Book Review: Uneasy Street: The Anxieties of Affluence by Rachel Sherman

Published by Anonymous (not verified) on Tue, 20/02/2018 - 11:13pm in

In Uneasy Street: The Anxieties of AffluenceRachel Sherman undertakes 50 in-depth interviews with rich New Yorkers to consider how they navigate their anxieties and the negative connotations surrounding extreme wealth. The frank accounts offered in the book provide a complex picture of elite consumption and the attempt to reconcile affluence and moral legitimacy, finds Jonathan Yong Tienxhi.

If you are interested in the topic of this book review, listen to a panel discussing ‘The Challenge of Richness: Rethinking the Giant of Poverty’ at LSE on Tuesday 20 February 2018 as part of LSE Festival Beveridge 2.0 (Mon 19 Feb – Sat 24 Feb 2018). The Festival offers a week of public engagement activities exploring the ‘Five Giants’ identified by Beveridge in his 1942 report in a global 21st-century context. Tickets to all the events, which are free and open to all, can be booked here.

Uneasy Street: The Anxieties of Affluence. Rachel Sherman. Princeton University Press. 2017.

Find this book: amazon-logo

We live in an era which has every appearance of being increasingly obsequious towards the extremely wealthy: Donald Trump crassly boasted of his status as a ‘really rich’ man in the run-up to the 2016 US Presidential election, while Oprah Winfrey’s recent proclamation that she is ruling out a presidential run has not deterred political pundits and media outlets from fantasising about the prospect of a campaign between two celebrity plutocrats in 2020. In this political climate, it is refreshing to read Rachel Sherman’s Uneasy Street: The Anxieties of Affluence, which purports to consider a sociological phenomenon that is as easy to mock as to overlook – the stigma attached to great wealth.

Sherman is a professor of sociology at The New School of Social Research, with over a decade’s worth of experience in using ethnographies and qualitative interviews to uncover how class inequalities are justified and entrenched in contemporary capitalism. Her latest work utilises 50 in-depth interviews with affluent New Yorkers to consider how the wealthy interpret and understand their own consumption patterns. Sherman’s subject matter invites comparison with Thorstein Veblen’s landmark study of affluent consumerism, The Theory of the Leisure Class: An Economic Study of Institutions. Yet Uneasy Street differs from Veblen’s treatise in both form and substance: Sherman is as empathetic as Veblen was sardonic, and she eschews broad socio-economic analysis for a more intimate examination of New York’s privileged elite. At the core of her argument is the proposition that the wealthy do not simply use consumption to publicly display economic power and solidify social status (contrary to Veblen). Rather, she explores how the affluent seek to avoid the stigma associated with exorbitant wealth by emphasising the modesty of their spending, using money for social purposes and raising children in a non-materialistic fashion.

Much of the allure of Uneasy Street lies in its author’s ability to convince her interviewees to give frank accounts of their lifestyles, a conversation which one respondent describes as akin to talking about masturbating. This offers glimpses into the social lives of the wealthy, which few outside the elite have witnessed, through a range of memorable anecdotes. One interviewee points out that he pays ‘a shitload of federal income tax’ when asked about charitable giving (146); another person recounted her son’s words after flying on a commercial airline: ‘It was great, but next time we fly private like everyone else’ (210). Yet, Sherman urges us to refrain from our inclination to be judgmental, instead offering an account in which members of the affluent class generally desire to act morally and are to some degree aware of their own advantages. Many of her interviewees perceive themselves as having acquired wealth through luck (64), and others offer detailed critiques of how their own lifestyles serve to perpetuate poverty (52). This allows Sherman to paint a more complex picture of elite consumption than typically portrayed in popular media.

Image Credit: (Pixabay CC0)

Uneasy Street is an insightful guide through the struggle faced by elites in reconciling extreme wealth with the desire for moral legitimacy. Sherman writes with great nuance and subtlety, skilfully navigating social taboos in her interviews while providing thoughtful reflections on the research process. This includes the challenge of deconstructing the logic of moral judgment while being subject to the same ideological pressures as well as practicalities, such as her need to upgrade her wardrobe in preparation for the interviews. Reading Uneasy Street provoked me to re-evaluate my own mechanisms for coping with the tensions Sherman describes: I recall complaining about the difficulties of living on a scholarship stipend while among certain social circles at the LSE, in order to deliberately draw boundaries between myself and the stereotype of the rich, ethnically Chinese international student who did not face such financial restrictions – a manoeuvre that Sherman would undoubtedly identify as a means of deflecting from my own class privilege.

