Capitalism With Airbags

By Beth Schwartzapfel ’01 / November/December 2013
October 30th, 2013

When Professor of Political Science Mark Blyth was growing up in Dundee, Scotland, in the 1970s and 1980s, unemployment rates in the United Kingdom were the highest they’d been since World War II. “When I left school, nobody said, ‘What are you doing for a job?’ They just said, ‘Where are you signing on?’” he recalls. “In other words, ‘Where are you getting your unemployment?’ There was almost a sort of expectation that you might do a lot of things in your life, but work might not be one of them.”

Jesse Burke
Blyth favors an economic approach that preserves government safety nets. "Capitalism with airbags," he calls it. "The type of capitalism I am a fan of." 
Blyth was raised by his paternal grandmother in her tenement flat. His mother died when he was a child, and his father, a butcher in a local slaughterhouse, was only an occasional presence in his life. Blyth and his grandmother survived on her state retirement pension—which Blyth estimates amounted to about $100 a week in today’s dollars—and on the meat that his father would periodically drop off. “There was no money for anything else,” he says. “That was it. I literally went to school with holes in my shoes.”

But even in those bad times, Blyth recalls, the state was there with its safety net. “Capitalism with airbags,” he calls it. “The type of capitalism I am a fan of.”

“Because of the British welfare state, threadbare though it is in comparison to its more affluent European cousins, I was never hungry,” he says. “My grandmother’s pension plus free school meals took care of that. I never lacked shelter because of social housing. The schools I attended were free and actually acted as ladders of mobility for those randomly given the skills in the genetic lottery of life to climb them.”

In April, Blyth, who studies international political economy, published Austerity: The History of a Dangerous Idea, his critique of the economic approach that governments in both the United States and Europe have applied in recent years. “It’s crap,” he says of the approach. “It doesn’t work. But it’s dangerous crap.” It dismantles those airbags for the poor, he says, and provides them only for the rich—an economic intervention that only exacerbates the conditions it is meant to address.

“What made it possible for me to become the man I am today,” Blyth writes in Austerity, “is the very thing now blamed for creating the crisis itself: the state, more specifically, the runaway, bloated, paternalist, out-of-control welfare state.”

Had austerity been the predominant approach in the United Kingdom during his childhood, Blyth argues, he would most likely not be a professor today. “I am,” he writes in Austerity, “as extreme an example of intragenerational social mobility as you can find anywhere.”

You may have heard the buzzwords on the news: Growth-friendly fiscal consolidation. Expansionary fiscal contraction. They’re synonyms for austerity, the idea that governments can best reverse economic slowdowns by slashing spending and raising taxes. “The resulting growth would help them to pay back debts,” explains John Cochrane, a University of Chicago economist who supports this approach, “and market recognition of that fact would let them borrow in the meantime and avoid a debt crisis.”

Austerity, Blyth says, is a twenty-first-century example of something he’s been studying and writing about his entire career: the power of ideas. Something need not be true to have a very real impact on people’s lives, he argues. “So long as something about the economy is believed by a large enough group of people, then because they believe it, it becomes true,” he wrote in his 2002 book, Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century.

The idea that cutting government spending and slashing public services will lead to economic prosperity by promoting investor confidence may be, as Blyth asserts, ludicrous on its face, yet the fact that enough people believe it has led to austerity’s widespread implementation and set the stage for what Blyth says will be “a generation of misery” throughout Europe: millions of unemployed and angry young people stuck in downwardly spiraling economies.

Blyth speaks with a Scottish brogue, an easy confidence, and a potty mouth. His quick-witted intelligence and his sense of humor are obvious, though his anger and passion are less so: the more worked up he becomes about a subject, the more deadpan his presentation. And when he discusses austerity—the way it stacks the deck and contributes to an unfair and unequal society—his face goes blank and he begins to talk with the rat-a-tat delivery of an auctioneer.

Blyth came of age during a time of great economic and social upheaval in the United Kingdom. Margaret Thatcher became prime minister when he was twelve. “What Mrs. Thatcher did was to take a rather complacent and comfortable set of social institutions and arrangements,” he says, “stick dynamite under them, detonate them, and not really give a damn about the casualties.”

