Why politicians pursue austerity policies that never work.
These arguments acquired ever fancier mathematical trappings. Economists came up with toy models under which austerity could actually expand the economy by restoring business confidence. And this general wisdom seeped down into politics. In 2009, Alberto Alesina and Silvia Ardagna wrote a paper arguing that austerity was a signal that politicians sent to entrepreneurs, guaranteeing that tax increases would not happen in the future so that they would have the confidence to invest in the present. When the crisis hit, they were invited to deliver a version of this paper to the gathered economics and finance ministers of Europe. Likely, many of these ministers now regret having listened to its recommendations, but the hurt is done.
Blyth’s book is not perfect. It veers between entertaining polemic and detailed analysis, and sometimes overstates its case. To take one example, states like Ireland were more profligate than Blyth suggests. As the political scientists Niamh Hardiman and Sebastian Dellepiane have shown, they maintained budget surpluses only through unsustainable tax policies, which assumed that the property bubble would keep on expanding forever. Blyth’s indictment of banks and private finance sometimes lets government off a little too lightly. And the book isn’t as well organized as it might be; Blyth tries to stuff 400 pages of analysis into 200 pages of prose, leading to some unseemly bulges.
Nonetheless, it’s essential reading. John Maynard Keynes famously argued that politicians are the unwitting slaves of the ideas of defunct economists. Blyth’s book is a practical application of Keynes’s dictum, asking what those ideas are, why they are so important, and where they came from in the first place. If Blyth is right, we are only going to get out of the mess we’re in by developing new ideas that work better than austerity and can shape a new economic order, at least for a while. He doesn’t know any better than I do where those ideas will come from, but at least he has some understanding of why and how they are important. The economy is much too important to leave to economists. We need to understand how ideas shape it, and Blyth’s new book provides an excellent starting point.
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