Mark Blyth and Jeffrey Sommers: Austerity – A Dangerous Idea Returns

Yves here. Please welcome Mark Blyth and Jeffrey Sommers to Naked Capitalism. They bring some pithy if grim description of how, in classic “never let a crisis go to waste” fashion, Covid-19 is serving in Wisconsin as a pretext to double down on austerity policies.

By Mark Blyth, The William R. Rhodes ’57 Professor of International Economics, The Watson Institute for International and Public Affairs, Brown University and Jeffrey Sommers, Professor of Political Economy and Public Policy, University of Wisconsin-Milwaukee

The past decade delivered powerful lessons in what not to do in an economic crisis. Many countries pursued, or had imposed on them, austerity policies. That is, cutting government spending when the economy tanks in order to balance the books. The idea is that with less spending now, taxes will be lower later on, which will make people feel more confident now, thereby shortening the recession. It’s a nice idea. But it actually makes things worse.

The state of Wisconsin is set to embrace austerity in the wake of Covid-19. March 26th saw metro Milwaukee, the state’s biggest city, declared the 6th highest site for Covid-19 infections in the United States. In response, the state’s Democratic Governor engaged the Legislature to meet the challenge. But Robin Vos and Scott Fitzgerald, respectively heads of the Wisconsin Assembly and Senate, rejected cooperation. Up for grabs was an important State Supreme Court justice seat. The Governor in response gave an emergency order postponing elections until June. The GOP controlled Wisconsin Supreme Court, ironically under orders not to convene at the Court under the health emergency, overturned the Governor’s order. Wisconsinites who had not filed for absentee ballots would have to vote in person, or not at all.

On April 7th once-proud and progressive Wisconsin delivered scenes that seemed inspired by the Book of Revelations. Milwaukee manned only 5 of the normal 182 election sites. Voters, young and old, hale and frail, lined up for blocks and for hours in a day punctuated by hailstorms. Meanwhile, Vos served as election commissioner in a small town not yet hard hit by the virus, fully attired in safety glasses, protective gown, and surgical gloves. Looking more like Hannibal Lecter than an election commissioner, he declared to the press that it was “incredibly safe to go out” and vote. And then, emboldened by an election turned into a deadly farce, on April 8th Vos and Fitzgerald pressed for greater legislative powers to cut education spending during recessions. Yes, you read that correctly.

Massive cuts in education in Wisconsin have already occurred. Many K-12 teachers have left the profession, and the schools are now short of staff. Many university professors departed for better conditions elsewhere. And this was just one part of the austerity already seen; the next round will be worse, and Wisconsin, once the proud home of Robert LaFollette, of William Proxmire and Henry Reuss, of the Progressive Party, Wisconsin the incubator of Social Security and other New Deal programs, is by way of becoming a backwater, stagnant and impoverished. Unemployment remained low – until these past few weeks, only because working age people left the state for better jobs elsewhere.

Austerity now or later, in the pandemic or afterward, is the path to economic suicide. Of course it also belies the promises that President Trump made when he carried the state, and won the presidency, in 2016. There is an irony here, which is that the President’s Republican allies are working hard to make it more difficult, if not impossible, for him to win the state in 2020 – at least in a free and fair election. But as this week’s experience makes clear, free and fair elections are not on the agenda in Wisconsin either. Austerity isn’t just bad economics; it can be imposed, and maintained, only by force, fraud, a campaign based on fear, and the active subversion of democracy in Wisconsin and in America as a whole.

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22 comments

  1. michael lacey

    Why do I like this argument when I’m a billionaire!

    The family that spends too much they have to reign in their expenditure and that is what the government has to do to!

    Now the reality!

    How many families do you see that get to bring people into the family and tax them for five or six generations!
    none

    How many families get to issue their own currency particularly if you maintain states and is the global reserve currency that’s pretty important
    none

    Oh bond markets do you get to do debt through your children no you don’t
    So in other words a family in a household is nothing like a state.

    Why do you keep saying it Mr rich person? I do not want to pay tax!

