Tue May 7th, 2013 at 02:35:59 AM EST
A great piece by Mark Blyth on the roots of the "The Austerity Delusion: Why a Bad Idea Won Over the West" in general zeroes in on a question that I have been asking myself eversince this madness started in 2008: Why the peculiarly German impetus to austerity?
Yes, I had heard the proverbial explanation based on collective memory of Weimar hyperinflation and the Nazi nightmare that ensued.
But Blyth's account post-war, practical and policy-based, and while nothing new for readers of this forum, is worth quoting for its clarity:
Given Germany's history with inflation and deflation in the 1920s and 1930s, financial stability has always been the watchword of postwar German economics. But what has really distinguished German economic thinking is its dismissal of Keynesianism -- because the theory never made much sense to German policymakers considering the way the German economy actually functions.
front-paged by afew
German economic growth has always been export-led. Berlin's priorities after World War II were thus to invest in rebuilding the country's capital stock (which meant keeping a lid on domestic consumption) and to recover export markets (which meant keeping costs, and thus wages, low). With external demand more important than internal demand, growth was determined by competitiveness and monetary stability, not domestic consumption. All government stimulus programs would do in this system is increase the costs of production and lower export demand.
This is a great economic model for a supply-side, export-led economy with a strong monetary authority and supercompetitive products. The problem is that, like the Highlander, there can be only one. Not every European country can be a Germany and run a surplus; others need to run deficits, just as for someone to save, someone else needs to spend. Unfortunately, Germany was able to design the key institutions of the EU and the eurozone in its own image, creating a strong competition authority and an extremely independent and inflation-obsessed central bank. So in the moment of the Greek crisis, Germany's particular objection to Keynesianism was translated into the prevailing policy stance for an entire regional economy, with disastrous results.
Germany could afford to cut its way to growth, since the sources of its growth lay outside its borders: it is the export champion of the world. But the whole of Europe cannot play that trick, especially as the Asian countries are also running surpluses. As the Financial Times columnist Martin Wolf asked, "Is everybody supposed to run current account surpluses? If so, with whom -- Martians?" The ideas that informed the institutional design of the postwar German economy and the EU may work well for Germany, but they work terribly for the continent as a whole, which cannot run a surplus no matter how hard it tries. Once again, composition matters.
The composition in the last sentence is one of the three conceptual problems that austerity has, described earlier in the essay:
Austerity is a seductive idea because of the simplicity of its core claim -- that you can't cure debt with more debt. This is true as far as it goes, but it does not go far enough. Three less obvious factors undermine the simple argument that countries in the red need to stop spending. The first factor is distributional, since the effects of austerity are felt differently across different levels of society. ...
The second factor is compositional; everybody cannot cut their way to growth at the same time. ...
The third factor is logical; the notion that slashing government spending boosts investor confidence does not stand up to scrutiny. ...
In a retrospective on Austerity 1.0 in the 1920s-30s, Blyth explains how the Japanese were the most austerian of all, which drove military spending so low that an ultra-nationalist coup kicked out the austerian policy-makers, got the economy back on its feet, and then put the country on firm footing for fascist-imperialist expansion:
The Japanese government applied austerity more consistently and with more vigor than it was applied anywhere else. Following a stock market bust in 1920, several rounds of spending cuts exacerbated an ongoing deflation. The largest item on Tokyo's budget was military spending, which was almost halved over the next decade. Japan continued to cut spending in order to get back on the gold standard, which it did in 1930 -- just as the U.S. and European economies went into free fall, killing Japan's exports. Japan's growth rate fell by 9.7 percent in 1930 and by 9.5 percent in 1931, while its interest rates shot up. Despite the collapse, Tokyo accelerated its spending cuts, with the military bearing the brunt. By late 1930, the military had had enough.
Following the October 1930 ratification of the London Naval Treaty, which placed limits on naval buildups, an ultranationalist group in Japan attempted to kill Prime Minister Osachi Hamaguchi (he ultimately died of his wounds). Later, in 1932, former Japanese Finance Minister Junnosuke Inoue, who had been the architect of the austerity policy throughout the 1920s, was assassinated. The finance minister of the new government, Takahashi Korekiyo, abandoned austerity, and the economy quickly began to turn around, growing at an average rate of four percent a year from 1932 to 1936. Proving that no good deed goes unpunished, however, Korekiyo was himself assassinated in 1936, along with several other civilian political figures. By 1936, the civilian government had collapsed, bringing Japan's experiments with both democracy and austerity down with it. Japan's imperial expansion was the result.
And why the USA has to lead the world out of the Austerian winter:
If the United States adopted austerity, the inability of the government to generate Keynesian waste* would undermine the country's ability to grow. Cut away the state, especially at a moment when other countries around the world are busy slashing their way to prosperity, and Americans will end up much worse off than they could ever have imagined. But don't take it on faith. Just ask the Europeans how it has been working out for them.