Yet, it is difficult to escape the conclusion that the broad arguments made in Uneasy Street espouse rather than debunk conventional wisdom. After all, evidence that the wealthy try to interpret their spending behaviour as morally worthy is prevalent across the political landscape, from countless articles in business websites celebrating the frugality of certain members of the billionaire class, to the swaggering anonymous email that went viral around Wall Street trading desks for describing the intensity of trading workdays: “We don’t demand a union. We don’t retire at 50 with a pension. We eat what we kill.’ Uneasy Street is unusual in choosing to focus on respondents who are less emblematic of the greedy millionaire cliché – Sherman’s interviewees are culturally curious, mostly women and generally politically liberal. Sherman is too attentive not to anticipate the objection that this sample group is unrepresentative of the affluent classes, yet her response that most privileged people still want to feel morally worthy (254) feels unsatisfactory. The need for moral validation in consumption is not limited to any social class, and Sherman does not articulate why her respondents interpret legitimate consumption so differently from the plutocrats described in Robert Frank’s Richistan, for instance.

The preponderance of women in Sherman’s interview samples is surely a significant part of this explanation, and indeed Uneasy Street is particularly insightful when exploring the gender dynamics within affluent households. Sherman provides sympathetic and detailed depictions of how women are unevenly yoked in the quest to attain morally worthy spending power. The stay-at-home mothers interviewed struggle to establish their consumption as legitimate due to the absence of financially rewarding labour in their lives, while their husbands are able to authorise or reject certain expenditures due to their position as the source of monetary income. Sherman is astute enough to point out that this remains the case even in situations where the husband is outwardly supportive, as he retains the prerogative to withdraw this when convenient. Thus, Uneasy Street presents a useful exploration of the intersection between class privilege and the sociology of gender, highlighting the unequal relations of distribution in affluent families even as they live vastly privileged lives compared to the rest of the population.

Sherman contends that the attraction of the affluent towards morally legitimate consumption has a clear political implication. Rather than drawing distinctions between members of the affluent class who are ‘moral’ or ‘immoral’ based on their spending patterns, capacity for charity or self-awareness of privilege, we should focus on dismantling systems of distribution that reproduce such wealth disparities. Sherman is surely correct to assess that exorbitant wealth inequality is immoral regardless of how such individuals seek to legitimise their expenditure, whether these are Trump’s vulgar pretensions or the gentler, sophisticated rationalisations found in Uneasy Street. However, severing the link between moral judgement and wealth inequality could potentially obscure the fact that the latter tends to exacerbate the demise of the former. Not only is there a growing body of academic research which indicates that there is an association between higher social class and unethical decision-making, but it is also intuitively true that increasing a person’s affluence would reduce their capacity for reasonable consumption patterns and tendencies towards critiquing unjust economic systems. Or, as one of Sherman’s interviewees puts it: ‘I used to say I was gonna be a revolutionary, and then I had that first massage’ (115).

Jonathan Yong Tienxhi recently completed an MSc in Sociology with distinction at the London School of Economics and Political Science. His research focuses on the intersection between ethnicity and class inequality, particularly in the context of Southeast Asia. He was a recipient of the Chevening scholarship as well as the Hobhouse Memorial Prize.

Note: This review gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics. 

Being the 1%, or What It Means to Be Entitled

Published by Anonymous (not verified) on Tue, 13/02/2018 - 2:21pm in

by Rachel Sherman*  Most contemporary research on economic inequality focuses on the causes, contours, and consequences of unequal distributions of resources. But how they do such distributions become legitimate? Why do people accept them, and even take them for granted? Why … Continue reading →

Cartoon: The next cryptocurrencies

Published by Anonymous (not verified) on Tue, 30/01/2018 - 11:50pm in

As I was penciling this, Paul Krugman's latest column on the Bitcoin bubble went up. Krugman makes some of the same points I make in the cartoon.

