The end of austerity?
The credibility of austerity policies has taken some hits--but as The Democrats: A Critical History, explains, they aren't on their way out just yet., author of
ONE OF the most cited justifications for the austerity measures that have been imposed by governments around the world was the claim, supposedly demonstrated empirically, that any country whose debt level rose above 90 percent of its gross domestic product was destined to see its economy stop growing.
Lazy politicians like Republican Rep. and former vice presidential candidate Paul Ryan often quoted the 90 percent statistic to give their austerity agenda the patina of empirical heft.
The source of this conventional wisdom, a 2010 paper by economists Kenneth Rogoff and Carmen Reinhardt, was definitively debunked last month in another academic paper by four University of Massachusetts economists. The UMass team discovered that Rogoff and Reinhardt's 90 percent figure rested first of all on a calculation error in their spreadsheet.
Besides the calculation error, Rogoff and Reinhardt's method gave greater weight to countries with high debt ratios and negative growth rates than to those with low debt levels and positive growth rates--in other words, they had their finger on the scale, statistically speaking.
The Rogoff and Reinhardt debacle was the second major debunking of the ruling class case for austerity. Another standard talking point that circulated around Fox News and the business press was the claim that government austerity measures would unleash economic growth. International Monetary Fund economists Alberto Alesina and Silvia Ardagna were the initial authors of this counterintuitive notion of "expansionary austerity"--and they received props from the likes of Ryan and British Chancellor of the Exchequer George Osborne.
Apparently, the politicians and the pundits didn't get the memo that Alesina and Ardagna had reworked their data and reversed their conclusions--as long ago as 2010!
THE INTELLECTUAL case for austerity may be crumbling, but the austerity agenda that has dominated politics in much of the capitalist world trundles on.
Yet even at the level of the elites, austerity is no longer a sure bet to gain support. If the press is highlighting debates about research methodology that normally take place unnoticed in academic conferences and peer-reviewed journals, it's because some segments of the establishment are starting to realize that the austerity drive has failed in fundamental ways to serve their interests.
It's important, however, to understand just what these various ruling class figures challenging austerity policies are saying.
Take Jose Manuel Barroso, president of the European Commission: "Socially and politically, one policy that is only seen as austerity is, of course, not sustainable...We haven't done everything right...The policy has reached its limits because it has to have a minimum of political and social support."
Italy's new Prime Minister Enrico Letta says that his government's "task is to continue with policies of fiscal consolidation and keeping public accounts in order," but at the same time concedes that it is "absolutely necessary" to create jobs "so that our citizens see Europe not as something negative, but as something positive." He added: "Politics has lost all its credibility. Either we regain it, everyone and together, or there cannot be the instruments to resolve the country's problems."
Irish President Michael Higgins got a standing ovation from the European Parliament April 17 when he pointed out: "Many of our citizens in Europe regard the response to the crisis in their lives as disparate, sometimes delayed, not equal to the urgency of the task and showing insufficient solidarity with them in their threatened or actual economic circumstances." In a subsequent interview with the Financial Times, Higgins warned that European governments "risked social upheaval and losing popular legitimacy" if they continued on the austerity path.
Perhaps with the partial exception of Higgins, who holds a largely ceremonial post in the Irish government, these figures seem less worried about the impact of austerity on millions of working people, and more worried about the loss of legitimacy that government and the elites have suffered as a result of austerity policies. Their views have less to do with any criticism of the policies themselves than with the increasing difficulty of selling those policies to a restive public.
For this, we can thank the masses of working people in Greece, Spain, Portugal and elsewhere who have demonstrated and struck against austerity measures being foisted on them.
This discontent has found echoes in electoral "earthquakes" in Greece, with the rise of left-wing SYRIZA coalition that nearly won two national elections last year; and in Italy, with the surprising eruption of the Five Star Movement. If nothing else, these challenges to the old electoral arrangements that ruled in "normal" times have put Europe's elite on notice.
Now comes word from the Congressional Budget Office in Washington that the U.S. government budget deficit in 2013 is likely to be around $600 billion, or about half the size it was just two years ago. Right-wing politicians who have harped about "trillion-dollar deficits" for years have now lost that talking point.
The smaller deficit partially reflects the slow recovery of the U.S. economy, which has produced increased tax revenues and a declining demand for unemployment insurance. But it is also the result of the federal and state governments, following austerity prescription, slashing billions from their budgets while raising regressive taxes that disproportionately affect working people.
