Friday, March 15, 2013

Defining Austerity Down

. Friday, March 15, 2013

Henry Farrell has reviewed Mark Blyth's new book, Austerity: The History of a Dangerous Idea, which has not yet been released commercially. (I've written about Blyth's research program before. See here and more if you scroll down here.) As I've previously said, the book looks very interesting and I welcome the chance to read it. I love intellectual histories, and this looks like a good one. But Farrell's review increases my level of skepticism of Blyth's core argument regarding present circumstances, which had already been growing in me.

Here's the gist of my concern: Blyth wants to advance an argument that the practice of austerity as a crisis response has ideational causes. That's why the subtitle of the book refers to an "idea". If true, this would call us to reconsider a good bit of the political economy literature, which has focused on materialist politics as filtered through various institutional structures as the most important factor in crisis policymaking. It's a provocative claim, and in making it Blyth does the dirty work of actually reading all those old political economists -- from Locke to Hayek and beyond -- who concerned themselves with the relationship between (sovereign) debt and growth.

The problem I have arises from Blyth's definition of austerity as an idea distinct from materialist interest. I don't think he's totally wrong about any of the main causes of the current crisis, and in fact he is very convincing on some points which I hadn't previously considered. I'm less sure about his explanation of the political response to the crisis in Europe as being primarily ideational. This impression comes not only from Farrell's review, but also from Blyth's hour-long lecture from the book, a version of which is on YouTube, in which he defines "austerity" (in the Q&A) as "a claim that if you cut public debt you will grow". I.e., expansionary austerity, via the work of Alberto Alesina. He specifically says that in his view not all spending cuts constitute austerity, only those intended to facilitate growth. His argument is that European policymakers have fully bought into this belief. His evidence is that Alesina gave a talk at an Econfin meeting, and was referenced in several reports from the ECB. Farrell's review doesn't dwell on this point of definition, but it is quite important. (More on Farrell in a bit.)

Historically, "austerity" generally referred to a set of policy measures designed to facilitate structural macroeconomic adjustment through internal devaluation of wages and prices rather than external devaluation of the exchange rate (which was often a metal standard originally, and a pegged exchange rate or currency board more recently). Most often, these were necessary because external liabilities -- public or private debt owed to foreigners -- had grown past the point at which service was feasible, and the highest policy priority was some sort of fixed exchange rate which made external devaluation undesirable. Austerity policies generally included cutting social spending, raising taxes, increasing interest rates to defend the exchange rate, and trying to boost exports (i.e. production) over imports (i.e. consumption). In other words, austerity was designed to reduce society's standard of living -- on purpose, but in a temporary fashion -- in order to get out from under the debt while maintaining the exchange rate. So the basic logic has nothing to do with spurring a short-run expansion; it has to do with avoiding a long-run collapse*.

That doesn't mean it's good policy. But it does put things into perspective: governments who enforce austerity generally have no good options. Either they devalue their currency, which makes consumption more expensive; or they default on the debt, which makes immediately eliminating any external deficits (via tax increases and spending cuts) mandatory; or they raise taxes and cut spending and try to pay down the debt. All are forms of austerity. The choice between them is political, and is primarily a function of distributional politics (in my view, anyway). The underlying problem is the debt, and the debt is something more than an idea. So far I think Blyth and I are more or less in agreement.

Back to Farrell's review, in which he applies something like the above description to some countries in crisis, such as Greece today: unless the Germans give them a bunch of money in some form or another, they face austerity (in some form or another). Blyth goes a bit further in the lecture (and presumably the book): even the "unless" here is wrong. If Germany gives Greece a bunch of money then Greece may suffer less but Germany will suffer more. The "austerity" hasn't gone away... it's only been redistributed. The idea of austerity is hardly the reason why Germany won't give Greece a blank check; the materialist reality is the reason for that. And in this case, the eurozone crisis is too big for Germany to manage. Heavily-indebted European countries, and their banks, are "too big to bail".

Farrell suggests that countries such as the U.K. need not bother with austerity, but do so anyway, so this is where Blyth's book really does its work: these ideas are so powerful that they compel states to do disastrous things which are not in anyone's material interest. This is where either I misunderstand Blyth or Farrell does. Since Farrell's read the book and I haven't, I'll presume it's me. But I don't think the U.K. really fits the story. If austerity programs are bad then you shouldn't do them unless you really have to do them, in which case you are Greece and not the U.K. But, according to Farrell, the U.K. is engaged in austerity. This argument rests on a core empirical claim: that countries sometimes (frequently?) practice austerity when they don't have to do so.