For more on the incredible energy use that goes into mining Bitcoin, this Arstechnica piece is a good place to start. This site has some eyebrow-raising stats, such as the fact that the number of U.S. households that could be powered by Bitcoin is 4,252,394. To quote from this Motherboard article making the Denmark comparison:

Even in the optimistic scenario, just mining one bitcoin in 2020 would require a shocking 5,500 kWh, or about half the annual electricity consumption of an American household. And even if we assume that by that time only half of that electricity is generated by fossil fuels, still over 4,000 kg of carbon dioxide would be emitted per bitcoin mined. It makes you wonder whether bitcoin could still be called a virtual currency, when the physical effects could become so tangible.

Emphasis mine. It's extremely ironic, then, that a currency this inefficient and destructive to the planet -- it's mostly powered by Chinese coal-burning plants, according to Digiconomist -- has become the darling of Libertarian utopianists who think they're creating a futuristic paradise.

Follow Jen on Twitter at @JenSorensen

Coming Fiscal Derailment – Why FY 2019 Will Sink The Casino

Published by Anonymous (not verified) on Sun, 24/12/2017 - 6:00am in



December 21, 2017 “Information Clearing House” – Since last November 8th the Russell 2000 has risen by 30% and the net Federal debt has expanded by an astounding $1.0 trillion dollars. In a rational world operating with honest financial markets those two results would not be found in even remotely the same zip code; and especially not in month #102 of a tired economic expansion and at the inception of an epochal pivot by the Fed to QT (quantitative tightening) on a scale never before imagined. And we do mean exactly those words. By next April the Fed will be shrinking its balance sheet at $360 billion annual rate and by $600 billion per year as of next October. Altogether, the Fed’s balance is scheduled to contract by upwards $2 trillion by the end of 2020.

Extreme Wealth Inequality Persists

Published by Anonymous (not verified) on Mon, 11/12/2017 - 4:15am in


taxation, wealth

There was little or no media coverage of the release of data on the distribution of the wealth of Canadians in 2016 last week, perhaps because there has been little or no change since the last Survey of Financial Security in 2012.

The top 20% of Canadians own 67.3% of all net worth (assets of all kinds minus liabilities), almost exactly the same as in 2012.

The bottom 20% have no net worth, and the bottom 40% collectively own just 2.3% of all net worth.

The top 20% also own 74.6% of all financial assets (stocks, bonds, bank deposits etc) held outside of RRSPs and registered pension plans, while the bottom 40% collectively own just 3.5% of such assets. Financial assets outside of pensions total $1.4 trillion.

Unfortunately, the new data does not detail the breakdown within the top 20%. Even within this group, wealth is highly concentrated in the hands of the top 10% and top 1%.

Clearly, taxable income from financial assets (interest, dividends, capital gains, stock options) flows overwhelmingly to a relatively small number of people. If the federal government was serious about progressive tax reform, they would be reducing the preferential treatment of such income in the personal income tax system. Over to you, Minister Morneau.

Extreme Wealth Inequality Persists

Published by Anonymous (not verified) on Mon, 11/12/2017 - 4:15am in


taxation, wealth

There was little or no media coverage of the release of data on the distribution of the wealth of Canadians in 2016 last week, perhaps because there has been little or no change since the last Survey of Financial Security in 2012.

The top 20% of Canadians own 67.3% of all net worth (assets of all kinds minus liabilities), almost exactly the same as in 2012.

The bottom 20% have no net worth, and the bottom 40% collectively own just 2.3% of all net worth.

The top 20% also own 74.6% of all financial assets (stocks, bonds, bank deposits etc) held outside of RRSPs and registered pension plans, while the bottom 40% collectively own just 3.5% of such assets. Financial assets outside of pensions total $1.4 trillion.

Unfortunately, the new data does not detail the breakdown within the top 20%. Even within this group, wealth is highly concentrated in the hands of the top 10% and top 1%.

Clearly, taxable income from financial assets (interest, dividends, capital gains, stock options) flows overwhelmingly to a relatively small number of people. If the federal government was serious about progressive tax reform, they would be reducing the preferential treatment of such income in the personal income tax system. Over to you, Minister Morneau.

