In the immediate aftermath of the Global Financial Crisis of September 2008, it seemed clear that the ideas that had dominated economic policy since the 1970s had failed, and that the only prudent response was a return to the Keynesian system of macroeconomic management that had held sway during the "long boom" of the 1950s and 1960s. Robert Skidelsky, a Keynes biographer, captured the moment with his book, Keynes: Return of the Master (PublicAffairs, 2009).
As long as the threat of collapse loomed over the entire financial system, there was no significant opposition to policies of monetary expansion and fiscal stimulus, or to the view that comprehensive restructuring of the financial sector was urgently needed. But that consensus was not to last.
Weeks after being bailed out, the banks were back to business as usual, putting on luxury trips to reward their highly skilled staff for the great jobs they had done. Bonuses dipped briefly but were soon restored to their pre-crisis levels and more.
In political terms, the backlash began with the Obama administration in 2009. The turning point was when a tiny fraction of the relief given to bankers was extended to homeowners facing foreclosure, producing an angry backlash from the right.
The backlash was sufficiently clear that, by mid-2009, I changed the working title of my own book on the crisis from Dead Ideas From New Economists (a play on the title of an earlier book by Todd Buchholz, New Ideas From Dead Economists), to Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton University Press, 2010). Colin Crouch's The Strange Non-Death of Neoliberalism (Polity, 2011) explored the same problem: How could ideas and institutions discredited so thoroughly prove so resilient?
Still, it was not until the Greek fiscal crisis of early 2010 that the opponents of Keynesianism developed an effective counternarrative. In that story, the global financial crisis was forgotten, and the focus was placed on the explosion of government debt that had followed it, and that, in turn, was blamed on public profligacy. The prescribed remedy was austerity or "fiscal consolidation," that is, cuts in public spending and, to a much lesser extent, an increase in taxation.
Public-health experts have joined economists and historians in the critique.
The story of public profligacy was true, to some extent, where governments had employed the skills of Goldman Sachs and others to conceal their borrowings. In most of Europe, however, the growth of public debt was driven by the cost of bailing out failed banks and the combination of reduced revenue and greater demands on social services arising from the recession. Spain, among the worst hit of the European Union economies, had been running a budget surplus before the recession.
Austerity swept all before it for several years, informing the policies of the key European institutions and the Conservative government in Britain. In the United States, though the specific term was rarely used, ideas of austerity dominated the thinking of the mainstream centrists who regarded stimulus as discredited and sought a "grand bargain" involving lower spending and higher taxes, as well as that of the Republican Party, which focused entirely on spending cuts.
Lately, however, things have not gone well for the "austerians," in Paul Krugman's derisive coinage. The work of Alberto F. Alesina and Silvia Ardagna, claiming to show that austerity policies could actually promote growth, has been thoroughly discredited.
More recently, a 2010 study by Carmen Reinhart and Ken Rogoff, widely presented as showing that a ratio of public debt to GDP in excess of 90 percent would lead to recession, has been comprehensively discredited. The most notorious, but not the most important, problem was a spreadsheet error that led to several countries' being discarded from the data set. More important, Reinhart and Rogoff's results were skewed by an odd weighting scheme and, in their discussion, they confused correlation with causality.
The biggest problem with austerity policies, though, is that they haven't worked. Three years after the swing to austerity, there is no sign of economic recovery in most of Europe. Britain's GDP is still well below the 2008 level. America has done a little better but has seen no recovery in the proportion of people employed.
The counterattack against austerity has also advanced, from critiques of particular proposals to broader, more-systematic analyses. The indispensable starting point is Mark Blyth's Austerity: The History of a Dangerous Idea (Oxford University Press, 2013). Although the arguments underlying austerity have their roots in the classical economics of the 18th and 19th centuries, austerity as a live political doctrine emerged in the 1920s when nations were, for the first time, large enough to matter economically, and when the debt overhanging from the Great War provoked a series of crises.
