austerity: the history of a dangerous idea...austerity: the history of a dangerous idea! mark%blyth%...
TRANSCRIPT
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Austerity: the History of a Dangerous Idea Mark Blyth Brown University and Watson Ins6tute Bernard Schwartz Globaliza6on Ini6a6ve SAIS, Washington DC, April 15th 2013
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Before we get to the Theory
Its useful to know why I’m interested in this ques6on…
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Europe is not in Great Fiscal Health
Source: Standard & Poor’s from na6onal sources
(Central government debt as percent of GDP, 2012)
0 50 100 150 200 250
Canada
France
Germany
Greece
Ireland
Italy
Japan
Portugal
Spain
United Kingdom
United States
Net Gross
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So What Brought About this “Fine Mess?”
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ECB ‘Credibility’ or the Greatest Moral Hazard Trade in Human History?
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This is what happens when you stuff your boots with periphery debts-‐gone-‐bad
0
10
20
30
40
% GDP
Foreign banks combined consolidated claims on Greece, Ireland,
Italy, Portugal, Spain (% GDP 2011)
6
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The result is…
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Assets held by banks in Germany, France, and the UK are about double the annual GDP of the en6re EU
0
5000000
10000000
15000000
20000000
25000000
30000000
35000000
40000000
45000000
50000000
GDP Bank Assets
Other
UK
Germany
France
• Gross contribu6on to GDP and Bank Assets in the EU (millions of EUR)
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For Comparison – The “too Big to Fail” USA
Bank Assets (millions of USD) Bank Assets (% of GDP)
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
Bank Assets GDP
GDP
Other
Wells Fargo
Ci6group
Bank of America
Morgan Stanley
JP Morgan
Goldman
0
20
40
60
80
100
120
140
GDP Top 6 Bank Assets Total Bank Assets
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At least the Brits have their own currency
Bank Assets (millions of GBP) Bank Assets (% of GDP)
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
8,000,000.00
9,000,000.00
Bank Assets GDP
GDP
Other
HSBC
Lloyds
RBS
Barclays
0
100
200
300
400
500
600
GDP Top 4 Bank Assets Total Bank Assets
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France is the exemplar of the ‘too Big to BAIL’ problem
Bank Assets (millions of EUR) Bank Assets (% of GDP)
0
50
100
150
200
250
300
350
400
450
500
GDP Top 3 Bank Assets Total Bank Assets 0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
8,000,000.00
9,000,000.00
10,000,000.00
Bank Assets GDP
GDP
Other
Societe Generale
Credit Agricole
BNP Paribas
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If that goes bad, its game over for the Euro and the core banks
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…which is why we have Austerity policies…
Keeping the periphery in at all costs
• Stopping the Bank run round the bond market…
But… You Can’t Solve a Banking
Problem with Budget Cuts You Can’t run a Gold Standard in a Democracy You Can’t Solve a Solvency Problem with a Liquidity Instrument You can’t all cut at once ands expect to grow
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So why did Anyone ever think that Austerity was a good idea?
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The “can’t live with it, can’t live without it, don’t want to pay for it” problem of the state
• John Locke’s filh chapter
• Appropria6on, Markets and Money
• Aliena6on and wages • Don’t trust the state since it will rob you blind
• But you need it to create the markets you want
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“Public Credit will Destroy the Na6on”
• David Hume • Money and Merchants • The Ease of Debt Issuance
• Crowding Out and Easy Money
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“The Prac6ce of Funding has gradually enfeebled every state that has adopted it”
• Adam Smith • Parsimony, Savings, Investment and Growth
• Inequality and the Necessity of the State
• Taxa6on to the Rescue?
• Debt and the perversion of parsimony
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Locke, Smith and Hume: Producing Austerity by Default
• The “can’t live with/without it and don’t want to pay for it” problem
• The state as the an6thesis and catalyst of the market • Austerity as an absence (state not yet big enough to cut) but also an inevitability that it needs to be cut
• Result: Liberalism’s Neuralgia and the Aspirin of Austerity
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Two Tracks through 19th Century Liberal Economics
• Can’t live with it and don’t want to pay for it
• Learning to live with it and Accep6ng the need to pay for it
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Track 1A: Liquida6onism
• Modern Business Cycle Theory
• Long Run Capital Structure (too much and wrong type)
• Misalloca6on of capital • Austerity via Binge and Purge
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Track 1B: The Treasury View
• Laissez Faire and crowding out
• “Can Lloyd George Do It?”
• The “Memoranda on Certain Proposals”
• Ricardian Equivalence and Investment
• Lack of Suitable Public Works
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Track 2A: The Keynesian Moment (or Teaching Birds how to Fly?)
• The CriScal Cases • Simultaneous contrac6ons in the 1930s
• USA, UK, Germany, France and Japan
• And the result is…
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Keynes (and events) Overturn Austerity
• Fallacies of composi6on and scalability in labor and money markets
• Investment expecta6ons as a social mul6-‐person PD • “Consump6on, repeat the obvious, is the sole end of economic ac6vity”
• Lessons Learned: • Democracy is asset insurance for the Rich • Redistribu6on and Debt is reinsurance for Democracy
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Schumpeter Retreats
• Crea6ve destruc6on over “many centuries” • Lord Keynes’ Ideas “laughable” • Bureaucra6za6on and Socialism as the same
• Results: • The End of the Entrepreneur • The End of Bourgeois Virtue • The End of the Bourgeois Family
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Austerity’s Long Winter
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A European Home for Austerity • Late Development and
Export Led Growth • Iron and Rye • Freiburg and the State • The economic
cons6tu6on • Compe66on not
consump6on • Sound Money and CBI
• Result: Crowding out Keynes Locally
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And an American Pied-‐a-‐Terre
• Banks, leverage and credit extension
• Beguiling the entrepreneur
• The allure of debt • Binge and purge (again)
• Result: Do not intervene…ever!
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Austerity’s Enablers
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The Neoliberal Shil
• Monetarism, Infla6on, and the Natural Rate • Public Choice and Poli6cal Business Cycles • Democracy as a Problem -‐ CBI as the solu6on • Ratex, EMH and Ricardian Equivalance
• Result: Crowding out Keynes Globally
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Road Tes6ng Austerity • Washington’s Consensus “Stabilize, Priva6ze, liberalize…and cut the state”
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Austerity Enabled
• There is a free Pranzo if you skip your Cena
• Einaudi and the Bocconi School
• Europe as a disciplinary device on states
• Bocconi school as Austerity’s aircral carrier
• From Milan to Harvard
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The Expansionary Austerity Hypothesis
• Debt and 6me inconsistency • Credibility and income
shocks • Spending and future taxes
• The New Cases: Ireland, Sweden, Canada, Denmark, Australia
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Austerity as a Policy Paradigm
• Alesina’s Ecofin Brief • ECB June 2010 Report • Troika condi6onality • Structure of periphery bailouts (cuts not taxes)
• Result: The Greatest Bait and Switch in Human History
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But Reality Bites?
• Bocconi School defec6ons
• IMF challenges to EFA hypothesis
• October 2012 WEO and 1.5-‐1.7 nega6ve mul6pliers
• The New Cases Aren’t so New
• More debt not less • The REBLL Alliance and the Debt Star?
• And yet it con+nues…