In a series of videos, Mark Blyth discusses the intellectual history of austerity -- the basis for his forthcoming Oxford UP book. Annoyingly, the video is organized as a playlist, so the video switches every ten minutes or so rather than playing through. The talk is well worth an hour's watching nevertheless, and I look forward to reading the book when it comes out in April.
I don't want to take too much away from him, but I have a few problems with in Blyth's analysis of current events. When he talks about the eurozone crisis he diagnosis it correctly: in a currency union, if everyone devalues internally then recession will continue; in a currency union, devaluation externally is impossible; the only other option is default. Where Blyth goes wrong is when he says that austerity is a choice, even under these conditions. Here I disagree for reasons I outlined in a previous post (see also the follow-up: "There Will Be Austerity"). Any of default, internal devaluation, and external devaluation is a form of austerity. What form is chosen is a political question. Each of these imposes costs on a different groups of people, so the political battle is of a distributional nature. Blyth insists (sometimes) that this is not the case, that austerity is the result of a cognitive or ideological blunder, and expresses a preference for a policy which is not politically feasible, nor normatively desirable (at least for much of the eurozone): turn the ECB into a "bad bank", and load it up with all of the underperforming assets being carried by eurozone banks.* While this would be great for some eurozone countries, it would be horrible for others. Which is why I think this political question is ultimately of a distributional, rather than ideational, nature.
In a another, somewhat similar way I think Blyth contradicts himself about the causes of the eurozone mess. On the one hand, he maintains that the root cause is profligacy on the part of the eurozone banks: they loaded up on too much sovereign debt from the europeriphery, as evidenced by declining interest rate spreads among the eurozone members. On the other hand, Blyth argues that the sovereigns themselves were not profligate; with the exception of Greece, they were all fiscally sound before the crisis and bailouts. But both cannot be true. If the euro sovereigns did not issue massive quantities of bonds, then there would not be massive quantities of sovereign bonds for banks to buy, in which case the banks would not be in any trouble at all.
This is an important point for him, because he claims that the eurozone crisis (and the US crisis) is the "greatest bait-and-switch in human history". Specifically, he claims that private obligations -- incurred by banks -- became public obligations -- via bailouts -- and now governments are the ones being chastised for fiscal profligacy and the public is having to pay through austerity policies. While not entirely false, this account needs more than he gives it. The story he's telling goes like this: Sovereign debt becomes bank assets, which then become sovereign liabilities again once the sovereigns begin to have trouble servicing they debt, which pushes the banks into insolvency, thus necessitating a bail out. But if this is not the fault of sovereigns then there must be a missing step somewhere. Otherwise I'm not sure where the "bait-and-switch" comes in. I think he can fairly easily square this circle by reference to capital inflows from the eurocore to the europeriphery which fed real estate booms, as well as European appetite for U.S. asset-backed securities. But then he can't explain the convergence in European sovereign borrowing costs so simply.
In the Q&A someone asks Blyth how he defines "austerity". I perked up at this point, because I've written about the slipperiness of definitions of austerity before. His answer, I think, leaves something to be desired. Blyth answers that to him "austerity" is not a combination of any particular policies, but rather a belief in the supposed expansionary properties of fiscal consolidation. Krugman also talks about the problems with "expansionary austerity" a lot, but it seems to me that this contradicts Blyth's own narrative about the ideological history of austerity. As Blyth tells it, austerity has traditionally been viewed (by Schumpeter and others) as the "purge" which must follow the "binge". It is the necessary hangover after the party. Well, such analogies provide no indication that austerity will be expansionary; quite the opposite. It is called "austerity" after all, not "luxury".
At times, Blyth conflates the "expansionary austerity" argument with the "Treasury View" (and earlier versions such as Ricardian equivalence). This is incorrect. The Treasury View -- which largely prompted Keynes' General Theory, as a retort -- is that government spending would "crowd out" spending in the private sector, so the effect of public spending would be neutral (or negligible), not expansionary.
Later, Blyth tries to make the case that shift from Schumpeterian "hangover" austerity to "expansionary" austerity occurred in the Bocconi school of economics in Milan, and was given full voice by Alberto Alesina.** So far as I can tell, this entire school of thought consists of a mere handful of academic papers authored by an even smaller number of economists (see lit review in this paper), the most significant of which (Alesina's) was published in 2010, well after austerity politics had begun in Europe and the U.S. Does Blyth seriously think that the German Finance Ministry, or U.S. Federal Reserve Board of Governors, are primarily influenced by these somewhat-marginal Italian economists rather than more traditional, distributional, political economy concerns? If so, he needs to do more to make case. Perhaps it's in the book, but as I've written before claims of expansionary austerity are mostly attacking a straw man.
These qualms aside, as intellectual history Blyth's talk is excellent and I expect his book will be outstanding as well. I've been waiting for it for what seems like years now, and I'll be happy to get my hands on a copy.
*Note that I think this is possible, and perhaps normatively desirable, but only if the legal standing and conceptual nature of the ECB changes in fundamental ways. As many have noted, this would transform the ECB into a quasi-dictatorial body with nearly no democratic oversight. Perhaps this is itself desirable to some, but there are major downsides to such a policy choice even assuming that the ECB chooses to behave as Blyth seems to think it will. As such, I see no clear sign that it will happen the way Blyth wants it to happen in the near term. Also note that Blyth says that the U.S.'s TARP was an analogous policy. It wasn't. TARP was administered by the Treasury, not the central bank, and was therefore the sort of private-obligation-into-public-obligation program that Blyth decries as a "bait and switch". The TALF program, which was administered by the Fed, supported new issuance of asset-backed securities (with the securities as collateral) as a means of unfreezing credit markets during the winter of 2008-9. The Fed bought some "toxic assets" as part of PPIP, but these later turned into billions in profit. The Fed is not now, nor has it ever been, a "bad bank".
**Alesina did do his undergraduate degree in economics at Bocconi, but he did his PhD at Harvard and has been on Harvard's faculty for almost his entire career. At one point he was the department chair. I.e., Alesina's saltwater credentials are intact. For the record, here are Alesina's current views on the effects of austerity on growth. The short answer? It depends. The longer answer? Austerity via tax increases harms economic growth, while austerity via spending cuts has a neutral effect. Nowhere does he say that austerity of any sort will be expansionary. So it is probably better to put Alesina in the "Treasury View" camp, at least as it relates to spending cuts, rather than the "expansionary austerity" camp. In which case, Blyth may need a better definition.
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Monday, January 14, 2013
Posted by Kindred Winecoff at 9:55 AM . Monday, January 14, 2013