Even on its own terms, austerity is a disaster. Greece, despite slashing government spending and ruining the futures of millions, has actually increased government debt as a percentage of GDP. Government spending has fallen, but GDP has fallen further. All that pain for no gain. Ireland, which imposed austerity after the financial crisis, is still languishing with high unemployment and miniscule growth. Iceland, which did not, is growing steadily. Here in the UK we barely avoided a triple-dip recession and even the IMF has suggested, albeit politely, that Osborne and Cameron find a plan B.
Meanwhile, the news from Japan shows that expansionary fiscal and monetary policy works even better than expected. The economic policies of Shinzo Abe, Japan’s new Prime Minister, have delivered 3.5 per cent annualised GDP growth in the first quarter, more than in any other developed nation. Wary Japanese consumers are finally opening their wallets. Exporters are enjoying a weaker yen. The contrast with austerity-ridden Europe could not be more dramatic. France has fallen back into recession, unemployment across the eurozone is over 12 per cent, and the entire European economy has been shrinking for the past six quarters. The publication of Mark Blyth’s Austerity: The History of a Dangerous Idea (Oxford University Press, £16.99) is well timed.
Today it may seem as if he is kicking a dead horse but in July 2010, when Mark Blyth was commissioned to write a book about the intellectual roots of austerity, it was about to become the dominant strain in economic thinking. Blyth, a professor of political economy at Brown University, reminds us that when the financial crisis hit, no one suggested cuts in government spending. At that point, the financiers now calling for austerity insisted governments had to bail out the banks—otherwise, the entire financial system could collapse. Purchasing banks’ bad debt inevitably increased government spending. It was not spendthrift governments that raised debt levels, it was the cost of moving troubled assets off banks’ balance sheets and onto the public sector’s. In 2007, Ireland’s government debt to GDP ratio was 25.1 per cent and Spain’s was 36.3 per cent, considerably less than Germany’s.
The austerity fad began in 2010, two years into the financial crisis. Banks…