An American economist, Mark Blyth, author of Austerity: the History of a Dangerous Idea, gave a talk to members of the German Social Democratic Party on why so-called austerity is a bad idea.
I write “so-called” because the dictionary meaning of austerity is doing without things you don’t really need. Food rationing in the UK and USA during World War Two is an example of austerity. It doesn’t mean prioritizing the requirements of holders of financial assets over the needs of everybody else.
Here’s why Blyth had to say.
Back in the 1970s, a period that now seems quite benign, corporate profits were very low, labor’s share of income was very high, and inflation was rising. We were told that this was unsustainable, and new institutions and policies were constructed to make sure that this particular mix of outcomes would never happen again.
In this regard we were singularly successful. Today, corporate profits have never been higher, labor’s share of national income has almost never been lower, and inflation has given way to deflation. So are we happier for this change?
What we have done over the past thirty years is to build a creditor’s paradise of positive real interest rates, low inflation, open markets, beaten-down unions, and a retreating state — all policed by unelected economic officials in central banks and other unelected institutions that have only one target: to keep such a creditor’s paradise going.
In such a world, why would you, the average worker, ever get a pay rise?
Blyth went on to talk about the “competitiveness” as the solution to economic problems. The problem with competiveness is that, by definition, some competitors will be losers. Framing the issue in this way makes it impossible to cooperate for mutual benefit.
European reforms take the more subtle cover of simply asking everyone to become “more competitive” — and who could be against that? Until one remembers that being competitive against each others’ main trading partners in the same currency union generates a “moving average” problem of continental proportions.
It is statistically absurd to all become more competitive. It’s like everyone trying to be above average. It sounds like a good idea until we think about the intelligence of the children in a classroom. By definition, someone has to be the “not bright” one, even in a class of geniuses.
By definition, Germany can’t have a trade surplus unless there are other nations with trade deficits. To frame European economic policy based on the demand that every nation have a trade surplus is to demand the impossible.
In a healthy free enterprise system, debtors who can’t pay would go through a bankruptcy process, banks that made bad loans would take a loss and, presumably, the lenders would be more careful in the future.
Instead the International Monetary Fund and the European Central Bank bail out the lenders. They do this by offering the debtor countries new loans to pay off the banks, and then squeezing those countries to pay off the debt consolidation loans.
In Europe this plays out at the national level, and at the international level of creditor countries (good) and debtor countries (bad), where the rights of the creditors must be protected and the mantra that “you must pay your debts” must be respected.
Yet even in terms of simple welfare economics, this is nonsense. If the cost of squeezing the debtor is to keep her in debt servitude, or if the losses to the creditors are less than the costs of servicing the debt in perpetuity, then default is efficient, if not moral.
It is an indication of the power of the bad idea of “austerity” that socialists need to be reminded of this.
Ending the Creditor’s Paradise by Mark Blyth for Jacobin. This is the complete talk, which is full of good sense.
Turning the European Debt Myth Upside Down by Conn Hallinan for Foreign Policy in Focus. European debtor countries are in trouble because of bank bailouts, not excessive spending. (Hat tip to Bill Harvey)
Caring too much. That’s the curse of the working classes by David Graeber for Jacobin. The moral issue.