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Austerity is still popular despite an abject record of failure

- January 8, 2015

(Courtesy Oxford University Press)
Dan Drezner is a professor of international politics at the Fletcher School of Tufts university, and a blogger here at the Washington Post. I interviewed him by e-mail about his recent book on the financial crisis, “The System Worked: How the World Stopped Another Great Depression
HF: You argue that the “system worked” in the recent financial crisis. How would you respond to critics who argue that the major problems that led to the crisis are still mostly unaddressed?

DD: This is a tricky question, because the answer depends on your beliefs about the key causes of the 2008 financial crisis. The two that spring to mind for me were rising macroeconomic imbalances and insufficient levels of financial supervision. As I said in the book, the imbalances issue has subsided considerably, due in part to market forces but also due to some post-2010 Sino-American/G20 diplomacy on the USD-RMB exchange rate. As for financial supervision, I’m reasonably optimistic that Basel III will help to prevent any future crisis from spreading to the banks. Indeed, it’s worth remembering that in the years since 2008, the international financial system has had to endure an ongoing eurozone crisis, the Arab Spring, multiple US debt ceiling showdowns, gyrating commodity prices, an imploding Russian economy, and turmoil in the Middle East without financial markets being roiled. There will be another financial crisis — that’s just the nature of capitalism — but so far the post-2008 system has displayed considerable resiliency.
HF: In your argument, China is the dog that didn’t bark – it seems to have been willing to support the status quo. Why did it do so, and can we expect it to continue doing so in the future?
DD: China was the only post-2008 actor that could have announced an alternative to the Washington Consensus and have gotten any traction with it, but in the end Beijing acted like a responsible stakeholder. I think there were multiple reasons. The most proximate was that the 2008 financial crisis caught them by surprise, and so they bandwagoned with the devil they knew rather than the devil they didn’t know. At the next level, for China to have challenged the status quo, it needed a viable, alternative set of economic ideas — and contrary to the many Western proponents of a “Beijing Consensus,” there was no consensus in China about alternatives. While many Chinese intellectuals took great pride in their heterodox path of economic development, elite Chinese economists were increasingly aware of the diminishing returns they were getting on their growth model. Indeed, if anything, the latest Third Plenum shows that China is moving closer, and not further away from the Washington Consensus.
HF: You argue that the fundamental ideas of economic liberalism have not been fundamentally challenged. However, it’s plausible that the ideas of political liberalism (the benefits of democracy and human rights) are being challenged, as countries such as Russia, Hungary and Turkey seem to be deliberately pushing against political liberalism. Why have the economic ideas of liberalism done better than the political ones?
DD: The simplest answer is that authoritarians and aspiring authoritarians do not think of economic liberalism as an existential threat in the same way that they view political liberalism. There are models out here — think Singapore — of polities that are economically open while still preserving less-than-democratic political structures. Furthermore, to date economic liberalism has demonstrated a better chance at producing greater levels of economic growth than the alternatives. In the short run, a rapidly growing economy makes life easier for authoritarian rulers.
HF: Might economic internationalism and liberalism too be challenged, as countries like Greece and Spain respond to the aftershocks of austerity, and countries like Russia respond to the vagaries of interdependent energy markets?
DD: The far greater challenge comes from Greece and Spain than Russia. The latter country’s troubles are viewed as less an example of excessive interdependence than Putin’s political and economic malfeasance. Furthermore, one can argue that the current fall in energy prices is evidence of markets working — the US shale oil boom was the natural economic response to high energy prices.
Greece and Spain, on the other hand, have had to endure a half-decade that is worse than they endured at the start of the Great Depression. One of the things that genuinely surprised me in research The System Worked was how robust public polling support was for free markets and free trade across the world. Over time, the one exception to that rule was the Southern European economies. And the most fascinating thing about the post-2008 period was the rise of austerity economics and its continued political popularity despite an abject record of failure. The power of austerity is a testament to the fact that power and interest alone cannot explain the global political economy. Ideas — even bad ones — matter as well.
Earlier book interviews on the politics of the financial crisis:
Jonathan Kirshner – The US-led global economic order is dying
Eric Helleiner: The G20 didn’t help much during the financial crisis.
Cornelia Woll: Bailing out banks is not a lucrative business