The terrible price of austerity

In August 2014, I wrote this post arguing that harsh austerity during the Depression caused Hitler's rise to power. At the time, my argument seemed controversial, at least in Germany. There, it is not the austerity of 1930-32 that is blamed, but the debt-driven hyperinflation of a decade earlier. Germans remain terrified of both inflation and debt to this day.

I am certainly not the only person to identify a causative link between austerity and Hitler. Here is Paul Krugman slapping down Eduardo Porter in 2015, for example:
Yes, there was a hyperinflation in 1923, which may have helped radicalize German politics. But the proximate factor in Hitler's rise to power was the great deflation of the 1930s, brought on by a disastrous attempt to stay on gold. 
Disastrously staying on gold might of course have been due to the recent experience of hyperinflation. In 2014, when Bulgaria was unable to pay insured depositors for six months after a bank failure, the central bank refused to relax the Euro peg so that the necessary money could be created. When I asked why, my Bulgarian friends reminded me that Bulgaria had suffered hyperinflation in 1996. "If the central bank printed money, there would be riots in the streets," they said. The scars of hyperinflation can take a very long time to heal.

But Chancellor Brüning's austerity policies went far beyond keeping interest rates high to stay on the gold standard and stem capital flight. A series of draconian fiscal budgets imposed severe spending cuts and tax rises:

The degree of fiscal consolidation achieved by these decrees, and the speed of the adjustment, was remarkable:

But there was an ulterior motive for this harsh austerity programme. Embedded in the "Second Emergency Fiscal and Economic Decree" of 5th June 1931 is a "reparations proclamation" that announced that "the limits of what the German people can tolerate have been reached". Brüning, it seems, wanted to engender desperate hardship among the German population in order to persuade the Allied powers to cancel the WWI reparations. And he succeeded. The reparations were suspended in 1931 and cancelled in the Lausanne conference of June-July 1932. Hitler became Chancellor in January 1933. Contrary to popular opinion, therefore, neither the 1923 hyperinflation nor the WWI reparations were the direct cause of Hitler's rise to power.

So what was? Well, unemployment was shockingly high, touching 30% in 1932:

chart from Willi Albers, 'Handwörterbuch der Wirtschaftswissenschaft, Band 9, 1982, ISBN 3-525-10260-7, p. 85, CC BY 1.0, via Wikipedia

Maybe the German people, sick of unemployment and poverty, voted for Hitler because he promised relief from austerity?

According to a new research paper (pdf, gated) that's exactly what happened:
With dashed hopes and a loss of faith in the Weimar Republic, fury and despair were channelled into the ranks of populists and demagogues, with the Nazi party campaigning against austerity and offering promises for a new era of prosperity. 
But wait. It wasn't the poor and the unemployed who voted for Hitler:
In fact, much of the growth in support for the Nazi party came from the middle classes, who were fearful of the Communists. The Kommunistische Partei Deutschlands (KPD) had achieved 16.9% of the vote by November 1932 (about 100 seats out of 584 in the Reichstag). The Nazis also received support from elites. During the 1920s, those with the highest incomes lost income more quickly than those at the bottom (Adena et al. 2015; Piketty 2014; Satyanath et al. 2017; Schreiner 1932). It was not that Hitler did not try to appeal to the unemployed masses, but rather that the Communist Party was perceived as the party that traditionally represented workers’ interests. Ultimately, Hitler’s attempts to attract the unemployed were ineffective (King et al. 2008; Petzina 1977).
The Nazis were a party of the middle and upper classes.

This was a surprise to me. I thought that unemployment was the principal reason why people turned to the Nazis. But the researchers found that unemployment growth was negatively correlated with support for the Nazis. In other words, Nazi support grew when unemployment was falling.

It seems that the real driver was the sharp fiscal consolidation imposed by Chancellor Brüning. Draconian spending cuts, tax rises and deliberately deflationary policies in a severely depressed economy had dramatic political effects (my emphasis):
We find that austerity measures are correlated with the rise of the Nazi party in interwar Germany, offering econometric support for the argument that austerity created polarization and radicalisation of the German electorate. Each 1 standard deviation increase in fiscal consolidation was associated with between 2 and 5 percentage point increase in votes to the Nazis or up to one quarter or one half of one standard deviation of the dependent variable.
Yes, I know - correlation isn't causation, and all that. But it clearly isn't possible for causation to be the other way round, and although there could be other drivers, the hurt caused by austerity is a rational explanation for rising Nazi votes. "Austerity caused the rise of Hitler" is a reasonable working hypothesis.

But we know that fiscal consolidation tends to affect the poor the most. So why did it cause better-off Germans to vote for extremists?

