A Review of Austerity: The History of a Dangerous Idea by Mark Blyth, Part Two
The roots of our austerity mania, says Mark Blyth, lie in a historic “neuralgia regarding the state in general” on the part of economic liberals, or, what we would now call, free market evangelists. They remain forever torn between really not wanting the state around and a grudging acceptance that it might be unavoidable.
Here is Blyth being interviewed:
But in the real world, no such divided self exists among conservatives. They know the state is useful and make ample use of it. What they don’t like, and want to use austerity to eliminate, is the “welfare state” – the use of public spending that doesn’t go to corporations and the very wealthy.
The other kind of state was indispensable for the bail-outs of 2008, the largest transfer of wealth, it has been estimated, from poor to rich in Britain since William the Conqueror. And this wasn’t some kind of strangely aberrant behaviour. According to a 1995 book by two Dutch economists, Winfried Ruigrok and Rob Van Tulder, every single one of the companies on Fortune magazine’s list of the world’s 100 biggest corporations has benefited from the industrial policy of its home country. And twenty of them wouldn’t even have survived were it not for the state taking them over or handing them huge taxpayers subsidies.
Before they were famous
Before George W. Bush had given $13 trillion to the likes of Bank of America and JP Morgan Chase, he had, in 2002, bailed-out the US airline industry. Before the UK government had spent 40% of British GDP on rescuing the Royal Bank of Scotland and co from insolvency, it had saved nuclear power generator British Energy from administration in 2002 and set up the Private Finance Initiative which, it is estimated, will cost taxpayers £300 billion.
The US, says economist William Lazonick, could plausibly be described as “the world’s foremost developmental state”. Iconic modern technologies, such as the algorithm central to Google’s search engine and the touch screens of Apple’s iPads and smart phones were developed using US federal funding. In Britain, between £2 billion and £3 billion is given by the NHS every year to support the research and development of drugs companies.
So Blyth is simply wrong to describe the politics of the $700 billion TARP bail-outs of the US financial system by the federal government as “perverse”. It wasn’t perverse, it was just an extreme, concentrated example of the dominant governing philosophy of the last decades. What is perverse is Blyth’s description of the US as “being very much on the left in terms of economic policy” as a result of the TARP bailout. That, frankly, is ridiculous. If using taxpayer money to save the richest organisations on the planet from their own mistakes counts as left-wing, then I’m Miley Cyrus (which, in case you’ve been wondering, I’m not).
There isn’t a gulf, as Blyth claims there is, between this kind of Keynesian from above and strict neoliberalism. Keynesianism from below, reasonable tax levies on corporations and the wealthy and a role for trade unions, has been cast into the outer darkness in political terms. But Keynesianism from above, government intervention and even ownership whenever necessary to further the interests of oligopolistic multinational corporations, has never gone away. If you want to call our current economic and political dispensation, neoliberalism, then go ahead. But don’t call it a free market.
Socialise the risks and privatise the profits. The nature of the song hasn’t changed. Many of the problems that Blyth identifies as being caused by austerity, such as falling wages, were evident before austerity. Wages have stagnated in the US since the 1970s and, in Britain, since 2003. The financial crisis has just made everything more transparent.
But accepting this reality of the way the world works does not enable you to escape an uncomfortable dilemma. What exactly do you do when the system crashes, as it did in 2008? Most people, hundreds of billions in the West, are materially dependent on its functioning, not only through their jobs but, in many cases, through their houses and private pensions. It’s easy to say, ‘let it burn’ but that might entail immense suffering and result in an economic and political system even worse than the one we are currently enjoying. At the time of the crash in the US in 2008, Blyth points out, there were 150 million workers, 72% living pay-cheque to pay-cheque, and 70 million handguns. It wouldn’t have been pretty. And the dilemma doesn’t end with bailing out the banks at taxpayer expense. Many countries in Europe, as this article from the New York Times relates, are furiously tearing up workplace protections in a bid to restore competitiveness and resuscitate economic growth, changes described by the International Labor Organization as the most significant since the Second World War. But they believe they have little choice because the alternative is unemployment of 15 or 25%.
It’s apparently an urban myth that the phrase, “What’s good for General Motors, is good for America” was ever uttered by that corporation’s chief executive in the 1950s. But the axiom that saying expresses – that whatever benefits big business will ultimately trickle down to the rest of us – is more shamelessly applied than ever. At least in the 1950s, when phrase was or wasn’t coined, there was some kind of deal in place. The corporate tax rate in the US in the 1950s was 52%. Now, it is officially 35% but effectively 19%, and, in many western countries, the official rate is considerably lower - 21% in the UK and 12.5% in Ireland, for example. Austerity has exacerbated the trend for corporations to escape their fiscal responsibilities, but it certainly didn’t create it. We live in an age of permanent blackmail.
It is true, as both Blyth and economist of the moment Thomas Piketty note, that considerably higher tax rates for corporation and the wealthy will not damage economic growth. Blyth quotes the conclusion of a 2012 US Congressional report to the effect that reductions in the top rate of tax and capital gains tax over the last 65 years “do not appear correlated with economic growth”.
Gross International Problem
The problem is that economic growth has been steadily declining for reasons other than the direction of the top rate of tax, a feature of the recent economic history Blyth doesn’t even acknowledge. In every region of the world, economic growth was higher between 1950 and 1973 than it has been between 1973 and 2008. In Western Europe, annual growth of 4 per cent has become growth of 1.8 per cent. In the US, 2.4 per cent has tapered down to 1.8 per cent. In Japan, growth has fallen by an astonishing 75%. As it became more difficult to make high profits through the manufacture of products, as growth hit a brick wall in other words, finance became irresistibly alluring to companies. But the spectacular growth of the finance industry resulted in the shuddering crash of 2008.
And this is what makes Blyth’s conclusion unconvincing. He actually, ironically, takes a leaf from the American 1930s liquidationist book, and says, in retrospect, the government shouldn’t have intervened in 2008. We should have let the banks go under. “Bailing led to debt. Debt led to crisis. Crisis led to austerity,” he writes. “Perhaps we could have avoided this sequence.” I agree. In future, don’t bail.
But he goes on to argue that bailing merely saved a financial industry that had probably exhausted its own growth model anyway. “We may have impoverished a few million people to save an industry of dubious social utility that is now on its last legs.” The intractable problem is that finance was itself a response to the exhaustion of a growth model. If finance is now exhausted as a profit-making machine, what are you left with? A finance-driven economy may be an accident waiting to happen, but western countries can’t plausibly re-industrialise. As economists John Bellamy Foster and Robert W. McChesney point out in The Endless Crisis, we find ourselves in trap. Once a crash occurs, the political authorities can think of nothing but re-installing the casino economy because the real economy is irretrievably stagnant. But that just makes further crashes all but inevitable.
The enduring thought left by Blyth’s book is that, though austerity involves the unnecessary impoverishment of millions, while this economic system remain intact there are no easy answers.
Here is part one
Here is part one