Podcast Summary: Odd Lots – "This Is Why It's So Hard To Cut Public Spending"
Podcast Information:
- Title: Odd Lots
- Host/Author: Bloomberg
- Description: Bloomberg's Joe Weisenthal and Tracy Alloway explore the most interesting topics in finance, markets, and economics. Join the conversation every Monday and Thursday.
- Episode Title: This Is Why It's So Hard To Cut Public Spending
- Release Date: February 10, 2025
Introduction
In the February 10, 2025 episode of Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve into the complexities surrounding public spending cuts in democratic governments. The discussion is enriched by insights from Fritz Bartel, an assistant professor of International Affairs at the Bush School at Texas A&M and author of The Triumph of Broken Promises: The End of the Cold War and the Rise of Neoliberalism.
The Challenge of Cutting Public Spending
Joe Weisenthal opens the conversation by highlighting the current political momentum towards reducing government spending:
"Scott Besant, I think he has something the 333 plan part of it. I think he wants 3% growth, 3% more oil production and then 3% deficit... there does seem to be this impulse for better or worse and other people can be the judge of that, to cut spending. But on the other hand, it's very difficult." [02:37]
Tracy Alloway probes into the difficulties associated with implementing austerity measures, referencing historical contexts:
"Wait, why do you say that? Because early in my career there was the Eurozone crisis and I think there was some austerity imposed in places like Greece ultimately. So why do you say it's difficult?" [02:37 – 02:49]
Joe responds by differentiating between discretionary and non-discretionary spending, underscoring the political ramifications of cutting entitlements:
"Anytime people talk about cuts, there is not a ton of discretionary spending in the US Government budget. There's the entitlement, Social Security, Medicare, Medicaid, and then there's defense, which there's usually not much political appetite to cut." [03:57]
Guest Introduction and Context
Joe introduces Fritz Bartel, setting the stage for a deep dive into the historical and political nuances of public spending:
"We really do have the perfect guest. We are going to be speaking with Fritz Bartel... his book is about exactly this topic, how governments break promises." [04:54]
Fritz Bartel joins the conversation, bringing his expertise on the economic and political shifts that made spending cuts both necessary and challenging.
Historical Perspectives on Austerity
Fritz Bartel provides a historical backdrop, explaining the global economic stagnation of the 1970s and the resultant push for austerity:
"The post World War II economic boom had run aground in the 1970s... the energy shock of 1973 again in 1979. The monetary confusion and shocks of the 1970s also spurred a great deal of inflation and crisis across the world." [05:25]
Tracy seeks clarification on the commitments governments made to their citizens during this period:
"So what exactly were the commitments or the promises that different governments made to their citizens? Because you know, I think about America... And then in the East..." [06:46]
Fritz elaborates on the contrasting promises in the West and East, emphasizing abundance and equality:
"The west had more abundance from the start... They created broad welfare states that invested in cradle to grave type of state intervention... In the east... access to housing... a future of both material abundance and some form of equality." [07:21]
The Soviet Union and Western Perceptions
Joe touches upon Western confidence in the Soviet economic model during the 1970s:
"It's funny... I think today we think of the Soviet Union's economic model as sort of having been a basket case and a disaster... Western financial analysts were really excited about these investments." [09:12]
Fritz explains the Western belief that authoritarian regimes like the Soviet Union could enforce economic discipline more effectively:
"Western bankers definitely believe that the communist world had a nice recipe for making secure loans... It was assumed that the Soviet Union would kind of come to their financial rescue." [09:50]
The Decline of Soviet Economic Power
Tracy inquires about the shift in the Soviet Union's economic fortunes from the 1970s to the 1980s:
"Explain how we got from the 1970s, where Russia is kind of impressive, at least to Western investors and analysts, to the 1980s, where it's unable to do what it had promised to some of its allies." [10:47]
Fritz attributes the decline to oil price fluctuations and inefficiencies in energy production:
"The Soviet Union had significant oil reserves... By the 1980s, the forces of supply and demand start to send the price of oil... Soviet production couldn't keep up, leaving the Soviet bloc looking much less economically powerful." [11:03 – 12:43]
Authoritarianism vs. Democracy in Austerity Measures
Joe raises a critical question about why authoritarian regimes failed to manage spending cuts as effectively as anticipated:
"Why doesn't authoritarian ease end up working out?" [12:43]
Fritz challenges the assumption that democracies are inherently less capable of breaking promises, using Poland as a case study:
"In Poland in the early 1980s... People openly revolt because they don't trust their government to break promises... In the United States, Paul Volcker enacts painful recession measures without resulting in full-blown revolt." [13:39 – 17:00]
The Role of Political Legitimacy
Fritz highlights how democratic legitimacy allows for policy shifts without societal collapse, contrasting it with the Eastern Bloc's instability:
"The legitimacy that democracy itself bestowed on Western states turns out to be the mechanism by which they were able to break promises... In the Eastern Bloc, authoritarianism was too weak at this task." [17:00 – 21:19]
