), credit default swaps (CDS), and how all these interacted in a climate of deregulation to produce the crisis. Professor Blyth does a good job of explaining these terms and how the interaction worked.
Chapter 3 - Europe: Too Big to Bail? This is another very illuminating chapter. It shows how Europe, which first believed it was not going to be affected by the US banking crisis, became a major casualty of it and their own internal banking problems. All these factors were compounded by the single currency Euro, which has removed devaluation as a solution to the crisis, instead fostering the idea that governmental austerity was the only way to correct a problem produced by the private banking sector.
Chapter 4 - Intellectual History of a Dangerous Idea 1692-1942. This chapter goes back to the writings of John Locke, David Hume and Adam Smith to see how the idea of austerity developed. It also covers the idea in the early 20th century and the development of anti-austerity Keynesian economic theory. It is a nice primer on classical economic ideas.
Chapter 5 - Intellectual History of a Dangerous Idea 1942-2012. This chapter carries the story of the idea of austerity into the present time. It shows how the idea of austerity, discredited by the Great Depression and the success of the Keynesian solution (although conservatives would argue these successes were illusory and set the stage for future economic problems), has been resurrected by economists writing in the latter part of the 20th century and early 21st.
Chapter 6. Austerity's Natural History 1914-2012. Blyth presents a lot of data that shows that, contrary to the theories presented in the previous chapter, austerity has not worked in practice. Much of the chapter is spent it refuting the writings of several economists that say that the recent historical data does support the idea. Blyth contends that in general it does not and if is does in a few cases it either does not when all the data is considered, or worked only marginally under a very limited set of conditions.
Chapter 7 - The End of Banking, New Tales and a Taxing Time Ahead. This is a very short eleven-page chapter, but perhaps the most controversial on in the book. Blyth, initially a supporter of bank bailouts as absolutely necessary to prevent a complete collapse of the banking system and with it the whole capitalist economic system and with it democratic society as a whole, now questions whether in might not have been better to let the banks fail. He cites the case of Iceland where the banks were allowed to fail and society has recovered. This was done by making the bank's creditors bear the cost of failure, instead of all of Iceland's citizens. He notes that most of this loss was borne by foreign creditors of a very small country, whose banking system was an immense part of the country's economy, but was small compared to the economies of the US or the EU. Unfortunately, he fails to say how a banking collapse in the US or EU could be handled when the systems are huge compared to Iceland's and where the creditors are largely internal. He does not explain how the failure of these huge banking systems, with their internal creditors, would not result in the scenario he originally envisioned. I found this analysis to be poor and not in keeping with the thoroughness of the rest of the book. Blyth also floats the idea of huge tax increases, either through a one-time tax on assets or a very large increase in higher bracket tax rates. Conservatives, and many not quite so conservative, will likely blanch at these ideas. There is no discussion of the political difficulties of doing this or very much development of the idea, which is contained in only the last four pages of the book.
44 of 52 people found the following review helpful.
Combines a brilliant critical analysis of austerity with a dissonant view on bank bail out
By Abacus
Blyth shows how the piling on debt in the US was not due to wasteful profligate policy, but instead associated with the bailing out of the private sector, and the banking and financial system. For another excellent coverage of this period see Mark Zandi's Paying the Price: Ending the Great Recession and Beginning a New American Century.
Mortgage borrowers were defaulting en masse, housing prices were dropping like a rock, and the banks and overall financial system were either heading towards insolvency or in a freeze. Without extension of credit and the associated brutal deleveraging of all sectors at once, an economy not only contracts... it just about dies. If the economy is left to its own devices resulting GDP contraction is very severe and unemployment rate can reach 20%+. You are in a Depression. The solution is for the Government to pick up the slack in Demand and counterbalance the deleveraging and contraction occurring in all other sectors with expansive policies. That's an effective Keynesian response. Blyth advanced that's what the US did and it worked. The US is now undergoing a slow and sustainable recovery and has seen its unemployment rate dropped markedly already (instead of heading towards 20%+).
As the financial crisis contaminated Europe through the conduits of complex misrated housing related securities such as MBS and CDOs Europe faced a banking and sovereign debt crisis of its weak peripheral members of the Euro Zone. After, a short and incomplete Keynesian response, the Euro Zone lead by Germany went on a destructive austerity path. European austerity has already thrown the peripheral countries into a long Depression. Greece and Spain's economies have cratered for several years plagued by record unemployment levels of over 25%. Additionally, austerity has not contributed to any reduction in those countries Debt/GDP ratios as Blyth shows on the graph page 38. This is because the denominator (GDP) has contracted faster than the numerator (Debt) has been reduced or written down. This is the classic Debt Deflation conundrum that Irving Fisher had brilliantly exposed back in 1933 (The Debt-Deflation Theory of Great Depressions). Also, austerity policies did not contribute to reducing the unsustainable yields on those countries sovereign debt (see graph pg. 65). It is only once the European Central Bank bought such bonds to do "whatever it takes" to maintain the Euro that such yields have receded.
Next, Blyth goes on a long history of austerity. He presents a twin history.
The first one is an intellectual history that has survived through the times. At the onset, it was derived from interpretation and misinterpretation of the works of Locke, Smith, and Hume. Later austerity was heavily promoted by the Austrian school of economics championed by Hayek. Later, austerity found another champion in Milton Friedman and his monetarism. And, currently it is championed by libertarians, the Tea Party, and the German intelligentsia.