Here is where limiting the definition of austerity to Alesina's "expansionary austerity" truly matters. Look at the U.K.'s budget (from HM Treasury's most recent budget document):

  

Over the past 15 years, the UK's budget as a percentage of GDP has averaged below 40%. As the crisis began, it was about 41%. In response to the crisis, it spiked to about 48%, an increase in government spending of about 17%. That is the opposite of what Alesina recommends, which is a massive, immediate cut in spending. Since 2010, British fiscal expenditure has gradually declined about four percentage points (not massive or immediate) from an exceedingly-high baseline, so that it remains above its pre-crisis level. Tax receipts have stabilized and practically normalized, but the deficit remains well above the historical norm at 7-8% of GDP per year. I.e., the U.K. is accruing more debt rather than paying it down. The U.K.'s sovereign debt level is now the highest its been since the end of WWII.

The U.K. is closer to the "soft Keynesian" playbook than Alesina's, in other words. So either I am conflating Blyth's argument or Farrell is. (Krugman also calls the U.K. policy mix "austerity", and notes that U.K. growth has lagged U.S. growth since the crisis. But whether a moderate increase in fiscal expenditure is austerity depends on the definition of "austerity". According to Blyth's definition I'm not sure it does.)

The U.K. is still hurting -- its economy was heavily dependent on the health of the financial sector, and its exports have suffered tremendously from economic weakness on the Continent -- but it is doing far better than most European economies. And the worst is probably over for the U.K. Full recovery may be excruciatingly slow but the situation does not appear to be deteriorating further (Blyth's hallmark of austerity). Meanwhile, any new debt accrued will need to be repaid, with interest. Bond rates are low now, but they will rise once the economy fully recovers, so even if taking on debt is cheap today it will be expensive to service tomorrow. The Conservative government has decided it would rather trim a bit now rather than push the whole bill back.

The prudence of that policy is certainly debatable. What is not debatable is that this is in any way analogous to Greece's situation. Yet the U.K. policy mix is frequently referred to as "austerity" in the same breath as Greece, including by Farrell in his review of Blyth. I think this is mostly Blyth's fault: he's used a common word in an uncommon way -- again, in the lecture; we'll see about the book -- so when people see it they think he's referring to something more general: contractionary austerity, of the sort written about by Schumpeter, or maybe neutral fiscal consolidation (the Treasury View) rather than Alesina's narrow conception of expansionary austerity. I initially made this mistake as well. I wrote a draft of this entire post complaining that Blyth was guilty of conceptual confusion. He's not. But because he's taken the word "austerity" to mean something different from the general/historical understanding, he's given us a fairly difficult task to overcome before we can understand what he's really talking about.

In his review, Farrell describes the U.K. situation thusly:

After enduring two recessions in the last four years, Britain is now well on its way into a third. The pain has been compounded by a succession of austerity budgets, in which Britain’s Conservative-led government has tried to hack away at spending. Repeated rounds of cuts have battered the British economy. However, Britain’s chief economic policymaker, Chancellor of the Exchequer George Osborne, wants still more pain. He is pushing the government to identify £10 billion more in cuts this year.

I think Farrell's right on the substance: to the extent that Britain has restrained the growth of fiscal deficits that has had a negative impact on the economy. But they are far from a primary surplus and don't even (optimistically) plan on running one for another 6-7 years. They're not paying back externally-held debt. The most you could say of this is that the deficit spending isn't expansionary enough. There's certainly a case to be made there. It's my own personal view, in fact. But that political decision is best explained by materialist, not ideational, politics: the Conservative government and their wealthy constituents understand that when the bill does come due, they'll be the ones to pay for it, while the benefits from increased fiscal expenditure are unlikely to benefit them much. Cameron has courted the U.K.'s business community using naked language to this effect, and prominent business leaders have supported the cutting programs. They'd rather keep the future bill low, if possible, all things considered. Hence, the attempts to "hack away at spending". Hence the tax cuts for the rich and tax increases for pensioners in the most recent budget, which were praised by business and The Economist. All very materialist.