Better-off they may have been, compared to the poor and the unemployed, but they didn't see it that way. They resented government policies that cut their wages, raised their taxes and reduced their pensions and benefits when they were already suffering because of the economic depression. And they also resented those who were poorer than them, because the really poor received some government support, while they got nothing:
.....austerity measures contributed to votes for the Nazi party among middle- and upper-classes who, despite the depth of the Depression (i.e., after controlling for the level of output and employment) still had something to lose and may have resented government austerity in the face of Depression (a pocket book motive) and while other segments of society received benefits from relief or automatic stabilizers. 
They were what Theresa May dubbed the "Just About Managing", and I have called the "in-betweeners".  They bore the full brunt of tax rises, spending cuts, the deliberate wage-price deflation imposed by Brüning, the extremely tight monetary policy needed to maintain the gold standard and the effects of the Depression itself. They weren't wealthy enough to weather the storm unscathed, but they were too well-off to receive any support. And the public services on which they relied were being cut to the bone. They saw no future for themselves or those they loved. They became angry and desperate - and desperate people are cannon fodder for extremists.

Perceptive as ever, John Maynard Keynes warned in 1932 (emphasis in original):
....many people in Germany have nothing to look forward to – nothing except a ‘change’, something wholly vague and wholly undefined, but a change.
Now where have we heard something very like this recently?

The Nazi party certainly offered a change. It campaigned on an anti-austerity manifesto, promising generous pensions, infrastructure investment (notably roads) and restoration of welfare benefits. The Communist party had a similar manifesto, of course, but the German middle classes were frightened of the Communists. So they fled to the Nazis in droves. By the time Brüning was replaced with a less austerity-minded Von Papen in 1932, it was already too late to save the Weimar republic - and the lives of 60 million people.

Of course, the researchers warn that there may also be other reasons why better-off Germans turned to the Nazis, including anti-semitism. Humans are complex creatures: there is seldom one single reason for the rise of a populist movement. But the terrible folly of imposing austerity in a deeply depressed economy seems clear.

And therein lies the warning for today. Austerity policies in a depressed economy cause political crisis:
....even when the particular history of a country precludes a populist extreme-right option, austerity policies are likely to produce an intense rejection of the established political parties, with the subsequent dramatic alteration of the political order.
In the UK, years of foolish, harmful and wholly unnecessary austerity policies - about which I and many others repeatedly warned - have already plunged the country into deep political crisis. Brexit is no accident: a straight line can be traced from the financial crisis, through the years of stagnation and austerity, to the rise of UKIP and ultimately to the Brexit vote. A deep fault line has opened up, fracturing the political system and undermining the UK's system of representative parliamentary democracy.Today's politics is driven not by Left versus Right, but by Leave versus Remain, or as David Goodhart would have it, the "somewheres" versus the "anywheres". And the damage to the social fabric of the UK is already evident. Families are split, friends lost, relationships broken. Where will this end? I do not know.

The US, too, is in political crisis. There, the fracture is more external than internal. The world's hegemon is threatening to abandon globalisation and adopt 1930s-style protectionist trade practices. The consequences for world trade, and indeed for world peace, could be serious indeed.

The EU has yet to suffer its political crisis. But it will come. The researchers observe that the EU appears to be repeating the mistakes of the 1930s. And they warn:
The case of Weimar Germany explored in this article provides a timely example that imposing much austerity and too many punitive conditions can not only be self-defeating, but can also unleash a series of unintended political consequences, with truly unpredictable and potentially tragic results. 
Learn from your history, Europe, before it is too late. Unless there is radical loosening of the fiscal straitjacket into which too many countries have been tied, your political crisis, when it comes, will be terrible indeed.

Related reading:

The Worst Political Storm In Years
Austerity and the rise of populism
When the world turns dark
What have we learned from history?
Study: austerity helped the Nazis to come to power - Vox
The chilling irony of German austerity - The Week

Image is from The Week. 


  1. I regret that these days Hitler etc. and his Germany is the go to history for comment and comparison with the past. As someone who was bombed during a visit to Bootle, had refugees from Coventry to share a bedroom with as well as losing two loved uncles, never mind time spent in the British Army of Occupation on the banks of The Elbe, I have my own issues with The Third Reich. My point now is that given all the states and all the economies to choose from, The Third Reich is a bad one and too far removed from the modern economic structures of today. Hitler was no economist, none of his close henchmen had much clue about economics, he relied on a handful of unreliable men whose "advice" was what he wanted to hear, otherwise chop chop. Flash mob finance make work for an occasional scheme, flash mob economics and sociology based on a deranged dictator and his circle from near a century ago do not.

