Professor Mark Blyth’s accessible and persuasive book offers a spirited critique of the policy proposition that governments should cut public expenditure during recessions. He concludes that to do so is a misguided strategy arising from a traditional economic liberal hostility to government interference in the market, dating back to John Locke. The ‘austerity’ policy is wrong, in his view, because it does not produce the beneficial results its adherents claim it will (‘it fails to deliver what is says on the tin’).
This is an engaging read, covering multiple national case studies, the GFC and the Eurozone sovereign debt crisis, along with an historical survey of notable contributions in the evolution of liberal ideology. Blyth considers both the stated and implied objectives and expectations of relevant policymakers, and surveys what they actually did and to what effect. The results were consistently either bad, inconclusive or otherwise problematic – certainly not sufficient justification for inflicting large-scale economic suffering on millions of human beings.
My one serious reservation about his account is with his explanation of why, like a zombie rising from the grave, ‘austerity’ programmes have been repeatedly applied to working populations throughout modern history, despite the lost output and social wreckage they invariably leave in their wake. The implied explanation is that blinkered commitment to liberal ideology has led policymakers to be insufficiently objective in weighing the pros and cons of theories they advance about how the economy operates, that is, that they sincerely hope and believe that austerity will produce economic growth.
But can we assume that those most apparently besotted by the ‘austerity’ strategy are really unaware of its track record? Is their uncritical acceptance of justifications for austerity, no matter how flimsy, and their willingness to persist with it even after it provokes a serious public backlash, not suggestive of interests lying elsewhere than with those of the broader public?
‘Austerity’ is, after all, merely an intensification of the progressive curtailment of public provision and of the abandonment of aggregate demand management techniques by Western societies since the 1970s. The results have been decades of chronic mass labour underutilisation and socially destabilising wealth and income polarisation throughout the world. Pools of unutilised workers continue to be cruelly managed to undermine the bargaining power of all sellers in the labour market, as they have been for centuries. In order for this to happen, governments must first be constrained from eliminating unemployment, as they did in the post-war era. I will return to this point, but first outline Blyth’s account.
The book surveys studies by neo-liberal/anti-Keynesian advocates of ‘austerity’. The US and European Union policymakers have uncritically turned to these studies for guidance during the recent global financial crisis and sovereign debt crises in the Eurozone. Such studies have suggested that when economic growth is stalling, and a country is slipping into a recession, the best policy is to cut public sector employment and expenditure, particularly welfare payments and other transfers. Such cuts are designed to signal to investors that they can expect ongoing future cuts to taxation (which many do not pay in any event). It is theorised that the resulting long-term increase in disposable incomes (for those with incomes) will prompt them to invest, resulting in increased employment and economic growth.
Proponents of this ‘expectations effect’ claim that it offsets the negative impact of welfare and public sector cuts on aggregate demand, basing their arguments on econometric analysis. Surprisingly, given the influence accorded their papers, Reference Giavazzi and PaganoGiavazzi and Pagano (1990), Reference Alesina and PerottiAlesina and Perotti (1995), Reference Alesina and ArdagnaAlesina and Ardagna (1998) all appear to have difficulty identifying cases where their ‘expectations’ effects unequivocally generated economic growth following public sector expenditure cuts. The few supporting cases all entail concurrent policy changes that more credibly explain higher growth, such as currency devaluations, cuts to interest rates, and the like. Even so, this does not dissuade these writers from insisting that governments have no choice but to cut welfare and public expenditure in a recession.
In demolishing the case for austerity, Blyth provides a convenient summary overview of how the idea of cutting public expenditure in a recession gained a bad name in the first place, by reviewing the 1930s ‘gold-standard’ experiences that generated the depression. The similarities between the gold-standard years and the present Euro crisis are clear, particularly in relation to how trade imbalances are addressed between countries with fixed exchange rates. Recessions are induced (generally with cuts to public employment) accompanied by cuts in welfare provision. The fear of harsh lengthy episodes of unemployment compels workers to accommodate increasingly demanding employers, driving down real wages and working conditions to lower national production costs, thereby improving trade competitiveness.
Blyth also describes how reflation measures advocated during the depression were attacked by austerity advocates as economic madness. He disposes of the old chestnut about the 1920s German hyperinflation, which is repeatedly raised as an objection to deficit funded aggregate demand management. He restates what others (including Australia’s E.G. Theodore in the 1930s) have previously explained: it was a deliberate strategy of the German government at that time to escape the punishing reparation demands of the victors of the World War I. It was not ‘Keynesian’ pump priming that got out of control.
