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Austerity: The History of a Dangerous Idea [Hardcover]

Mark Blyth
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Book Description

March 15 2013
Conservatives today have succeeded in casting government spending as useless profligacy that has made the economy worse, centering the policy debate in the wake of the financial crisis on draconian budget cuts. We are told that we need to live in an age of austerity since we have all lived beyond our means and now need to tighten out belts. This view conveniently forgets where all that debt came from. Not from an orgy of government spending, but as the direct result of bailing out, recapitalizing, and adding liquidity to the broken banking system. Through these actions private debt was rechristened as government debt while those responsible for generating it walked away scot free, placing the blame on the state, and the burden on the taxpayer.

That burden now takes the form of a global turn to austerity, the policy of reducing domestic wages and prices to restore competitiveness and balance the budget. The problem, according to political economist Mark Blyth, is that austerity is a very dangerous idea. First of all, it doesn't work. As the past two years of trying and countless other historical examples show, while it makes sense for any one state to try and cut its way to growth, it simply cannot work when all states try it simultaneously: all we do is shrink the economy. Second, it relies upon those who didn't make the mess to clean it up, which is always bad politics. Third, it rests upon a tenuous and thin body of evidence and argumentation that acts more toprop up dead economic ideas and preserve astonishingly skewed income and wealth distributions than to restore prosperity for all. In Austerity: The History of a Dangerous Idea, Blyth demolishes the conventional wisdom, marshaling an army of facts to demand that we recognize austerity for what it is, and what it costs us.

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"One of the especially good things in Mark Blyth's Austerity: The History of a Dangerous Idea is the way he traces the rise and fall of the idea of 'expansionary austerity', the proposition that cutting spending would actually lead to higher output. As Blyth documents, this idea 'spread like wildfire.'" --Paul Krugman, The New York Review of Books


"An important polemic... valid and compelling."--Lawrence Summers, Financial Times


"Essential reading... The economy is much too important to leave to economists. We need to understand how ideas shape it, and Blyth's new book provides an excellent starting point."--Washington Monthly


"Splendid new book." --Martin Wolf, Financial Times


"Austerity is an economic policy strategy, but is also an ideology and an approach to economic management freighted with politics. In this book Mark Blyth uncovers these successive strata. In doing so he wields his spade in a way that shows no patience for fools and foolishness." --Barry Eichengreen, George C. Pardee and Helen N. Pardee Professor of Economics and Political Science University of California, Berkeley


"Of all the zombie ideas that have been reanimated in the wake of the global financial crisis, austerity is the most dangerous. Mark Blyth shows how austerity created the disasters of the 1930s, and contributed to the descent of the world into global war. He shows how European austerity policies have prevented any recovery from the crisis of 2009, while rescuing and protecting the banks and financial institutions that created the crisis. An essential guide for anyone who wants to understand the current depression." --John Quiggin, author of Zombie Economics


"Most fascinating is the author's discussion of the historical underpinnings of austerity, first formulated by Enlightenment thinkers Locke, Hume and Adam Smith, around the (good) idea of parsimony and the (bad) idea of debt. Ultimately, writes Blyth, austerity is a 'zombie economic idea because it has been disproven time and again, but it just keeps coming.' A clear explanation of a complicated, and severely flawed, idea." --Kirkus Reviews


"Informed, passionate." --Dissent Magazine


"Mark Blyth's fascinating analysis guides the reader through 'the historical ideology which has classified debt as problematic.' In doing so he outlines the relevance of century-old debates between the advocates and opponents of laissez faire, and explains why, after a
brief reemergence in 2008-09, and despite the lack of evidence supporting austerity, the world turned its back on Keynesian policies."
--Robert Skidelsky, author of Keynes: The Return of the Master


"Among all the calamities spawned by the global financial crisis, none was as easily avoidable as the idea that austerity policies were the only way out. In this feisty book, noted political scientist Mark Blyth covers new territory by recounting the intellectual history of this failed idea and how it came to exert a hold on the imagination of economists and politicians. It is an indication of the sorry state of macroeconomics that it takes a political scientist to expose so thoroughly one of the economics profession's most dangerous delusions."
--Dani Rodrik, Rafiq Hariri Professor of International Political Economy, The John F. Kennedy School of Government, Harvard University


About the Author

Mark Blyth is Professor of International Political Economy at Brown University. His books include Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century.