U.S. Has Worst Wealth Inequality of Any Rich Nation, and It's Not Even Close

Published by Anonymous (not verified) on Sun, 19/03/2017 - 7:13pm in

I've discussed the Credit Suisse Global Wealth Reports before, an excellent source of data for both wealth and wealth inequality. The most recent edition, from November 2016, shows the United States getting wealthier, but steadily more unequal in wealth per adult and dropping from 25th to 27th in median wealth per adult since 2014. Moreover, on a global scale, it reports that the top 1% of wealth holders hold 50.8% of the world's wealth (Report, p. 18).

One important point to bear in mind is that while the United States remains the fourth-highest country for wealth per adult (after Switzerland, Iceland, and Australia) at $344,692, its median wealth per adult has fallen to 27th in the world, down to $44,977. As I have pointed out before, the reason for this is much higher inequality in the U.S. In fact, the U.S. ratio of mean to median wealth per adult is 7.66:1, the highest of all rich countries by a long shot.

The tables below illustrate this. First, I will present the 29 countries with median wealth per adult over $40,000 per year, from largest to smallest. The second table also includes mean wealth per adult and the mean/median ratio, sorted by the inequality ratio.

1. Switzerland  $244,002 2. Iceland  $188,088 3. Australia  $162,815 4. Belgium  $154,815 5. New Zealand  $135,755 6. Norway  $135,012 7. Luxembourg  $125,452 8. Japan  $120,493 9. United Kingdom  $107,865 10. Italy  $104,105 11. Singapore  $101,386 12. France  $  99,923 13. Canada  $  96,664 14. Netherlands  $  81,118 15. Ireland  $  80,668 16. Qatar  $  74,820 17. Korea  $  64,686 18. Taiwan  $  63,134 19. United Arab Emirates  $  62,332 20. Spain  $  56,500 21. Malta  $  54,562 22. Israel  $  54,384 23. Greece  $  53,266 24. Austria  $  52,519 25. Finland  $  52,427 26. Denmark  $  52,279 27. United States  $  44,977 28. Germany  $  42,833 29. Kuwait  $  40,803
Source: Credit Suisse Global Wealth Databook 2016, Table 3-1

Now that I've got your attention, let me remind you why this low level of median wealth is a BIG PROBLEM. Quite simply, we are careening towards a retirement crisis as Baby Boomers like myself find their income drop off a cliff in retirement. As I reported in 2013, 49% (!) of all private sector workers have no retirement plan at all, not even a crappy 401(k). 31% have only a 401(k), which shifts all the investment risk on to the individual, rather than pooling that risk as Social Security does. And many people had to borrow against their 401(k) during the Great Recession, including 1/3 of people in their forties. The overall savings shortfall is $6.6 trillion! If Republican leaders finally get their wish to gut Social Security, prepare to see levels of elder poverty unlike anything in generations. It will not be pretty.

Let's move now to the inequality data, where I'll present median wealth per adult, mean wealth per adult, and the mean-to-median ratio, a significant indicator of inequality. These data will be sorted by that ratio.

1. United States  $ 44,977  $344,692 7.66 2. Denmark  $ 52,279  $259,816 4.97 3. Germany  $ 42,833  $185,175 4.32 4. Austria  $ 52,519  $206,002 3.92 5. Israel  $ 54,384  $176,263 3.24 6. Kuwait  $ 40,803  $119,038 2.92 7. Finland  $ 52,427  $146,733 2.80 8. Canada  $ 96,664  $270,179 2.80 9. Taiwan  $ 63,134  $172,847 2.74 10. Singapore  $101,386  $276,885 2.73 11. United Kingdom  $107,865  $288,808 2.68 12. Ireland  $ 80,668  $214,589 2.66 13. Luxembourg  $125,452  $316,466 2.52 14. Korea  $ 64,686  $159,914 2.47 15. France  $ 99,923  $244,365 2.45 16. United Arab Emirates  $ 62,332  $151,098 2.42 17. Norway  $135,012  $312,339 2.31 18. Australia  $162,815  $375,573 2.31 19. Switzerland  $244,002  $561,854 2.30 20. Netherlands  $ 81,118  $184,378 2.27 21. New Zealand  $135,755  $298,930 2.20 22. Iceland  $188,088  $408,595 2.17 23. Qatar  $ 74,820  $161,666 2.16 24. Malta  $ 54,562  $116,185 2.13 25. Spain  $ 56,500  $116,320 2.06 26. Greece  $ 53,266  $103,569 1.94 27. Italy  $104,105  $202,288 1.94 28. Japan  $120,493  $230,946 1.92 29. Belgium  $154,815  $270,613 1.75
Source: Author's calculations from Credit Suisse Global Wealth Databook 2016, Table 3-1

As you can see, the U.S. inequality ratio is more than 50% higher than #2 Denmark and fully three times as high as the median country on the list, France. As the title says, this is not even close.

