Weekend Reader:<i>Austerity: The History Of A Dangerous Idea</i>
This week, Weekend Reader brings you an excerpt from Mark Blyth’s new book, Austerity: The History Of A Dangerous Idea. Congress hasn’t passed a budget since 2009 — exposing the failure of a highly polarized government to agree on anything. The GOP remains completely unwilling to change or compromise their stance on the budget. They still uphold the idea that austerity, a combination of spending cuts and tax decreases, will somehow help the economy despite a majority of claims from expert economists who promise that austerity will not do anything but hurt our economy. Blyth, a political economist, explains the damage austerity has already done to our economy and what the future holds if Republicans win.
You can purchase the book here.
The Distribution of Debt and Deleveraging
Austerity advocates argue that regardless of its actual origins, since the debt ended up on the state’s “books,” its “balance sheet of assets and liabilities,” the state’s balance sheet must be reduced or the increased debt will undermine growth. The economic logic once again sounds plausible, but like Bill Gates walking into a bar and everyone becoming millionaires as a result (on average), it ignores the actual distribution of income and the critical issue of ability to pay. If state spending is cut, the effects of doing so are, quite simply, unfairly and unsustainably distributed. Personally, I am all in favor of “everyone tightening their belts”—as long as we are all wearing the same pants. But this is far from the case these days. Indeed, it is further from the case today than at any time since the 1920s.
As the Occupy movement highlighted in 2011, the wealth and income distributions of societies rocked by the financial crisis have become, over the past thirty years, extremely skewed. The bursting of the credit bubble has made this all too clear. In the United States, for example, the top 1 percent of the US income distribution now has a quarter of the country’s income. Or, to put it more dramatically, the richest 400 Americans own more assets than the bottom 150 million, while 46 million Americans, some 15 percent of the population, live in a family of four earning less than $22,314 per annum.
As Robert Wade has argued: The highest-earning 1 percent of Americans doubled their share of aggregate income (not including capital gains) from 8 percent in 1980 to over 18 percent in 2007. The top 0.1 percent (about 150,000 taxpayers) quadrupled their share, from 2 percent to 8 percent. Including capital gains makes the increase in inequality even sharper, with the top 1 percent getting 23 percent of all income by 2007. During the seven-year economic expansion of the Clinton administration, the top 1 percent captured 45 percent of the total growth in pre-tax income; while during the four-year expansion of the Bush administration the top 1 percent captured 73 percent…This is not a misprint.
If you reside in the middle or the bottom half of the income and wealth distribution, you rely on government services, both indirect (tax breaks and subsidies) and direct (transfers, public transport, public education, health care). These are the transfers across the income distribution that make the notion of a middle class possible. They don’t just happen by accident. Politics makes them happen. Americans did not wake up one morning to find that God had given them a mortgage-interest tax deduction. Those further up the income distribution who have private alternatives (and more deductions) are obviously less reliant upon such services, but even they will eventually feel the consequence of cutting state spending as the impact of austerity ripples back up the income distribution in the form of lower growth, higher unemployment, withered infrastructure, and an even more skewed distribution of resources and life chances. In essence, democracy, and the redistributions it makes possible, is a form of asset insurance for the rich, and yet, through austerity, we find that those with the most assets are skipping on the insurance payments.
When government services are cut because of “profligate spending,” it will absolutely not be people at the top end of the income distribution who will be expected to tighten their belts. Rather, it will be those who lie in the bottom 40 percent of the income distribution who haven’t had a real wage increase since 1979. These are the folks who actually rely upon government services and who have taken on a huge amount of debt (relative to their incomes) that will be “fiscally consolidated.” This is why austerity is first and foremost a political problem of distribution, and not an economic problem of accountancy.
Austerity is, then, a dangerous idea because it ignores the externalities it generates, the impact of one person’s choices on another person’s choices, especially for societies with highly skewed income distributions. The decisions of those at the top on taxes, spending, and investment prior to 2008 created a giant liability in the form of a financial crisis and too big to fail and bail financial institutions that they expect everyone further down the income distribution to pay for. “We have spent too much” those at the top say, rather blithely ignoring the fact that this “spending” was the cost of saving their assets with the public purse. Meanwhile, those at the bottom are being told to “tighten their belts” by people who are wearing massively larger pants and who show little interest in contributing to the cleanup.
In sum, when those at the bottom are expected to pay disproportionately for a problem created by those at the top, and when those at the top actively eschew any responsibility for that problem by blaming the state for their mistakes, not only will squeezing the bottom not produce enough revenue to fix things, it will produce an even more polarized and politicized society in which the conditions for a sustainable politics of dealing with more debt and less growth are undermined. Populism, nationalism, and calls for the return of “God and gold” in equal doses are what unequal austerity generates, and no one, not even those at the top, benefits. In such an unequal and austere world, those who start at the bottom of the income distribution will stay at the bottom, and without the possibility of progression, the “betterment of one’s condition” as Adam Smith put it, the only possible movement is a violent one. Despite what Mrs. Thatcher reportedly once said, not only is there something called society, we all live in it, rich and poor alike, for better and for worse.
Mark Blyth is Professor of International Political Economy at Brown University. His most recent book is Austerity: The History of a Dangerous Idea (Oxford University Press, 2013), from which this essay is adapted. Copyright © Oxford University Press.