BOOK REVIEW: “Austerity: The History of a Dangerous Idea” by Mark Blyth (2013)

Austerity: The History of a Dangerous IdeaSuccess often depends on timing. Though Mr Blyth has been working on this book for two years, its launch seems to have come at a very appropriate moment. After several years of austerity measures, public opinion in countries across the world is becoming more critical on the cutbacks their governments have brought in to reduce their deficits. Adding to that is the discovery that Reinhart and Rogoff’s models, the theoretical underpinning of these policies, were erroneous. This is a well researched and well argued book and the title, “Austerity: The History of a Dangerous Idea”, will give you a clear indication of where the author stands. 

Key words

Economics, finance, economic crisis, debt crisis, governmental fiscal policy, leverage effect.

Summary

Mark Blyth

Mark Blyth

“Austerity doesn’t work. Period.”

So concludes Mr. Blyth at the end of this very clever book. (And if you are thinking that the ending has been spoilt, you’ll have got the message long before reading the final chapter.)

The logic behind policies of austerity has always been that, by reducing wages, prices and public spending, confidence is retored in a defunct economy and business will begin to reinvent itself. This idea is not new and can be traced back to philosophers, such as Locke, Hume and Adam Smith, who all fought to limit the influence of the state.  Germany’s disastrous period of hyperinflation in the 1920s have made it a champion of avoiding inflation at all costs, even if that leads to high unemployment.

poor feeds rich

Austerity = all will pay for mistakes of the rich.

According to Mr. Blyth there are several problems to this policy. Firstly, it is blatantly unfair since most of the costs of such policies are met by the poorer sector of society, who had nothing to do with the curent crisis, rather than the affluent.

     

“Austerity is the penance- the virtuous pain after the immoral party- except it is not going to be a diet of pain that we shall all share.  Few of us were invited to the party, but we are all being asked to pay the bill.”

The second reason is that , by voluntarily deflating the economy we will never get the public to start spending again and to thus create new and sustained economic activity. This takes us back to Keynes’ argument of the 1930s in that the decision to save and to invest are separate.

One of the strengths of the book is that it gives an objective stance to the current crisis.  According to Mr. Blyth, too much time has been wasted talking about what some bankers did in their private lives rather than concentrating on the decisions that they were making, which would lead to the financial meltdown.

“The moral failings of individuals are irrelevant for understanding both why the financial crisis in the United States happened and why austerity is now perceived as the only possible response, especially in Europe.”

The book is sometimes full of very dry wit indeed. Take one or two examples.

” (Adam) Smith economics are a bit like Shakespeare – often quoted, seldom read. ”

“Smith’s invisible hand had just given the public the finger.”

The difficulty with Mr Blyth’s arguments is that they are far less easy to understand than those of the austerity camp and require a certain knowledge of economics to grasp the underlying logic of the author’s arguments.

Adam Smith

Adam Smith

Still, he is not short of courage. He is happy to take on the Scottish Enlightenment philosophers (Hume and Smith, in particular) and comes back time and time again with examples to reinforce his central theme that reducing taxes and public services will not lead to growth.

Mr. Blyth’s solution to this problem is through higher taxes. He admits that this idea is not generally liked by the public, but concludes that “since I found out in 2010 I paid more taxes than the General Electric Corporation…I’m willing to give financial repression a chance.” This could be done by a one-off tax on the richer parts of society or chasing corporate money in tax havens, which are in hiding from governments.

After, several years of hearing « there is no alternative » (to quote “she” that shall not be named !), this book is very interesting reading indeed, and I recommend it to any of those who wants to get a different, well argued view as to why the current austerity policies may not end our current economic woes.

Mr. Blyth on Austerity

    

Interesting Quotes:

Part of what academics do is generate ideas and teach.  The other, perhaps more important part, is to play the role of “the Bu*I*hit Police.” The arguments given for why we all must be austere do not pass the sniff test.

Italian public-sector debt in 2002 was 105.7 percent of GDP and no one cared.  In 2009, it was almost exactly the same figure and everyone cared.

