Lies and prejudice: The politics of austerity | Video

Transcript

Governments in both Europe and the US have succeeded in casting previous government spending as reckless wastefulness that has destroyed economies. In contrast, they have advanced a policy of draconian budget cuts – austerity – to solve the financial crisis.

World Finance: Mark your book was published in 2013, which basically says that austerity doesn’t work. However, fast forward two years, and it seems that he Uk measures, for example, have paid off, with our economy growing. Do you still stand by your findings?
Mark Blyth: The United Kingdom stopped doing austerity in late 2011, before they even got the warning from the IMF to tell them to do so.

If you look at central government consumption, it contracted in 2009 and 2010, and then balanced out in 2011 and accelerated at the end. They’ve been hacking away at the welfare budget, with one third of the cuts falling on disabled people, and that’s made for good press, but they’ve got a budget deficit of around four percent.

The eurozone has cut, and the ones that have cut the most have lost 30 percent of GDP and seen their debts balloon

So if the United Kingdom has been doing austerity, whilst doing quantitative easing, whilst doing help-to-buy, whilst doing funding for lending, it’s a funny definition of austerity.

World Finance: You book says following the financial crisis we were told that we had lived beyond our means, and now need to tighten our belts. This view conveniently forgets where all the debt came from, bailing out the broken banking system. But that’s a bit easy isn’t it, why doesn’t anyone ever acknowledge the huge borrowing of the former government. What about Gordon Brown selling all of our gold, what about that?
Mark Blyth: Well what about Gordon Brown selling gold when it was at an all time low? It seemed to be a rather pointless asset at the time and I believe that was 13 years ago and has very little bearing on the current moment.

We have to remember the United Kingdom had four banks that were over 400 percent of GDP, and two of them went insolvent. If it wasn’t for the Treasury bailing out those lenders, because you can’t have over-borrowing without over-lending, you wouldn’t have had this mess.

Simply go to stats.oecd.org or whatever database you want and plug in ‘oecd debt.’ Check when it rises. It’s kind of flat going in to 2007, and then it rockets afterwards as we start to cut, and the more you cut the smaller the economy gets and the more debt you have, which kind of explains Greece.

So this is ultimately still a story about the banks, particularly in Europe, and the lazy thinking is to go “well, isn’t Gordon Brown overspending?”

World Finance: You’ve painted yourself out of the picture, but these strike me as socialist views, so your book, is that just a reflection of your political beliefs?
Mark Blyth: What’s a socialist view on the economy? If it’s a socialist view to say that when the private sector is contracting and de-levering its balance sheet, and the public sector simultaneously does the same thing, the only thing that can happen is a recession, then sign me up as a socialist. But then you’d have to sign up half the phds of the University of Chicago.

World Finance: You argue that historically austerity has been done over and over without the best results, yet governments still turn to it. Is it the lesser of evils, or is there a better solution out there?
Mark Blyth: Well yes. We’ve run a giant natural experiment across the world over the past several years. The sequester apart, which was $7-8bn a year over ten years on a $17tn economy, which they eventually stopped, the United States at a federal level didn’t cut. It’s growth rate is currently five times that of the eurozone.

The eurozone has cut, and the ones that have cut the most have lost 30 percent of GDP and seen their debts balloon. I’d say that’s pretty much conclusive evidence, yet again, that this doesn’t stick. So why do we keep doing it? Because it’s easier than telling democratically elected governments that they have to bail out the banking sector yet again, which is what they’ve done already and what they’re continuing to do.

World Finance: Does austerity work better in certain countries, or would you say it’s flawed the world over?
Mark Blyth: What is often seen as austerity is when governments cut and then they have growth afterwards. The classical cases of this happening are in small open economies such as Sweden, Canada, and Denmark in the 1980s. The only reason that happened is because the rest of the world took their exports, and they did a massive devaluation of their currency at the same time, an option which is not open to the eurozone.

Once you look at the facts of this case, there is nothing left standing for it. It’s simple prejudice.

World Finance: So your book traces the rise and fall of the idea of expansionary austerity. So are we headed for another crash?
Mark Blyth: Well one doesn’t necessarily lead to the other. The expansionary austerity is a very simple idea called the confidence fairy, which goes like this:

You have a precarious job at the moment. Your wife has one too, and the economy is tanking. Nonetheless, you lie awake at night worrying about government debt, because of course it’s such a terrible thing, and you’re delighted to hear that the government is slashing the welfare budget and contracting the economy now, even though it’s about to cost you your job, because you will pay less tax ten years from now. Given this, you’re so buoyed by the confidence effects, you run out to Ikea and buy a couch.

That’s literally the horse manure that was being sold by the European Commission in 2009 as an economic theory. Now, if you continue to behave like this, you’ll find you’re in a crisis. Guess where Europe is just now. In a crisis.