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Mark Blyth explains how an old orthodoxy is being put to more openly political and redistributive uses

Public Policy / opinion
Mark Blyth explains how an old orthodoxy is being put to more openly political and redistributive uses
Musk with chainsaw

What do Rachel Reeves, Javier Milei, and Elon Musk have in common? All are preaching the gospel of austerity as a necessary cure for what ails their respective economies.

Hence, Reeves, the United Kingdom’s Chancellor of the Exchequer, has tightened rules for government spending and investment, despite the fact that fiscal constriction has been a major cause of the country’s problems over the past 15 years. Similarly, Milei has framed austerity as the price Argentina must pay for 20 years of overextension. He argues that defeating inflation is the only path to prosperity, even if doing so deepens an already deep well of poverty.

And for Musk, the United States supposedly needs austerity to spare it from bankruptcy. This argument is just a ruse: states with sovereign currencies, especially the main global reserve currency, cannot go bankrupt. Musk’s obvious motivation for slashing public budgets is to make room for tax cuts, and to fire public employees who do not share his agenda.

The last time we heard the drumbeat of austerity was during the global financial crisis. In the US, the prescribed response took the form of a milquetoast “sequester” (spending caps). But in Europe, the fiscal tightening went much further, destroying a decade’s worth of growth, undermining public investment, and contributing to many of the problems that the continent is still struggling with today.

What was obviously a failure of private finance was rechristened a crisis of runaway state spending. Bilateral loans to the European Union’s periphery states were little more than disguised bailouts of core countries’ banks “paid for” by fiscal contractions. Those offering elaborate arguments about the expansionary power of fiscal tightening were denying the obvious: When the private sector is trying to save and the public sector does the same, the economy inevitably will shrink, and the debt stock will grow larger as a share of GDP.

This was the essence of Europe’s self-defeating experiment with austerity in the 2010s. By 2016, even the European Commission had begun to change its tune; and by the time that COVID-19 had struck, the days of “growing the economy by shrinking it” seemed to be over. How wrong we were.

As John Quiggin argued at the time, austerity is a zombie idea: It cannot be killed, because it is immune to empirical refutation. The wisdom of the COVID crisis – when the sound response was to bail out the economy in the face of a global shutdown – thus became another “runaway debt crisis” that threatens to bankrupt the state.

Back in the 2010s, austerity in the EU was supposed to stabilise public finances by “restoring confidence” in the bond market. But cutting spending when the economy was already in recession simply compounded the problem. Fear of inflation owing to “all that spending” quickly turned into fear of deflation and declining confidence. Austerity in a recession simply produces more recession and unemployment. We have known that since the Bruning Chancellorship in Weimar Germany.

But what about austerity under other conditions? The current cases of the US and Argentina are interesting in this regard. For its part, the US is nowhere near a recession. The economy is powering ahead and facing inflationary pressures. In addition to freeing up fiscal space for tax cuts, another possible explanation for pursuing austerity under such conditions concerns geopolitics and global imbalances.

When Joe Biden took office in early 2021, he kept most of Donald Trump’s tariffs in place and embarked on a path of “green” reindustrialisation. Now that Trump is back in power, he is raising tariffs further to force adjustments in exporting economies, and replacing Biden’s green reindustrialisation strategy with a fossil-fueled approach.

But this isn’t the whole story. Musk and his Department of Government Efficiency (DOGE) are pursuing the long-held Republican (and libertarian) dream of dismantling the modern administrative state. They would much prefer the nineteenth-century state, which used tariffs both to protect domestic industry and raise government revenue. The implication is that Silicon Valley’s tech lords will reprise the role played by the robber barons during the Gilded Age. Thus, austerity is being dusted off for a whole new set of purposes.

Argentina, by contrast, faces permanent high inflation without real (inflation-adjusted) GDP growth. More than a dozen stabilisation plans have come and gone, and Milei has achieved what seemed impossible: a broad electoral coalition in favour of austerity.

Milei owes his success (so far) to the distributional politics of permanent inflation. The Peronists lost their long hold on the poor and the working class because these are the voters who spend the greatest share of their incomes on consumption, and rising prices consistently eroded their purchasing power.