The rapid shrinkage of the federal deficit should not have been a surprise. The recession had reduced tax collection to its lowest level in half a century. When the economy recovered, it stood to reason that tax collection would increase.
Contrary to the claims of the austerity-mongers and their academic supporters, debt and deficit didn't cause the recession and slow down growth--slow growth and recession increased debt and deficits. But the deficit hawks in Washington continued to promote the idea that the federal budget had pushed the economy into a cul-de-sac from which it couldn't escape--which bolstered the justification for forcing through more than $2 trillion in cuts over the next decade.
Today, the political forces in Washington are betting that the declining deficits will take the wind out of the sails of White House and congressional discussions about a "grand bargain" that would continue the austerity drive and fundamentally restructure popular government programs like Social Security and Medicare.
But for millions of people, the damage is already done.
SO ARE we about to see a switch in the elite Zeitgeist away from the politics of austerity?
Perhaps. We shouldn't forget that demands for Keynesian stimulus measures dominated elite opinion in 2008-09 (remember Newsweek's "We're All Socialists Now" front cover based on the broad support for Barack Obama's fiscal stimulus). But once governments had acted to bail out the private sector, austerity moved to the center of the government discussions around the world, and it's remained there ever since.
There are elite voices challenging that international consensus now. Nevertheless, we should be cautious about pronouncing the death of austerity--which, of course, has never depended on empirical proof or actual results to gain support among the ruling class. There are several reasons for this.
First, the chief cause of the explosion of government debt that gives austerity measures their seeming rationale was the "socialization" of bad private sector debt--the shifting of toxic financial assets from the likes of AIG and the Royal Bank of Scotland onto the balance sheets of national governments and central banks.
While national governments have made some progress in liquidating these bad debts, there remains a huge overhang. Marxist political economist David McNally estimated in 2010 that governments had bailed out banks and other corporations to the tune of $21 trillion. In 2012, McNally wrote, "It is now clear that my estimate, among the largest (and arguably most accurate) at the time, was many trillions shy of the real total."
The existence of this massive debt presupposes a continued political fight over who will pay for it. And in that fight, the banks and the corporations have a huge advantage.
Rather than accept the consequences of their reckless business decisions in bankruptcies and debt write-downs, they will continue to press governments to enact austerity. Effectively, they have succeeded in getting governments to underwrite the bailouts with wage freezes and layoffs for government employees and cuts in essential programs such as assistance to the unemployed. Pressure from the corporate sector to continue this theft of public resources won't let up--and there will be always be a sustained "market" of politicians willing to shill for big business.
Second, austerity dovetails well with broader agenda of the world's ruling classes. This is one reason why they continue to implement austerity measures despite their obviously devastating and seemingly counterproductive results. As McNally points out in another article, "[T]here is a logic to such suffering [that austerity produces]. Or, to put it more accurately, there is a capitalist logic to it."
Surveying the success of capital in raking in record profits while enforcing austerity for working class people, McNally writes:
Not only have public services been drastically curtailed, so have living standards generally. In the U.S., median incomes contracted more than 4 percent during the "recovery" since 2010 and have now declined to where they stood in 1995. That represents the elimination of all wage gains in the past 17 years. In the U.K., meanwhile, living standards have been pushed 13 percent below their 2008 levels.
Now, all of this may be bad for "the economy" in the abstract: reduced incomes mean less spending and less employment. But we don't live in an economy in the abstract. We live in a capitalist economy whose imperative is profit. And reduced incomes are highly functional for capital.
Third, the austerity agenda is connected to longer-term strategies of economic and government elites in the major capitalist powers. In the U.S., as Joel Geier outlined in the March-April issue of the International Socialist Review, the austerity agenda--especially the bipartisan commitment to "entitlement reform"--can be seen as part of a longer-term strategy of the "restructuring of American capitalism...first begun under state auspices in the financial sector."
This explains, in part, why the Obama administration has waxed and waned in its advocacy of jobs and housing programs--while it has always been more determined in its effort to negotiate a "grand bargain" with the Republicans.
So austerity may be unpopular, and it may hold back economic growth, but it isn't going away anytime soon. Except, that is, if a broad working-class movement can turn the tide on the "austerians" and hasten their demise.