So what does an ideational explanation (note: not necessarily Blyth's argument) bring to the table? Only that Cameron government thought this would be expansionary. But it didn't. Treasury reports under Chancellor Osborne revealed that they expected 1.3 million jobs lost.

How about monetary policy? The U.K. is not defending a fixed exchange rate or commodity standard. Its interest rates have been near zero for years, and it has engaged in quantitative easing programs. The U.K. has recently hired one of the most expansionary central bankers in the world to try to spur on the economy, and are considering changing the Bank of England's legal mandate to give him more flexibility to do so. This central banker, Mark Carney, has said that he will pursue "radical" monetary policies in an attempt to generate growth, with no apparent concern for the value of the pound sterling.

This is certainly something qualitatively different from what Greece is doing: devaluing internally in order to maintain a fixed exchange rate. It's the opposite policy. And so Blyth says in his lecture that the U.K. policies do not constitute the sort of austerity he's concerned with. He clearly distinguishes between the U.K. Conservatives' policies and the continental European policies; the implication is that the latter is "austerity" while the former is just normal distributional politics.

But, as I mentioned before, that is not what "austerity" has meant throughout history (even Blyth's own intellectual history), where "history" is as recent as the Washington Consensus responses from 1980-2000 to crises in East Asia, Latin America, and elsewhere. And, arguably, the ongoing eurozone crisis, where the roles of Thailand, Indonesia, South Korea, and Malaysia are being played by Greece, Spain, Ireland, and Portugal; and the role of the IMF is being played by the Troika. It's not what folks like Krugman and Farrell mean when they talk about austerity now. And, frankly, I don't think Blyth's restriction on that definition is helpful. I guess it's possible that the German finance ministry actually believes that Greece's economy will grow following massive public sector cuts, but it is not necessary to believe that in order to explain Germany's actions.

I look around the world and I see two kinds of (industrialized) countries facing crisis: those which have no choice but to engage in austerity, and so do, and those which do have a choice, and so do not. The former are the beleaguered eurozone states. The latter are large industrial economies which have responded to economic slowdowns with, shall we say, half-measures that fall somewhere in between the Keynesian ideal and the Treasury View*. A sort of "soft Keynesianism" which meets the partisan predilections of elected governments. The former Blyth characterizes as having been victims of "the greatest bait-and-switch in human history". Perhaps so (perhaps not, and Farrell questions this claim as well), but how they got into crisis ex ante has little to do with what is done about it ex post, and what is done about it ex post has little need for an explanation which is distinctly ideational rather than materialist.

Why am I concerned by this? Because restricting austerity to Alesina's model muddies the water, and insisting that eurozone leaders fully bought into it is a big claim which, if true, would jeopardize a lot of existing literature. Moreover, it's deceitful marketing. Describing this version as "discredited" (or as a "zombie", as John Quiggin does in a self-promoting blurb) begs the question: what is it, exactly, that has been discredited? Alesina's model hadn't been at the time it was supposedly being tried. I agree with Blyth's incredulity that anybody could have believed it in the first place -- although he's the one claiming that they did, not me -- but experiments are conducted because the outcome is not predetermined. If this was a new beast, then it wasn't an old zombie. So I guess Quiggin was fooled by the narrowness of Blyth's definition as well. That makes nearly all of us.

So the "history of a dangerous idea" is somewhat misleading: Alesina's theory wasn't formed in a vacuum, true, but it was a real break from past conceptualizations of "austerity". It was such a significant break that I don't think they really are the same concept. By referring to one subset of austerity theories -- expansionary austerity -- as if it was the only or even main one, Blyth appears to have made it tough on his audience. Maybe this is all resolved clearly in the book, and he simply elided that discussion in the lecture for reasons of brevity. I hope so, but if so that sense doesn't come out of Farrell's review. I'll read it either way, and I expect to enjoy it. I love intellectual histories like this, Blyth is a good writer, and many parts of his lecture are very good. I mean all that sincerely: I really enjoyed the lecture, and I anticipate getting a lot out of the book.

I'm just not sure about the thesis.

*The Treasury View is that fiscal stimulus will be neutral (multiplier of exactly one), so that version of austerity is a little less austere, but is still not expansionary. Most of the classics believed deficit spending would spur inflation, which is not expansionary in real terms. (Keynes' contribution was to point out that there would be no inflation if there were under-utilized productive capacity.) From what I can tell, none of the intellectual traditions Blyth covers in the lecture espouse expansionary austerity in a crisis except for Alesina.