Aside from her more obvious endeavors, such as beating down unions, he says, Thatcher tried to address Britain’s persistent unemployment by changing the nation’s culture of work, taxation, and ownership. “She changed people’s conception of themselves,” Blyth says. “She gave them the right to buy their houses that were officially state-owned. Next thing, you get this ridiculously subsidized mortgage. The next thing, you get a mortgage tax deduction. The next thing, you’re buying a new front door to signify to everyone that you’re different from them. And what you’re doing is, you’re creating new political identities. So the whole project of Thatcherism was creating interests where they didn’t exist before.”

While in high school, Blyth dated a young woman who was studying politics and economics at the local university. Reading her course books was a revelation; he saw his own life reflected in their pages. Suddenly his community wasn’t buffeted just by economic forces beyond anyone’s control: The books gave them context, backstory. They offered explanation, analysis, insight.

He played bass in rock bands—some good, some not so good—and, inspired by his girlfriend’s books, enrolled in college. “And because we had this thing called the welfare state, where you could do this,” he says, “I went to college part-time for free, and I got the qualifications necessary to go on to university. And that’s what I did.”

Jesse Burke
"Because of the British Welfare State...," Blyth writes in Austerity, "I was never hungry... the schools I attended were free and actually acted as ladders of mobility for those randomly given the skills in the genetic lottery of life to climb them." 
The year after he began at the university, he was chatting with his father in the run-up to the 1987 British elections when his father said he planned to vote Tory instead of Labour. “From every conceivable materialist position imaginable, my father should have been a Labour voter,” Blyth writes in the preface to Great Transformations. As a struggling member of the working class, his father would have benefited far more from Labour’s proposed programs and subsidies than from the Tories’ tax breaks. But when Blyth asked him why, his father—despite never having taken an economics course in his life—“regurgitated at least fifty years of contested economic thought in less than one minute flat.”

Blyth’s father argued that Labour would spend money on creating jobs, which would make prices go up and leave no money for schools and hospitals, which would force the government to borrow, which—given the inflation they had created—would be expensive, and leave “less money for everyone else. This means we will have to pay more on loans and things, so people will have less money to spend. The less people spend, the more the economy slows down, so there are fewer people working. If the Tories get in again, they’ll cut taxes, people will spend more, and there will be more jobs.”

Blyth was “bemused and impressed,” and he challenged his dad: “So why does the money you spend that comes from a tax cut create jobs while the money spent by a Labour government creates inflation?”

After a brief pause, his father answered, “Because it does. Governments shouldn’t do that kind of thing.”

Later, as a graduate student studying economics, Blyth thought about his dad when he was taught that we all act in our own self-interest. One of the basic tenets of economics, he learned, is that we make the choices that we determine will most benefit us materially—make us richer and more successful, help us get ahead. And when all of us individually pursue our own fortunes, the market is inevitably optimized: many self-interested actors together add up to the perfect economy.

“That’s what economics assumes: the notion of rational expectations,” he says. Central banking models assume that each of us is a rational agent “running around optimizing choices given certain bits of information. We actually have in our head the structure of the economy written as an equation. We actually know the value of all the coefficients governing it, and we constantly update, and we optimize as we go through life,” he continues. “And it seems painfully obvious to me that about 40 percent of the country can’t do long division. Once you basically say, ‘That’s dubious, that’s problematic,’ you’ve then got to say, ‘Well, how do people fill in the gaps?’
“What they do is they tell themselves stories.”

They tell themselves stories about the value of hard work and self-reliance, say, about the appropriate role of government or the laziness of the poor, and they act and vote accordingly, whether or not their own economic self-interest is served.

“Ideas matter,” Blyth wrote in Great Transformations, “because they can actually alter people’s conception of their own self-interest.” Much like the British voters who suddenly discovered that it was in their self-interest to own their own home, what begins as a story, an emotion, soon has widespread and very concrete implications.

To Blyth nothing illustrates this better than “Growth-friendly fiscal consolidation.” Though  it sounds like the perfect solution to all our financial problems, the notion that indebted countries can, during an economic downturn, cut their way to economic prosperity is, Blyth says: “A fairy story.”

Austerity: The History of a Dangerous Idea is a scathing and detailed takedown of this fairy story from all sides. Blyth critiques austerity’s intellectual history (paltry, he says), its practical history (in his case study of fifteen countries he discovered that it has never, ever worked), and its ethical underpinnings (“indefensible”—“disgusting,” even).

