Austerity

Austerity: The
History of a
Dangerous Idea
“Does Austerity Kill? Does
Austerity Cure?”
IDEFF - Law School of Lisbon
University
November 29th 2013
Mark Blyth, Brown University and the
Watson Institute for International Studies,
USA
So What is Austerity Anyway?
• Austerity is not cutting
when you grow. Cutting
when you grow is
commonly known as
‘sensible economic policy.’
•
Austerity is cutting in a slump, which is
turbocharged when everyone does it at
the same time and they are all each
others trading partners
•
”It is an undisputable fact that excessive
state spending has led to unsustainable
levels of debt and deficits that now
threaten our economic welfare. Piling on
more debt now will stunt rather than
stimulate growth in the long run.
Governments in and beyond the Eurozone
need not just to commit to fiscal
consolidation and improved
competitiveness – they need to start
delivering on these now.”
W. Schauble, 2010
“The Boom, not the slump,
is the time for Austerity”
J.M. Keynes, 1933
•
•
So we have to cut the debt – right?
But why then have the countries that have cut
spending the most increased their debts the most?
• Greek Debt to GDP
• Greek Public Spending
The same is true whether big or small
•
Spain’s debt goes down then up
•
While Spain’s spending goes up then
down
The Irish Tiger?
• Ireland looks like Spain
• Only its worse
Even the “Poster Child” quadrupled their debt as
they cut
• Latvia’s Debt to GDP
• And what paid for it
What About Germany?
German debt to GDP
German public spending?
And Portugal?
Portuguese Debt to GDP
Portuguese Debt to GDP
SO WHAT CAUSED THIS?
Two Stories: ECB ‘Credibility’ or ‘the Greatest
Moral Hazard Trade in Human History?’
You can’t have Over-Borrowing
without Over-Lending
Assets held by banks in Germany, France, and the UK
are about double the annual GDP of the entire EU
50000000
45000000
40000000
35000000
30000000
Other
UK
25000000
Germany
20000000
France
15000000
10000000
5000000
0
GDP
Bank Assets
• Gross contribution to GDP and Bank Assets in the EU (millions of EUR)
If that goes bad, its game over
for the Euro and the core banks
For Comparison – The “too Big to Fail” USA
Bank Assets (millions of USD)
Bank Assets (% of GDP)
20.000.000
140
18.000.000
120
16.000.000
GDP
14.000.000
100
Other
12.000.000
Wells Fargo
80
Citigroup
10.000.000
Bank of America
8.000.000
60
Morgan Stanley
JP Morgan
6.000.000
40
Goldman
4.000.000
20
2.000.000
0
0
Bank Assets
GDP
GDP
Top 6 Bank Assets
Total Bank Assets
France is the exemplar of the ‘too Big to BAIL’
problem
Bank Assets (millions of EUR)
Bank Assets (% of GDP)
10.000.000,00
500
9.000.000,00
450
8.000.000,00
400
7.000.000,00
350
GDP
6.000.000,00
300
Other
5.000.000,00
Societe Generale
Credit Agricole
4.000.000,00
250
200
BNP Paribas
3.000.000,00
150
2.000.000,00
100
1.000.000,00
50
0,00
0
Bank Assets
GDP
GDP
Top 3 Bank Assets
Total Bank Assets
Which is why this is not really a government
debt crisis…
…but it is why we have Austerity policies…
Keeping the periphery in at all
costs
• Its all about stopping the Bank
run round the bond market…
But…
You Can’t Solve a Banking
Problem with Budget Cuts
You Can’t run a Gold Standard in
a Democracy (in Theory…)
You can’t all cut at once and
expect to grow without increasing
your debt
Because you can ‘kick the can down the road’ with
unlimited liquidity to keep the banks afloat
• Thanks Mr. Draghi!
• December 2011: Long Term
Refinancing Operation (LTRO)
(1 trillion Euro)
• March 2012: LTRO 2 (0.529 T
Euro)
• June 2012: Emergency
Liquidity Assistance (0.4 Euro)
• July 26th 2012: Draghi says he
will do “whatever it takes…”
•
Italian Ten Year Bond Yields June 2011 –
May 2013
So government debts were going down going into the crisis –
they went up (massively) during the crisis despite austerity and yet yields went down…despite the debt going up!