He looks at the rise of modern Europe, particularly the influence of the Ordoliberals after World War II, whose small-government fetishism shaped the German economic strategy, with its focus on export competitiveness, and examines how this ideology came to dominate Eurozone thinking. Blyth points out the folly of those advocating its universal application (in Europe and elsewhere). It is logically impossible for every nation to be a net exporter. Some countries must be net importing by the exact same amount (in aggregate) that others are net exporting. He reports many instances like this of liberal economic arguments hinging on fallacies of composition or reversals in the direction of causation.
Blyth is perhaps at his most refreshingly blunt as he describes (with appropriate scorn) how the great private money houses of the world created the global financial crisis through their reckless greed, then arranged through their political and bureaucrat minions in governments to transfer their bad debts to public sector balance sheets, by means of trillion-dollar emergency bailouts. Gallingly, the financial upper class now demand harsh public austerity measures be implemented because they fear the debts that governments have assumed on their behalf will inhibit economic growth! And this is supposed to justify millions of the world’s citizens being made unemployed and impoverished? Meanwhile, those who caused the crisis that started the problem in the first place have returned to paying themselves massive incomes while getting on with business as usual.
We return now to my main reservation about this, as about many progressive critiques of economic liberal public policy. This concerns the framework used to explain why these discredited policies continue to be foisted on the world’s working people. The problem, as I see it, lies in taking austerity’s propagandists at face value, and assuming their stated expectations and objectives for policy are sincere. It often transpires that what liberalism’s propagandists claim as expressing a high philosophical ‘principle’ (promoting individual freedom, self-reliance, inter-generational justice, etc.) actually have more base and strategically self-interested motivations.
For example, Blyth notes that in the early 20th century, liberal ideology came to embrace a more interventionist role for the state because ‘the poverty and inequality that Riccardo regarded as inevitable could no longer be tolerated’ (p. 117). They (the Liberals) did not see this
embrace of the state as a necessary evil, as a papering over the cracks to avoid revolution. Rather, the New Liberalism acknowledged the state’s responsibility for the ongoing management and reform of capitalist institutions. (p. 117)
Blyth claims that this apparently benign attitude was reflected in the establishment of unemployment insurance and other civilising policies.
A closer review of the UK Liberals’ 1911 unemployment insurance and labour-exchange legislation, however, reveals it to be a carefully formulated strategic solution, designed to deflect public support from the Independent Labour Party’s proposals to eliminate unemployment and establish the ‘right to work’ (RTW) with a permanent stand-by public works system. The Liberals’ pro-business sensibility made them adamant that unemployment had to be preserved, in order to ensure that employers had the threat of unemployment to use in order to maintain authority over their workers. Even so, as a Government, they needed to be seen to be doing something practical to address the unemployment problem, if they were to retain the support of skilled tradespeople and white collar workers and to deter them from lending industrial support to the agitation for full employment among the larger mass of semi- and unskilled workers. Despite previously making a speech that eloquently expressed the common-sense logic of the RTW, Churchill set Beveridge to work on solving the Liberal government’s political problem. The method turned out to be a labour exchange and contributory unemployment insurance scheme, where worker contributions were matched by employers and the government. Among those in regular work, the insurance contributions of higher status workers provided a good measure of protection during their relatively occasional periods of unemployment. However, the insurance contributions of the great mass of chronically under-employed workers (the bulk of the labour force) were insufficient to support them during their longer and more frequent episodes without work. This ensured that unemployment retained its disciplining sting for them.
So while it was promoted to working-class electorates as a compassionate solution to their chronic unemployment, this Liberal legislation was designed to split the working-class vote, by retaining the electoral support of the ‘aristocracy of labour’, while grinding the lower levels of the workforce under the heel of intentionally inflicted unemployed poverty. Labour abandoned its support for its own RTW policy after Labour politicians were blocked from receiving salaries from trade unions as a consequence of the 1908 Osborne Case. In exchange for the establishment of parliamentary salaries, Labour’s Ramsay MacDonald agreed to drop their ‘RTW’ policy and support the Liberal legislation.
Thus, like much of what is claimed as enlightened and high-minded liberal policy development, the introduction of contributory unemployment insurance was simply at its base an exercise in class warfare. This raises my doubts about the usefulness of seeking an understanding of why these policies are repeatedly inflicted on us through an appreciation of ‘liberal philosophy’. There is, I suggest, an older understanding in which to situate the desire of business advocates to cut both public sector employment and expenditure on welfare: wealth polarisation depends on preserving and intensifying the misery and fear of labour underutilisation.
Since the emergence of waged employment as the predominant method for allocating people to work, employers have been aware of the social and economic power they derive as the gatekeepers of employment. They also feel their power increase when more of the willing labour force are unemployed and standards of welfare provision reduced, because the willingness to placate the demands of employers rises as the prospect of unemployment becomes more fearful. Conversely, we need only read the preamble to the Statute of Labourers of 1351, or the business press of the post-war era in Australia, to realise employers have seen their authority (social power) and access to cheap labour undermined in times of full employment. Reference Kalecki and KaleckiKalecki’s (1943 [1990]) Political Aspects of Full Employment is the best known work on the subject.
