If we are going to debate global austerity, let's at least involve all sides
Published 29/10/2015 | 02:30
The interesting question about the current global austerity is why it has happened. This profoundly important question is posed by the organisers of a conference - Debating Austerity - which begins this evening in Dublin and goes on all day tomorrow.
The conference programme makes the point that since the economic crisis began in 2008, the eurozone has had a choice about the degree to which the bloc could have stimulated the economy. But individually and collectively decisions have been taken not to do that.
Along with a fragmenting banking system - which starved the economy of credit, and the effects on confidence of fears that the euro itself would cease to exist - the tightening of budgetary policy across the eurozone is likely to have made the recession deeper and longer than it would otherwise have been. In my view, it was a mistake not to stimulate more in those countries with the borrowing capacity to do so, and collectively via the issuance of eurobonds.
Why fiscal (and indeed monetary) policy did less to support demand in the eurozone economy than in most other comparable economies is a very important question not only in understanding the past. It is also important in understanding the future - inevitably there will be other downturns and knowing how and why the eurozone will act is important to households, businesses and member states.
To understand why something happens, and to have a meaningful debate about it, one needs people from all sides of an argument so that positions are explored and challenged. Alas, the schedule for the conference kicking off at the Royal Irish Academy today does not seem to list any advocates of eurozone policy as participating in what looks like quite a one-sided 'debate'. (I twice emailed the lead organiser asking if pro-austerity speakers had been invited, however, she did not address the question directly in either of her replies.)
This is unfortunate, because all too frequently in the English-speaking world, economically illiterate Germans who obsess about balanced budgets are fingered as the authors of austerity. An ever cruder argument is that austerity is a "neoliberal" conspiracy, defined by one of the speakers at the conference as a plot "to redistribute wealth and income upwards thereby enhancing the power of corporate and political elites".
But as with any big question involving many countries and decision-makers, explaining austerity is much more complicated and messy, and the reasons go far beyond a single country.
One reason for austerity relates to national interests, of which there are now 19 in the single currency. Because eurozone economies tend to be very open to foreign trade, a large part of any money that is borrowed for stimulus purposes ends up being spent on imports. As such, it leaves the economy of the government that borrows it and helps stimulate other economies.
As German economist Michael Burda put it last month: "It is disingenuous to expect individual sovereign countries to engage in aggregate demand policy for the benefit of others, if domestic voters can't be convinced of their own welfare gains".* (Incidentally, his short article, entitled 'Debunking three myths about economics in Germany' is well worth reading for an understanding of how Germans think.)
Even if this problem could have been overcome by the eurozone collectively issuing eurobonds, the question then would have been how to spend the money raised from these IOUs. Given that each country would be on the hook for repayments, there would have been a demand that the borrowed money be spent in perfect proportion to the weighting of each member state, resulting in very lengthy squabbles. Although this is what I think should have happened, it was never seriously considered, again because a big majority of the 19 members did not think it was in their national interest.
Another reason for the absence of fiscal stimulus was, and is, uncertainty.
Although many of the noisiest people on both sides of the debate are utterly certain that their views are correct, the evidence does not support anyone's certainty.
Just as the slow-growing but highly competitive economies of Denmark, Finland and the Netherlands prove that success is not just about competitiveness (as austerians tend to claim), there are plenty of examples from around the world which prove that the fiscal stance of governments is not as important as stimulators claim.
Many European countries have endured austerity - Ireland, Iceland, the Baltic states and Spain - and bounced back strongly despite frequent claims that the "medicine would kill the patient".
Japan has been trying every form of stimulus for a quarter of a century and has still not managed to drag its economy out of deflation.
Politicians - the people who make the decisions in the end - are aware of this uncertainty.
They know that there are risks associated both with not stimulating (deeper short-term recession) and with stimulating (it may not work - Japan is now saddled with the biggest public debt in the world after the failure of prolonged fiscal stimulus).
The truth is that public opinion in a majority of eurozone member states is not well-disposed towards stimulus and is more favourable to cutting deficits.
The five members of the eurozone which were behind the iron curtain until 1990 are, for instance, understandably suspicious of big government interventions, but their positions around the eurozone table are rarely discussed in the English-language debate which focuses almost exclusively on Germany.
To answer the question posed by today's event, understanding what makes the other members of the eurozone tick is imperative. The absence of a representative from any of these countries, or an advocate of eurozone austerity, at the conference is curious (a famously pro-stimulus academic from outside the eurozone is the only foreign invitee).
Surprising though it may be to people outside the academic world, but lop-sided debates within it are not at all uncommon. In some corners of the academy there can be surprisingly little interest in rigorous contests of the mind.
A good rule of thumb is that if an event has the word "neoliberal" in its title its participants will be confirming their biases, not challenging them.
Many people in the academic world (and beyond) bandy about the some variant of the term "neoliberalism" a lot, and always do so with extreme distaste, because what they describe is anti-democratic, if not downright evil.
But despite the power and prevalence of this odious neoliberal creed, at least in the minds of those who believe it to be so dominant in shaping our world, there is nobody who calls themselves a neoliberal. And because there are no self-described neoliberals, it is not possible to hear their positions or to have a debate with them.
This is convenient. Creating a label and attributing all manner of ills to it and its non-existent proponents, allows one to create a world view that is never challenged. The role of the academy in society is exactly the opposite. Or at least, it should be.