Blyth shows how the "treasury view" in Britain and "liquidationism" in the United States were the forerunners of modern theories of austerity and how their failure led to the triumph of Keynesianism in the postwar era. Austerity policies had disastrous effects in America and Britain, but they were truly catastrophic in Germany, where the contractionary policies of the Brüning administration destroyed faith in the Weimar Republic. It was austerity, and not the hyperinflation of the early 1920s, that paved the way for Hitler. Austerity also played a central role in the rise of militarism in Japan.
Blyth goes on to document in detail the way in which austerity doctrines re-emerged in the 1990s, primarily through the work of Alesina and others associated with Bocconi University, in Italy, but also through the influential Reinhart-Rogoff paper. He provides ample evidence for the failure of austerity policies, not just in the current crisis but whenever they have been tried.
Until recently, debates of this kind have been dominated, for better or for worse, by economists and historians. A striking recent development has been the intervention of public-health professionals, in works like The Status Syndrome (Times Books, 2004) by Michael Marmot and The Spirit Level (Bloomsbury Press, 2010) by Kate Pickett and Richard Wilkinson, which have examined the relationship between inequality and adverse health outcomes.
The latest contribution to this literature is The Body Economic: Why Austerity Kills, by David Stuckler and Sanjay Basu (Basic Books, 2013). As the subtitle suggests, the authors argue that the choice between stimulus and austerity, in response to an economic shock, can literally be one between life and death.
Early mortality has a lot of causes, and many of them are affected by economic conditions. Unsurprisingly, for example, increased suicide rates are strongly associated with unemployment and homelessness, and that was true of the Great Depression. From 1929 to 1932, suicide rates rose by about 16 percent. Although the classic image from that period was a stockbroker jumping to his death from a skyscraper, the first recorded suicide of that kind was of a newly unemployed construction worker, and suicide rates rose most among the working class.
That tale is consistent with the previous research of Marmot and others, which demolished the myth of "executive stress." Marmot showed that it is subordinates, not bosses, who experience most work-related stress and depression, with resulting lower life expectancy.
Another big source of early deaths is the (mis)use of drugs, including tobacco (where the effects are usually long-delayed) and alcohol (where they may not be). Here, the effects of lower incomes, which make drugs and alcohol less affordable, may or may not offset the increase in drug and alcohol use arising from depression, in both its economic and psychological senses. Then there are policy changes, such as the repeal of Prohibition in the United States and the abandonment of Gorbachev's campaign against excessive drinking in the U.S.S.R., both of which coincided with severe economic depressions.
The central point made by Stuckler and Basu is that the health effects of economic shocks are not immutable. They can be ameliorated by well-designed intervention policies, including active labor-market strategies and universally accessible primary health care. They can also be exacerbated, quite reliably, by austerity policies of the kind that have been the default response to economic crises over the past 20 years.
Reflecting their background in public health, Stuckler and Basu present the adoption or rejection of austerity policies as a clinical trial, one in which we have all been enrolled without any requirement for informed consent, and arguably, at least, without any meaningful consent at all. They examine three recent crisis periods: the transition from Communism, the Asian crisis of 1997 and 1998, and the current Organisation for Economic Co-operation and Development recession.
In each case, they reason, countries that adopted harsh, rigid austerity policies (Russia, Indonesia, and Ireland, for example) fared much worse than those that did not (Belarus, Malaysia, and Iceland). Cutbacks in health spending combined with a sharp rise in unemployment to produce increased mortality from a wide range of causes.
As we know from the debate over the Reinhart-Rogoff paper, there's an important issue of causality here. It might be that austerity was the only option for countries that were going to do badly in any case. But Stuckler and Basu make a persuasive case that these were genuine experiments. The different choices owed much more to the differing preferences and judgments of political leaders than to the differences in the objective constraints under which those leaders worked.
The results are clear: Austerity really is bad for us. It is an idea that has repeatedly failed. Countries where governments have resisted austerity have done better than those that have accepted the idea. The evidence that was supposed to show the benefits of austerity has been discredited. Popular resistance is increasing.
And yet, the policies of austerity remain dominant. We need both a clearer alternative and a political movement capable of carrying out that alternative. There are some hopeful signs, such as the way the Occupy protests changed the terms of political debate in America, but there is still a long way to go.