Tracy connects this to Ronald Reagan's policies, noting the impact of electoral legitimacy on austerity measures:
"Ronald Reagan... redefines the state as the problem itself... His popular mandate gives him political capital to enact policies." [18:58 – 21:19]
Shifting Responsibility: Politics vs. Economy
Tracy brings up Gorbachev’s perspective on the interplay between politics and the economy:
"Gorbachev has a famous Quote, I think it's something like politics always follows the economy, not vice versa... which one has the most influence on the other." [25:53]
Fritz discusses the fluid relationship between political ideas and economic realities, emphasizing that neither is categorically dominant:
"Political economy... provides windows of opening and closing for political possibilities... Economic forces underpin political movements and their viability." [26:13 – 27:28]
Contemporary Relevance and Reflections
Joe queries the relevance of Bartel's historical analysis to present-day economic challenges, especially in light of recent inflation:
"As you were writing it, how much you were thinking about this is a lesson for contemporary times." [27:28 – 28:02]
Fritz reflects on the sustainability of the U.S. political-economic system, tracing its roots to the early 1980s policies:
"The book examines how the United States arrived at its current political-economic arrangement, tracing back to the combination of Volcker and Reagan in the early 1980s." [28:10 – 30:07]
Research Insights
Tracy expresses interest in Bartel's research process, particularly his archival work:
"I wanted to ask you about the actual research process of writing a book like this because I read on the back that you did a bunch of new archival research. What was that like? What did you find?" [32:05]
Fritz shares his experience digging into archives across Washington D.C., East Germany, and Russia, uncovering the intertwined nature of international finance and energy in governmental promise-breaking:
"There was an entire story... officials on both sides of the Iron Curtain were obsessed with international finance and energy... an exuberant story unfolding in archives across North America and Europe." [32:18 – 33:46]
The Collapse of the Soviet Union
Joe brings up the enduring mystery of the Soviet Union's collapse, seeking Bartel's insights:
"What promises did the Soviet Union ultimately have to break... how did that contribute to the ultimate collapse of the whole project?" [33:46 – 34:19]
Fritz explains how Gorbachev's policies and economic mismanagement led to broken promises and the eventual dissolution of the Soviet Union:
"Gorbachev and others viewed the imperial relationship as a bad economic deal... In 1989, the Iron Curtain comes down... perestroika introduced market mechanisms, leading to increased unemployment and job insecurity." [34:19 – 37:17]
Societal Responses to Market Reforms
Tracy inquires about societal reactions to the abrupt economic transitions in post-Soviet states:
"Can you maybe give us a little bit of color on how the market opening played out among people? Specifically about price increases." [36:46]
Fritz describes the implementation of "shock therapy" in Poland, emphasizing the societal pain and restructuring involved:
"Poland introduced shock therapy in 1989, pushing through economic transformation swiftly... Resulted in dramatic price increases and industrial restructuring, though unemployment was somewhat mitigated by companies retaining employees." [37:17 – 39:37]
Conclusion and Reflections
Joe summarizes the key takeaway that cutting spending and breaking promises is inherently challenging, even for highly legitimate democratic governments:
"Cutting spending, breaking promises is extremely hard... sometimes if the government enjoys a high degree of public credibility across the aisle, maybe sometimes it's possible without destroying society public credibility." [39:56 – 40:21]
Tracy adds that democracy presents unique challenges, as it combines political and economic spheres in ways that can complicate austerity measures:
"In communist systems, the state is mixed with everything... In the west, the politics versus economy distinction is a fundamentally important one for how and why capitalist societies work." [42:23]
Joe expresses concerns about the current political climate and the legitimacy of government, drawing parallels to historical contexts discussed:
"The question... the state itself and the legitimacy of government is coming under fire. So some difficult challenges if we're gonna go down that path." [42:38]
Tracy and Joe wrap up the episode by reflecting on the intricate balance between political legitimacy and economic policy, highlighting the enduring relevance of historical lessons to contemporary economic challenges.
Notable Quotes
- Joe Weisenthal [02:37]: "Anytime people talk about cuts, there is not a ton of discretionary spending in the US Government budget."
- Fritz Bartel [05:25]: "The post World War II economic boom had run aground in the 1970s."
- Fritz Bartel [13:39]: "In Poland in the early 1980s... People openly revolt because they don't trust their government to break promises."
- Fritz Bartel [21:19]: "The legitimacy that democracy itself bestowed on Western states turns out to be the mechanism by which they were able to break promises."
- Fritz Bartel [26:13]: "Political economy... provides windows of opening and closing for political possibilities."
Final Thoughts
This episode of Odd Lots offers a profound exploration of the intricate relationship between political legitimacy and economic policy-making, using historical precedents to shed light on contemporary challenges in cutting public spending. Fritz Bartel's insights bridge the past and present, emphasizing that the difficulties in implementing austerity measures are deeply rooted in the structural interplay between political systems and economic realities.
For more detailed discussions and episodes, visit Bloomberg Odd Lots.