Mark Blyth

My favorite thing about reading occurs when I do not understand a concept. I read a book about it and then, magically, knowledge appears. This is perhaps a clichéd notion, but it still makes me feel good about reading. By no stretch of the imagination will I be able to teach a course in economics after this one, but when I hear radio and news reports of the economic landscape, I should be able to follow them with a little more understanding. Mark Blyth’s Austerity is a book really about show more three related things: convoluted economic instruments and how their interrelatedness sparked the current global downturn, the history of austerity as a way to alter a country’s financial standing, and how the clarion call for austerity measures in economically weak European countries is perhaps the wrong thing to do.

Austerity is the measure by which a country endeavors to tighten its fiscal belt in order to reduce the amount of debt it’s carrying and show to the world that it is trying to become less deficit-heavy. Interestingly, there are two things happening here. One is an actual change in balance sheets in that the government has to decrease actual spending in order not to go into default. The other is a perceived change to induce other countries to trust in the future liquidity and investment possibilities of said austere state. After reading this book, I realized that economics is always a combination of these two forces—the real and the imagined.

Blyth’s history of the current financial crisis is surprisingly easy to read, even though he has to explain things like credit default swaps, mortgage-backed securities, and value at risk analysis. While he clearly has an agenda (and who doesn’t), his explanations have merit. Most of what happened in the real estate crisis had little to do with state spending and government debt. The only hand the government had in the downturn was the omission of rigid and exact regulation on new banking products. When banks bundled together what they thought were low-risk, low-volatility products, they actually created high-risk securities that blow up in their face.

Blyth’s parallel history of the idea of austerity is in many ways not as interesting, We get the standard Locke-Hume-Smith thread that seeks to endow every citizen with the opportunity to amass property and calls for the state to check its own immense power to remove that property from the citizen. The problem comes from the disconnect between lawmakers enacting austerity measures and how that will invariably affect the populace in a disproportionate manner. If everybody has to take a financial hit once measures are in place, it’s those who are lowest on the totem pole who will invariably feel it the most.

This book was astonishing in the amount of information it has to offer. I was fully prepared to be put to sleep by all the economic mumbo-jumbo, but following Blyth’s arguments and polemic against the use of austerity turned out to be quite interesting. The metaphors he uses for modern financial theories and instruments are apt and elegant. While this book will of course have its detractors and bring out age-old political arguments, the history of the idea is certainly worth a look—even if it’s because you’re trying to know thy enemy. show less

New Dimensions in Bait ‘n’ Switch

Right off the top, I liked Austerity, because it directed me to a Youtube video of the author giving a five minute summary of the book in his lovely Scottish accent, immersed in complementary animation that he seemed to direct with his hands. A great start, that made me read with his delivery in mind. Fortunately, his writing is as clear, direct and succinct as his speaking, so it made reading Austerity a pleasure. It added immeasurably to the total show more experience. Something more authors might consider to get into the heads of their readers.

Austerity (the book) seems to be a bunch of Keystone Kops in dark suits, madly running around accomplishing very little. They rationalize, they contradict themselves and their policies, they make the same dumb moves over and over, they make up incredible formulas that cannot work even in theory, they take down the economies of the world – and they blame their governments for the mess they leave. The result is bankers continuing to pay themselves obscenely, while governments are saddled with assumed banking debt and the ugly prospect of austerity, as Blyth puts it, that “constitutes the greatest bait and switch in human history.”

Blyth proves repeatedly that austerity is “zombie economics” – no matter how many times it is disproved, it just keeps coming back for more. No amount of mere fact disconfirms a good ideology, he tells us.

He hammers the point that in essentially every national case except maybe Greece, government spending was not behind the current financial collapse. Government was not overspending, not creating inflation, not distorting the economy. It was the bankers doing that, with theories of efficient markets and off the books vehicles. When it blew up, government had to step in, and the private mess became public debt, with bankers walking away whole –again.

Blyth gives vibrant life to the chaos. Unfortunately, what he doesn’t say is that austerity becomes self fulfilling, as people claim the state of the economy is a reflection of the crippling effect of national debt. Faced with this new burden of public-ized bank debt, everyone fears saddling their children with it, and only austerity can reduce the debt. This is doubly unfortunate, because as Blyth proves decisively, austerity actually increases debt, every time and everywhere it is applied.

I disagree with Blyth’s acidic view of the euro. He says it is an “unmitigated disaster for everyone but the Germans,” and spends a lot of space slamming it. But countries are lined up for years forward to get into the euro, because they see how well their neighbors are doing by it. Even now, countries jostle to get on the waiting list. Countries like Estonia and Slovakia have benefited mightily in just a few years; they could not possibly have done as well with their own insignificant currencies. The original euro members have only themselves to blame for running up deficits. Hardly the fault of the euro, though Blyth blames it instead of them. France’s myopic (anti)industrial policy is at least as much to blame for its fiscal woes as anything Societé Generale or BNP did to load up on sovereigns (country bonds). Germany’s greed with its surpluses reminds us of China, only the Germans are the good guys for most of us, so it’s acceptable. Blyth also conveniently and completely omits the out and out fraud of both Italy and Greece in entering the euro in the first place. While he notes that Greece had not generated a surplus in 50 years, he doesn’t relate how it was able to (magically) declare less than 3% deficit in order to qualify for entry. It repeatedly failed to qualify, until the last minute, when it suddenly turned out Greece’s ducks were all in a row after all – a model student. Please. But the powers that be bought it, lock, stock and barrel. The same scenario played out for Italy. And in the intervening years, neither country did anything to reform and legitimize their accession. So fraud is why the euro was “an accident waiting to happen” as much as anything Blyth posits about regulations.