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8 of 8 people found the following review helpful
4.0 out of 5 stars New Dimensions in Bait ‘n’ Switch March 8 2013
By David Wineberg TOP 100 REVIEWER
Format:Kindle Edition
Right off the top, I liked Austerity, because it directed me to a Youtube video of the author giving a five minute summary of the book in his lovely Scottish accent, immersed in complementary animation that he seemed to direct with his hands. A great start, that made me read with his delivery in mind. Fortunately, his writing is as clear, direct and succinct as his speaking, so it made reading Austerity a pleasure. It added immeasurably to the total experience. Something more authors might consider to get into the heads of their readers.

Austerity (the book) seems to be a bunch of Keystone Kops in dark suits, madly running around accomplishing very little. They rationalize, they contradict themselves and their policies, they make the same dumb moves over and over, they make up incredible formulas that cannot work even in theory, they take down the economies of the world - and they blame their governments for the mess they leave. The result is bankers continuing to pay themselves obscenely, while governments are saddled with assumed banking debt and the ugly prospect of austerity, as Blyth puts it, that "constitutes the greatest bait and switch in human history."

Blyth proves repeatedly that austerity is "zombie economics" - no matter how many times it is disproved, it just keeps coming back for more. No amount of mere fact disconfirms a good ideology, he tells us.
He hammers the point that in essentially every national case except maybe Greece, government spending was not behind the current financial collapse. Government was not overspending, not creating inflation, not distorting the economy. It was the bankers doing that, with theories of efficient markets and off the books vehicles.
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4.0 out of 5 stars Economic policy making: not a morality play May 16 2014
Format:Kindle Edition|Verified Purchase
Enlightening account of the origins and cultural premises of the hope that austerity will redeem our sins and a well argued case that this hope has always been disappointed. However, the authors also has blinkers. So absorbed as he is in the current debate between proponents of austerity vs expansion that important issues are left unaddressed like a longer term perspective on the sustainability of social programs in a world of slowing population growth or the political dimensions of European integration.
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Amazon.com: 4.3 out of 5 stars  88 reviews
36 of 41 people found the following review helpful
4.0 out of 5 stars Combines a brilliant critical analysis of austerity with a dissonant view on bank bail out April 6 2013
By Gaetan Lion - Published on Amazon.com
Format:Hardcover|Vine Customer Review of Free Product
Blyth shows how the piling on debt in the US was not due to wasteful profligate policy, but instead associated with the bailing out of the private sector, and the banking and financial system. For another excellent coverage of this period see Mark Zandi's Paying the Price: Ending the Great Recession and Beginning a New American Century.

Mortgage borrowers were defaulting en masse, housing prices were dropping like a rock, and the banks and overall financial system were either heading towards insolvency or in a freeze. Without extension of credit and the associated brutal deleveraging of all sectors at once, an economy not only contracts... it just about dies. If the economy is left to its own devices resulting GDP contraction is very severe and unemployment rate can reach 20%+. You are in a Depression. The solution is for the Government to pick up the slack in Demand and counterbalance the deleveraging and contraction occurring in all other sectors with expansive policies. That's an effective Keynesian response. Blyth advanced that's what the US did and it worked. The US is now undergoing a slow and sustainable recovery and has seen its unemployment rate dropped markedly already (instead of heading towards 20%+).

As the financial crisis contaminated Europe through the conduits of complex misrated housing related securities such as MBS and CDOs Europe faced a banking and sovereign debt crisis of its weak peripheral members of the Euro Zone. After, a short and incomplete Keynesian response, the Euro Zone lead by Germany went on a destructive austerity path. European austerity has already thrown the peripheral countries into a long Depression. Greece and Spain's economies have cratered for several years plagued by record unemployment levels of over 25%. Additionally, austerity has not contributed to any reduction in those countries Debt/GDP ratios as Blyth shows on the graph page 38. This is because the denominator (GDP) has contracted faster than the numerator (Debt) has been reduced or written down. This is the classic Debt Deflation conundrum that Irving Fisher had brilliantly exposed back in 1933 (The Debt-Deflation Theory of Great Depressions). Also, austerity policies did not contribute to reducing the unsustainable yields on those countries sovereign debt (see graph pg. 65). It is only once the European Central Bank bought such bonds to do "whatever it takes" to maintain the Euro that such yields have receded.

Next, Blyth goes on a long history of austerity. He presents a twin history.

