BEYOND AUSTERITY: MYTH AND SUBSTANCE #

By Dieter Plehwe, Stephen McBride, Bryan Evans and Moritz Neujeffski

The global political economy continues to undergo rapid change in the wrong direction. Stagflation 2.0 translates into slow or no growth, into permanent and increasing austerity in many OECD countries and in major parts of the global south. Many members of the European Union in particular have been subject to severe internal deflationary adjustment, which saw wages and welfare-state transfers fall in absolute terms. While social inequality between countries has remained stable, more or less, inequality within countries has been rapidly rising due to the long and severe recession which followed the global financial crisis.

Stagflation 2.0 means economic stagnation and deflationary tendencies, rather than the stagnation-plus-inflation which characterized economies in the crisis of the 1970s. If deficit spending for public programs seemed to have little impact on employment and economic development a generation ago, this triggered the argument to try something else, namely austerity combined with deregulation and privatization. Three decades and a global financial crisis later, it has become obvious that austerity and intensified economic globalization, driven by deregulation and privatization, have failed to deliver. States are even more in a straitjacket of restrictive finance than they were previously.

According to the core ideology of austerity capitalism, neoliberalism and supply-side economics, taxes on the rich and mobile capital in particular can only be raised at the price of reduced international competitiveness of corporations and declining attractiveness of geographic locations. If demand on the public sector is nevertheless growing due to the return of mass unemployment, demographic change and additional needs for digital infrastructures and training, for example, spending still has to be cut and pressure needs to increase on those who need support or assistance to take care of themselves. Pressure is the true meaning of the euphemism ‘incentives’. Stagflation 1.0 ushered in paradigm change and the rise of neoliberalism. Why has stagflation 2.0 not led to similar change?

To be sure, the rise of right-wing populism in quite diverse countries and regions, such as the United States, Brazil, India and many countries in Europe, seems to indicate a change of political thinking. At the center of the messaging of right-wing populism, which has become the dominant mode of critique after the global financial crisis, is a new emphasis on economic nationalism. Economic nationalism can of course be considered the natural result of the neoliberal emphasis on globalization, international competitiveness and locational competition. Yet, if right-wing populism takes exception to the claims of international co-operation to prevent climate change, for example, and declines to share the burdens of migration and misery as a result of war and devastation, it does not challenge the doctrine of austerity. Right-wing nationalism and populism rather appear to intensify further the pressure on the welfare state, through continued emphasis on tax cuts for corporations and a new stress on ‘law and order’. Neoliberalism breeds austerity and austerity in turn breeds more authoritarian neoliberalism.

While globalization appears to have taken a beating, due to the impact of the global financial crisis, austerity continues to be strong. The joint monetary activities of the Federal Reserve in the United States and the European Central Bank—engaging in ‘quantitative easing’—ultimately sufficed to stabilize the transatlantic economy and to take the edge off the pain for the moment, but the next downturn lurks around the corner. With it will come demands for further belt-tightening. Macro-economic fragility and a lack of state capacity to meet serious challenges at home and abroad characterize the status quo. There is and there will be an increasing need to tackle austerity’s causes and consequences. We need to talk and think more about austerity and how to go beyond it.

Two English dictionary entries for austerity are telling:

1. sternness or severity of manner or attitude;
2. difficult economic conditions created by government measures to reduce public expenditure.

Living through the recent past, many if not most citizens can attest to the difficulties faced under conditions of permanent and increasing austerity, not only in the global or the European south. Those who came of age in the 1970s still remember the suffering of countries in the global south under the International Monetary Fund and World Bank regimes following the Latin American debt crisis. While it is normal to emphasize difficult economic conditions created by government measures, it is never clear to what extent difficult economic conditions have been created domestically. The first myth that needs to be exposed relates to debt and public finance as a purely domestic matter. Without the deliberate raising of interest rates in the United States, the world debt crisis of the late 1970s and early 1980s would not have occurred; nor without the global financial crisis would European states have needed suddenly to go deep into debt.

The postwar international financial regime (managed fixed exchange rates pegged to the dollar or gold-exchange standard, with adjustment mechanisms), agreed upon at Bretton Woods, was designed to prevent such instability. Following the Vietnam war and the dollar glut. the US government decided to abandon the system and move towards flexible exchange rates. By the 1980s, states were surveyed in terms of financial performance much like corporations, by rating agencies and international financial institutions, but no system was put in place to prevent severe imbalances or to intervene if adjustment was needed. Instead of taking a systemic view, the burden was placed on the individual country. Political responsibility for global economic asymmetries was delegated to financial-market authorities.

As a result, many austerity programs have been imposed by mechanisms that are not governed by democratic decision making. The results are poor, both with regard to economics and democracy. If such things as vicious interest-rate fluctuations are externally imposed, and if one’s own government is complicit but not fully responsible, citizens deserve greater insight into the international and domestic complexity of public finance and what’s wrong with austerity.