9 comments:

Anonymous said...

“But because he's taken the word "austerity" to mean something different from the general/historical understanding”

I don’t get your general objection here. As you’ve shown there is no “general/historical understanding” of the word austerity. It means different things at different times in different contexts. What Blyth is doing (I assume) is giving that history, (the background to the current interpretation of austerity) to explain its current manifestation in a very specific mix of policies.
You can acknowledge the way ‘austerity’ has been interpreted historically as background, while also explaining its specific interpretation now, without contradicting yourself or being disingenuous, imo.

Also, if austerity is the result of material, (or distributional), concerns, does the fact that it is beginning to be implemented/ supported in the core undermine that argument?

http://www.economist.com/blogs/democracyinamerica/2013/03/economics-and-ideology?fsrc=scn/tw/te/bl/rightforthewrongreasons

Anonymous said...

(Continuing from above)
Your arguments vis a vis the UK are pretty convincing (but as you note Blyth probably isn’t speaking about the UK in the book). I have one or two queries in general though.

On this:

“Cameron has courted the U.K.'s business community using naked language to this effect, and prominent business leaders have supported the cutting programs. They'd rather keep the future bill low, if possible, all things considered. Hence, the attempts to "hack away at spending".

But how are these policies in the interests of the ‘business community’? Surely what is in the interests of the business community, in general, are people with disposable incomes they can use to buy things from these businesses? So if ‘austerity’ is not naturally in the interests of prominent business leaders, we have to explain why they support it?

“Hence the tax cuts for the rich and tax increases for pensioners in the most recent budget, which were praised by business and The Economist. All very materialist.””

Accepting the importance of ideas in driving austerity (in general, perhaps not in Blyth’s conception – I haven’t read the book but Farrell says in the review it’s not without flaws, but a way to start thinking about the role of ideas) is not incompatible with austerity taking very specific distributional forms in very specific contexts, or is it? If you see what I’m saying?

Anonymous said...

Actually ignore the points on the UK..I see what youre saying

Kindred Winecoff said...

Anon,

thanks for your thoughtful comments. I'd written this post a week or more ago, and have revised it several times sense. I find this whole conversation to be a bit confusing. (I'm even more confused than others, I think... I have a post planned which makes that case that Keynesians actually believe in expansionary austerity!)

The way I see it is that "austerity", as a concept, has historically had such a different meaning and served such a different purpose from Blyth's usage that using the same term is misleading. Austerity means impoverishment, not growth. Phrases associated with it -- "tighten the belt" etc -- mean that hard times are here, "tough choices" have to be made, etc. In the history of thought it has taken on a moral element: the purge after the binge, a necessary correction after years of exuberance. That sort of thing.

This isn't ancient history, either. This is how the word was used during the Latin American debt crises and East Asian currency crises. This is how Farrell seems to be using it in his review. This is how Krugman and Stiglitz and others commonly use it now.

To restrict "austerity" to Alesina's version (inappropriately, actually, as I'll spell out in the next post) misses all this. To use an analogy I'm sure I'll regret, it would be as if someone referred to affirmative action programs as "slavery". Well, okay, you could probably trace a line of thought from one to the other, but in the end they are still very different things.

My point about the UK is simply that their situation is not really analogous to Greece, or to austerity programs in E Asia/L America, etc. Basically all I'm doing is agreeing with those who criticize neoliberals for advocating austerity during peripheral crises but Keynesianism when crisis hits closer to home (although I don't actually think there's a disjunction here, for reasons I won't elaborate right now). Given that, how is it helpful to use the same word to refer to very different things?

Ronan said...

(That was me above, I’ll use a username from now on so it’s easier to tell the anons apart)

On this:

“Given that, how is it helpful to use the same word to refer to very different things?”

I really don’t know. (Not without having read the book anyway..although I’m not sure even that will clarify a whole lot – a lot will depend on how he builds his argument in the book, I guess.)
It might be the case (probably) that he adopted to wide a purview (Farrell hinted at that in the review, that it was too dense in places) and tried to fit too much into the narrative. (To give it contemporary relevance) I guess it lives or dies on how convincing the argument about Alesina’s influence is. If he makes that case somewhat convincingly/coherently, then the other flaws (conflating too many different ideas/policies etc under one banner) can be overlooked, to a degree.
Or maybe not. I really don’t know. I’m inclined to be sympathetic towards his argument, I think, so this post has been a useful corrective to my prejudices

JR said...