Five years into the “great recession,” with U.S. unemployment rates continuing to hover at roughly double what they were for the previous twenty years, we’re told that austerity is the “pain after the party”: the price for decades of out-of-control government spending.

But this is a lie, Blyth says. A deliberate bait-and-switch. In reality, austerity is the price the rest of us must pay for saving the banks: “The cost of bailing, recapitalizing, and otherwise saving the global banking system… has ended up on the balance sheets of governments as they absorb the costs of the bust,” he writes, “which is why we mistakenly call this a sovereign debt crisis when in fact it is a transmuted and well-camouflaged banking crisis.”

The people who generated great personal wealth in the process of creating this mess—bankers and financiers who invented products like mortgage-backed securities and credit-default swaps —are now “actively eschewing any responsibility for that problem by blaming the state for their mistakes,” Blyth writes. Cutting government spending inevitably means cutting social programs that, by and large, the wealthy don’t use: public education, public transportation, food assistance, and health care. Blyth argues that austerity is the rich demanding that the rest of us pay for their mistakes: “socialism for the rich and capitalism for the poor. I’m all in favor of everyone tightening their belts the minute we’re all wearing the same pants. But we’re not.”

As someone with a keen sense of what it feels like to depend on these social programs, Blyth feels personally affronted by proponents of austerity who slash these programs and then are dishonest about why they’re doing it.

“State bad, market good” was the standard way of thinking in the years before the financial crisis. Get the government out of the way and the market will always right itself. In reality, Blyth says, “there’s no difference between states and markets. States make markets,” he says. “They either make them possible, through the promulgation of laws, weights, measures, courts, all the rest of it, or, more deeply and more often, they create markets. They create firms. They create credit markets. They force savings. They create rates of interest. They create the entire environment in which you can incubate what we now call capitalism.”

But those in power believed it was true that markets would prosper with minimal state intervention—a belief that fueled decades of deregulation, which in turn paved the way for the financial meltdown. All the ostensibly level-headed talk about getting our financial house in order, Blyth says, is in fact a cover for the true intentions of austerity’s proponents: weakening the state, shrinking the government, and eliminating sovereign debt at all costs.

In Austerity, Blyth locates the origins of this type of thinking in such early thinkers as Locke, Hume, and Smith: “Saving is a virtue, spending is a vice,” he writes. “Hence countries that save must be doing the right thing, while spenders must be storing up trouble.” This philosophy resonates in a country like the United States, with its Puritan ancestors and runaway credit-card debt. Trouble is, Blyth says, it doesn’t make sense. And the sooner we recognize that, the sooner we can get back on sound financial footing.

We cannot all cut our way to growth at the same time. Blyth frames one of his major objections to austerity as common sense. “A debt … is someone’s asset and income stream, not just someone else’s liability,” Blyth writes. By the same logic, “For someone to benefit from a reduction in wages, … there must be someone else who is willing to spend money on what that person produces.” But if everyone takes a wage cut, everyone has less money to spend:“If we all save at once there is no consumption to stimulate investment.”

This is true on a macro level, too: “This problem is especially pernicious under a policy of generalized austerity, because if a country’s private and public sectors are both paying back debt at the same time,” Blyth writes, “the only way that country can grow is by exporting more…to a state that is still spending. But, if everyone is trying the same strategy of not spending, as is happening in Europe today, it becomes self-defeating.”

Proponents of austerity point out that countries with high debt-to-GDP ratios have slow economic growth. This seems like a reasonable rationale for cutting debt: too much debt appears to hamper growth. But Blyth and others point out that this mixes up cause and effect: countries develop high debt-to-GDP ratios because they have slow growth, not the other way around. This makes intuitive sense: an economic slowdown leads to lower tax revenues as fewer people are working and wages decrease; simultaneously, governments must spend more on such safety net programs as unemployment and food stamps.

Part of Austerity is devoted to case studies in which countries in modern history have tried to use the approach to promote growth. “To me, the shocking part was, I went into it with the understanding that there were positive cases,” Blyth says. He looked closely at examples like Canada in the 1980s or the United States in the late 1990s—examples that proponents of austerity often cite as proof that it works. What he found was that these countries’ economies were growing already, and with their tax receipts increasing, they used that increased income, quite sensibly, to pay down debt. “Bravo!” Blyth says. “But that’s not austerity.”

