MEG JACOBS
Fiscal Drag
Finally—about 40 years too late—the tide may be turning against austerity.
D E B TO RS’ PRISON: THE POLITICS OF AUSTERIT Y VERSUS POSSIBILIT Y
BY R O B ERT KUT TNER • KNOPF • 2013 • 352 PAGES • $26.95
AU ST E R IT Y: THE HISTORY OF A DANGEROUS IDEA BY MARK BLY TH
OX FO R D UNIVERSIT Y PRESS • 2013 • 304 PAGES • $24.95
A
usterity has shaped American politics and policy for almost four decades. Over that period, the pressure for deficit
reduction and spending cuts has been ongoing and intense. Even when liberals
have found a modicum of political space to push through new social initiatives,
such as President Obama’s Affordable Care Act, the agenda has quickly returned
to constraining and limiting the growth of government. Democrats have generally
joined Republicans in embracing this cause. The debate has centered on how far
to go with austerity, rather than whether austerity is even the right objective.
That is the point of a recent spate of books from the unrepentant Keynesian
left, which offers a potent, if largely unheeded, critique of contemporary public
policy. These books argue that we’re in the mess we are in today—an anemic
recovery, chronic underinvestment in the public sphere, and the specter of EU
collapse—because of the austerity policies that the United States and Europe
meg jacobs is associate professor of history at MIT. She is writing a book on
the energy crisis and the politics of the 1970s.
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have chosen. The furloughs, freezes, and cuts that have resulted from the budget sequestration are microcosms of larger battles fought and won in the halls
of Congress, the White House, the Federal Reserve, and the European Central
Bank (ECB) that privilege capital over labor, investors over consumers, and
austerity over stimulus.
What we are experiencing is the culmination of a near century-long debate
between opposing schools of thought: Keynesianism versus free-market economics. Keynesians were ascendant from the 1930s to 1960s, their dominance
over economics unchallenged. Then, around the 1970s, conservatives started
to push back against the state-interventionist view by introducing an agenda
that revolved around tax cuts, spending cuts, and tight monetary policies. In the
wake of the 2008 financial meltdown, a strong rebuttal has emerged from the
left against austerity’s stranglehold on our policies. Following decades when
everyone seemed to agree that austerity was the responsible course of action, a
true debate has opened up about what is really best.
This debate, far from academic, is now making front-page headlines, as
European and American policy-makers respond to the longest bout of high
unemployment and slow growth since World War II. Should policy-makers
stick to the course of austerity that has largely governed the response to the
financial collapse and the resulting recession? Or is it time to consider a return
to Keynesian stimulus and more robust government regulation of finance? Perhaps the real question is how long the counterassault against austerity will last.
Is this a short-lived Keynesian eruption, or are we at a true turning point? Have
policy-makers really moved beyond the concerns that have dominated public
discourse for so long?
I
nto this debate enter two new books: Debtors’ Prison: The Politics of Austerity Versus Possibility by Robert Kuttner and Austerity: The History of a
Dangerous Idea by Mark Blyth. Kuttner, co-founder and co-editor of The
American Prospect, is a well-known and incisive proponent of left-of-center
economic policy; Blyth, a Brown University political scientist, first gained public attention outside of the academy with an entertaining video that explains
the recent financial meltdown and the ensuing recession. Both are unapologetic Keynesians who share the view, common among those who are to the
left of today’s centrist Democratic Party, that austerity politics are not simply
callous, but, by prolonging the economic problems they’re intended to solve,
are also just plain bad policy.
In the anti-austerity narrative, the private sector, not government spending,
was responsible for the 2008 financial crisis. Unregulated bankers concocted
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Rube Goldberg financial instruments; banks borrowed in short-term credit
markets to finance a housing bubble. This private debt caused the spectacular
liquidity crunch. The limited public spending that followed did little to prevent
the crash from turning into a full-blown recession: All told, the net government
stimulus—$152 billion passed under Bush and $787 billion under Obama—was
less than 10 percent of GDP. As Kuttner points out, it was the first slump in
nearly a century during which the government cut jobs rather than added them.