Furthermore, the American dollar is living proof of why the euro will survive and thrive. Despite all the crises, the budget deficits, the trade deficits, the debt, the mismanagement and the uncertainty, the dollar refuses to decline. And this despite the treasury printing possibly nine trillion new dollars to save the banks (which Blyth shows is money down the drain). The dollar has no intrinsic value; it is a fiat instrument, just like the euro. Normally, you could not print so very much money and not have it seriously affect the currency. But if all the major fiat currencies are dealing with these same factors, and they’re all trying to devalue, they will all remain in place relative to each other. At least that’s how it has been working this millennium. It’s a confidence game, not a value play. As long as people believe in the euro, there will be value attached to the euro. And that’s why the discredited concept “austerity” continues to survive. You can’t stop it, much as Blyth wants to, because despite the theory and despite all the evidence, people still believe.

It’s no secret the euro is flawed because of all the constraints it members shackled it with to emulate their wonderful old national systems. That is being undone slowly, with small concessions from Germany and workarounds by the ECB, for example. Eventually, the whole thing will have to rationalized, or this will happen again, and worse, just like financial crises in the US. I don’t think there’s any controversy there. But there’s more than just the euro in economics:

Blyth is hypercritical – of everyone and everything. Independent central banks “spread like a rash all over the face of the planet” is a typical description. Hard to please, it seems, but entertaining in an otherwise dismal science.

Austerity the concept needs no more disproof than the IMF and the “economic hit men” who impose it on every developing country, despite its total failure wherever it is implemented. It’s garden-variety hypocrisy, and it’s global. Contradictions in terms like “expansionary austerity” don’t seem to dull its blade either. It’s a pesky fly you can swat at, but not kill. But Blyth tries. He beats it up, body slams it to the mat repeatedly and clubs it over the head with an (economic) anvil. He meticulously trashes every study that supports it. I particularly appreciated the point that central banks can offset contracting budget cuts by lowering interest rates, but in our situation of near zero rates, there can only be pain from deep cuts. So in case you missed it – austerity the concept never works. Basically, contractions beget contraction, and expansion begets expansions. Everything else is fantasy.

Austerity the book is an expression of great frustration. If it shows one thing, it’s that no economic school or theory works. There is some aspect that fits in every situation, but nothing covers totally or perfectly. They have a hard enough time fitting the past and none of them has a prescription that will work going forward. As JK Galbraith said, the only reason for economic forecasts is to build credibility for astrology.

Unlike austerity the concept, Austerity the book is very rewarding. show less

This is very much a book of the moment, though this is partly a matter of luck. While Mark Blyth’s book was written in response to the emergence of austerity policies in 2010, its publication was nicely timed with the contemporaneous undermining of the key study by Carmen Reinhart and Kenneth Rogoff which was used to make the case for the necessity of austerity. Though Blyth’s book was written before the revelation of the study’s flaws, his more broader focus on the origins and show more development of austerity is no less powerful and damming.

Blyth’s book can be broken down into three parts. The first is an explanation of the recent debt crisis that has plagued the global economy. Here Blyth demonstrates that, contrary to much of the political rhetoric, this did not originate as a sovereign debt crisis but as a private debt crisis in the banking sector, one that became a sovereign debt crisis in a “bait and switch” as European states (and their taxpayers) absorbed the costs of fixing the problems created by the profligate and unwise lending policies of several European banks. Blyth then turns his attention to the history of the idea of austerity, which he sees as born out of a set of assumptions in classical economic theory that remained overly simplistic and underdeveloped. He concludes the book with an examination of the application of austerity as policy in recent history, showing how the examples of the past offer clear demonstration of its failure of austerity as a solution to economic crisis – and often end up making the problems worse rather than better.

All of this makes for a convincing argument against austerity as a response to economic downturns. Its effectiveness is aided by Blyth’s ability to walk the reader through the recent crises and untangle the underlying causes. While his use of economic jargon can make some of his arguments difficult to follow, overall he provides a clear and direct explanation of economic events. The result is a book that should be read by anyone seeking a better understanding not just of the concept of austerity and its misuse, but of the broader economic crisis we face and what brought us to this point. show less

Blyth's treatment of the concept of austerity contributes significantly to our understanding both of economic history and the history of political thought without holding back on advocacy. Austerity fails time after time, Blyth shows. His overview of the origins of austerity in seventeenth- and eighteenth-century Britain, while brief, demonstrates crucially that the policy's moral component is a big part of its resilience. His insistence that ideas about austerity grow out of liberalism's show more ambivalence about the relationship between state and market is also a useful corrective to those who equate capitalism with unfettered economic freedom. Austerity may be a simple idea that seems rooted in common sense, but it has a complicated history that Blyth helpfully offers to reshape current debates among policy wonks and the public alike. Both its "natural" and "intellectual" histories offer a sustained argument that, despite the protestations of self-proclaimed pragmatists, ideas powerfully shape human behavior. One can only hope the book will find a wide audience. show less