So what is the alternative?

First and foremost, Blyth says, countries trying to cure recessions by implementing drastic budget cuts simply need to stop. It’s “Hippocratic capitalism,” he says: “First, do no harm.” Part of the reason the U.S. economy has recovered more quickly than Europe’s, he says, is the stalemate in Congress: “Because the Republicans and Democrats haven’t been able to do anything, the economy is at least partially recovered.”

Beyond doing nothing, Blyth says, the best way out of a recession is through more government spending. In other words, you can cure debt with more debt. “One in three bridges in the United States is falling down,” he says. “Repairing this at a time when you can borrow at basically negative real rates is a hugely obvious, great thing to do. Investing in light rail, smart rail—there are tons of things you can do, all of which are productivity-enhancing.” The more jobs you create, he says, the more people will pay taxes. The higher the tax receipts, the more readily you’re able to pay down debt.

Many proponents of austerity say they are in favor of spending on things like light rail, and that painting them as cold-hearted budget slashers is unfair. “Austerity is a word that has been twisted to all sorts of ridiculous meanings, to the point that it is now one of Lewis Carroll’s words that mean whatever its speaker wants it to mean,” they University of Chicago’s John Cochrane, whom Blyth describes in his book as a “pro-austerity advocate,” wrote me in an e-mail. “Saying you’re for austerity is now pretty much just a meaningless insult.”
Cochrane continued, “This is not about roads and bridges, infrastructure, keeping the lights on, or all the other usual red herrings,” he says. It’s not about cutting all government spending but rather wasteful government spending, alongside “freeing up over-regulated markets.” In Europe, Cochrane wrote, “austerity has come to mean a package focused mostly on raising distorting taxes to astronomical levels, and particularly on anyone who dares to invest, run a business, or hire someone, with essentially no reduction in government spending and no structural reform. Well, duh, that isn’t going to work, and it has not… I am adamantly not for that, nor ever was.”

Even Kenneth Rogoff and Carmen Reinhart, the two Harvard economists whose paper is often cited as proof that austerity works (the very same paper whose Excel spreadsheet error garnered a lot of media attention), were never “big boosters of austerity in the recession,” Rogoff told me—that was a distortion of their position. He and Reinhart actually favor fiscal stimulus as part of a package of reforms, he said, primarily “high-return investments in infrastructure and education.”

This was precisely the rationale behind the Obama administration’s American Recovery and Reinvestment Act of 2009. For a brief period, some of the world’s largest economies seemed to agree that a big burst of government spending was the best way to reverse the recession. That is, until a G20 meeting in Toronto during the summer of 2010 at which the twenty most powerful economies in the world got together to reverse course. Their oft-cited communiqué called for “growth-friendly fiscal consolidation.”

Thanks in part to the cultural changes initiated by Mrs. Thatcher, the working-class Dundee, Scotland, of Blyth’s childhood is no more. “So for me, cognitively, interpersonally, the place where I grew up no longer exists,” he says. He has lived outside Scotland so long that “it’s literally a foreign country.”

Blyth shares this sense with his wife, who grew up in East Germany and fled to the United States and England as soon as the wall came down. “Although Germany is there, she didn’t grow up in Germany. The country she grew up in literally no longer exists,” Blyth reflects.

Both of them are classic American immigrants who have become citizens. “This really is our home,” Blyth says. Blyth’s critiques of the United States arise from love and admiration for his adopted home. He wants to make it better, more prosperous, and a more welcoming place for others.

“I often bring up [my wife] in talks when people are dragging on about the American state being wasteful and terrible,” Blyth recalls. “I say, ‘Really?’ It’s funny, because my wife’s from East Germany. She thinks the American state’s pretty awesome. It faced down the Communists. It put a guy on the moon. If you’re on the East German side of things, the United States has got a pretty damn good state.”
Blyth tends to agree, though he is frustrated that the state has been falling short on its responsibility to make sure everyone gets a fair shot.

“Frankly,” he writes in Austerity, “the world could use a few more welfare kids that become professors. It keeps the rest honest.”

Beth Schwartzapfel is a BAM contributing editor.

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