Ten years ago, Brown University political economist Mark Blyth published a book called “Austerity: The History of a Dangerous Idea.”
That “dangerous idea” had plenty of purchase at the time.
The global economy was still dragging after the Great Recession. And there was a feeling, in the halls of power, that we hadn’t fully atoned for the excesses of the boom that preceded it. We needed to clean up, cut the budget, balance the books.
Across-the-board reductions in government spending were sweeping through Washington. And England was deep into what Tory leader David Cameron had dubbed an “age of austerity.”
Blyth’s polemic — which landed on the Financial Times’s “Best Books of the Year” list and drew praise from bold-name economists like Paul Krugman and Larry Summers — was a punchy bit of pushback.
Cutting spending might feel virtuous, he wrote, but it was stupid.
When multiple governments pull back simultaneously, they curb economic growth and deepen the debt problem.
And too often, he argued, austerity is just a cover for the ideological project of shrinking the state.
In time, that argument hardened into something like orthodoxy on the left. And it helped undergird the Biden administration’s sweeping response to the pandemic.
But the mood has shifted again in recent months.
The federal government’s budget deficit has soared to $2 trillion — effectively double what it was a year ago. And rising interest rates have increased the cost of financing the nation’s ever-accumulating debt, which now stands at about $33.7 trillion.
Republicans have howled loudest.
But there is also concern on the left, where some worry that growing interest payments could squeeze out more productive spending and pose long-term risks to the economy.
“Serious deficit reduction, a bad idea a decade ago, is a good idea now,” wrote Krugman, the liberal economist and New York Times columnist, in a recent newsletter.
So, what does the man who wrote the book on the subject think? Has Blyth shifted his position? In a word, no.
The interview has been edited and condensed.
Why is the idea of austerity so attractive to so many people?
It’s kind of folksy and homespun. There was a letter in the Times from one of the Bush [Council on Economic Advisers] chairs and he says, ‘Well, it just stands common sense. When when my family spends too much, we need to spend less, and we tighten our belts.’ That seems to be a popular story.
It’s complete nonsense, because the state’s budget is nothing like a household budget. I don’t get to issue Mark Blyth dollars. And if anybody wanted to hold them, they’d be idiots. I don’t get to do intergenerational debt contracts, so that when I’m dead, the people who are left in my family need to pay the debt forward. I don’t provide the global reserve asset. I don’t provide the instrument of national savings.
The second [reason] is a lot of people just don’t benefit from public spending directly — or at least, they don’t think they do. Do you benefit from a massive defense budget? Well maybe, right? Do you benefit from policies that target racial minorities? Probably not. So you know, this is an excuse to basically cut back spending [and reduce] your taxes.
With deficits up, there is some nostalgia for the 1990s, when President Bill Clinton, a Democrat, and Speaker of the House Newt Gingrich, a Republican, balanced the budget and the economy grew. Isn’t that proof that austerity can work?
Well, if the only two variables in the world were the size of the economy and the size of the deficit, you could maybe make that case.
Lots of countries with very different size deficits grew in the 1990s — some of them cut [deficits], some of them didn’t. What happened in the 1990s is that globalization came online. And a huge number of countries around the world, such as China, started to import and therefore drive demand and exports in other countries.
What else began to happen? There was the end of the Cold War, the integration of the European Union, NAFTA, a whole bunch of changes that basically juiced the economic growth rate through the 1990s. That had nothing to do with the size of the deficit. Nothing at all.
The deficit reached $2 trillion this year — double what it was a year ago. Don’t we have to rein it in at some point?
So the argument about this is, ‘Oh, look at the financing costs. Interest rates have gone up. When it was zero, this didn’t cost anything to roll over. And now it costs a fortune.’ There’s certainly something in this, but there’s also a bit of sleight of hand in these arguments. It’s not as if the entire federal debt stock becomes the same interest rate overnight. The vast majority of the debt stock is not at the current peak interest rate of just under 5 percent. So that’s a bit of a scare tactic to start with.
Should we be concerned? One way of looking at it is, you’re going to be spending that money on interest payments and you could be spending on something else. The chances are, though, we don’t spend on something else. We just give it away in the next round of tax cuts, particularly if the Republicans get in. I mean, the hypocrisy on this is astonishing. They’re screaming about deficits, and the first thing they’ll do when they come in is have tax cuts. And those tax cuts lead to bigger deficits. That’s exactly what happened under Donald Trump.
One argument you hear is: The economy is pretty good now. If you’re going to reduce the deficit, now is the time. Do you buy that?
Well, I would if we filled the gap by taxing people that pay absolutely no tax — such as our billionaire class. But it’s just another argument for, ‘therefore we can’t invest in education, therefore we can’t invest in decarbonization, therefore we must cut it back to the essentials.’ And those essentials tend to conform to the preferences of conservative Republicans.
So we can just go on forever with deficit spending?
Look, here’s the deal. At the end of the day we built a world economy, and you’ve got to think of this globally. When there are too many exporters, they have to sell to the importers. We are the biggest importer. The only way that they can actually offload all the stuff they make is to accept dollars.
They don’t use dollars in their domestic system, so they give them to the central bank, and the central bank turns them into Treasury bills. That lowers our long-term interest rates, gives us more consumption power, and we buy more of their exports. If we actually balance the books, the economies of China, Japan, and Germany would explode, because there will be nobody to buy the massive amount of stuff that they produce that their own economies couldn’t possibly absorb.
Now, if you think of the world that way, the deficit is a sign that people either want to — or have to — hold our currency and our debt. If that is the case, there’s no alternative. You’re not going to hold Chinese bonds. You’re not going to hold crypto. It’s too volatile. It’s run by crooks. So we have a structural advantage.
Now, if you want to spend all your time fretting about an accountancy thing called the size of the deficit — when you look at us as a company, like a balance sheet — go ahead. I think it’s nonsensical.
So we’re exempt from the economic rules that govern the rest of the planet?
Look, if you’re a normal country, you have a thing called the “current account constraint.” Over the long term, you have to export to balance your imports, right? And if you’ve got a soft currency, one that isn’t regarded as a savings asset, then all these things matter. The size of your deficit really matters.
If you are the global financial hegemon, you just don’t have these constraints.
It’s very similar to bringing the household analogy into the austerity debate. Trying to say the United States is just like any other country, and it has to “live within its means” — either you don’t know what you’re talking about or you’re mendacious.
Watch Mark Blyth on austerity in 2010, two years after the financial crisis that spawned the Great Recession: