Austerity Is 'Complete Horsesh*t': Ivy League Prof Dismantles the Conservative Lie
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11 February 2015
As devoted readers of Paul Krugman know well, there’s plenty of evidence from the last six years indicating that austerity, the idea that the government can best boost the economy by engaging in significant tax cuts as well as spending cuts, simply doesn’t work — at least not in today’s economic conditions. With the U.S. going through a period of significant GDP growth, a decrease in the unemployment rate and a falling deficit, it’s a lesson that holds less salience today than it did in years past. But in the eurozone economy, the application of “expansionary austerity” has been vigorous — and rather unsuccessful.
But with the victory of the anti-austerity party Syriza in Greece’s recent election, the state-of-play in Europe has changed dramatically. After years of economic pain and dislocation, Greek citizens now have a reason — however small — to hope that political pressure may force the leaders of the eurozone (German Chancellor Angela Merkel, first and foremost) to reevaluate their approach. Still, years of failure have not loosened austerity’s grip on much of the West; the appeal of the economic philosophy to its proponents seems to operate beyond the level of simple reason.
And this is why Brown University professor Mark Blyth’s book “Austerity: The History of a Dangerous Idea,” released in paperback last month, remains such necessary reading. Simultaneously functioning as an economics explainer, a merciless polemic, and a penetrating history, Blyth’s book offers a clear insight into austerity’s lineage, its theories, its champions and its failures. Recently, Salon spoke over the phone with Blyth about the book as well as the U.S. economy and the future of Europe. Our conversation is below and has been edited for clarity and length.
So, first off, I have to say that the book was a much funnier, feistier read than I’d expected, considering the subject.
[Laughs] I try to find the humor in death and gloom, yes.
In the introduction, you say austerity is an offensive canard. Can you tell me what you meant by that?
Canard, trope, truism, call it what you will. It’s one of those wonderful “well, it stands to reason that,” common-sense sort of tropes. The problem is, it fails because it’s not a common-sense argument. If there is a single insight that deserves the title of the key insight of macroeconomics, it’s the one that the whole is different from the sum of its parts. While it makes sense for anyone, family or firm or even state, to try and reduce its debts in order to grow better, if everybody tries it at the same time it becomes self-defeating. You need income from which to save, so if everybody tries to save at once nobody’s generating any income and therefore the project becomes self-defeating…
The common sense is, well, the more you cut the more you’ll be rewarded. No, I say the more you cut the more debt you end up with. That’s what I mean by being a canard, a trope. it’s one of those common-sensical things that seems to be true but just look at the evidence and you’ll find that the reverse is actually true.
Why is it something that you find offensive? What is it about austerity that you take personally?
Part of it is because what I think the financial crisis is best seen as — and we’re still dealing with the aftermath of it, whether we like it or not — is that there’s a class-specific put option. Let me explain what I mean by this: A put option is a contract that’s very common in finance where essentially someone is selling insurance and the other person is taking the income for payments. At some point, they get to basically cash in the put. One way to think about this is, Europe’s been expanding up to the borders of Russia and there’s a country called Ukraine, and, essentially, that means that Europe is writing a put option, which Ukraine has now decided to cash in. Which is why, basically, Europe’s now on the hook for all the crap that is Ukraine. That’s a put option contract.
What has this got to do with the financial crisis and why do I feel passionately about it? Well, remember all those banks that got bailed [out]? In order to get bailed out you need to have assets, and my liabilities are the bank’s assets. The bank doesn’t give a damn about my condo because they’ve got an income stream coming from the mortgage. The assets and liabilities of the bank and the private sector sum up to zero, so when you bail that out, what you’re doing is you’re bailing out the private sector’s assets, which basically means the top 20 percent — if not about the top 10 percent, the top 1 percent — of the income distribution.
How do you pay for those bailouts? You pay for those bailouts with cuts. And who are the people that use government services? Well, it’s not the top 20 percent or above of the income distribution, it’s the bottom 70 percent and below. That’s what I mean by a class-specific put option. The people at the top get their assets bailed; the government says, Oh my God, look at all that spending! It’s out of control! We need to cut policemen and fire brigades and healthcare and various public services.