The message couldn't be clearer: Get down to your town halls and let your Senators and Representatives know that it's time to raise Social Security benefits and forget the nonsense of cutting them.

Cross-posted to Angry Bear.

We're All Paying for the Unaccountability of So-Called Experts Who Screwed Up the World Economy

Published by Anonymous (not verified) on Tue, 01/12/2015 - 8:29am in

The eurozone crisis is a perfect example of the damage done when people in high places make basic mistakes.

The following is an excerpt from the new bookFailed: What the 'Experts' Got Wrong about the Global Economy by Mark Weisbrot (Oxford University Press, 2015).

Of all the examples of neoliberal policy failure since the Great Recession, the eurozone crisis stands out as a work of art. The European authorities who made this mess—the European Commission, the European Central Bank (ECB), and the International Monetary Fund (IMF)—known as “the troika”—provide one of the clearest, large-scale demonstrations in modern times of the damage that can be done when people in high places get their basic macroeconomic policies wrong. That it has happened in a set of high-income economies with previously well-developed democratic institutions makes it even more compelling.

It is necessary to say “previously well-developed” democratic institutions because the eurozone countries surrendered their sovereign rights to control their most important macroeconomic policies: first monetary and exchange rate policy, and then increasingly fiscal policy for the so-called PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain). As we will see, this was a profound loss of democratic governance, and one for which tens of millions of eurozone residents would pay dearly in the years following the world financial crisis and recession of 2008–2009, and for as yet untold years to come.

Most citizens of the euro area did not understand what they were losing when the Maastricht Treaty was signed in 1992, and the euro was introduced in 1999. You couldn’t see it until there was a serious recession—when the government really needed to use expansionary macroeconomic policies to restore growth and employment. Then we discovered that not only was the fate of most Europeans in the hands of people who were almost completely unaccountable to the electorate; it was worse than that. Power was now in the hands of people who had their own political and economic agenda, and who, as we shall demonstrate, saw the crisis as an opportunity to implement changes that could never be won at the ballot box.

To see the world of difference between unaccountable and partially accountable economic authorities, we need only compare the economic performance of the eurozone with that of the United States in the six years following the collapse of Lehman Brothers in October 2008. The United States, which was the epicenter of what would become a world recession, had a downturn that lasted officially 18 months; its recession was declared over in June of 2009. To be sure, it was the worst US recession since the Great Depression, and more than four years after the recession ended, employment levels were almost the same as they were at the depth of the recession. The US recovery was nothing to brag about; only the vastly worse results in the eurozone could make it look good. By February 2014, the eurozone was still close to record unemployment of 12 percent (as compared with 6.7 percent in the US); and GDP had fallen in both 2012 and 2013. And in the harder hit countries like Greece and Spain, unemployment had passed 27 and 26 percent, respectively, while youth unemployment surpassed 58 and 53 percent.

By 2013 more than 20 governments had fallen in the euro area, but austerity was still the order of the day. This could never happen in the United States, where even if the deficit hawk Republican Mitt Romney had been elected in 2012, he would not have dared plunge the US economy back into recession. His first goal, like that of most politicians, would be re-election, and there would be no external authorities that could force him to commit political suicide.

Then there is the vast difference between monetary policy in the two economies. Although by law the Fed and the ECB are both independent, there are degrees of independence and some would say, dogma; and the Fed turned out to act quite differently than the ECB in the past five years. The US Federal Reserve, which had lowered its policy lending rate to zero at the end of December 2008, kept it at or near zero for the next six years. As a way of providing further stimulus through influencing expectations, the Fed also made it clear that these “exceptionally low” rates would continue for “an extended period.”

