In 1936, things were looking up in the United States. Unemployment had fallen from its high of 25% in 1933 to just 13%. Nothing gets votes like results, and President Franklin Roosevelt won a smashing re-election victory, taking over 60% of the vote and 46 of the 48 states of the Union. But despite their willingness to vote the New Dealers back in, the voters remained troubled: a Gallup poll found that two-thirds of Americans wanted their president to balance the budget.
And so Roosevelt scaled back his stimulus measures, and the recovery turned to ashes in his mouth. By the middle of 1938, unemployment was back up to 20% and the US was again mired in a deep recession.
By the time the 1938 midterms rolled around, the voters were ready to punish Roosevelt for doing what they told him to do. The Republicans made sweeping gains across the north and west of the United States, forcing Roosevelt to rely on conservative southern Democrats to get his policies through the House and Senate. And what did those Republicans promise to do? The very same thing Roosevelt had been doing – cut deficits and balance the budget.
If it were not for the military build-up to the Second World War, that might have been the end of stimulus. As it turned out, the United States could and would spend far, far more than even the most ardent New Dealers might have believed feasible: the public debt rose from less than 60% of GDP to almost 120%. Wartime government investments (for instance, in technology and pharmaceuticals) spawned innovations which continue to drive growth and improve living standards today.
Austerity is intuitively appealing, but its appeal often exceeds its value. Voters want economic results, but they don't always know how to get them. At minimum, austerity will reduce the quality of the public services affected, and may also undermine growth, living standards, and employment depending on the circumstances. The results are likely to be worse the higher the "fiscal multiplier" is, and much of the research post-2008 indicates that multipliers may be higher than we used to think they were, particularly in the immediate aftermath of crashes. Even IMF economists have suggested that in states with large amounts of fiscal space (such as the US and UK), reducing debt “is likely to be normatively undesirable as the costs involved will likely be larger than the resulting benefits”. The inflation rate in the US is below the traditional 2% target, and the British rate was below target until the Brexit referendum. There are even economists (such as J.W. Mason) who argue that western economies still suffer from a persistent demand shortfall and could use more stimulus.
This larger macroeconomic context, however, rarely features in mainstream public debate. Instead, the economy is discussed through reductive metaphors comparing the government budget to that of a household or a firm – entities with nothing like the fiscal and monetary resources available to states – or flippant comparisons with the fiscal crisis of the 1970s. As a result, opponents of austerity rarely make the straightforward argument that we can afford to spend more, choosing instead to focus on two "symptoms" of austerity: declining public services (such as the NHS and infrastructure) and stagnant real wages and incomes, especially for young people and those without university degrees. These symptoms frustrate and disappoint voters, and so they start looking for solutions – for ways to improve the public services and increase the quality of the available jobs. But in spite of this, they still have a gut belief that the books should be balanced. So they go looking for ways to transcend austerity – to make the public services and jobs better without increasing the deficit.
The left's answer is relatively straightforward: soak the rich. Left-wing parties promise spending increases, but to avoid looking irresponsible they also pledge to cost those policies, primarily by taxing corporations and rich people. Take for instance Jeremy Corbyn's fiscal credibility rule, which stipulates that "at the end of every parliament, government debt as a proportion of trend GDP is lower than it was at the start". Never mind that this pledge would be totally unrealistic in the event of another major recession or war, or that it would limit Labour’s ability to deliver some of its more radical proposals. Voters think they want the books balanced, so Labour have to say they'll do it.
The right has used two tactics to defend austerity from the left: challenging the credibility of the left's promise to balance the books (both by questioning whether the left’s policies would raise enough revenue and by arguing that they would damage growth and investment) and diverting attention from austerity by blaming others (such as immigrants and foreigners) for its effects. This second strategy has become increasingly essential for the right. Public services must be declining not because of budget cuts but because of massive influxes of immigrants and refugees overburdening systems that would otherwise be okay. Our jobs are poor not because of inadequate public investment or consumer demand, but because immigrants will work for too little, and because bad trade deals with foreign states allow jobs to migrate abroad.
This argument was frequently deployed in the wake of the financial crisis by establishment conservatives such as David Cameron, but it has become the stock-in-trade of authoritarian populists such as Donald Trump, Marine Le Pen and Nigel Farage. The centre-right has lost its voters (and sometimes its parties) to populist upstarts, outbid by the most uncompromising critics of multiculturalism and globalization. At the same time, the centre-left has found that its own spending promises are now too tepid for many of its supporters. Bernie Sanders is now the most popular politician in America by a wide margin, and (for the time being at least) Jeremy Corbyn’s position as Labour leader appears untouchable.
The political establishment now gives ground from every direction because it's trying to give people what they said they wanted – a balanced budget. But as FDR found out in 1938, giving people what they say they want doesn't matter – results do. Austerity fails to get the results that make voters happy, and so voters continue to lose confidence in its purveyors. Centrists tell the voters that they shouldn't soak the rich, that they shouldn't turn their backs on the world, that this is the best we can do, and it's good enough. As Barack Obama put it, "America is already great". But few believe them anymore. As anti-establishment politicians come to power, we’ll discover whether they can really square the circle of balancing the budget while also making our societies nicer places to live in. If they are forced to choose between the two, their choice will show us how anti-establishment they really are.