Of course, with the advent of universal suffrage, proposals to drive up unemployment by cutting public employment and expenditure, and to cut welfare expenditure in order to intensify the pain of unemployment, need to be justified as something other than the naked class aggression they really are. Thus, the incessant spurious advocacy for smaller government, balanced budgets and austerity, as the only pathways to national prosperity. And this is despite this strategy never delivering the full employment and prosperity that the alternate interventionist Keynesian approach consistently delivered, in Australia and elsewhere, for more than 30 years during and after the war.
Blyth is clearly right to meet the advocates of ‘austerity’ on their terms (they claim public sector retrenchment leads to growth; he shows that it does not), because their arguments need to be directly and publicly demolished in order to give politicians less scope to use them. But even if his critique did stay the hand of policymakers this time around, such people ‘have form’. If not with these arguments, they will push through their agenda with others, equally spurious. As things stand, by simply directing their government minions to maintain and strategically manage pools of unemployed and under-employed people, the buyers in labour markets across the world preserve their economic and social domination over the sellers in those markets.
In his conclusion, Blyth calls for a halt to austerity measures and for the enforcement of more progressive taxation regimes to make the rich pay more. He makes a case for not bailing out recklessly managed banks in future, no matter what their size. For those countries with currency sovereignty, only the first approach is strictly necessary for avoiding austerity in future, although the latter two have a desirable redistributive purpose. In view of persistent attempts, decade after decade, to use unemployment and harsh revisions to the adequacy of welfare provision as social engineering tools for empowering the buyers in labour markets, it is more necessary to remove the capacity of governments to create unemployment. This requires implementation of Article 23 of the Universal Declaration of Human Rights – the RTW, by requiring governments to employ any willing worker the private sector does not wish to employ, at a liveable minimum wage.
Those who read this and wonder how such a programme could be paid for, without being inflationary, could well study the research of the Modern Monetary Theorists (MMT), such as Mitchell.Footnote 1 They argue that governments that are the sovereign monopoly issuers of fiat currencies with floating exchange rates can first spend to mobilise otherwise unproductive human and other resources, and subsequently draw off whatever net financial assets they wish through taxes and charges. Such governments are not revenue constrained. The MMT-endorsed ‘Job Guarantee’ model provides a non-inflating minimum wage anchor to the wage structure, while providing employment in work of community and environmental benefit to anyone who needs it. This creates a healthier, more skilled and productive spare workforce for the private sector than does a skill-atrophying pool of unemployment, while concurrently providing a workforce for addressing otherwise intractable social and environmental problems.
Once established, there is an interesting political dynamic concerning full employment that makes it difficult to withdraw, even following a change of government. This dynamic emerged during the post-war period when countries like Australia kept unemployment below 2% for 30years. After just a few years of very low unemployment, the public came to understand the principles of aggregate demand management and to realise that governments had complete control over the level of unemployment (as those with currency sovereignty do today). They realised that any increase in unemployment was either deliberate or proof of incompetence, leaving governments with no choice but to maintain full employment or be annihilated at the polls (OECD, 1970: 37).
To prevent the possibility of such regimes becoming established again, neo-liberal economic frameworks, propagated by corporate-funded ‘economic education’ campaigns since the 1970s, and even embraced today by corporate-funded ‘labour’ parties, extol the need for fiscal constraint, balanced, even surplus, budgets and reductions in the size of the public sector. They assert the need to maintain unemployment at the non-accelerating inflation rate of unemployment (NAIRU) as a fact. It is the recipe for chronic labour underutilisation. The consequent power imbalance this maintains in labour markets around the world explains why the gap between rich and poor has continuously widened since the 1970s: working people are chronically disempowered.
Austerity is a demonstrably failed strategy, as Mark Blyth has established, when considered from the perspective of ‘what is written on the tin’. But we need to be more sceptical of the motivations of those who show such zeal in applying austerity, particularly when the justification for doing so is as flimsy as revealed in this book. Past decades of failed fiscal conservatism have not deterred their advocates, nor can they be somehow blind to the results, just as the ‘failings’ of contemporary ‘austerity’ measures are there for all to see. As Reference Kalecki and KaleckiKalecki (1943 [1990]) observed about the opponents of aggregate demand management during World War II,
Among the opposers of this doctrine there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives. (p. 324)
The take-away message from this book is that the austerity mongers clearly need to be brought to heel. In my view, Mark Blyth has not arrived at a policy that will do that, which I suggest is a properly constituted, locally and democratically managed, central government–funded, job guarantee system. This was a very engaging book, and I thank the editors for extending their kind invitation to me to review it.