By contrast, the ECB actually raised rates twice in mid-2011, to 1.5 percent, despite the weakness of the eurozone economy. But even more important was the Fed’s policy of more than $2.3 trillion of quantitative easing (QE), which the ECB had refused to consider, despite the fact that it was so drastically more necessary in Europe—given the vicious cycle of rising borrowing costs that threatened to spiral out of control in the weaker economies, including the “too-big-to-fail” countries of Italy and Spain.

With QE, as we will see, Europe could have recovered as quickly as the United States, and of course much more quickly if the member countries had the ability and the will to engage in expansionary fiscal policy. The ECB, like the Federal Reserve, controls a hard currency and can create money. As such, it had the ability to prevent the sovereign debt of eurozone countries from ever becoming a crisis in the first place. It actually had the ability to keep long-term borrowing costs for eurozone countries, including even Greece, as low as it wanted—as the Fed did in the United States while the US federal budget deficit soared to a post–World War II record of more than 10 percent of GDP.

The Fed’s QE also provided some funding for the government to stimulate the economy through spending and tax cuts, without increasing its net debt burden. This is not magic but just the rules of accounting, combined with the economics of a weak economy. When the Fed creates money through QE, and uses it to buy long-term US Treasury bonds, it refunds the interest payment on these bonds to the Treasury. This means that the government is getting the equivalent of an interest-free loan, and its net debt burden does not rise. It can then use this money for anything—building a more energy-efficient infrastructure, for example, or any kind of expansionary fiscal policy. Unfortunately, in the United States, the federal government did not take advantage of this “free money” as much as it could have. And yes, it really is free money—with consumer price inflation at 0.8 percent for 2014 in the United States and negative 0.2 percent in the eurozone, there is no downside to this money creation, since there is no significant risk that inflation will become too high.

I remember speaking about these matters with a group of German members of parliament, from all of the major political parties, in September 2011. One of them objected that it would be impossible to sell the idea of expansionary macroeconomic policies, and especially those involving money creation, to a German public that still had historical memories of the devastating hyperinflation of the 1920s. I couldn’t speak to that—not being an expert on German public opinion—but my response was that if this was indeed the case, it indicated a problem of public education, not an economic problem.

And public education is a big part of this story. It is a story in which most of the public—in Europe, the United States, and much of the world—has been continually misled as to the nature and causes of a festering economic problem. How else to explain how a crisis that originated from over-borrowing by the private sector was sold to the public as a problem caused by governments refusing to live within their means? It was then exacerbated by fiscal tightening, to the point of pushing the regional economy into years of recession and stagnation. The worsening crisis was then used to justify still more neoliberal policies—including cutting public pensions, shrinking the public sector, privatizations, and making it easier for employees to be fired. This sequence of escalating misery caused by government policy—accompanied by regressive structural reforms—can only happen if a broad swath of the public, including many journalists and politicians, is seriously confused as to what has gone wrong and what feasible economic alternatives are available.

But to understand how it happened we must also look at how the decision-makers—in this case the so-called troika—made their decisions, in large part independently of the citizenry’s views of what is right and wrong. For that we must turn to the financial crisis that began in early 2010.

Crisis as Opportunity: The Troika Seizes the Moment to Reshape Europe

The crisis in eurozone financial markets began as a problem with Greek sovereign debt that could have been easily managed. Greece’s economy is less than 2 percent of the GDP of the now 19-member eurozone, and the other euro countries had set aside vastly more than enough resources to resolve Greece’s problems in early 2010 when Greek debt first began to disturb the financial markets. But before it was over, the crisis would push the eurozone into its longest recession and record-high unemployment, and make Europe the biggest drag on the world economy.

By the end of 2011, the so-called BRICS countries—Brazil, Russia, China, India, and South Africa—were being recruited to help Europe by buying some of their bonds or with contributions channeled through the IMF. What is wrong with this picture? India has a per capita income of $3,400, less than one-ninth of the eurozone; Brazil has 42 million people living on less than $4 a day. Even China, although it has more than $3.6 trillion in reserves, has only about one-fourth of the per capita GDP of the euro area. And as noted above, a eurozone recovery has always been feasible without any outside help.

