Austerity Is Back – and More Dangerous Than Ever

Mark Blyth

PROVIDENCE – 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 stabilize 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” reindustrialization. Now that Trump is back in power, he is raising tariffs further to force adjustments in exporting economies, and replacing Biden’s green reindustrialization 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 stabilization plans have come and gone, and Milei has achieved what seemed impossible: a broad electoral coalition in favor 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).