Finanace and Economics
Austerity: The History of a Dangerous Idea
By Mark Blyth, Oxford University Press, 2013.
Reviewed by Dave Gracey
Canada is in the grip of austerity. After being
forced—by the threat of a Liberal-NDP
coalition in 2008—into a brief experiment
with stimulus, the federal government
has returned to its natural reliance on
cuts, cleverly disguised as the “Canadian
Action Plan.” We are told that these cuts
are necessary to reduce debt, balance the
budget, and “restore confidence.” This
will bring prosperity and lots of jobs. Will
it work? This book looks at the historical
record and says no. It will make things worse.
The author, now a university professor in the US, has a personal stake in the debate. He was raised in poverty in Dundee, Scotland, and understands, as few people do, his debt to government spending on health, education, and welfare. He is sensitive to the huge human cost of austerity. The sacrifices are made at the bottom; the benefits accrue to a tiny minority at the top.
The history of austerity goes back a long way, but Blyth’s examples are from the 20th century—and there are many. The Great Depression provided a case study. Most countries, Canada included, resorted to massive cuts and made things worse. A few—New Zealand, Sweden, Japan, and Germany—tried austerity and rejected it. Those countries were able to restore full employment long before World War II pulled the rest of us out of the Depression.
Currently almost all European countries are imposing austerity. The financial crisis of 2008 bankrupted the banks, which were bailed out by governments at enormous costs. These costs were transferred to the public through tax hikes and massive spending cuts, which were sold to the public as necessary to restore fiscal balance and bring about recovery. In practice, austerity has achieved the exact opposite. Debts and deficits have skyrocketed, along with “unemployment, and no recovery in sight.”
The most dramatic example of this perverse policy is Ireland. Prior to the 2008 collapse, the Irish economy was doing well, but the banking sector went on a credit/debt binge that ended badly. In the crisis, the Irish government assumed the entire debt of its banks, a total now exceeding €70 billion. Government debt shot up 320 per cent and unemployment rose to 14 per cent. The latter would have been much worse if thousands of workers had not emigrated.
By contrast, Iceland refused to bail out its banks, though they were even more irresponsible than Ireland’s. Instead, Iceland “rejected austerity, devalued its currency, imposed capital controls and bolstered welfare.” (p. 237) Within two years, growth had returned and the budget was balanced.
If austerity is such a bad policy, why does it keep coming back? Blyth offers a number of reasons but the one I find most convincing is about power. The financial elites are the chief beneficiaries. Cutting spending makes possible the diversion of resources to the financial sector.
While this is obviously the case in the USA and Europe, it is less true in Canada. Here we have a government that is ideologically committed to austerity—all the time. It is strongly opposed to big interventionist government, and a budget deficit is a good excuse to cut programs. It claims its cuts will restore confidence (Blyth calls it the “confidence fairy”) but it won’t. Canadian corporations are so “confident” that they are sitting on $15 billion in cash, and they won’t invest it until they see evidence of increased demand. As Keynes taught us many years ago, that demand can only come from an increase in government spending.