    1. «I regret that these days Hitler etc. and his Germany is the go to history for comment and comparison with the past»

      It is a bit of a national obsession here, with the celebration of the "finest hour" and the vileness of the huns to drive attention away from military and political defeat.

      In this article the argument seems quite tendentious to me, because the original and well understood thesis was that fascism in Italy and later natsoc in Germany were the byproduct not of deliberate policies of austerity, but of depression conditions in those countries, same as the earlier depression in Russia leading to the revolution, and the contemporary brown/black shirt movements in the USA and UK. What leads to adventurism is not mere "austerity", but desperation about an ongoing depression and widespread unemployment.

  2. Its very simple - the West did well for about 50 years post 1945 precisely because there was abject alleviated poverty in vast swathes of the rest of the world, that the rulers of those countries were quite happy to allow to continue, for their own ideological reasons. Now those masses have been freed from their shackles, and are joining the world trade party in a rapid process of wealth creation the like of which has never been seen before. The West however can not insulate their populations from the effects of that process.

    Why are wages static in the West? Because billions of low paid workers in the BRICS suddenly were available to make stuff that used to be made in the West. In 1970 Apple (if it existed) would have made iPhones in the US, and delivered well paid jobs to US citizens. But the phones would have been very expensive and thus only a niche market. Now they are made in China for a few dollars and owned by refugees the world over.

    So we can no more go back to the pre-globalisation days than we can make all those Chinese and Indians etc etc as poor as they used to be. They're getting richer at our expense. One day they'll have caught us up, and everyone will then proceed at a similar pace. But until then we are treading water. To pretend anything else is possible is basically saying that lots of brown people have to become poorer so some (relatively) rich white ones can get richer.

  3. Austere and hyperinflation are nouns describing economic conditions of the economy.

    It seems to me that austere and hyperinflation describe opposite ends of the same continuum.

    Between austere and hyperinflation should lay a stable economy.

    Should an economy be in a hyperinflation condition, the only way to stability would be towards 'austerity'.

    'Austerity' as a method cannot in itself be evil.

    The evils you describe may be the result of overly aggressive policies attempting to reverse the causes of hyperinflation (which may have resulted from excessive anti-austere policies).

    1. No they weren't. The hyperinflation was in 1923, and Bruning's austerity was in 1930-32. There is simply no connection.

      Austerity can be evil.

  4. Great post. It is very frequent to hear that Hitler was a Consequence of hiperinflation. That is a mantra for the spanish libertarian, very motivated by hiperinflation as the unique evil, an austerity as the greatest good in the earth. But I reserve my mostadmiration por “The Economic Consequences of The Peace”, one of the best essay in the Economic history, in my opinion. Welcome to a paper that demonstrate the deep wisdom of young Keynes.

    1. I completely agree. That paper by Keynes is outstanding. I should add it to the Related Reading list of this post, really.

  5. I hope someone can help me out here, as a layman who has read of much economics but never studied per se. I had always thought of austerity as "the chancellor taking away the punchbowl" just as the party gets started. I had no idea that using austerity during recessions had such a long history, I had always assumed such a policy was for times of full employment to tame potential inflation during the good times to prevent booms.

    That we're making exactly the same mistakes again I find totally depressing, how often do we have to repeat the same mistakes? It's almost as if the Gold Standard have never ceased. Today austerity has been directly responsible, not only for Brexit, but also the rise of Corbyn. It could just be that he will be fine if he sticks to sensible social democratic policies but what if he doesn't?

    The worst that could happen is we relearn capital "s" Socialism doesn't work and have the worst of austerity nulled somewhat. What a truly depressing choice we'll have at the next election, where is any new thinking? I despair.

    1. The fact that pro-cyclic, ZLB austerity is an economic mistake isn't widely enough known to make it a political mistake. We have too poor a fourth estate to help make it one.

    2. «I had always assumed such a policy was for times of full employment to tame potential inflation during the good times to prevent booms. »

      Well your intuition that "austerity" is being used quite inappropriately by F Coppola and many sell-side Economists is quite correct, but this is not the historically appropriate use of "austerity" either. Technically, "austerity" was the "stop" phase of "stop-and-go" cycles, and was triggered by balance of payment deficits and consequent falls in the currency.
      The standard policy answer to that, "austerity", involved fiscal tightening, mostly through higher taxes, to cut both consumption and investment to reduce trade inflows, and at the same time monetary tightening via credit caps and higher interest rates to increase capital inflows and reduce capital outflows.
      At the time "austerity" was also called "the squeeze", because it was a policy of deliberate reduction of living standards that afflicted everybody, poor to rich.

