Must-Read: Simon Wren-Lewis: Neoliberalism and Austerity

Must-Read: Simon Wren-Lewis: Neoliberalism and Austerity: “Austerity could [not] have happened on the scale that it did without this dominance of this neoliberal ethos…

…Mark Blyth has described austerity as the biggest bait and switch…. It took two forms…. (1) The financial crisis, caused by an under regulated financial sector lending too much, led to bank bailouts that increased public sector debt. This leads to an outcry about public debt, rather than the financial sector…. (2) The financial crisis causes a deep recession which – as it always does – creates a large budget deficit. Spending like drunken sailors goes the cry, we must have austerity now.

In both cases the nature of what was going on was pretty obvious to anyone who bothered to find out the facts. That so few did so… can be partly explained by a neoliberal ethos. Having spent years seeing the big banks lauded as wealth creating titans, it was difficult for many to comprehend that their basic business model was fundamentally flawed and required a huge implicit state subsidy…. They found it much easier to imagine that past minor indiscretions by governments were the cause of a full blown debt crisis….

Austerity was popular, but then so was bashing bankers. We got austerity in spades…. [Perhaps] the Eurozone crisis was pivotal, but… austerity plans were already well laid on the political right… before that crisis… [and] the Eurozone crisis went beyond Greece because the ECB failed to act… as a sovereign lender of last resort…. The Greek crisis was made far worse … because politicians used bailouts to Greece as a cover to support their own fragile banks. Another form of bait and switch….

But I do not think you can go further and suggest that austerity was somehow bound to happen because it was necessary to the ‘neoliberal project’…. I can imagine governments of the right not going down the austerity path because they understood the damage it would do. Austerity is partly a problem created by ideology, but it also reflects incompetent governments that failed to listen to good economic advice. An interesting question is whether the same applies to right wing governments in the UK and US that used immigration/race as a tactic for winning power…. Brexit is a major setback for neoliberalism. Not only is it directly bad for business, it involves (for both trade and migration) a large increase in bureaucratic interference in market processes. To the extent she wants to take us back to the 1950s, Theresa May’s brand of conservatism may be very different from Margaret Thatcher’s neoliberal philosophy.