    Prof. Blyth

    Reply
  2. Sound of the Suburbs

    I watched this video of Mark Blyth, where he explains the Euro-zone crisis and shows what austerity actually did to the countries that were forced to do it.
    https://www.youtube.com/watch?v=B6vV8_uQmxs&feature=em-subs_digest-vrecs
    (The important stuff starts at 16 mins., long intro.)
    It is very informative and worth watching.

    I didn’t really understand his description of how cutting public spending makes the public debt-to-GDP ratio grow.
    He said it was a numerator denominator problem, but I couldn’t see how he got to that.

    This helped me to understand what he meant.
    Richard Koo used to be a central banker and worked at the Federal Reserve Bank of New York. He views the economy through the central banker’s lens, which is the money supply.
    The money supply needs to grow in line with the new goods and services in the economy.
    https://www.youtube.com/watch?v=8YTyJzmiHGk

    The IMF predicted Greek GDP would have recovered by 2015 with austerity.
    By 2015 Greek GDP was down 27% and still falling.
    The money supply ≈ public debt + private debt
    The “private debt” component was going down with deleveraging from a debt fuelled boom. The Troika then wrecked the Greek economy by cutting the “public debt” component and pushed the economy into debt deflation (a shrinking money supply).

    This is why Japan has been doing so much Government borrowing and spending.
    Japan has been deleveraging since their real estate boom turned to bust in 1991.
    As people pay down debt the “private debt” component of the money supply shrinks and they maintained the money supply with the “public debt component.
    If they hadn’t done this they would have ended up like the US in the Great Depression, or Greece more recently.

    It was an analysis of the Great Depression that told Richard Koo fiscal stimulus was the answer.
    Richard Koo shows the US money supply / banking system (8.30 – 13 mins):
    https://www.youtube.com/watch?v=8YTyJzmiHGk
    1) 1929 before the crash – June 1929
    2) The Great depression before the New Deal – June 1933
    3) During the New Deal – June 1936
    It was the public borrowing and spending of the New Deal that helped the economy recover.
    The money supply ≈ public debt + private debt
    The “private debt” component was going down with banks going bust and deleveraging from a debt fuelled boom causing debt deflation (a shrinking money supply).
    The New Deal restored the money supply by increasing the “public debt” component of the money supply.
    Once the New Deal was working, they reduced Government borrowing and plunged the nation back into recession again. The enormous public spending and borrowing of WW2, eventually sorted things out.

    Reply
  3. Sound of the Suburbs

    “Austerity, the History of a Dangerous Idea” Mark Blyth
    They used austerity in the 1930s, and economic hardship caused politics to swing to the extremes. It got so bad in Japan, the military started to assassinate the politicians.
    The history of austerity seems to have been unknown to today’s policymakers.

    Buy the book; you are not borrowing my copy.

    Reply
    1. KLG

      I tried to get a few of my PMC colleagues to read my copy of Austerity…they would rather listen to NPR. Alas.

      NB: It is the Book of Revelation, not Revelations. If you are going to refer to the Bible, try not to sound like President Two Corinthians.

      Reply
  4. EoH

    Government budgets are not home budgets, especially when they issue their own currency.

    Hoarding the supply of usable aid – money, work, relief efforts, supplies, PPE – during a crisis is an opportunity to enhance power and pursue a regime no one would otherwise tolerate. It is not a step a competent government would take. It is a step for the cynical hyperpartisan, who thinks increasing systemic societal harm is just breaking a few eggs to make a yummy omelette only he can eat. The analogy illustrates the pathology.

    Reply
      1. Jokerstein

        Neither can I: an analogy is a conceptual comparison of the similarity between two different ideas. Using the word “like” to compare things is a simile.

        Reply
  5. notabanker

    “But as this week’s experience makes clear, free and fair elections are not on the agenda in Wisconsin either.”

    Once again, Blyth is out ahead of this, calling spades.

    Reply
  6. The Rev Kev

    A hearty welcome to Mark Blyth and Jeffrey Sommers first off. I hear the Prime Minister of Australia, aka Scotty from Marketing, mentioning that after all this is over that all the money will have to be paid back. I have heard too that they are considering raising the Goods and services tax from its present 10% to 15%. Of course there is not much point at the moment as there are not so many goods being sold or services being done but I would not be surprised that this will happen. So I am looking at the possible introduction of austerity, especially in the face of a world-wide recession.

