Austerity: Book Review

Every dollar spent by government is a dollar not available for job creation and investment. Our first national priority must be eliminating the federal budget deficit, and paying down the national debt. It is immoral to pass on all that debt to our grandchildren. Europe’s problems are of its own creation: too generous a welfare state, too high taxes. What’s needed is belt-tightening, cuts in spending. Recessions are simply normal parts of a business cycle. Ride them out, and normal and natural rates of unemployment will return. The biggest problem in a recession is for a government to spend; it just prolongs the misery. The Great Depression would have ended years earlier were it not for Roosevelt’s foolish reliance on Keynesian stimulus efforts. What we need is to improve business confidence, achieved by cutting government spending. Or, heard more faintly, out on the fringes, this: what we need is to get rid of the federal reserve, and go back to the gold standard. What’s needed, above all, is austerity.

You have probably heard most, if not all of the ideas expressed in that first paragraph. Sometimes they’re uttered by politicians, sometimes by commentators, often by businessmen, occasionally even from economists, though only from that small (but sadly influential) minority of economists from the Austrian school of neo-liberal or libertarian thinkers. You’ve probably heard them at family gatherings, from your elderly great-uncle Horace, or on-line from that old high school friend now working as a computer programmer. But here’s what’s really important: everything in that first paragraph is false. All of it; every sentence. Demonstrably false. Provably false. Factually false. Or, to put it more colorfully (and here I quote Mark Blythe), “absolute horse***t.”

May I recommend an excellent book making that case: Blythe’s Austerity: The History of a Dangerous Idea. And no, his language isn’t generally that colorful. But it’s a passionate book, a fiery polemic, as well as a first-rate economic history. I loved it, and found it almost compulsively readable, but I should warn you; it’s a book about economics by an economist. It’s intelligibly written, intended for a general readership, but there are still paragraphs it may take you some time to unpack.

Blythe is professor of economics at Brown University, holds an endowed chair, published scholar with a lengthy resume. But, of course, economists disagree with each other all the time, and the main rival schools of thought hold views that are unreconcilable. So don’t just believe him because he’s a smart guy with advanced degrees in the field and an impressive publishing history. Read the book. Follow his logic and reasoning and evidence. Then let’s talk.

Because, let’s face it; austerity has a certain grim appeal. The United Kingdom, and France, and Spain, and many other countries in Europe have generous welfare states, high unemployment, and massive budget deficits. All that debt is crippling their ability to budget responsibly, especially when paying interest on debt already accrued becomes a major budget line. So what’s needed is good old fashioned thrift and industry. It’s common sense, we think, because that’s what we would do in our families. If we had a situation, in our families, where someone was out of work and our income shrank, we’d immediately cut down on our spending. We’d see if we could cut our food budget, we’d clip coupons, we’d forgo that new purchase, we’d scrimp and save and make do. Even if our income didn’t shrink, even if we did find ourselves in relative prosperity, we still look for ways to be frugal. Frugality is a virtue; profligacy a vice. How much TV advertising is based on that premise? You can save $___ if you use our insurance company, or wireless service, or buy that car from our dealership.

The problem is, if everyone practices frugality and austerity, the economy grinds to a halt. If everyone does it, it doesn’t work. Companies go broke, factories are shuttered. And a government is the very definition of ‘everyone.’

So when governments spend, more money is put into circulation, demand grows, and supply grows to meet demand. When governments contract, less money circulates, unemployment increases, and, paradoxically, budget deficits increase. Over and over again, Blythe makes this point: austerity doesn’t work. It has never worked. It’s been tried repeatedly, in countries all over the world, and has essentially a one hundred percent fail rate historically. What does tend to happen in austerity situations is that rich people get richer (because they’re insulated from the effects of it), and poor people, obviously, get a good deal poorer. And there are always neo-liberal economists who will insist that the only thing that’s needed is more patience. That it will work eventually.

Economically, there’s no reason to believe that austerity will ever work. Politically, of course, it’s a complete failure. As Blythe points out repeatedly, you can’t have a gold standard in a democracy. Gold standards constrict economic growth, and voters eventually get fed up. That’s exactly why the anti-austerity party, Syriza, just won an election in Greece, for example.

Blythe does not suggest, BTW, that governments should spend irresponsibly, or that deficits don’t matter at all, ever. Of course, too much government debt is a bad thing. But he does suggest several policy initiatives that are more likely to be successful. Looking at the debt held by the US government, for example, one obvious solution is to raise taxes on the super-rich. The greatest periods of economic growth in US history coincided with very high taxes on the top brackets.

He also believes that there exists, internationally, a tax collection crisis. That’s certainly true in Greece, where wealthy scofflaw tax cheats held, at one time, nearly every seat in their parliament. The fact is, most rich people don’t like paying taxes, and have the resources to avoid paying them. Governments need relentless imagination and cunning to see to it that that doesn’t happen.

I’m a bit skeptical about a country like the US mustering the political will to actually raise taxes, or let banks fail–another policy notion Blythe recommends. But the book is a treat. Give it a read. Plow through. You’ll be well-rewarded.



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