• And all at a sadly predictable cost…
So why did anyone, especially in Europe, ever
think that Austerity was a good idea?
Liberalism’s Reluctant Embrace of the State
• John Locke’s fifth
chapter
• Markets as inequality
generators
• States as Policemen
• Don’t trust the state
since it will rob you
blind
• But you need it to
create the markets you
want
The Fear of Debt: “Public Credit will Destroy the
Nation”
•
•
•
•
David Hume
Money and Merchants
The Ease of Debt Issuance
Crowding Out and Easy Money
• Adam Smith
• Parsimony, Inequality and the
Necessity of the State
• Taxation?
• Debt perverts parsimony
The Result: The “can’t live with/without
it and don’t want to pay for it” problem
Liberalism’s Neuralgia with Debt and the
Aspirin of Austerity
This creates two Liberal Stories through 19th Century
Economics
• Story One: Can’t live
with it and don’t want
to pay for it
• Story Two: Accepting
the need for it and to
pay for it
And then came the Great Depression
Austerity American Style:
Liquidationism
• Modern Business Cycle
Theory
• Long Run Capital
Structure (too much
and wrong type)
• Misallocation of capital
• Austerity via Binge and
Purge
British Austerity: The Treasury View
• Laissez Faire and
crowding out
• Public Spending,
Investment, and Taxes
• Lack of Suitable Public
Works
Individually rational actions can be
collectively disastrous
• The Critical Cases of
the 1930s
• Simultaneous
contractions (just like
today) in USA, UK,
Germany, France and
Japan
• Austerity is the
response
• Extremism and collapse
is the result
SO WHERE DO BAD IDEAS
HIBERNATE?
An ‘Ordoliberal’ Home for Austerity
• Late Development and
Export Led Growth
• Freiburg and the State
• The economic
constitution
• Competition not
consumption
• Sound Money and CBI
• Result: Exports Yes,
Keynes No.
Generalizing Ordoliberalism
• The Euro as Generalized
Ordoliberalism
• Commission >
Parliament
• Sound Money > Output
considerations
• Rules > Discretion
• Competitiveness >
Consumption
• Result: Let’s all be more
Competitive
And then came the current crisis, which was not
(only) made in America
• Thanks Mr. Trichet!
• “... the idea is to revive the
market [for covered bonds],
which has been very heavily
affected, and all that goes with
this revival, including the
spreads, the depth and the
liquidity of the market. We are
not at all embarking on
quantitative easing." [italics
added] (ECB: May 7th 2009)
The New Bad Old Idea: The Expansionary
Austerity Hypothesis
• Credibility and cutting the
state
• Spending and future taxes
• The New Cases: Ireland,
Sweden, Canada, Denmark,
Australia
Is written right into the ECB’s Crisis
Response
•
•
•
•
Alesina’s Ecofin Brief
ECB June 2010 Report
Troika conditionality
Structure of periphery
bailouts (cuts not taxes)
• Result: The Greatest
Bait and Switch in
Human History
But Reality Bites?
• IMF challenges to EFA
hypothesis
• October 2012 IMF WEO
and 1.5-1.7 negative
multipliers
• 0.3 percent growth Q3
2013 based on NOT
doing austerity
• More debt not less
• Emigration of future tax
bases
• 12-25-50 percent
unemployment in
Europe
• 0.1 percent Growth last
quarter…
SOME CONCLUSIONS AND
CONJECTURES
Where does this all end?
• More of the Same? Problem of different
preferences and ideas (Merkel, ECB, EC, IMF)
• Turning Japanese? Perma-Austerity and Permalow growth?
• Or Worse? If the North runs a Perma-surplus and
no corresponding deficit is allowed, the result
must be unemployment and bankruptcy
• Gray Swans? Political Unrest? Interest rate spike
from global recovery?
• Black Swans? Italy leaves?