The Peronist coalition managed to shelter unions from inflation by indexing wages accordingly, and the professional classes sheltered themselves with US dollar holdings. For a while, this arrangement was sufficient for Peronists to win elections. But those without these protections suffered falling consumption, and poverty increased year after year. Milei offered a way out. He would embrace austerity, destroy the Peronist networks, disrupt the middlemen, and deregulate everything. It would hurt for a while, but it would crush inflation and destroy Peronist insiders’ ability to protect themselves. Their pain would be your gain. Thus, austerity has become a form of schadenfreude politics, much like the war on federal employees and other “elites” in the US.

Will it work? In Argentina, if the point is to defeat inflation despite rising poverty, then yes, it is working. But it will be electorally sustainable only if lower inflation leads to more investment and rising real wages. If it leads to ever deeper poverty for those who voted for it, Milei will lose his base.

In the US, if the goal is to dismantle the administrative state, austerity will work. But in a country where 53% of counties – most of them Republican-leaning – are dependent on government transfers for a quarter or more of their incomes, it may backfire badly. Still, if Republicans get $4 trillion worth of tax cuts for the top 10%, the scheme might just be worth it.

Austerity is back, but this time it is not just a bad idea. It is also a political weapon and a dangerous redistributive tool.


Mark Blyth, Professor of International Economics and Director of the Rhodes Centre for International Economics and Finance at the Watson Institute for International and Public Affairs at Brown University, is the co-author (with Nicolò Fraccaroli) of the forthcoming Inflation: A Guide for Users and Losers (W. W. Norton & Company, 2025) and the author of Austerity: The History of a Dangerous Idea (Oxford University Press, 2015). This content is © Project Syndicate, 2025, and is here with permission.

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56 Comments

No commentary on value for money in the public domain aka not disrespecting tax payers so I guess you reap what you sow….

The liberals have brought this on themselves. They need to wake up!

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Spot on!

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The biggest waste of public wealth was privatising assets and services then having to rent them back or pay premiums so shareholders could line their pockets. All the while we got less and pay more.

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I think Musk isnt so much about austerity, rather cutting out government waste with spending and less bureaucracy...

Bankruptcy happens when no one is prepared to lend you any more money. This is the case in the US, and is currently artificially propped up by money printing, to keep the system from collapsing...

Most of the extra money in circulation is only feeding asset prices and artificially lowing their returns, which no longer reflect the risk. Meanwhile, the masses who dont have many or any assets are paying the price...

These are the customers that business relies on, and hence further contraction to real business, rather than inflated house and stock prices.

We need a correction in the cost of essential items for the system to survive. Cutting costs of doing business, which means reducing bureaucracy and regulation, including reduce accommodation costs...I would add, most regulation is there to protect big business, and limit competition by increasing entry costs for small businesses..

While little is being mentioned of it, this represents stagflation and is poison to banksters and politicians; including big business. Well, its time they took some of their own medicine too.    

 

 

 

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Still, if Republicans get $4 trillion worth of tax cuts for the top 10%, the scheme might just be worth it.

Worth it on what basis, the 'trickle-down' theory? 

Yeah, right. 

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The statement is not accurate.  As a middle class American I have benefited from the Trump tax cuts.  The liberal media deliberately distorts what is going on in the states, following the academic establishment which has become extremely left-wing.

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We're not ignorant, elmoboy12.  We can see the anger at GOP town halls ourselves.  My guess is they (GOP representative) will stop holding them, but regardless, we know these unlawful actions on your civil service workforce are simply a ruse/means to provide the top 10% with tax cuts they don't need.

Are you so on the bare bones of your ass that even someone like you in the middle class can't live with dignity in the US? 

If so, I feel very sorry for you.  But only you, can do something about that. 

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Who is ignorant?  I see the cut and paste "journalism" in NZ and people like yourself who repeat their mantras.  Once Kiwis were an independent people but now many only see things through the lens of the media, which does not report accurately what is happening in the U.S.  Even many Democrats are now saying the party has no future unless it begins to listen to the people, rather than the media.

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You have to pick the right media - the outlets that 'bring receipts' as they say.

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The author has failed to explain why balanced budgets, efficient use of taxpayers funds or indeed tax cuts are bad.

The transparency with DOGE is good approach.

https://doge.gov/savings.

