On Political Books

March/ April 2013 Slaves of Defunct Economists

Why politicians pursue austerity policies that never work.

By Henry Farrell

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.


If you are interested in purchasing this book, we have included a link for your convenience: Buy from Amazon.com.

Henry Farrell is an associate professor of political science and international affairs at George Washington University.

Comments

  • smartalek on March 07, 2013 12:17 PM:

    You know that old line about not assuming malice behind what could be explained by incompetence?
    This appears to be the opposite.
    If Farrell's summary of Blyth's argument is accurate (and there are indications here that it might have left out key elements), then Blyth may not be paying sufficient attention to the possibility that some of the pol's may be -- and many of their Wall St and other financial-sector owner-operators surely are -- not mistaken, but deliberately and aggressively lying through their teeth.
    The financiers have different stakes than everyone else, including other actors in the private sector.
    And they've made it painfully and repeatedly obvious that they don't care what happens to anyone else, to "their" countries (do they even have any, at this point?), or to the world as a whole, as long as their loan payments arrive in full and on time.
    It's the ultimate, and apparently inevitable, expression of the socialization of costs, and the privatization of profits.

  • smartalek on March 07, 2013 12:31 PM:

    My bad.
    That should have read:
    "...as long as their loan payments arrive in full and on time and in currencies with values undiluted by devaluation or inflation."
    That one's especially important w/r/t "our" own Federal Reserve now, innit?
    Am I the only one who really pines for an "edit" button here?

  • Robert Waldmann on March 07, 2013 10:09 PM:

    You are unfair to German Social Democrats re the great depression. The Weimar Republic's response to the great depression was handled by Heinrich Bruning head of the Center (Catholic) party. He was a "presidential" chancellor which means he governed not through laws passed by the Reichstag but by presidential decress signed by Paul Hindenberg (who was also most definitely not a social democrat).

    Use the wikipedia http://en.wikipedia.org/wiki/Heinrich_Br%C3%BCning

  • Robert Waldmann on March 07, 2013 10:17 PM:

    Great post by the way. Also Huh ???

    "Keynes ... He doesn’t know any better than I do where those ideas will come from" is an odd passage. I would tend to guess that the ideas we need might come from Keynes via Krugman. The case has been made. It makes sense. It is overwhelmingly supported by the data.

    You and Blythe are sure we need new ideas. Ideas which would have been new in 1776(although Smith was very firm on the need to regulate banks) but they aren't new any more.

    I mean do you reall think that the economy is too important for us to listen to Keynes, Krugman, Romer, and (belatedly) Summers and Blanchard ? What makes you say that ?

  • Kevin Donoghue on March 08, 2013 5:37 AM:

    Robert Waldmann: "I mean do you really think that the economy is too important for us to listen to Keynes, Krugman, Romer, and (belatedly) Summers and Blanchard?"

    Going by things Henry Farrell has written at Crooked Timber etc., I doubt that he means we should disregard Keynesian macroeconomics. The question is, given that Keynes wiped the floor with his opponents in the 1930s and Krugman does the same today, why aren't the Keynesians winning? If the point is not merely to interpret the world but to change it, we need to know how to dispose of zombie economics, or cockroach ideas as Krugman has taken to calling them. (I'm encouraged by the fact that he seems to have managed to get under the thick skin of the Eurocrats, judging by their outbursts on Twitter.)

    Kalecki warned that getting macroeconomics right wouldn't be enough. A situation of deficient demand can be just fine for some classes of people -- stock markets are doing very well right now, even though labour markets are in shit.

  • Brad S on March 11, 2013 11:17 AM:

    Dreck. "Austerity" is an invented term to replace "spending calibrated to normal revenues". If a country spends above 100% of revenue at a rate which exceeds even the supposed small percentage of "sustainable deficit", then eventually there will be some sort of reckoning of accounts. When spending has to fall back to "normal" revenue levels, and then fall a little bit further to cover past spending, then things are going to seem a little recessionary. The solution is not to try to artificially sustain unsustainably high spending levels indefinitely. Keynesian spending is suited to brief crisis intervals, not whatever level of program spending a country wishes to indulge on itself.

  • Mark Garrity on March 14, 2013 7:53 PM:

    Brad S. the US has spent above "spending calibrated to normal revenues" since Reagan promised that his massive tax cuts for the rich would bring prosperity to all. Since then we've seen the richest 1% acquire massive amounts of wealth while the middle class has sunk into debt along with the government. It's been the tale of the two Clauses ever since. When Republicans are in power they spend like drunken sailors. Under the last president Bush two unpaid for wars and a huge Medicare giveaway to the drug and insurance companies piggybacked on a drug benefit for seniors. As soon as they lost power Dick Cheney's proclamation that "Reagan taught us deficits don't matter" was no longer operative. To a man they all became spending hawks and I imagine they'll stay that way until the next Republican president comes along. Of course they can't kill off government programs they don't support like Medicare and Social Security by driving down the debt so they fight any and all tax increases that will close the gap. Again until, and only until they regain power when spending will (but not taxes) will go up again.

    The US government's costs to borrow are at historic lows. Not so much because our government is perfect or even good at it what it does but because the rest of the world looks even worse right now. We ought to be borrowing $200 billion a year to build desperately need infrastructure and alternative energy in this country. Putting people back to work paying taxes instead of collecting unemployment benefits would take care of the deficits in the short run and the long term debt bomb which is almost all waste in medical services, over $700 billion a year according to various studies can be dealt with by cost benefit analysis to see what works, what is useless, and what is worse is actually harmful. This isn't uncharted territory. Other industrialized nations spend half what we do per capita and get much better medical outcomes than we do. Obamacare has made a start but more needs to be done. Lots of people get this. Unfortunately not many in DC do.

  • js on April 11, 2013 7:00 PM:

    Austerity hardly reflects "mistaken" notions resulting from "amnesia," as smartalek notes. Why not forgo the intellectual cop-out and try evaluating the actual purpose austerity achieves without assuming that its advocates are mere fools.

    Austerity assures bondholders that the government is "serious" about reducing its debt. Moreover, it drives down the cost of labor. What is mysterious about this?