      Austerity has not happened for several decades now, the current policy is not one of austerity: imports are booming, lending is booming, interest rates are nugatory, asset prices have been zooming up in the south. In general there is no squeeze for the upper, upper-middle, and southern middle-classes: their incomes and their living standards, especially if they are property and and business rentiers, have been doing very well indeed, after a wobble around 2009. As a result Conservative votes have risen by 1m between 2010 and 2015 and another 2m between 2015 and 2017, which would be absurd if Conservative-leaning voters were suffering "the squeeze".

      So the current policy is not ever remotely describable as "austerity", it is something completely different: upward redistribution, and north-to-south redistribution, that is redistribution from poorer to richer, and from labour to tory voters, not "the squeeze" reborn.

    3. «"the squeeze", because it was a policy of deliberate reduction of living standards»

      As hinted in previous lines, the policy was not motivated by sadism or idiocy, but by worsening international terms of trade that at the time could not be balanced with capital inflows, and at the time the exchange rate still mattered. In recent times capital inflows mean avoid having to beg the IMF for the same, and most governments try to drive their exchange rate as low as possible, including the UK, so completely different conditions anyhow.

  6. Interesting article, but isn't this just economists repeating what historians have long known? Hobsbawm's Age of Extremes for example makes this very point.

  7. "Brexit is no accident: a straight line can be traced from the financial crisis, through the years of stagnation and austerity, to the rise of UKIP and ultimately to the Brexit vote."

    Except that the leave /UKIP voters were overwhelmingly Boomers who have tended to have done very well over the last 15 years with higher pensions, lower taxes and a surge in asset prices. True , there were concerns about spending on the NHS but this was shielded from the cut-backs to some extent.. The Millennials were the big losers from austerity/globalisation and they overwhelmingly voted for remain.

    You are right about austerity giving rise to political parties with autocratic tendencies offering populist policies.

    1. As I pointed out in the post, it was the German middle classes who flocked to the Nazis. Similarly, it was older people with pensions, savings and property who voted for Brexit. Where have Millennials turned? Jeremy Corbyn. Not quite Communism, but certainly substantially further left than any Labour party leader since the 1970s. Austerity drives people to extremes in both directions.

      The most worrying feature of the Brexit vote in my view is the intergenerational divide. The selfishness of older people is sowing the seeds of a very nasty backlash in the future.

    2. «older people with pensions, savings and property who voted for Brexit. [ ... ] The selfishness of older people»

      Ah, but “older people” (as related in part to Brexit in part to "austerity") is indeed somewhat inappropriate as a demographic because the distinguishing character is not age, but indeed “pensions, savings and property” and that correlates with class, geography, sex as well as age, because the divide between those whose living standards are doing well, and those with falling living standards cut across those categories:

      * Class: rentier class are often but not necessarily older, and whichever age they have been doing quite well.
      * Sex: most older people and pensioners are women, and they are disproportionately property or investment fund owners (divorce or widowhood), and pensioners.
      * Geography: northern property and business rentiers are not doing that well, but southern ones have been doing very well.

      The two extremes are:

      * Struggling with insecurity and lower living standards because of both lower wages and higher rents and property prices: younger, male, working (or trying to), northern renters (e.g. Momentum members).
      * Celebrating G Osborne for better security and improving living standards thanks to higher profits and property prices and lower real wages: retired (or close to), southern rentiers.(typical Conservative club members).

      People with different mixes fall in-between: for example older people in the north often have good final salary pensions as FlipChartFairyTales noticed, and younger people in the south often look forward to a massive property inheritance.

      The situation is nowhere like depression-era Germany (or Italy or even USA or UK), because there is no austerity: while many are struggling, a large number of people are doing quite well out of what G Osborne described:

      "A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active."

  8. This comment has been removed by the author.

  9. yes if Austerity works when the economy is slowing then no-one would have heard of Hitler but Bruning would go down as one of the longest serving chancellors ( although he despised the Reichstag as much as Hitler).
    Keynes proved right again unfortunately.

    Great article

  10. Good afternoon
    Very nice article as usual
    I would like to stress the fact that the rise of the Nazis happened because there was communism
    otherwise we do not know what would happen

  11. The problem is the money is owned by the monopoly and not the people , giving money /commons directly to the people is deflationary , devaluing one sister banks currency against another medusa will not solve the gap problem. Everybody sentient has witnessed the lengths the high priests will go to so as to maintain prices higher then income including physical intervention above & beyond monetary methods (massive industrial sabotage & transhumance migrations) - the problem perhaps you have been found out - your livestock become somewhat selfaware of their wage slavery condition - they must therefore be hearded into the fascist pen rather then the open fields of distributionism.


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