Imagine the waste and grift that would be uncovered in "Aotearoa" with a similar effort.

Weimar Germany and Zimbabwe are two famous examples of sovereign states with their own currencies going down the shitter.

 

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Other reports have said that savings asserted by DOGE are, well, lies really.  Massively higher than reality and potentially offfset by the cost of DOGE staff and subsequent legal challenges.

 

If effort was put into tax legislation that ensured US billionaires couldn't avoid paying tax at the same rate as poorer citizens, the results would see a doubling of the savings asserted by DOGE.

 

Sorry, no links from me ATM.  Try again later.

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Govt spending is a red herring, whilst important, it pales in comparison to the potential corporate and billionaire tax law reform. Eat the rich. 

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What will you eat when you run out of billionaires?

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Millionaires.  Trust fund babies to begin with.

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I'm a millionaire.  Are you going to eat me?

That's the problem with socialism.  It's actually just "eat anyone richer than me until everybody is equally poor".

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English poet Ian Fraser Kilmister spelt it out nigh on 40 years ago:

Motörhead – Eat The Rich (Official Video)

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Cambodia tried this out in the late 1970's.  It didn't work out so well for them.

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We're stuck with the massive old age welfare benefit bill, yep.

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Doesn't matter how much proxy you claim - eating is a matter of gaining calories. So what do you weigh? 

This is the whole point - you types measure bull--it. 

Some of us measure real stuff. 

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He's also failed to look through the medium term effects of reining in the current high levels of redistribution (the current tax lots and spend lots model) to what history tells us is very likely to happen on the other side of the correction, ie upon these state-induced distortions in the free market being removed (ie better economic progress and higher growth).

The current New Zealand government is not even centre-right. Fundamentally we are a socialist nation.

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Yes, and in general we live longer and happier lives than those living in the USA. Lets not follow their lead.

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Economically, NZ is far right. And economic policy in a neoliberalist word is fundamentally all that matters.

We are left on some social policies, but this is because our economy is so out of whack that they are necessary for people to survive.

NZ is like an ecosystem destroyed by decades of industrial farming, whereby the only remedy short term is to apply more and more fertilisers and poisons to kill pests.

We tend to vary between progressive and moderately conservative depending on the government of the time.

So, fundamentally we are a far right nation with some progressive and leftish social policies.

If we fixed the far right economic policies, we would have no need for such a high level of social policies to compensate.

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LOL - those DOGE folks can't even follow a common format with respect to rounding.  Check out the entry which shows both dollars and cents - where all others are round to even dollars.  The other day they listed an $880,000,000 contract which was only an 8,000,000 one.  

It's absolutely laughable - they have even put up a number of contracts that have already been fulfilled and paid for.

They don't know what they are looking at.

 

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It would appear you can’t see the forrest for the trees Kate.

Doge is trying to prevent the US from bankrupting themselves so in return you attack them for rounding errors (on a spreadsheet?)

Do you know what you are even looking at big picture - not the political nitpicking of left vs right policies but the actual long term survival of the US as a state and currency that doesn’t bankrupt itself though unsustainable government spending. 
 

The left seem happy to bankrupt the US (via continuing Biden’s policies of the last 4 years) but only so long as they get to be in control of doing so - and anyone who tries to stop them is a Nazi or is a fool because they have incorrectly rounded one figure on a spreadsheet. 

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It would be much easier to respect the money savings efforts if they weren't apparently going hand-in-hand with tax cuts. 

The US deficit is so large they have to attack it from both sides - reduce spending and increase revenue. Reducing spending to hand it back to the people will do precisely nothing for the deficit. 

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Are any of us truly capable of seeing the forest for the trees?

Unsustainable government spending vs unsustainable capitalism vs unsustainable credit creation vs unsustainable asset inflation vs unsustainable consumerism vs unsustainable monetary wealth creation. Billionaires could easily be a corollary proof that the tokens of currency are already worthless.

Yet we're still caught up in left vs right politics, and that in itself is a weaponised tool to keep the masses fighting amongst themselves while the "ruling elite" will continue with their personal agendas. Agendas that may not benefit the masses no matter the propaganda spewed out.