Meanwhile, as housing prices plummeted, millions of Americans saw a serious
decline in their net worth, with $9 trillion in household wealth wiped out by
the collapsing real estate market. Between 2005 and 2009, African Americans
lost more than half their net worth.
What started as a financial collapse in the United States spread and led to a
collapse in Europe. The European situation was compounded by the fact that The myth is that the 1970s
countries were bound together by the
discredited Keynesianism, but
euro. Without sovereign currencies,
countries could not print money; nor the truth is that government
by the rules of the EU could they accrue
programs to soften the period’s
massive debt to bail out their banks.
Blyth cleverly describes the situation restructuring were never tried.
in Europe as a system of banks “too big
to bail.” In this arrangement, Germany, the most powerful country in the EU,
insisted on belt-tightening as the basis of bailouts by the ECB.
Kuttner and Blyth do an expeditious job of laying out this story of interconnected crises. Their point is simple: It was not reckless spending by governments
in the United States or Europe that was responsible for the crisis. Rather, they
lay blame at the feet of bankers and the private debt they amassed on a shaky
foundation. Conservative commentators and even the mainstream press put the
sovereign debt crisis of countries like Greece at the center of their stories. But
these two authors don’t buy it: These conservative narratives that hold public
spending accountable are, they argue, a smokescreen for an attack on welfare
states throughout the industrialized West.
Much of this is familiar, especially to regular readers of Paul Krugman’s New
York Times columns. What Kuttner and Blyth contribute is a much-needed
historical perspective that explores, as Kuttner puts it, “how the bad economic
advice of the austerity lobby became the prevailing view.” Carmen Reinhart and
Kenneth Rogoff’s 2010 paper, “Growth in a Time of Debt,” which argues that
high public-debt levels retard growth, has served as intellectual cover for austerity programs around the globe (and has recently been discredited by other
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academics). But the austerity agenda has become so dominant today not because
of recent research but because of its deep roots.
Austerity as a way of addressing debt and debtors has an intellectual lineage
dating back to at least the seventeenth century. Kuttner derives his title, Debtors’
Prison, from the story of Daniel Defoe, author of Robinson Crusoe, who, after
having been imprisoned for unpaid debts, argued that such punitive measures
were counterproductive, eliminating the potential for debtors to not only pay off
debt but also be productive members of society. “Debtors’ prisons have mostly
been abolished,” Kuttner tells us, “but the mentality lives on.”
And herein lies the problem for modern capitalism. This mindset that
has punished debtors and rewarded creditors—unless of course the debtors
are big private banks—has led to periodic deflation and the destruction of
productive capital as debtors have found themselves imprisoned, or simply impoverished, by circumstances that they alone did not create. Today’s
twenty-first-century Defoe equivalents are the homeowners with underwater
mortgages and declining property values. While they won’t be sent to jail,
they are suffocating under a sea of debt, which prevents them from breathing life back into the economy.
Blyth likewise looks backward to offer his own cautionary note. Whereas
today’s neoliberal conservatives critique the state because they disapprove
of social welfare and redistribution, the originators of liberalism, like John
Locke and Adam Smith, lambasted the state because it inhibited individual
entrepreneurship and the accumulation of private wealth. In their time, state
intervention, at the hands of unelected monarchs, was confiscatory (taking
property away from individuals) rather than compensatory (providing assistance to individuals). We ought not to miss the moral critique embedded
within today’s conservatism, says Blyth, that people, and governments, are in
debt because of their own failings and extravagance rather than the structure
of the economy and the power of elites to insure their private interests. This
has resulted in a bait and switch of epic proportions, where governments
get blamed for debts they assumed to bail out bankers’ private-sector losses.
“The banks may have made the losses, but the citizenry will pay for them,”
writes Blyth.
T
he critical moment for both authors, and indeed for a new generation of
historical scholarship on contemporary conservatism, came in the 1970s.