World turning into Greece

There never was any general risk of the whole world turning into Greece.

 There was no orgy of government spending to get us there (in the US).  There never was any general risk of the whole world turning into Greece.  There is no risk of the United States ever going bust anytime soon.

 Austerity is intuitive, appealing, and handily summed up in the phrase you cannot cure debt with more debt.

We tend to forget that someone has to spend for someone else to save; otherwise the saver would have no income from which to save.

Austerity is a zombie economic idea because it has been disproven time and again, but it just keeps coming.  Partly because the commonsense notion that “more debt doesn’t cure debt” remains seductive in its simplicity, and partly because it enables conservatives to try (once again) to run the detested welfare state out of town, it never seems to die. 

rich and poor

The overall approach towards the poor and the rich is not always fair.

In sum, austerity is a dangerous idea for three reasons: it doesn’t work in practice, it relies on the poor paying for the mistakes of the rich, and it rests upon the absence of a rather large fallacy of composition that is all too present in the modern world.

Austerity is the penance- the virtuous pain after the immoral party- except it is not going to be a diet of pain that we shall all share.  Few of us were invited to the party, but we are all being asked to pay the bill.

The moral failings of individuals are irrelevant for understanding both why the financial crisis in the United States happened and why austerity is now perceived as the only possible response, especially in Europe.

According to Mr. Viniar, (CFO of Goldman Sachs) what happened in 2008 was “comparable to winning the lottery 21 or 22 times in a row.

leverage wordcloud

Leverage effect can be costly in bad times.

Leverage is how banks make such absurd sums of money.  The Germans have a saying, “when you have two marks, spend one.”  In modern banking that becomes “when you have one dollar in the bank, lend thirty or forty or more.”

So, part of the reason no one saw the crisis coming lay within the very models that the banks used to see things coming.  Such models see the future only as a normally distributed replication of the past.

The models used were worse than inaccurate.  As Andy Haldane of the Bank of England put it, “these models were both very precise and very wrong.”

The banks may have made the losses, but the citizenry will pay for them.  This is a pattern we see repeatedly in the crisis.

Since the 2008 crisis, banks that file with the US Securities and Exchange Commission have awarded themselves $2.2 trillion in compensation.

CNN: The Austerity Debate

     

See also:

Other Book Reviews

Slaves of Defunct Economists

Washington Monthly: “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.”

The end of the line

Financial Times: “Blyth writes in the tradition of Keynes, slashing away at orthodoxy and the orthodox, emphasising the power of ideas as well as interests in shaping outcomes, ranging widely over the history of economic and political thought, expressing deep scepticism about financial actors, and rejecting the curtailment of spending as the solution to a period of excess.”
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Austerity’s Big Bait-and-Switch

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Reviews, debate pile up around Blyth’s “Austerity”

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It Doesn’t Matter Whether It’s Actually Illegal. In Fact, It’s Actually Worse Because It’s Probably Legal.

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Reinhart-Rogoff one more time: why the 90 percent never should have been taken seriously

Real World Economics Blog: “This is the only reason that the Reinhart-Rogoff 90 percent debt-to-GDP threshold was ever taken seriously to begin with. The point that I have tried to make in the past, apparently with little success, is that debt is an arbitrary number. It is not something that is relatively fixed, like the age composition of the population or the supply of land.”

Gnasher’s Eye

“You will find a mixture of photojournalism and HDR’s on here, the two opposite sides of me. When photographing something for editorial purposes, we are not allowed to enhance the image with anything more than a crop or levels adjustment. This is one of the reasons I enjoy doing HDR’s, because I can go to town with the processing. I can go as wild as I want.”

3 Comments

Filed under Book Review, Business, Economics, Europe, Finance, Management, Strategy, USA

3 responses to “BOOK REVIEW: “Austerity: The History of a Dangerous Idea” by Mark Blyth (2013)

  1. Awesome post! Very interesting links too!!

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