The first one is an intellectual history that has survived through the times. At the onset, it was derived from interpretation and misinterpretation of the works of Locke, Smith, and Hume. Later austerity was heavily promoted by the Austrian school of economics championed by Hayek. Later, austerity found another champion in Milton Friedman and his monetarism. And, currently it is championed by libertarians, the Tea Party, and the German intelligentsia.

The second history of austerity is how it has worked out in practice from the 18th century to nowadays. And, it invariably exacerbated economic downturns. It is bar none the main cause of the Great Depression. Back then, due to policy constraints imposed by the Gold Standard (not unlike the ones associated with the Euro today) Government felt obliged to impose contracting government policies to curb imports. History demonstrated that the countries that left the Gold Standard first and were able to reverse their restrictive government policies were the ones who recovered first too.

Next, Blyth covers what austerity advocates mention as the demonstrated successes of austerity policies including Denmark, Ireland, Australia, and Sweden resolving their crises in the 1980s and 1990s. But, when Blyth examines the body of studies covering those events "far from supporting the idea of `expansionary austerity' it rather completely undermines it." In each case those economic crises were not resolved by austerity but by initial Keynesian expansive policies. It is only once those economies were shored up that these countries implemented fiscal disciplines. Once the private sector and households balance sheet are robust enough to take on the deleveraging of the government sector; then everything works out ok.

Next, Blyth analyzes some of austerity's most recent "successes" including the recent economic experience of Romania, Estonia, Bulgaria, Latvia, and Lithuania. However, when giving it a closer look he observes that austerity was not successful at all and confirmed one more time its really poor historical record as it contributed to brutal recessions in all those countries followed by subpar economic growth (see graph pg. 174 and table pg. 175).

Blyth advances an interesting idea separate to his rebuttal of Austerity. And, that is that a country to fully recover does not need to bail out its banking sector. He mentions Iceland as a success story. Iceland's three largest commercial banks had assets equal to 11 times its GDP. Those banks were literally too big to bail. So, the Icelandic government nationalized the smaller domestic portion of those banks' balance sheet and placed its much larger foreign portion in receivership. This in essence placed the burden of their bank bail out on British and Dutch depositors who saw much of their savings wiped out. Later, Germany contributed funds so those depositors recovered a few cents on the dollar on their Icelandic deposits. At the time, the Icelandic stock market lost nearly 100% of its value. And, five years later the market is still 94% below its pre-crisis level.

There are a couple of problems with Blyth's letting the banks go strategy. First, just like austerity it certainly can't work if everybody does it; or it can't work if a country of any scale does it. Imagine if Italy or Spain let their banks go. Or if the US had done the same... Oh wait the US tried that on a tiny scale. Remember the Lehman Brothers bankruptcy in September 2008. Well, that's when the entire global financial system froze overnight (spreads between LIBOR and Treasuries jumped from 15 basis points to over 400 basis points). And, Lehman represented only a very small portion of the US overall banking assets. Second, as reviewed above it is unclear how much of a success the Icelandic bank receivership strategy has been. I think it was more like a desperate measure in desperate circumstances rather than a success. By comparison, once the US Government learned its lesson that playing the "moral hazard" card does only exacerbate financial crisis (the Lehman bankruptcy) it quickly bailed out the banks by injecting $250 billion directly into the banks (TARP). Within a year, the banks bounced back and repaid the entire TARP funds plus a profit in the tens of billions to the US Treasury and taxpayers. Today, the US stock market has fully recovered and the US is not plagued by capital controls, IMF restrictions, and other limitations to fully accessing the capital markets. A financial crisis most often needs a lender of last resort to be resolved (be it the Government or a Central Bank). Absence of such a lender, you get continuing financial, stock market, and economic collapses. For more on this fascinating topic I also recommend Charles Kindleberger's outstanding Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics).
12 of 13 people found the following review helpful
5.0 out of 5 stars An interesting Keynesian view of the current EU austerity programs April 20 2013
By John B. - Published on Amazon.com
Format:Hardcover|Vine Customer Review of Free Product
I found this to be a very interesting and thought provoking book. The author makes his viewpoint very clear with the book's subtitle "The History of a Dangerous Idea". The essence of the author's argument is that austerity is unfair because it makes workers pay for the mistakes of banks, and even more importantly, dangerous because it does not lead to prosperity, but only to decreased economic growth and increased unemployment. This thesis is backed up by an analysis of the banking crisis of 2008, how it spread from the US to the EU, why the single currency Euro has made the problem worse for the EU and why using austerity to solve the problems will not work. It also discusses the history of the idea of austerity, both in terms of the economic theory that promotes it and the economic history that does not. Conservatives, who find Keynesian economics to be not only wrong, but also the road to economic ruin, will likely be turned off by the book's subtitle and many of the arguments that Professor Blyth utilizes. However, there is a lot of data in this book that they should look at, if only to criticize it. I found this book very enlightening and while I do not agree with all of Professor Blyth's ideas (particularly those of the last chapter), I learned a lot, so for me it was 5-stars.