In the dominant public discourse the message is simple: governments should not—and ultimately cannot—overspend. Wikipedia shares a mainstream technocratic definition: ‘Austerity is a political-economic term referring to policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. Austerity measures are used by governments that find it difficult to pay their debts.’

If only the world were so simple! Why do governments incur and accumulate debts? How did not just one or two, but many governments arrive in a situation in which accumulated debt became an issue? At the same time, why does it become an issue in one country (say Greece or Ireland), but not in another (say the United States or Japan)? And how does capitalist development rather than public-sector behavior affect taxes and spending? During the ‘golden age’ of capitalism after World War II, full employment, a strong public sector and a mixed economy, combined with limited international competition, translated into rising income, which was made available for greater social integration through welfare-state capitalism. Economic stagnation and rising unemployment, following the great crisis of capitalism of the 1970s, reduced income and increased the public cost of unemployment, public health and education. Who decides if the imbalance is corrected by way of higher taxes and on whom, or by lower spending and on what? How has the preference and need for cuts in particular been constructed and by whom?

Austerity has not been the same throughout history. There has been austerity before the age of welfare-state capitalism, to be sure, mostly following war and economic crisis. State capacity to tax citizens was limited due to the extremely uneven distribution of wealth. Only with the rise of the modern industrial working class and public employment did a reliable and reliably broad tax base develop. Much of the income of the public sector is paid out of the pockets of those who are employed in the private and public sectors. The share of regressive taxes, such as value-added taxes, has however been raised in recent decades. Under these taxes poor and rich people pay the same tax on goods (unlike income taxes, for example, where the more affluent normally pay a higher percentage of their income). Average and less affluent citizens should be concerned about the future of public finance. After all it is their money which we are talking about. Those who demand tax cuts for the rich and spending cuts for the poor need to be answered by those who, as a result, will pay more and receive less.

When we talk about austerity today, roughly since the 1970s, we are thus talking about more than simply balancing the revenue and spending of the state. We are talking about recalibrating modern welfare-state capitalism. The target was and remains the macro-economic capacity of the state, with regard to domestic matters and international economic relations. Welfare-state capitalism, rudimentary in the global south and more fully if unevenly developed in the north (varieties of the welfare state), created new conditions for public finance.

At the time of the crisis of the Bretton Woods monetary system even Milton Friedman recognized that welfare states would be unwilling to give up macro-economic leverage. Realistically, states needed room to maneuver to meet the contradictory needs of business and people in a globalized world. Unlike those who wanted to return to the rigidity of the gold standard, Friedman advocated the switch to flexible exchange rates. While flexible exchange rates provide a cushion in the case of asymmetrical balances—countries can devalue their currencies—they also subject states to the discipline of the global capitalist market, its power relations and its institutions.

Ever since, a mix of flexible exchange rates and quasi-gold standards, such as the euro-system or other forms of fixed exchange rates and currency boards, has governed public finance, for better or worse. We do not talk much anymore about the global monetary regime and its uneven distribution of power. Instead everyone talks about the need for the state to limit public debt. The widely shared belief in the supreme importance of public debt—the overriding concern of public finance—underpins the hegemony of neoliberalism and austerity, the dominant ideology of our age. It is held together by a range of beliefs which are backed up by diverse neoliberal schools of thought, ranging inter alia from Austrian economics and Chicago monetarism to Virginia School public choice, Freiburg ordoliberalism and locational competition rooted in Kiel.

It is common to neoliberal ways of thinking to imbue the private sector with creative qualities and to scold the public sector for wasting money—even when most of the money ‘wasted’ goes to safe private-sector investments. This paradox of the neoliberal state is important in two ways. First, unlike a pure emphasis on law and public order in the age of laisser faire, neoliberals have come to embrace the state to keep capitalism safe. This requires state action and investment, including nationalization, in particular in times of extraordinary economic crisis but also during normal times of operation depending on challenges and challengers.

Secondly, the unique responsibility and capacity of the neoliberal state and public finance to act in this way and in meeting challenges of all kinds needs to be disguised—hidden behind a language of state failure, bureaucracy and self-interest on the part of the ‘political class’, to keep a lid on demands from the lower classes. The greater the state capacity, actual or potential, the greater the need perceived by neoliberals to control the purpose for which it is used. If the welfare state was designed to increase spending for greater social equality and the integration of the lower classes (social citizenship), the austere state has been designed to transform, roll back and privatize the welfare state, in the name of competition and the alleged benefits of inequality.

This booklet has been designed to argue against the idea of general mechanics of public finance that are presented as a common set of equations valid for every country and across time. Sure, each state budget has an income side composed of tax and other revenue. And each state budget has an expenditure side accounting for what governments pay for welfare, public safety, security, education, health and so forth. But both the capacity to raise taxes and the purposes of public spending have changed fundamentally over time and can again be subject to change. To restrict the potential for future change, austerity is presented as a ‘one size fits all’ model, valid across time and space. To give the impression of general validity, a number of different yet overlapping myths can be discerned—the myths of austerity.