Two sides of the same coin, two wings of the same bird, and the solution isn't about finding the centre, but envisioning a different outcome. A simple analogy using the smallest perspective of the individual - the left hand and right hand must collaborate and align to achieve a desired outcome. Until our ability to expand this view improves, our desire to create win/win rather than continue with the duality of winning and losing, we're likely to keep circling around the drain.

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The derangement syndrome is strong in some people.

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Ironically

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The expression "redistributive tool" is odd. This article describes a set of policies designed to in fact reduce the extent to which income (and, in extremis, capital) is redistributed by the state from those who earned it to those who didn't.

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After rereading this article, I now think it is fair to describe the author's expression of austerity as a redistributive tool, as simply wrong in the medium or long term. Reversing austerity will of course lead to short-term pain, but it's better overall.

The overall dynamic is very simple - lower overall taxes incentivise participants in the economy to achieve productive gains and consequent income, whereas higher taxes are a disincentive.

It is illuminating to then ask a couple of equally simple questions. First, which model (ie higher taxes or lower taxes) is more likely to provide greater aggregate productivity. Secondly, which model is more likely to mean more economic participants operate in a competitive framework rather then a non-competitive monopolistic framework.

 

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Go somewhere with low taxes and thrive dude. I suggest Somalia. Just don't get sick, make sure to hire some security, get a 4WD SUV and don't expect to get anywhere very fast.

The simple fact that there is billionaires in this world means that there is a lot of inefficiency in the private sector.

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Classic strawman. Tedious.

Most people would rather live in a world that enables the creation of billionaires than the grim socialist alternative.

That's why the Berlin wall was only required for one direction.

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Most people would rather live in a world that enables the creation of billionaires

Are you sure about this? Or is it a rhetoric that no-one questions.

What is this grim socialist alternative you think will happen?

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History is littered with examples of countries that rejected capitalism and embraced socialism.  Take your pick.

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We've had higher taxes in the past that didn't appear to disincentivise anyone, so the issues must be deeper than that.

Those with the highest access to avoiding tax have created the least productive gains. They also appear to create the least productive industries.

For many the incentive may not be money or productivity, but that the money and productivity actually enables them to have their basic human needs, which are much wider than finance and economic activity.

We could quite well be better off as a whole if we were able to conceive interdependence and cooperation over independence and competition.

We've been repeatedly warned about monopolies but it's effectively been ignored and encouraged by the "free market" credence. And we chose to ignore duopolies and oligopolies, assuming that as long as they were competing for market share, the consumer would be better off. How's that really worked out in reality.

 

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How much capital has realistically been "earned"? 

A lot of it is magical and reliant on certain policies or lack of checks and balances that fail to encourage a reasonable distribution before needing redistribution. 

The bulk of magic capital comes from zero effort and is solely dependant on the narrated beliefs instilled in the ignorant.

The "state" is meant to be us, the collective citizens, but we've been taught to see it as a separate entity.

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It's not valid to compare Argentina and the USA.

Aregentina has been dominated for so long by a bloated, corrupt and useless bureaucracy, whereas ...

No, wait ...

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"And for Musk, the United States supposedly needs austerity to spare it from bankruptcy. This argument is just a ruse: states with sovereign currencies, especially the main global reserve currency, cannot go bankrupt."

A state that issues its own currency cannot fail to pay for those resources available within its realm.....this is somewhat different to the statement above.....the question is at what point do you lose access to resources outside that realm?

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What about the increasing weight of interest to be paid on the ever increasing mountain of debt ?  Could that perhaps be problem ?

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That would depend upon who holds the debt....in a closed economy there is no need to issue debt to create currency....it is the concern for currency demand in a multi currency world that provides the constraint.

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The Professor is not at all willing to tell the reader that the $4 Trillion is not a tax cut but a continuation of the current taxation rates which have been in effect since 2018, and if they expire in September then there would be a $4 Trillion increase over 10 years. The current rate boosted income from $3.3 Trillion to $5.45 Trillion over a 7 year period on the back of GNP rise of $10 Trillion. What the author not shine the light on is a spending rise under Biden that has caused servicing the debt to rise from $400 Billion in 2019 to $1.2 Trillion in 2024. Luckily there are brighter bulbs than he who recognize that $800 Billion increase has to be dealt with as it now the elephant in the room. Here is how much the 2017 Act helped working families-not just the rich and consequently the economy:

Despite CBO’s Predictions, Trump Tax Cuts Were a Boon for America’s Economy and Working Families | The U.S. House Committee on the Budget - House Budget Committee

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Do you honestly think that the debt servicing cost increasing from $400 billion to $1.2 trillion is because of Biden's borrowing rather than higher interest rates? 