What is in the book?
The book is divided into 7 chapters, which cover the following:

Chapter 1 - A Primer on Austerity. This is a short chapter that summarizes the main thesis of the book (mentioned above), and sets the stage for the more detailed discussions in subsequent chapters.

Chapter 2 - America: To Big to Fail? This is an excellent chapter that summarizes the origins and unfolding of the 2008-banking crisis in the US. This is a very complicated story, which Professor Blyth tells in a clear manner. The story revolves around repurchase agreements (Repos), mortgage backed securities (MBS), collateralized debt obligations (CDO), credit default swaps (CDS), and how all these interacted in a climate of deregulation to produce the crisis. Professor Blyth does a good job of explaining these terms and how the interaction worked.

Chapter 3 - Europe: Too Big to Bail? This is another very illuminating chapter. It shows how Europe, which first believed it was not going to be affected by the US banking crisis, became a major casualty of it and their own internal banking problems. All these factors were compounded by the single currency Euro, which has removed devaluation as a solution to the crisis, instead fostering the idea that governmental austerity was the only way to correct a problem produced by the private banking sector.

Chapter 4 - Intellectual History of a Dangerous Idea 1692-1942. This chapter goes back to the writings of John Locke, David Hume and Adam Smith to see how the idea of austerity developed. It also covers the idea in the early 20th century and the development of anti-austerity Keynesian economic theory. It is a nice primer on classical economic ideas.

Chapter 5 - Intellectual History of a Dangerous Idea 1942-2012. This chapter carries the story of the idea of austerity into the present time. It shows how the idea of austerity, discredited by the Great Depression and the success of the Keynesian solution (although conservatives would argue these successes were illusory and set the stage for future economic problems), has been resurrected by economists writing in the latter part of the 20th century and early 21st.

Chapter 6. Austerity's Natural History 1914-2012. Blyth presents a lot of data that shows that, contrary to the theories presented in the previous chapter, austerity has not worked in practice. Much of the chapter is spent it refuting the writings of several economists that say that the recent historical data does support the idea. Blyth contends that in general it does not and if is does in a few cases it either does not when all the data is considered, or worked only marginally under a very limited set of conditions.

Chapter 7 - The End of Banking, New Tales and a Taxing Time Ahead. This is a very short eleven-page chapter, but perhaps the most controversial on in the book. Blyth, initially a supporter of bank bailouts as absolutely necessary to prevent a complete collapse of the banking system and with it the whole capitalist economic system and with it democratic society as a whole, now questions whether in might not have been better to let the banks fail. He cites the case of Iceland where the banks were allowed to fail and society has recovered. This was done by making the bank's creditors bear the cost of failure, instead of all of Iceland's citizens. He notes that most of this loss was borne by foreign creditors of a very small country, whose banking system was an immense part of the country's economy, but was small compared to the economies of the US or the EU. Unfortunately, he fails to say how a banking collapse in the US or EU could be handled when the systems are huge compared to Iceland's and where the creditors are largely internal. He does not explain how the failure of these huge banking systems, with their internal creditors, would not result in the scenario he originally envisioned. I found this analysis to be poor and not in keeping with the thoroughness of the rest of the book. Blyth also floats the idea of huge tax increases, either through a one-time tax on assets or a very large increase in higher bracket tax rates. Conservatives, and many not quite so conservative, will likely blanch at these ideas. There is no discussion of the political difficulties of doing this or very much development of the idea, which is contained in only the last four pages of the book.
26 of 32 people found the following review helpful
5.0 out of 5 stars You can't cut your way to growth April 6 2013
By Ian Kaplan - Published on Amazon.com
Format:Hardcover|Vine Customer Review of Free Product
The United States seems to be in a constant set of battles about budgets and spending. These battles are relatively new: they didn't exist until we got a Democratic President. Under Republican Presidents budget deficits were OK.

In addition to the existence of a Democratic President, the other factor that has induced the budget battles is current size of the US debt. Republicans constantly portray this debt as the result of government spending gone crazy. Some Republicans claim that President Obama is a socialist, so the spending, by implication must be a massive transfer of government wealth to those "takers" rather than "makers".