That’s when the Keynesian world of robust growth, low unemployment,
strong unions, and the public provision of welfare and social benefits started to
unravel. It is also when deregulation, the end of Bretton Woods, and the replace96
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ment of industry with finance as the engine of growth further eroded the social
compact that had been in place since the New Deal.
Political battles and public policy reforms in the 1970s laid the basis for this
new political economy of austerity. For example, the Employee Retirement Income
Security Act of 1974 allowed for the shift from traditional pensions with set
monthly payments to employee-contributed 401(k)s with no guarantee of payout.
(Not only are 401(k)s less secure, they also cost companies about half of what a
traditional pension does.) The Bankruptcy Reform Act of 1978, which substantially overhauled the system for individuals and business, made it much easier
for companies to file for Chapter 11 and relieve themselves of debt, including
pensions and labor obligations. Collectively the result was what political scientist
Jacob Hacker calls the “great risk shift” away from businesses and government
and onto families, resulting in both greater insecurity and greater inequality.
A key moment in the ascendance of austerity occurred during the recession
of 1974-75. The steepest downturn to that point since the 1930s, the recession
saw a shift in economic policy-making. President Ford’s treasury secretary,
William Simon, and chief economic adviser, Alan Greenspan, both argued that
inflation was a bigger evil than unemployment, and along with other emerging
conservative voices like Chief of Staff Donald Rumsfeld and his assistant Dick
Cheney they urged Ford to use the threat of a veto to prevent a large stimulus
package pushed by Democrats in Congress. Simon offered up an argument that
has now become commonplace, that public debt “crowds out” private investment, raises interest rates, and reduces confidence in the dollar, and therefore
was enemy number one. The eventual compromise, unsatisfactory to most liberals, was a temporary tax rebate, coupled with promises to cut spending. This
story suggests that the intellectual revolution in economic thought had, by the
1970s, found key proponents in government.
Another conservative figure, Pete Peterson, who got his start in Washington as
secretary of commerce under Richard Nixon, gets a lot of attention in Kuttner’s
narrative. Kuttner offers a fascinating account of this investment banker’s recent
past, his foundations, and his media outlets, such as The Fiscal Times, which has
been a key forum for austerity. In 2002, Peterson led the committee that recommended Timothy Geithner as chairman of the New York Federal Reserve Board,
and it was Geithner who, as treasury secretary under Obama, insisted that a takeover of the banks was a step too far. Peterson has worked hard to push both parties
to seek a grand bargain to cut spending and raise taxes—though the emphasis has
been more on cuts than on tax increases—even in the face of a prolonged downturn. Since 2008, both Republicans and Democrats, as well as European leaders,
have accepted much of the conservative critique of Keynesianism, resulting in
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what Kuttner and Blyth see as the self-defeating austerity measures of President
Obama and German Chancellor Angela Merkel. In their eyes, Obama deserves as
much of the blame as congressional Republicans for recent public policy.
K
uttner’s and Blyth’s books arrive at an opportune time. Today there is
some optimism on the left that austerity has been discredited and we are
on the cusp of a new era of economic policy. These two books hold out
the possibility of a different future. “The hegemony of finance is not an iron law,
only a predisposition,” writes Kuttner. “In a democracy, an activated citizenry
can contest that dominance and channel finance to a role more conducive to
broad prosperity and less prone to periodic disaster.” All the more so if they
know their history.
For these authors, history not only offers an explanation for today’s failed
policies, but also a possible way out. The Scottish-born Blyth, a child of the British welfare state, bolsters his argument in favor of liberal spending by looking
backwards at other moments when countries relied on austerity to promote
recovery—what he calls the natural history of austerity—and finds the record
disastrous. The most obvious examples come in the 1920s and ’30s. For Kuttner,
history holds similar lessons. Not surprisingly, the era of Franklin D. Roosevelt
demonstrates to him the political and economic success that attended a rejection
of fiscal austerity. As Kuttner explains in a fairly boilerplate account of the New
Deal, the idea of underconsumption—that workers and middle-class Americans
could not consume the products they were producing—led to a public policy
revolution. A consumption-driven view of the economy provided the justification for the adoption of many new public policies, all of which institutionalized
redistribution and the regulation of profit as legitimate and necessary goals of
government. The New Deal included financial reforms separating commercial
and investment banks, regulating the stock market, and guaranteeing deposits.