    The present coalition has a fundamental belief in the economy being “in the black” and it is almost a matter of religious belief with them. Would they go with austerity to help achieve this? Experience show that austerity damages your economy and is a bad long term solution but I would not be surprised if they try it. But to be honest, I have never thought of austerity as just an economic method. I have thought of it as a political method to crush wage class people and make them less capable of opposing other political measures that you want to introduce. Privatization as an example. In the UK the privatization of the Royal Mail went along with their austerity programs “because they needed the money”. But we know that that was never the reason and they sold it on the cheap anyway to their friends.

    Reply
    1. Adam Eran

      That federal ‘debt’ needs to be paid back is a common misunderstanding. A better metaphor is that your bank account is your asset, but the bank’s liability. Does the bank need to ‘pay it back’? Kind of, but I’m guessing most people leave the money in the bank. The current austerians are like people leading a mob down to the bank to demand it reduce its ‘debt.’

      “But that would mean reducing the size of your accounts,” an honest bank manager might say. “We don’t care! We hate the word ‘debt’ and want you to reduce our accounts’ size if that’s what it takes.” replies the mob.

      Not very sensible, is it?

      Reply
    1. Adam Eran

      It’s correct accounting to say money is ‘debt.’

      The conventional wisdom says ‘tax & spend’ is how government operates. But that’s obviously false. Where would tax payers get the dollars to pay those taxes if government didn’t spend them first?

      The logical way it works is ‘spend first, then get some back in taxes.” So what do we call the dollars left out in circulation, not retrieved in taxes. Answer #1: the dollar financial assets of the population. Answer #2: National ‘debt’… Just as your bank account is your asset, but the bank’s liability.

      So it is correct accounting to call money an IOU. In fact, it says so right on the dollar: “Federal Reserve Note”… A “note” is a legal term that means “IOU”

      What does the Federal Reserve owe you for your dollar (besides another dollar)? Answer: a dollar’s worth of relief from taxes. That makes even fiat money, not backed by any commodity, valuable. The MMT expression says “taxes drive money.”

      Notice that spending occurs first, independently of any tax revenue too. So the monetary sovereign, with fiat money and floating exchange rates, is fiscally unconstrained.

      Notice also that reducing national ‘debt’ reduces the dollar financial assets of the population, i.e. their savings. So financial emergencies are much more dire after such fits of “fiscal responsibility[tm],” because fewer savings exist to bridge the gap when usual income expectations fail. That’s why significant reductions in national ‘debt’ produce economic emergencies where waves of asset forfeitures and foreclosures plague the economy. Of course the vulture capitalists love these because they can pick up assets on the cheap.

      Randal Wray has a nice article explaining this further.

      In any case, I usually put quotes around ‘debt’ when I’m referring to national ‘debt’ just to wake readers up a little.

      Hope this helps!

      Reply
  7. John Merryman.

    How much is austerity a necessary feature of capitalism? By squeezing the real economy, that much more debt is required, soaking up a lot of the investment money.
    Capitalism is not synonymous with a market economy. Markets need money to circulate, but the capitalist assumption is it’s the signal to extract and store. Since it’s a glorified voucher system, the asset is backed by a debt. So storing it means generating lot of debt.
    Could the financial markets function, without government debt siphoning up trillions in otherwise surplus capital?
    Money is a lubricant, not a fuel. It’s functionality is in its fungibility. We own it like we own the section of road we are using, or the air and water flowing through our bodies. It’s a public utility, like roads and has to be treated as such.

    Reply
    1. Adam Eran

      Yep, Marx noted the inevitability of a “race to the bottom” in the stated market capitalist ideals. Capitalists would reduce profit, seeking market share. The exception is when they are monopolists, or oligopolists…which explains the lack of antitrust prosecutions…now that the price setters control the state.

      I’ll be curious to see how someone without any allegiance to the abstract principles of capitalism adapts when this contradiction comes to its inevitable conclusion. I’m speaking of Trump–who, if nothing else, is willing change his story. Another commenter called it a shift of the poles, like when North became South and vice-versa…in geological time.