But what does one have to do with the other? Well, the people at the top who get their assets bailed, you’re not going to tax them, as Obama just found out with his college proposal. So what do you have to do? You have to take it from those who have very little already. I find this personally offensive because, although I’m an Ivy League professor today with a named chair and all the rest of it, the only reason I’m here is because of the British welfare state. I grew up in a single-parent home with my paternal grandmother on basically no money at all, and if it wasn’t for free schooling and free university… I don’t know where I’d be, but I wouldn’t be an Ivy League professor.
So what you’re doing is you’re bailing out the assets of me today so that a younger person of me down the income distribution doesn’t get to go to college like I did. That’s total bullshit.
It seems that politicians often frame their argument in the same way. Like, “We’re saddling our grandchildren with debt…” and so forth.
This is a classic canard as well; it’s complete horse shit! The sum total of public debt is equivalent to the assets of the private sector. Who do you think is buying these things? At the end of the day, the public’s debt is simply a transfer of income and interest from one side of the public to the other; you owe yourself the money. The argument that you have to cut it now so that you don’t leave your kids in debt is totally fallacious because if you cut now what you’ll leave them instead is a smaller economy by the time they become adults, which means that the same amount of debt will actually be bigger.
That’s what happened in Greece; that’s what happened in Portugal; that’s what happened in Ireland through the cuts. It’s doubly fallacious because if you don’t actually pay it now and you focus instead on growth— which is what the administration, through the opposition of Congress and other such nonsense, has done— as those kids get older the economy will be so much bigger that, reciprocally, the debt will be smaller. There’s a reason the United States has never paid back its Civil War debt in full. The economy is hundreds of times bigger than it was back then. What’s the point?
We also tend to hear that what’s happening in the eurozone is a consequence of sovereign debt. The narrative we get is that all these countries were showering their citizens with welfare-state goodies but at some point “the party has to stop” or whatever.
That’s another of what I like to call “information-free comments.” There’s no information in that statement. Simply be lazy enough to crawl over to your keyboard, tap in stats.oecd.org or the vastly complex tradingeconomics.org, and just look at the public debt profiles of, for example, Spain and Ireland. Both of those countries cut their debts in half from 2000 to 2007, and yet those debts exploded beginning in 2008.
Why? because when they got hit with the financial crisis there were certain stops in the capital flows that these guys were living off of, not public debt sales. Because of that, their economies imploded, their deficits exploded, and they end up with huge amounts of debt. Then came the austerity move, either formally, through the troika, or informally, through peer pressure in the European Central Bank (ECB) — and both of these countries have seen their debts explode while they’ve been cutting.
In America, at least, the narrative has shifted quickly to the idea that the era of austerity in the West is over or coming to an end. Is that true?
It’s definitely not past in Europe. Europe is about to basically fall apart by trying to teach a tiny little country the size of Alabama a lesson in moral hazards, which could lead to the implosion of its banking system once again, and this time [ECB President Mario] Draghi has no more tricks in his bag to solve the problem. They really are on a path to blowing up the eurozone and it’s looking very likely that they’ll do that.
Back in the United States, you went through the craziness of the sequester and that stuff and, ultimately, $78 billion of discretionary, nondiscretionary, on a $17 trillion economy is enough to be annoying but it wasn’t enough to actually do real damage. Once the brakes were off, then, of course, the economy started to recover more. Now, you’ve got the eurozone dragging the world economy down; you’ve got China slowing down; the United States is the only place left that’s actually growing. Why is that? Because it’s the one that cut the least. It doesn’t mean austerity is over and it doesn’t mean the Republicans aren’t going to come back with the same old-time medicine and illogical nonsense masquerading as economics — because, basically, they represent people who don’t want to pay taxes — it doesn’t mean that that’s gone, that we’ve all woken up and said, Whoop dee do!
The politics have turned as such that when you’re running an experiment across the globe in what happens when you cut and it looks like Europe and it’s really bad, it’s really hard to stand up and say, Unless we make Social Security stable in 2056 we may have to cut benefits in 2048, which is why we need to cut now. It’s like, what are you talking about? This is rubbish! Just stop!