Trying to figure out if you're one of the 'brighter bulbs' or not. 

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The left is trying to grip on through the lies. The author does not add to it. You live in a socialist paradise. Glad im outta there.

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What austerity in the US? The budget that Trump just put through shows annual $2T deficits for the next 10 years!

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the fact that fiscal constriction has been a major cause of the country’s problems over the past 15 years

Or is the real problem due to too much borrowing over the last 15 (and more) years ?  I would like to suggest that austerity in the USA is not the problem, but that distributing the tax cuts to the top 10% is the real problem.

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It’s not even austerity- they were running a 6% deficit but the political left now label war time Iike deficient spending that we’ve just had as ‘normal’ (because they seem to love endless war, defence spending and big government gravy train) and any reduction to return the deficit to something sane like 3% is now called austerity. 
 

It doesn’t make any sense to call a return to a 3% deficit as austerity. Because it is not.

Edit - fixed typos  

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Thank you IO, someone with some sense at last.

 

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Reserve currency does not give you immunity on excessive deficit spending (despite the authors claims - who’s minds is he corrupting at universities? Probably future treasury employees…) Eventually there is a run on your currency and bonds when the world realises that the productivity of the reserve currency nation is not great enough to pay the interest expense on the excessive bonds issued to pay for the excessive deficit spending.

Ray Dalio covers this very well in ‘The Changing World Order’. 
 

Perhaps the author of this article could explain why the Dutch who were the global power and reserve currency nation only a matter of centuries ago is no longer and why they fell from grace so quickly? Like the path the US is heading down, they issued too many bonds to fund their deficit spending (mainly to fund their military/navy/global rule) and the world called their bluff. The same could happen to the US in the coming decades unless it reigns in its excessive spending/bond issuance - steps Musk and Doge are working towards despite the whinging from the political left (who seem to have no grasp of financial history).

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Well said IO, I fully agree.

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What do Rachel Reeves, Javier Milei, and Elon Musk have in common?

The only one of the 3 doing austerity is Reeves - spending cuts and tax increases.  Millei and Trump are doing spending cuts and tax cuts - not austerity.

 

 

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Yes, it doesn't seem to be about saving money for the Government. More about redirecting money. 

Anyone actually willing to bet Trump will reduce the size of the deficit significantly?

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Perhaps Musk could take that chainsaw to his own interests? https://x.com/NPRinskeep/status/1894771816750551349/photo/1

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The neo-libs, i.e. the 'economists' that the mega-rich employ to make them richer, have come up with new rebranding. (In fact, it's not new at all. But the outcomes will be the same.)

Instead of additional personal taxes, we'll call them tariffs.

And instead of slashing government spending, we'll call it, 'slashing government waste'; and we'll use some convenient billionaire fall-guy to do it. (Musk couldn't get life insurance if he tried.)

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Musk is in possession of much clandestine knowledge and runs Twitter.  He could distribute everything to about 500 million people instantly. 

Best life insurance policy ever.  

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I suspect the other US tech moguls are getting very nervous.

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To echo the sentiments of so many others here: what of the need to assure that taxpayers receive value?

I think there's a widespread perception that the public service has become a self-perpetuating power unto itself that isn't terribly interested in obeying the democratic process, and that it's growth had become uncontrolled and focussed on organisational expansion rather than service delivery (remember: the NZ public service grew by 34% 2017-23, while general labour force participation grew by about 9.5%). 

What extra got delivered? The local cuts have returned the NZ public service to about the size it was in 2019.

A DOGE may not be the optimum way to change things, but when confronted with a recalcitrant and passively obstructive public service, the backgrounds of those now in power will make creative destruction the order of the day. 

God knows what will arise from the ashes, but hopefully something less violently risk averse, more democratic, more data driven, and more able to learn and adapt positively to changing circumstances.

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