The eurozone crisis is most commonly described in the media as a “debt crisis,” or more specifically as a “sovereign debt crisis.” But this is very misleading. If we look at the numbers and recent history, we see a crisis that has been fundamentally caused and deepened by bad policy. Of the PIIGS countries, only Greece can be said to have built up a potentially unsustainable debt burden before the financial crisis and world recession of 2008–2009 hit Europe. The others actually reduced their debt-to-GDP ratios during the boom years of 2003–2008. Spain’s net public debt, for example, fell from 41.3 to 30.6 percent of GDP during these years. Italy’s was larger, at 89.3 percent of GDP, but with a low budget deficit and low interest rates there was not any reason for such debt to be seen as unsustainable until the mismanagement of the eurozone economy sent Italy’s borrowing costs much higher.

Even Greece, when it was negotiating its first agreement with the IMF in May 2010, had a debt of 130 percent of GDP, which could have been manageable with low interest rates, and with the debt burden reduced over time with reasonable growth. Seventeen months later, after shrinking its economy at the behest of the European authorities, its debt had increased to 170 percent of GDP. By this time, even when the European authorities reached a tentative agreement on October 26, 2011, for a 50 percent “haircut” for bondholders—that is, a 50 percent reduction in the principal of the Greek public debt held by private bondholders—it was still not enough to put Greece on a sustainable debt path. A problem that could have been resolved with—at most—just a few percent of the funds that the European authorities had set aside for this purpose had morphed into a financial crisis that threatened the health of the whole European economy. This was one result of what economists call pro-cyclical macroeconomic policy—shrinking the economy when it was already weak or in recession.

From the beginning of this crisis, the European authorities had the power, resources, and ability to bring about a robust recovery of growth and employment. It was the will that was lacking. Most commentators and analysts have emphasized the difficulties of coordinating fiscal policy—especially the spending that would be needed to put the eurozone economy back on track. A narrative of hard-working, thrifty Germans and other northern Europeans reluctant to subsidize the lazy and indulgent habits of their southern neighbors became a common theme in the media. Of course most of this has no basis in reality. For example, Greeks, on average, put in considerably more hours on the job than their German counterparts—about 2,037 per year as compared to 1,388 in Germany. Greeks also retire later than Germans do. And if we look at the problem in terms of who has benefited most from the good years of the euro, it is not so clear: more than 100 percent of Germany’s growth in the expansion from 2002 to 2008 came from exports, the majority of which went to Europe. Germany’s export-led growth also enabled them to increase productivity and competitiveness in manufacturing. Over the long run, this is much better than the bubble-driven growth that countries like Spain and Ireland experienced in the run-up to the crisis.

This is not to deny that there are serious problems of tax evasion for high-income earners and business owners in Greece and Italy, or that popular sentiments in countries like Germany or Finland can make it more difficult to assist other eurozone countries in crisis. But the eurozone crisis was not brought on by public sector over-borrowing. And even “anti-bailout” sentiment in the richer countries is often oversimplified—much of it is not just national prejudice against southern Europeans, but also includes more legitimate popular resentment against bailing out European banks.

But all of these problems are secondary compared to the fundamental and deeply misunderstood problem of flawed macro- economic policy. If not for the economic damage inflicted by the European authorities in 2010–2013, the Europeans could have had a number of years to try to correct the structural and political problems of the eurozone—if that was what the people and their elected representatives wanted to do. It is of course possible that the political will would not be there to make the changes that would be necessary to preserve the common currency over the long run. But for more than four years (and still going), the European authorities successively implemented policies that slowed the eurozone economy and, for most of that time, additional policies that caused serious financial crises. This would make it increasingly difficult, if not impossible, to address problems of policy coordination or other structural problems of the eurozone.

As noted above, Greece’s debt situation was transformed from something that could have been resolved relatively simply, and with few resources, into an intractable and contagious mess. And the acute crisis that the eurozone suffered from July 2011 until August 2012 was based on the worries in financial markets that the European authorities might do to Italy what they did to Greece. When the IMF had to lower its growth projections for the Italian economy, between its April and September forecasts in 2011,12 it was a direct result of the $74 billion austerity package that the European authorities forced on the Italian government.