At the start of Mark Blyth's book Austerity, he reminds the reader of how the budget reached its current state. It was not a transfer of money to welfare mothers, but a transfer of money to too-big-to-fail banks (welfare bankers). This combined with the war of choice in Iraq, has resulted in trillions of dollars that have been lost to productive economy.

The subtitle of the books Austerity: "A History of a Dangerous Idea" discusses the long history in modern economics of austerity budgets and the roots of Austerity budgets going back to the late seventeenth century. Austerity is a dangerous idea because austerity budgets, when an economy is performing poorly, act against economic growth.

After providing a brief tour of the current fiscal crisis and a longer discussion of economic theories of Austerity, Mark Blyth provides a much briefer discussion of what might be done moving forward. He points out that Greece did not get into its current situation solely as a result of government spending and cheap Euro credits. The massive borrowing in Greece was, ultimately, a result of Greek citizens not paying their taxes. While out-and-out tax fraud in the United States is much lower than Greece, the tax system has been warped so that General Electric paid less taxes than most people reading this review.

However, other than pointing out that changes in taxation are necessary, Marky Blyth doesn't offer much in the way of a solution to our current economic problems. The conclusion of the book is definitely the weakest part.
26 of 33 people found the following review helpful
5.0 out of 5 stars Mandatory Reading for anyone who reads a newspaper March 11 2013
By Evelyn Uyemura - Published on Amazon.com
Format:Hardcover|Vine Customer Review of Free Product
All we hear about in the news these days is the need to cut the deficit, cut the debt, sequester, shrink government, etc. But this book demonstrates how wrong-headed this idea is. It may seem like common sense that cutting government expense will make the economy stronger, but in fact, as he amply demonstrates, it will do the exact opposite, and for reasons that are not too hard to understand.

I appreciated the clear exposition of how both the US and the Eurozone got into our current semi-crisis. The answer is simple: banks did foolish things, and the banks were in danger of collapsing. Banks are private businesses, and when they make a profit, that money goes into private pockets. And a LOT of money flowed into the pockets of investment bankers over the past 10-12 years. But unlike other businesses (well, actually, like some other large, favored businesses such as automotive manufacturers) when things went south, when the richest among us faced the consequences of their big gambles, a hue and cry went up, and the government essentially took the losses onto their own balance sheets.

And then, in the shadow of that mess, the real economy also started collapsing, and so revenue into government coffers declines, while the need for help from the government for laid-off workers increased. But note carefully that the root cause of the crisis was bad business decisions made by well-paid private companies--the banks.

Suddenly, the banks losses are on our backs, and then we are told that the only solution (TINA, There Is No Alternative) is for ordinary working people, who never benefited from the banking excesses, have to tighten their belts, absorb the losses, in order to let the banks go on their merry way.

All that would be galling enough, if austerity (cuts to government expenses, ie to things that put money in the pockets of millions of people) actually did work to cut the deficit and pay down debts (that were caused, remember, by the actions of banks and bankers.) But as the author demonstrates clearly, Austerity doesn't work, never has, never will. Austerity, cutting government, leads to *higher* debts, not lower, because it slows the whole economy so that GDP shrinks, tax receipts shrink, and therefore even a steady amount of debt now constitutes a larger ratio to GDP.

Blyth provides a highly readable survey of the historical origins of the idea of the laissez-faire doctrine (which somewhat confusingly is known as liberal or neo-liberal economics in recent times, but is espoused by political conservatives, not Democrats or other liberals. It helps to think of it as libertarian, as opposed to the usual concept of liberal.) He traces the thought of John Locke, who begins with a stunning thought: "Men have agreed to an unequal possession of the earth." In other words, inequality, poverty (and wealth) are something that people have decided to accept and live with. (The poor, evidently, not being consulted.) He shows how those who benefited from early capitalism were eager to defend the rightness of a system that meant immense suffering for the working poor of England and other early capitalist states.

He then traces the development of the argument as to whether the state could do anything to ameliorate the ups and downs of one banking crisis after another. After the Great Depression, the argument seemed to have been settled with a positive answer to that question. Left to its own devices, the market ran aground every so often, and when it did, many innocent victims suffered tremendous losses. The role of the state to set standards and a legal system, to enforce rules, and in particular to offer a counter-balance in times of lack of demand from the private sector seemed to be clear. But the Austrian (and Anglo-American) belief in the superiority of laissez-faire, hands-off, the market is always right thinking lay dormant.