" I guess it's possible that the German finance ministry actually believes that Greece's economy will grow following massive public sector cuts, but it is not necessary to believe that in order to explain Germany's actions."

I would argue that the German finance ministry more than likely believes this because simply because - in their estimation - a form of "austerity" actually did work and bear fruit in Germany 10ish years ago. The Hartz/Agenda 2010 labor and social reforms did cause immediate, short-term hardship in Germany, but were largely a success (http://www.spiegel.de/international/business/fixing-the-labor-market-schroeder-reforms-bear-fruit-in-german-recovery-a-528757.html - yes, I know it's out of date, and most of the predictions in there are laughably rosy, but the main point remains intact). These reforms were political suicide for Schroeder and the SDP, and were wildly unpopular at the time. However, as things stand now, I heavily suspect that broad swathes of the German electorate do believe there is a connection between these reforms and Germany's economic resilience of the past 4 years (I have no real evidence/polling data to back this claim up - but it seems pretty plausible given the unpopularity of eurobonds, debt-pooling, sovereign bailouts in general, high inflation, etc...).

In my cursory glances at the austerity debate, I have yet to see it mentioned that deficit reduction and labor market/social system reforms have been a prominent strain in the politics of Germany, Austria, the Netherlands, and Finland for the past two decades (among others - keeping it in the eurozone for now). It's worthy to consider that the origins of current European "austerity" could be a lot closer to home than the East Asian or Latin American financial crisis, a lot closer in time than Weimar-era hyperinflation, and a lot less arcane than a handful of recent papers by a somewhat obscure Italian economist. In addition to the distributional "materialist reality", these origins could also be found in the internalized "lessons" of RECENT economic history in many of the creditor states.

Kindred Winecoff said...

JR,

I think that's probably right. Germany was known as the "sick man of Europe" for a long time, because it was undergoing structural reform. It was quite costly but it did put them on a path for later growth. And, as you say, many other European countries went through somewhat similar processes during the 1990s/2000s.

But this is more like the old definition of austerity: make structural reforms which will HURT now, in the hopes that you will benefit LATER. Alesina is arguing that with a sufficiently large set of cuts now you will gain today, not sometime down the line. So it's a very different.

My guess is that the EZ policymakers are thinking more like you, with the add-on that it's one thing for you to decide you want to adjust structurally in your own country; it's another when some other country doesn't really want to do that but wants your money. And so Germany is acting like the IMF because they have been in the position of the IMF: there's a huge dynamic consistency problem which is exacerbated by the fact that southern European democracies *do not want structural reform*.

John Quiggin said...

Have you read my book? It certainly doesn't seem so. The chapter on austerity (in the US paperback edition) makes all these distinctions (Treasury View vs Alesina vs austerity to meet external balance constraint) quite clearly, drawing on Blyth, whose book I read in manuscript.

But obviously my 50-word blurb fell a bit short in this respect. Thanks for pointing that out.

Kindred Winecoff said...

Yes I read your book, although I didn't take the time to go back and re-read that chapter before writing this since my focus was on others. I'll try to carve out some time to revisit it this week, but I don't recall having any objections to that chapter.

I'm sorry if you thought I was taking a cheap shot at you. Really what I am trying to stress is that Alesina's argument is qualitatively different from previous conceptions of austerity in such an important way that the same term really shouldn't be used for both. I plan another post expanding this claim. Hopefully it will be done this week sometime.

The reason why I am splitting these hairs is because I'm mostly interested in the politics of the thing. And the political dynamic in Alesina-austerity is completely different from the political dynamic in Schumpeter-austerity. Almost the opposite in fact. And the political side of this is what seems to have motivated Alesina in the first place (this will also be discussed in the upcoming post).

Possibly Blyth makes the necessary distinctions in the book. I hope so. What I'm suggesting is that conversations about the book, Alesina, and the political situation more generally should be similar clear on the concepts. When I read folks on austerity I sense a lot of vagueness and "mood affiliation" which doesn't really add up to any substantive argument. This is what I try to point out in the discussion of the UK in this post.

Defining Austerity Down
 
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