Austerity doesn't work. Period.
Austerity: The History of a Dangerous Idea by Mark Blyth (Oxford University Press, $24.95)
If you only read one book about the current state of the world’s economy—and the reasons for it—Austerity should be the one. Mark Blyth, a political economist at Brown University, has written a short history of austerity that ought to put a stake through the heart of the idea that we can rescue a recessionary economy by cutting back on government spending.
First and foremost, Blyth uses historical cases (Japan, the U.S. during the Great Depression, Ireland) to illustrate that austerity—the great thrifty hope of the people who think we must be punished for our economic sins, but who, for some reason, want to punish the poor rather than the bankers—simply doesn’t work. The sort of thriftiness that might be quite a virtue in personal finance, when elevated to national economic policy during a recessionary period, is an absolute failure. Even those of us who hate cutting social welfare programs might be persuaded to suck it up and make cuts if it would have a stimulative effect on the economy, but Blyth has the evidence lined up: It doesn’t work.
Next, he goes after the big conservative bugaboo: National debt. He makes clear that the current crisis (both in the U.S. and overseas) is not a debt crisis, but a banking crisis. The accumulation of national debt is—worrisome though it may be—is the result of the banking, another effect of an out-of-control financial sector. It’s not the cause of the recession; it’s another symptom.
But the real advantage to this book, above all others, is Blyth’s tone and style. The simplicity of his statement that “we cannot all cut our way to growth at the same time”—a powerful truth—is backed up by a clear explanation of the simple necessity that, in order to grow any economy, someone somewhere has to be in a position to purchase something. If everybody cuts back on spending at the same time, no one can make enough money to jump-start growth. He writes:
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. A debt, we must remember, is someone’s asset and income stream, not just someone else’s liability. Just as we cannot all hold liquid assets (cash), since that depends upon someone else being will to hold less-liquid assets (stocks or houses), so we cannot all cut our way to growth at the same time.
It’s a pretty straightforward explanation of Keynes’ “paradox of thrift.”
Blyth also goes into detail about where our current ideas of austerity come from, and, in a most useful way, explains how it is the our current austerity path (as well as the even more radical austerity plans in some other nations) will in fact only increase the disparity in wealth between the very wealthy and the rest of us, since these austerity measures fall so disproportionately on the poor.
He dismantles claims of austerity’s previous “victories,” and—especially in his explanation of the different ways that Iceland and Ireland handled their financial crises, has a solid foundation for refusing to bail out banks and regulating out of existence the whole “too big to fail” conundrum.
With the introduction this week of the “New Glass-Steagal act” (which really should have a better name; say, something like “the Fair Banking & Investment Practices Act,” this book is quite timely. It’s also necessary; since so many of us tap out out understanding of money with our own personal finances, Blyth’s overview of how larger systems work and how they affect our lives is crucial information.