I wrote a review of Mark Blyth's excellent new book Austerity: The History of a Dangerous Idea for the LSE Review of Books blog. The review is available here but I also post it below. Ha Joon Chang has a really good review of the book in the Irish Times.
The book is strongly recommended because not only does it provide one of the best treatments of the causes of the current crisis in the US and Europe but also traces back the development of the theories underpinning an austere approach to the crisis. It describes several examples where austerity has been shown to have failed (or at least where alternative explanations for recovery exist).
Irish readers will appreciate particularly the approach to our 'expansionary fiscal contraction' of the later 1980s and 1990s. There is a lot of mythology built up around that time which suggests government cutbacks fuelled the recovery. The book cites two excellent revisionist academic articles, one by Stephen Kinsella in UL and one by a colleague, John Considine and former colleague, David Duffy.
The book makes the argument that governments have sold the crisis as a sovereign debt crisis rather than the banking crisis that it really is. The chapter on the development of the European crisis separates the 'problem' cases into Greece, which is the only real sovereign debt crisis country, Spain and Ireland, which suffered from a property bubble, and Italy and Portugal, which are both suffering from long-term low-growth and institutional sclerosis. To me this shows that a common approach to resolve the European crisis can't work.
In my view the author lets governments too easily off the hook in some cases. For Ireland and Spain the role of regulation was absent, which is a government role. It's complicated of course in democracies where populist policies that inflate the bubbles find favour with the electorate. In that case governments have to be exceptionally brave and prescient. For Italy, Portugal and Greece (to different extents and for different reasons) the state does have to take more responsibility. For exampe, the author asks whether the state caused the current crisis and answers no "unless we are willing to say that in Italy the level of family fertility is a fiscal responsibility" (page 71). Of course it's not but neither is the state helpless in the face of demographic trends and needs to formulate policy in the context of demographics and institutions (perhaps trying to influence positive changes in both). The suggestion that the state is powerless in the face of these issues makes it less convincing that the state can do anything useless to resolve these crises.
These are important ideas. The argument that there is a type of paradox of thrift at work is very convincing. Austerity may be appropriate for individual countries (where there an opportunity to generate growth through exports for example) but where all countries are in austerity mode these growth options are not available.
There is also a game element to this crisis. It is difficult for one country on its own to forsake austerity for fear of market reaction and the reaction of EU leaders. This makes it more safe politically (though potentially less safe economically) to keep on keeping on with the current policy modus.
Here's the review.
Austerity: The History of a Dangerous Idea. Mark Blyth. Oxford University Press. May 2013.
At times I wondered if it was a contradiction in terms to enjoy so much a book about austerity. This is an intelligent, well-written book that is recommended for anyone wishing to understand, in both practical and intellectual terms, how the global economy has found itself in crisis.
We have heard the common mantra “austerity is not working” so often that it has now become cliché. The most irksome element of that mantra, at least for this reviewer, is that so often it is not clear what austerity means and even what would it mean for austerity to ‘work’. This is why it is refreshing for Mark Blyth to offer his definition of austerity early in the book, when he says it is “a form of voluntary deflation in which the economy adjusts through the reduction of wages, prices and public spending to restore competitiveness, which is (supposedly) best achieved by cutting the state’s budget, debts and deficits” (p.2).
The author argues that austerity is a dangerous idea for three reasons: it can’t work in practice, it imposes a disproportionate burden on poorer households, and it ignores the fallacy of composition that says that all countries cannot be austere simultaneously.
The book is structured in three sections. In the first section, Blyth sets out the sources and consequences of the current economic crises. The chapters in this section consider the US and European experiences and contain an impressively clear and detailed but yet concise explanation of how we arrived in the current mess. It is among the best descriptions of our path to crisis that I have read and is highly recommended to anyone who wants to understand the current economic climate. The author pitches his argument perfectly, avoiding the ‘pop economics’ approach that patronises many readers, while also taking space to explain the more complex elements of banking and finance that resulted in the perfect storm experienced by western economies. Blyth convincingly argues that what has happened since 2007 is the “greatest bait and switch in modern history” (p. 73), as business leaders, bankers and European politicians have sold a private banking crisis to citizens as a sovereign crisis.
While the author convincingly shows that the roots of the problems facing the global economy lie in a banking crisis rather than a sovereign debt crisis, one small criticism is that I think he is too forgiving of the roles played by governments and their regulators. They were found wanting as the seeds of the crisis were planted (in financial institutions and speculative bubbles that appeared in many economies) and spent too long trying to understand the scale and sources of crises subsequently.
The second section of the book is a consideration of the intellectual bases of austerity and a fascinating description of previous historical attempts at austerity as a means to restore competiveness and economic growth. In this section the author conflates the austere approach with liberal economic policies that distrust the state and see a very limited role for it in regulating a market economy. Tracing a line from Locke, Hume and Smith to the Austrian School, Schumpeter and Friedman to the critical role played by economists at Milan’s Bocconi University, the author demonstrates the persistence of austerity policies, despite periods when they would appear to have been spent. The strongest element of this section is the ‘natural history’ of austerity, which considers several examples (some touchstone examples for proponents of austerity policies) and demonstrates that the role played by contractionary fiscal policies is overstated. The experiences of austerity in the US and UK in the 1920s and 1930s, and Denmark and Ireland in the 1980s, are considered in the context of the REBLL countries today (Romania, Estonia, Bulgaria, Latvia and Lithuania).
The third and final section is unfortunately the briefest. In the words of the author it provides a “conjecture in lieu of a conclusion” and considers what would have happened if governments had not embraced the austerity agenda and transformed a banking crisis into a sovereign debt crisis. Iceland’s experience is held up as a “positive lesson”. I suspect the author over-simplifies the Icelandic developments and whether they can be generalised. The Icelandic government protected its citizens from the full impact of the banking collapses, but only at the expense of foreign deposit holders who saw savings wiped out. Even in countries with a significant proportion of foreign deposit and bondholders this may not have been an option for states in a monetary union. The arguments for financial repression and Tobin taxes on financial transactions are well made and it is a pity there isn’t a longer treatment of these ideas.
This is not to take away at all from what is a fine book and one that is certain to become an important reference point for anyone studying this turbulent period. The author has done a great service by describing the path to crisis in such an interesting and lucid way and also by putting the current policies in the context of the battle of ideas. It would be wonderful to think that ministers for finance and economy around the world will bring a copy of the book on holidays with them. We could expect a fresh approach on their return if it were the case and the clear message from the book is that we require fresh thinking to allow our economies and societies renew themselves.
I'm an economist so many of these posts will be about economic issues. But since everyone is allowed a view on economics I am inclined to go beyond my profession to throw my tuppence ha'penny into other issues.