      Reply
  8. Jeremy Grimm

    As far as I know — US State and local governments must maintain a balanced budget. I believe, they are not allowed to print their own money — although exceptions were made at times in the past. The Corona pandemic has shut down the US economy, increasing unemployment, diminishing the total State payrolls, and other sources of revenue, as expenses to the State grow with no end in sight. Although it cannot print currency the State can increase State debt by issuing State bonds, it can raise taxes, and it can cut back on some spending — austerity.

    I have no idea what kind of credit rating the State of Wisconsin has, and I know neither the Wisconsin tax structure nor the structure of Wisconsin expenditures and liabilities. Without help from the Federal government I am not sure what options Wisconsin has but ‘austerity’ is clearly one of those options. This seems like it might a good time to sell State bonds while there the US dollar is in demand. If it is like other States, about the only tax base in Wisconsin that has not taken a hit are the very wealthy who live in the State. I suspect the Corporate Cartels that remain in the State have already provided generous long-term ‘tax-incentives’ for themselves. As for cutting State expenditures the question isn’t whether they need to be cut, the question is where can they be cut, and of those options where cuts can be made which of them should take the hit and by how much.

    Again, as far as I know — the CARES Act leaves aid for the States on a future ToDo list, or a list for consideration for action by the FED and Treasury but I admit to less than vague understanding of what the Federal government is doing or intends to do for the US State and local governments … if anything.

    Reply
    1. Adam Eran

      Warren Mosler advised the Italians–who are in the same situation in the eurozone–to issue “tax credits.” Sure, Maastricht forbids them issuing their own currency, but it’s not currency, it’s “tax credits”…😁…Yeah! That’s the ticket!

      Reply
  9. Kirk Seidenbecker

    A glimpse into the economic ideology behind this –

    https://mises.org/library/real-austerity

    An excerpt – “Austrian School economists reject both the Keynesian stimulus approach and the IMF-style high-tax, pro-bankster “Austerian” approach…This involves cutting government budgets, salaries, employee benefits, retirement benefits, and taxes. It also involves selling government assets and even repudiating government debt… Despite all the hoopla in countries like Greece, there is no real austerity except in the countries of eastern Europe…For example, Latvia is Europe’s most austere country and also has its fastest growing economy.”

    Michael Hudson debunks the “Latvian Miracle” here –

    https://michael-hudson.com/2013/01/latvias-economic-disaster-as-a-neoliberal-success-story-a-model-for-europe-and-the-us/

    What do Austrians largely omit from analysis? – Economic rent. There are a few left leaning libertarians out there that recognize this –

    https://schalkenbach.org/rsf-2/wp-content/uploads/2015/02/Sullivan-Dan-1998-Real-or-Royal-libertarian.pdf

    And finally a debate between the Austrian school vs MMT, with Warren Mosler –

    https://modernmoneynetwork.org/content/modern-monetary-theory-vs-austrian-school

    Austrians generally believe the MMTers tend to underestimate the influence of special interests—including government actors and central bankers themselves—on monetary policy. As governments having been largely captured by financial interests, MMTers should take Michael Hudson’s lead and buttress their description of currency issuance with a robust analysis of the deadweight loss creating nature of rent-seeking, public asset stripping.

    Reply
  10. The Rev Kev

    I can only wonder what a conversation would be like between Mark Blyth – who knows so much about the subject of austerity – and Michael Hudson – who knows so much about the subject of debt. Now that would be something that.

    Reply
  11. larry coffield

    Austerity is a racket. The oligarchs don’t care about repayment of debt because money can be keystroked into existence for remuneration. The financial parasites prey upon inability to pay debt so they can capture tangible assets being held for collateral. It’s a weapon of class warfare, otherwise an austerity tax would visit the real estate of royalists. There is an LBO pattern that is always in play. debt from a disaster that inures to austerity that invites an emergency management team from which asset stripping, and deregulation lead to privatization and stranded assets such as pension liabilities.

    Lessons have been learned and the mainstream is furious because of the callous neglect of this corporate-pimped government lavishing the free-money ilk with bailouts as opposed to going through bankruptcies.If not understanding potential blowback, rentier parasites might otherwise find themselves in a leper colony if found to be afflicted with pleonexia.

    As Professor Blythe noted, this is a very dangerous idea. Hitler scaffolded his campaign on an anti-austerity platform to be elected.

    Reply

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