The second history of austerity is how it has worked out in practice from the 18th century to nowadays. And, it invariably exacerbated economic downturns. It is bar none the main cause of the Great Depression. Back then, due to policy constraints imposed by the Gold Standard (not unlike the ones associated with the Euro today) Government felt obliged to impose contracting government policies to curb imports. History demonstrated that the countries that left the Gold Standard first and were able to reverse their restrictive government policies were the ones who recovered first too.
Next, Blyth covers what austerity advocates mention as the demonstrated successes of austerity policies including Denmark, Ireland, Australia, and Sweden resolving their crises in the 1980s and 1990s. But, when Blyth examines the body of studies covering those events "far from supporting the idea of `expansionary austerity' it rather completely undermines it." In each case those economic crises were not resolved by austerity but by initial Keynesian expansive policies. It is only once those economies were shored up that these countries implemented fiscal disciplines. Once the private sector and households balance sheet are robust enough to take on the deleveraging of the government sector; then everything works out ok.
Next, Blyth analyzes some of austerity's most recent "successes" including the recent economic experience of Romania, Estonia, Bulgaria, Latvia, and Lithuania. However, when giving it a closer look he observes that austerity was not successful at all and confirmed one more time its really poor historical record as it contributed to brutal recessions in all those countries followed by subpar economic growth (see graph pg. 174 and table pg. 175).
Blyth advances an interesting idea separate to his rebuttal of Austerity. And, that is that a country to fully recover does not need to bail out its banking sector. He mentions Iceland as a success story. Iceland's three largest commercial banks had assets equal to 11 times its GDP. Those banks were literally too big to bail. So, the Icelandic government nationalized the smaller domestic portion of those banks' balance sheet and placed its much larger foreign portion in receivership. This in essence placed the burden of their bank bail out on British and Dutch depositors who saw much of their savings wiped out. Later, Germany contributed funds so those depositors recovered a few cents on the dollar on their Icelandic deposits. At the time, the Icelandic stock market lost nearly 100% of its value. And, five years later the market is still 94% below its pre-crisis level.
There are a couple of problems with Blyth's letting the banks go strategy. First, just like austerity it certainly can't work if everybody does it; or it can't work if a country of any scale does it. Imagine if Italy or Spain let their banks go. Or if the US had done the same... Oh wait the US tried that on a tiny scale. Remember the Lehman Brothers bankruptcy in September 2008. Well, that's when the entire global financial system froze overnight (spreads between LIBOR and Treasuries jumped from 15 basis points to over 400 basis points). And, Lehman represented only a very small portion of the US overall banking assets. Second, as reviewed above it is unclear how much of a success the Icelandic bank receivership strategy has been. I think it was more like a desperate measure in desperate circumstances rather than a success. By comparison, once the US Government learned its lesson that playing the "moral hazard" card does only exacerbate financial crisis (the Lehman bankruptcy) it quickly bailed out the banks by injecting $250 billion directly into the banks (TARP). Within a year, the banks bounced back and repaid the entire TARP funds plus a profit in the tens of billions to the US Treasury and taxpayers. Today, the US stock market has fully recovered and the US is not plagued by capital controls, IMF restrictions, and other limitations to fully accessing the capital markets. A financial crisis most often needs a lender of last resort to be resolved (be it the Government or a Central Bank). Absence of such a lender, you get continuing financial, stock market, and economic collapses. For more on this fascinating topic I also recommend Charles Kindleberger's outstanding Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics).
31 of 39 people found the following review helpful.
You can't cut your way to growth
By Ian K.
The United States seems to be in a constant set of battles about budgets and spending. These battles are relatively new: they didn't exist until we got a Democratic President. Under Republican Presidents budget deficits were OK.
In addition to the existence of a Democratic President, the other factor that has induced the budget battles is current size of the US debt. Republicans constantly portray this debt as the result of government spending gone crazy. Some Republicans claim that President Obama is a socialist, so the spending, by implication must be a massive transfer of government wealth to those "takers" rather than "makers".
At the start of Mark Blyth's book Austerity, he reminds the reader of how the budget reached its current state. It was not a transfer of money to welfare mothers, but a transfer of money to too-big-to-fail banks (welfare bankers). This combined with the war of choice in Iraq, has resulted in trillions of dollars that have been lost to productive economy.
The subtitle of the books Austerity: "A History of a Dangerous Idea" discusses the long history in modern economics of austerity budgets and the roots of Austerity budgets going back to the late seventeenth century. Austerity is a dangerous idea because austerity budgets, when an economy is performing poorly, act against economic growth.
After providing a brief tour of the current fiscal crisis and a longer discussion of economic theories of Austerity, Mark Blyth provides a much briefer discussion of what might be done moving forward. He points out that Greece did not get into its current situation solely as a result of government spending and cheap Euro credits. The massive borrowing in Greece was, ultimately, a result of Greek citizens not paying their taxes. While out-and-out tax fraud in the United States is much lower than Greece, the tax system has been warped so that General Electric paid less taxes than most people reading this review.
However, other than pointing out that changes in taxation are necessary, Marky Blyth doesn't offer much in the way of a solution to our current economic problems. The conclusion of the book is definitely the weakest part.
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