Once again two dictionary entries, under the term myth, are telling:

1. a traditional story, especially one concerning the early history of a people or explaining a natural or social phenomenon, and typically involving supernatural beings or events;
2. a widely held but false belief or idea.

The 12 widely-held but false beliefs with regard to social phenomena related to austerity capitalism and the transformation of the welfare state are grouped together in five categories: 1) the authority of austerity economics, 2) the construction of contemporary austerity’s iron cage of public finance, 3) austerity and the explanation of the cause of economic crisis, 4) the impact of debt on economic development and 5) the impact of debt on society.

We start with two contributions written to challenge the authority of economics and economists who backed austerity following the global financial crisis. The myths of expansionary austerity—that cutting public spending is ultimately good not only to lower state debt but also to increase economic growth—and of an objective figure for the threshold of debt that can be considered detrimental to the economy (the 60 percent debt-to-GDP ratio laid down in the Maastricht criteria, the 90 percent ‘calculated’ by the two economists Carmen Reinhart and Kenneth Rogoff) are at the core of the contributions by Jim Stanford and the co-authors Dieter Plehwe and Moritz Neujeffski, respectively. While the great stagflation 2.0 (stagnation and deflation) period is not backed up by supernatural beings, the numbers that provide the dubious authority for austerity have indeed been invented, deliberately or due to errors.

The social construction of the iron cage of public finance comes next, with three contributions. The myths of the external constraint of international tax competition and the benefit of tax cuts for the rich govern the income side of the austerity equation, as do those of the removal of spending obligations by way of privatization and by cuts the spending side. Alex Cobham explains why the arguments of an external constraint for lower taxes are a social construct, and who is constructing them. Heather Whiteside uses the Canadian example to show how privatization increases public expenditure in the long run, contrary to the claims of a reduced fiscal burden. Sheila Block summarily debunks the myth of consolidation, because tax cuts simply reduce state income, while spending cuts shift the burden from one state institution to the other rather than removing it.

Next are two contributions dealing with the claims regarding state debt as the cause of the crisis. Greg Albo explains why such a take confuses causes and impact, and why the single-minded focus on sound finance and fiscal consolidation does not provide the answer to key questions of public finance, before, during and after the crisis. Thomas Fricke utilizes the European Union member states to detail the reversal of causes and consequences. Sharply rising public debt was caused by the crisis—not the other way around.

On a more general level, those who advocate austerity claim that the private sector is good and the public sector is a problem. The famous crowding-out thesis suggests that state investments deprive the private sector of investment opportunities. Ingo Schmidt explains why this is not the case and what purpose the black-and-white claims of market populism serves. Louis-Philippe Rochon debunks the myth according to which the public sector must behave like individuals with regard to income, spending, savings and debt. The fallacy of composition—according to which what is true for a part of the whole is true for the whole—desperately needs to be deconstructed in the case of public-sector finance. If all individuals save rather than spend in order to reduce debt, the result is an economic contraction made worse by a government that in addition cuts spending. This is a lesson which the Greeks had once again to learn the hard way during the last decade. For this reason Swabian-housewife economics do not work at the state level, and are actually not a good take on what is really going on at the micro-level either. The allegedly model behavior of Germany furthermore obscures the international dimensions and true reasons for Germany’s austerity regime, according to Lukas Haffert: austerity-related pressure on wages and the labor market helps to keep German export industries competitive, at the expense of both domestic consumption and foreign unemployed.

The final section explains in more detail why austerity is not only bad for economic development but also for social development and society more generally. Contrary to the presentation of austerity as good, technocratic governance in the public interest, neutral with regard to distributional concerns, Stephen McBride shows how in reality it recreates two worlds which are moving further apart. The heart of the matter of austerity is not balancing budgets but shifting the burden and benefits in contrary directions. This can be seen in taxation and fees for services: the burden is shifted from the rich to the middle class and poor. Poor and marginalized people in particular have suffered from the cuts in benefits in the name of activation and greater self-responsibility. Austerity is class-based and contains a class character, revealed by its propensity to increase inequality.

The final chapter takes aim at the myth of the democratic character of austerity as a project jointly driven and implemented by the social partners, trade unions and employers. While coalitions for jobs and social concertation certainly played a strong role in the aftermath of the crisis, Bryan Evans, Stephen McBride and James Watson show how the organized working class has lost much of its capacity to influence relevant policy areas. This is partly due to its integration and subordination in austerity coalitions. The most visible result of the complicity of labor in neoliberal transformation projects has been the decline of the vote of traditional socialist and social-democratic parties. If leaders of such neo-corporatist experiments consider their projects successful, success has come at the expense of the political organization in many countries. Social concertation and national coalitions in support of consolidation and austerity have been eager to cope with austerity but have failed to develop a new spirit and a new capacity of the public sector. Many trade unions, traditional social democrats and other people left of center, old and young, have seen their influence wane within and across borders. The shift of power relations to the right, in individual countries and larger political regions such as the EU, leaves one conclusion only: coping is not enough.