Much to Angela Merkel’s chagrin, international political momentum seems to have swung rather decidedly from ‘austerity’ to ‘growth’. The transformation had been underway for some time – playing out in debates across the economics blogosphere – but the elections in France and Greece clearly accelerated this evolution. The recent G8 summit communiqué – which leads with the phrase “Our imperative is to promote growth and jobs” – epitomizes the shift.
In terms of our collective understanding of economics and how to fight recessions, I think there’s actually a lot less here than meets the eye, and indeed a lot of rather meaningless talk. To begin with, as Tyler Cowen has pointed out, ‘austerity’ means many different things to different people, and analytically is just not a very useful word. So while the slogan “austerity has failed” might sound good, in reality we a) don’t really know what ‘austerity’ means, b) even if we could define it we don’t really know if it’s been tried or not, and c) even if we could claim it’s been tried, we couldn’t really say if it’s failed or not.
On top of this, it’s important to note that ‘austerity’ is a means and ‘growth’ an ends; while austerity may never have been a well-defined policy position, growth certainly isn’t either. As Gideon Rachman wryly noted, “Mr Hollande says that he will replace austerity with growth. Why didn’t anybody think of that before?” Furthermore, calls for a pivot from ‘austerity’ to ‘growth’ can refer to two quite separate debates, which have tended to become muddled in media discussions. One question is whether current policies are imposing too much suffering and hardship, and if given high unemployment rates and weak economies (and, for some countries, low borrowing costs) new short term, Keynesian stimulative measures should be taken to kick start growth. A second question is what’s the best way for countries to work down their debt-to-GDP ratios, and the argument is that focusing too much on cutting the numerator is self-defeating and countries should instead prioritize growing the denominator, i.e. implementing long-term structural reforms to spur growth, thereby growing their way out of their debts. There’s some overlap between the two – with time the short term becomes the long term – but only some.
While the actual economics of the debate might be overhyped, I do think the rhetorical shift is of considerable political interest, and could have lasting effects. To better understand what’s going on it’s important to step back and look at the big meta-narratives of the crisis response and their political fallout.
The first big response of Western governments to the crisis was bank bailouts/recapitalization programs, which were, by almost every account, massively successful, and also almost immediately hated by the public. Then came a wave of stimulus programs, which I think most economists would also say were by and large successful, and which also quickly became despised by the public (certainly in the US at least, as seen in the 2010 Congressional elections, though I can’t speak as much to their reception in other countries – thoughts on this point from Europeans welcome in the comments section). The word “stimulus” now has a clear pejorative tone in American politics, such that no supporter of short term stimulus legislation can actually use the word (hence we get Obama’s “jobs bill”). After stimulus the next response was “austerity”, though again as noted above this has meant different things to different people. And now the people are fed up with austerity.
Notice a pattern? Such is the art of politics during extended slumps; when momentum coalesces around a certain idea as the response to the downturn, and then the economy doesn’t quickly pick back up, yesterday’s solution quickly becomes politically toxic, mostly regardless of whether it was a good policy or not.
And so ‘austerity’ is now on the way out, a fact which will be most obvious when – as has happened with stimulus in the US – even its advocates begin to disown the term. David Cameron might stick to his general small-government vision, but I’m willing to bet he won’t be making many more speeches centred around the theme ‘The Age of Austerity‘; that’s about as likely as Barack Obama running for re-election on the popularity of bank bailouts and stimulus programs.
So will the new ‘growth’ policy have a longer political shelf-life? As long as it stays at such a broad, vacuous level perhaps – it’s hard to imagine the public turning against growth as a concept. But if momentum begins to build for a more specific line of responses and if Western economies don’t quickly turn around (which, let’s be honest, they won’t), disillusionment could set in once again. Somewhat paradoxically, this actually gives pundits and politicians an incentive to refrain from cheerleading too loudly for the policies they think might actually help, in order to keep public expectations modest and avoid a future backlash. So here’s hoping for some quiet support for infrastructure investment and expansionary monetary policy.
Geoffrey Gertz is studying International Relations at the University of Oxford. This post also appears on his blog Tomorrow’s Economy.