Book Club VIII

What does it say about us that we’re operating under a political-economic framework that doesn’t work, at least, not for the overwhelming majority of us? isthisthingworkingMoreover, what does it say that we know categorically that that political-economic framework isn’t at all sound, that it’s based on ideology rather than evidence, and what evidence is provided can be (and has been) thoroughly debunked? We know there is a better route to take, one that does have a proven track record of success but one that runs counter to the prevailing narrative of the past 30 years, an approach challenging an established orthodoxy that’s pretty much faith-based, a faith based on little more than class and status.

These are thoughts I thought while reading Mark Blyth’s Austerity: The History of a Dangerous Idea. It’s a short book, considering the subject matter it covers, from the intellectual roots of economic austerity theory through to its current application post-2008 financial crisis. Spoiler alert! Blyth quite emphatically declares austerity does not work.

Austerity is more of a philosophical outlook than it is a working economic model. At its heart lies a distrust and dislike of the state. austerityGovernment, from an austerity point of view, serves only as an impediment, all red tape and interventionist bullying. Every dollar in public spending or investment translates into one less dollar in private sector spending or investment. Stated as if that is inherently a bad thing, based purely on an anti-statist philosophy, and one made, as with much of austerity economic thinking, without much evidence to back its case up.

Blyth traces modern austerity’s dim view of government back to the origins of liberal thought, the late 17th/early 18th-century and John Locke. That state, such as it was then, was represented by an authoritarian monarchy, subject to no rules but its own. Representative government was in its infancy. Locke foresaw a liberal, market-oriented society, free from the regular financial assaults on the state’s treasury by an anointed single family of misrule. Locke, and later others like David Hume and Adam Smith (the father of the free market’s Invisible Hand) wrote as champions of what grew to be the middle-class of merchants, bankers and small enterprise.

As unnecessary as it might seem to write that much has changed in the 300+ years since, to austerity proponents, evidently, it hasn’t.

Not This John Locke

Not This John Locke

In order for their economic case to be taken seriously, austerians must work to convince us that our representative form of government is as self-serving, antagonistic to free enterprise and willfully whimsical to the needs of its subjects citizens as any form of dynastic royalty. Unfortunately, they’ve succeeded in doing just that.

Forget for a moment such success at the wider, international level and simply look at our local politics currently. Toronto elects a new mayor in John Tory who almost immediately goes to work vilifying city staff, proclaiming that he’s confident, despite evidence to the contrary, there remains plenty of fat to trim. The solution to the city’s revenue problems lies in cutting its public sector spending.

Austerity in a nutshell.

Perhaps the more disturbing aspect of the success of austerity is that the economic underpinnings are highly suspect and when it has been trotted out by accommodating governments, as we’re watching right now in Europe, it hasn’t worked. In fact, it’s made the problems it sets out to solve even worse. fellforit1Government debt levels increase rather than drop. Ditto unemployment. Austerity exacerbates the economic upheaval and insists the only way to fix that is to implement more austerity.

Even here in North America, where pro-austerity governments reacted to the 2008 economic meltdown in a very non-austerity, very pro-Keynesian way via stimulus spending, at the first sign of, if not recovery, an easing of further cratering, the reins were quickly tightened and austerity pursued. All eyes turned to the public sector debt and we were told to quiver. This will dampen investor and consumer ‘expectations’ for an economic turnaround.

In an influential 2010 paper, Growth in a Time of Debt, economists Carmen Reinhart and Kenneth Rogoff suggested that once a government’s debt exceeds a point of 90% of a country’s GDP, it kills economic growth. This was all many governments and economic bodies needed to hear as they set out to slash debt. tightenyourbeltAusterity, in other words.

Turns out Reinhart and Rogoff’s numbers might’ve been a little off, an Excel spreadsheet error. Disturbing in and of itself but hardly the first time austerity advocates have pursued their agenda using faulty assumptions. Blyth goes into detail of the ‘expansionary austerity’ movement stemming from Milan’s Bocconi University and especially the work of two economists, Francesco Giavazzi and Marco Pagano. In essence, their theory goes, by cutting spending (and theoretically, its debt), governments signal two things: tough times ahead and decreased competition for the private sector for investment dollars from the public sector.

Both rely on the very imprecise notion of expectations and a predictable, rational response to them. Turns out, according to Blyth, reactions vary and, almost entirely in a way the theory doesn’t predict. richierichCertainly here in Canada, consumers haven’t responded to the federal government’s austerity measures by spending less while the private sector remains on the sidelines, sitting on ‘dead money’. Canadians pile up personal debt, propping up a shaky economy that shows little more than anemic growth, and the bigger players look on idly, waiting for an economic idea with no history of working anywhere to work this time.

So how to explain such obstinacy? I’ll let Mark Blyth answer that:

When government services are cut because of “profligate spending,” it will absolutely not be people at the top end of the income distribution who will be expected to tighten their belts. Rather, it will be those who lie in the bottom 40 percent of the income distribution who haven’t had a real wage increase since 1979. These are the folks who actually rely upon government services and who have taken on a huge amount of debt (relative to their incomes) that will be “fiscally consolidated.” This is why austerity is first and foremost a political problem of distribution, and not an economic problem of accountancy.

Wrap it up in as glitzy a package as you want, sell it as the only viable alternative to improving our economy, backed up with proof of concept from various “schools” — Austria to Chicago to Bocconi – but at its very tiny, cold, cold heart, austerity is nothing more than the weapon of choice in the class war that’s been waged for over 30 years now. A lopsided affair that the rich, by getting richer and richer, are winning handily. It’s a situation, if history can provide any sort of guidance on the matter, that never turns out well for anyone.

austerely submitted by Cityslikr

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