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Austerity and its Myths,
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This review is from: Austerity: The History of a Dangerous Idea (Hardcover)
Mark Blyth's "Austerity: The History of a Dangerous Idea" is an invaluable contribution to the debate on what direction policy should take post Credit-Crunch. In a civilised society, where ideas were debated on their merits and not on how useful they are to those with power and influence, it would minimally be a large part of the debate and in my opinion form the backdrop to a set of policies aimed at maintaining the welfare state, and bringing growth back to the economy.
Blyth includes the best short account of the credit crunch that I have read, and makes crystal clear where the sovereign debt came from: not over spending in the Public sector, but the costs of dealing with a massive private sector failure in the financial sector in terms of lost growth, bail-outs, and the rising welfare payments & tax shortfalls that accompany an economy which for the UK, in terms of GDP growth, has performed worse than it did during the Great Depression of 1929 onwards.
He looks at the theory behind the austerity idea and finds it to be somewhat threadbare, in short there is not much in the way of intellectual theory to back it up. It is more like a knee jerk reaction from central bankers (in particular the European Central Bank) and anti-state right wing politicians (among which one could include a substantial number of Labour politicians). What little theory there is, ie. the paper the Italian Alberto Alesina peddled at the ECOFIN meeting towards the end of the brief burst of Keynesian style expansion in 2008-09 is comprehensively debunked by Blyth for being decontextualized from actual political and economic events, and for setting time frames to produce results as favourable as possible for the pro-Austerity case. No matter, the media and the political right with their usual regard for facts, sang its praises to the sky!
As far as the "natural history" of Austerity goes, the record is miserable. Blyth makes the point that it only has a chance of working in a fairly narrow set of conditions, eg. one country does it in a context where neighbouring countries/trading partners economies are expanding, its not carried out in the middle of a recession, and its done gradually. None of these conditions apply, neither in the UK, the Eurozone (the main but by no means the main focus of Blyth's book) or the United States.
Austerity was also supposed to give the private sector the confidence to invest, on the basis that they knew public spending was being decreased and their future profits will thus not be highly taxed. But in the UK, according to even the Daily Torygraphs assistant editor Jeremy Warner: "UK corporates have cash sitting on their balance sheets of £754bn [2012 or 2 years into austerity], or around a half of annual GDP. These sums have doubled over the course of the past decade, with much of the growth having taken place during the financial crisis of the past four-and-a-half years." So much for that. Cameron/Clegg/Osborne now seem set on having another housing boom by insuring 15% of mortgages up to £600,000 thus reducing the deposits required from 20% to 5% of the house value. Doesn't seem particularly wise to me, or compatible with talk of rebalancing the economy, though not altogether different from Thatcher's policy of making consumer credit easier during the last bout of austerity during the early 1980's.
One alternative to Austerity which Blyth flags up, is to collect taxes. Richard Brooks (in his The Great Tax Robbery suggest that around £25bn could be raised not by introducing new taxes but in closing in on those who avoid taxes, and by closing loopholes with regard to existing taxes.
Overall this is an excellent book, that manages to be intellectually thorough as well as a well written, dryly witty, introduction to the arguments that is ideal for the general reader. Worth reading also on the subject (although their account of the credit crunch is confused and unsatisfactory) is Barry and Saville Kushner's Who Needs the Cuts?: Myths of the Economic Crisis which is particularly excellent on the media's handling of Austerity. On the tax side of the public finance equation Nicholas Shaxson's Treasure Islands: Tax Havens and the Men who Stole the World is priceless, as is Richard Brooks book cited above.