It has now sprung forth in the form of the Tea Party, and what passes for common sense, and even President Obama seems to believe that "reducing the deficit" is job 1, when in fact, creating an economy in which everyone who wants work can find it and at a living wage would go farther, faster than cutting and expecting, by some long and winding mechanism, that to result in economic growth.

All the bodies are buried here. What about Latvia? What about Ireland? What about Greece? Blyth delves into the papers that seem to support austerity, as well as the test cases that are trotted out, and in every case he shows that austerity does not deliver on its promises. Cutting government expenses in times of economic slowdown merely prolongs the suffering, and it puts the burden on the backs of the poor, even though the crisis was created by the very wealthy banks.

In the end, he even opines that perhaps investment banking as a concept is finished. If you read Joe Nocera's articles in the NY Times about how Goldman Sacks screws over companies going public, in order to siphon windfall profits into the pockets of its favored friends, you will not lament its loss.

Bottom line: the government didn't go broke, the government didn't cause the crisis of 2008, and cutting government expenditures will not fix it. This is a great, great book.
13 of 17 people found the following review helpful
5.0 out of 5 stars Why bailing out banks was and is a really bad idea March 10 2013
By Man in the Middle - Published on Amazon.com
Format:Hardcover|Vine Customer Review of Free Product
I expected not to agree with this book's main idea: that cutting government budgets to promote growth in hard times is a really bad idea. However, the author has a very good point: very often out-of-control government spending to be made up for only benefited a narrow slice of rich bankers and financiers, who then call for the pain of austerity to make up for it to be borne equally by everyone, thereby unfairly hurting most those at the bottom. He nicely sums this up as "workers bailing bankers", and I agree with his horror at that idea.

As he reviewed the economic history of the twentieth century and our current economic troubles, I found myself arguing with him a bit. He missed, for example, the effect on the American real estate bubble of government rules urging more home mortgage approvals for the poor, whether or not they could afford to pay off those loans. (He calls those NINJA mortgages: no income, no job, no assets.) He also seems to miss the role of high tariffs in triggering the Great Depression, and skips right over President Coolidge in describing that period. He also credits re-militarization with ending the depression, whereas Amity Schlaes' book The Forgotten Man credited President Roosevelt's finally ending his attacks on companies and capitalists as he realized he'd need their help in the coming war.

The author points out "the Keynesian wants to give it to the poor to consume right now to boost demand and consumption. Meanwhile, the neoliberal wants to give it to the rich to invest wisely." to which I added in the margin "and the politician wants to squander it on himself and his friends. Guess who wins?"

This book is also an excellent introduction to economic history, covering all the usual topics very nicely. He usefully notes, for example, that free market (laissez faire) economics "emerged in liberal thought as the intellectual and institutional antidote to the confiscatory politics of the king." I particularly liked his pointing out that "When there is a financial bust, there are (mainly) four ways to adjust: inflate, deflate, devalue or default."

It takes him a long time to get to the point that even a fervent Keynesian has to pay back in good times the extra money spent in bad times, but he does get there, referring to it as "an economic shock absorber." He notes the Swedish government in 1933 giving "a commitment to balance budgets over the whole cycle rather than over a given financial year." He also usefully reminds us that German hyperinflation between the wars was intentionally chosen as a way out of excessive reparation, and quickly corrected thereafter.

Another great point the author makes is that there is a deficit bias in democracies because of alternating partisan control of the government. "if competing parties agreed to the same levels, but different compositions, of public expenditure, then in the event that the incumbent party were likely to lose the next election, it should rationally create a deficit. This would allow the incumbent party to provide more of its preferred public goods while still in charge, effectively leaving the bill, in the form of more debt, to the successor party. This would also have the handy effect of tying the next government's hands."

Recent calls to return to a gold standard are also well discussed, eventually proving to even my satisfaction that "you can't run a Gold Standard in a democracy."

OK (I think, near the end) great, austerity is really bad, and neither Keynesians nor Austrians have a good solution. Now what? Surprisingly, the author does have an answer: Iceland. Of all the countries that have gone bust in the past century or so, Iceland alone "let its banks go bankrupt, devalued its currency, put up capital controls, and bolstered welfare measures." The author sums up: "above all, don't bail your banks", a goal on which both Occupy Wall Street and the Tea Parties can eagerly agree.

Highly recommended!
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