New agencies such as the Home Owners’ Loan Corporation and the Federal
Housing Administration allowed for the forgiveness and refinancing of mortgage debt and supported the first long-term, fixed-rate mortgages that, along
with the GI Bill, were essential to the explosion in postwar home ownership.
The Social Security Act—with old-age pensions, unemployment compensation,
and dependent care for single mothers—offered built-in transfer payments and
automatic countercyclical stabilizers. The National Labor Relations Act gave
workers the rights to organize and engage in collective bargaining, which in turn
helped boost their income and insure that wages kept up with productivity gains.
World War II then provided the object lesson in public deficit spending, ending the Depression and putting in place a system of mass taxation that would
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guarantee a federal budget large enough to wage the war and provide countercyclical stability. During and after the war, as a patriotic act, the Federal Reserve
guaranteed low interest rates for government bonds, even at a time of massive
public debt. At the international level, policy-makers supported debt forgiveness and, through the Marshall Plan, a massive public spending campaign for
European recovery. The Bretton Woods system limited speculation on private
capital and established fixed exchange rates, all of which promoted growth
instead of stymieing it. This long arc of the 1930s and ’40s provides historical
evidence for why we would be smart to ignore the naysayers and get on with
spending and regulating our way out of the contemporary crisis.
And the lesson is the same for the 1970s. Conservatives then and now blamed
government spending for bringing about the economic slowdown of that era. But
they were—and are—wrong. The problem was not the fiscal policies but the Austerity contains within it the
politics of the period. In the mid-1960s,
seeds of its own demise: As
President Johnson was unwilling to
raise taxes to pay for an unpopular war austerity-bred unemployment
and controversial poverty programs, a
lingers, the greater the
failure that resulted in mounting debt.
But by the standards of what was to challenge to austerity will be.
come with the Reagan- and Bush-era
tax cuts, the debt as a share of GDP was low, deficits were minuscule, and they
did not cause the stagflation of the 1970s. Instead, the bigger problems of the 1970s were structural, not cyclical, as
productivity began to slide and American manufacturers fell behind their West
German and Japanese competitors and started to hemorrhage jobs. Workers
shifted into the service sector, where they found themselves with less secure
jobs that paid less and offered fewer benefits. With global commodity prices
rising—most dramatically the price of oil, which quadrupled in price in just
two years—employees found the value of their paychecks eroding. The solution, as liberal Democrats argued, was a job-retraining program, public-works
investment, and the extension of benefits to out-of-work Americans. They also
argued for an energy policy that would bring down the price of oil by investing
in conservation and alternative fuels. But they lacked the political muscle to
push through these programs. The result was a debilitating wage-price spiral
that Republicans broke with fierce determination in the recession of the early
1980s. The myth was born that the 1970s discredited Keynesianism, but the
truth is that government programs to soften the restructuring of the period
were never tried.
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And that takes us up to today. The budget sequestration may be just another
sign of austerity’s grip on policy, but its unpopularity suggests that we may have
reached the end of this mania. Indeed, Obama’s 2012 victory over Mitt Romney and Paul Ryan shows the limited political appeal of the austerity agenda.
And the tide seems to be turning in Europe too, where it’s hard to ignore the
fact that austerity is simply not working. For austerity contains within it the
seeds of its own demise: The longer austerity-bred unemployment lingers, the
greater the challenge to austerity becomes, raising the possibility of new social
movements that will demand more from their governments. That is the history of the 1930s, and thus concludes Kuttner, “We must begin by reclaiming
democratic politics.” D
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