In May 2010, the Greek government was the first to receive money from the European authorities to finance the rollover of its debt because it was no longer feasible to borrow from financial markets. “Together with our partners in the European Union, we are providing an unprecedented level of support to help Greece in this effort and—over time—to help restore growth, jobs, and higher living standards,” said IMF managing director Dominique Strauss-Kahn in announcing the agreement for 110 billion euros to be disbursed over the next three years.

The key words were “over time.” The IMF and its partners knew that the fiscal tightening would make things worse. “Real GDP growth is expected to contract sharply in 2010–2011,” said the Fund, but it added that “from 2012 onward, improved market confidence, a return to credit markets, and comprehensive structural reforms, are expected to lead to a rebound in growth.”

The first part of that prediction came true, with GDP falling by 11.7 percent during 2010–2011.15 But the second part was a pipe dream. By December 2011, the Organisation for Economic Co-operation and Development (OECD) was forecasting a further decline of 3 percent for 2012,16 which turned out to be 7 percent.

It was not surprising, given that the Greek government commit- ted to cutting $28.3 billion, or 12 percent of GDP, from its budget through 2015, and laying off 20 percent of its public sector workforce over the next four years. Who is going to invest in a country that has committed to years of recession?

The IMF justified these measures partly on the grounds that the alternative—a debt restructuring—carried too much risk of contagion to the rest of Europe, where banks held hundreds of billions of dollars of Greek debt. But because the “bailout” package destabilized the Greek economy and thereby increased the risk of a chaotic default, their preferred solution actually worsened the contagion.

Fears that Greek bondholders would end up taking losses, and that Portugal, Ireland, and possibly even Spain would follow the path of Greece began to seep into financial markets. On May 9, 2010, the ECB said that it would intervene in sovereign bond markets, reversing a decision just four days earlier that had sent markets tumbling. It was a concession by the ECB, but it was much too small to arrest the financial crisis that the European authorities had set in motion. Fears that a Greek default and its aftermath would result in a breakup of the euro began to move the markets.

The next day, the European authorities (including the IMF) reached an agreement on a trillion-dollar fund that was intended to “shock and awe” the financial markets into believing that default by any of the eurozone governments on their bonds was not possible. Stock and financial markets initially soared in response, but there was a terrible hangover as reality set in the next morning. At this point the debt of Italy, which was considerably larger than that of all the other troubled eurozone economies combined, was not yet considered to be at risk.

But even for the others, including Spain, it was already clear to many that without a commitment by the ECB to keep borrowing costs down to sustainable levels, a “bailout” fund would only enable the governments to pile up more debt, on which they would eventually have to default. The European authorities were still not ready to consider any practical solution. By establishing fiscal tightening as a requirement for access to any European/IMF funding, they had guaranteed that the debt problems would only grow worse.

At this point, even the bond markets, which traditionally rally when governments commit to budget tightening, started to become strangely Keynesian: bond prices would sometimes fall on news that Greece, for example, would implement further austerity. In November 2010, the Irish government became the second eurozone economy to sign an agreement with the IMF and the European authorities, after their 10-year bond yield had passed 8 percent. Portugal would be third, in May 2011.

The dreaded agreements that had been, in past decades, the punishment meted out to low- and middle-income countries with balance of payments problems, had now become the fate of high-income European nations. It was an artificial and unprecedented kind of “balance of payments” crisis: these were, after all, governments with a hard currency that could be created by “their” central bank. But the central bank wasn’t really theirs, unfortunately, and it wasn’t going to do what the central bank of the United States or even the United Kingdom was willing to do in order to contain the crisis: most importantly, contain the sovereign borrowing costs of the vulnerable countries. The crisis scenario that began in July 2011 went like this. The austerity, in combination with the slowing regional economy, was causing the Italian economy to grow slower or even shrink.

Slower economic growth causes government revenues to fall (and some spending to automatically increase), and so the promised deficit targets are even more difficult to reach. The government is then pressured to take more steps to cut spending (and/or increase taxes). This further reduces economic growth. The process continues in a downward spiral, as happened in Greece. And Italy’s debt, then at $2.6 trillion, was more than five times the size of Greece’s. The European authorities had not managed to put together the resources to deal with a possible default of this magnitude; hence the series of crises in financial markets.