THE PRIORITY OF DEFICIT REDUCTION AND THE MYTH OF CONSOLIDATION
By Greg Albo
It is hardly a stretch to contend that concern over government deficits—and hence the purported need for fiscal austerity—has been at the center of economic policy since the ideology of neoliberalism came to prominence in political discourse in the 1980s and in the state policies of governments of the right and center-left since then. Certainly, austerity has dominated economic policy as the emergency fiscal measures in response to the Great Recession, led by the US and coordinated through the G20, began to be reversed. One after another, states have been attempting to constrain annual budgetary deficits as a portion of GDP to avert a further accumulation of the stock of total public debt. They have done so with more or less political commitment.
The results have been mixed, to say the least, given the unrelenting stagnation of economic growth. The US under Trump is something of an anomaly in the attempt of his administration to drive up growth through massive corporate tax cuts and a further boost to military spending, with the consequence of a radical shift to a major deficit in the national budget. The deeply polarising division this is causing among political and economic elites suggests the US is, to invoke a phrase of economic sociology, an ‘exception that proves the rule’.
The focus on deficit reduction as the centerpiece of economic strategy has gone by the paradoxical label of ‘expansionary austerity’, as vigorously defended by Alberto Alesina, Ken Rogoff and others in numerous studies (Dieter Plehwe and Moritz Neujeffski discuss the ‘90 percent debt-to-GDP stifles growth’ thesis in chapter two), or by the more technical terminology of ‘fiscal consolidation’, as adopted by international agencies such as the IMF and the OECD and consistent with the so-called ‘Washington consensus’ of the 1990s (compare Jim Stanford’s chapter on the great stagnation).
As with so much of modern neoliberal economics, the propositions put forward are based on idealized abstractions of the expectations of individualized economic agents, responding to the actions of extra-market institutions such as governments, in determining the allocation of their asset portfolios and thus of their investments in the economy. In the hierarchy of information processed by these agents, a crucial marker is the level and direction of the fiscal deficits of states. Increasing deficits, it is argued, destabilize investments via negative expectations on interest rates and profitability, thus creating market uncertainty and turmoil. In contrast, fiscal consolidation re-establishes a policy framework and expectations about interest rates and investment returns which promote economic growth and stability.
As Mark Blyth argues in his book Austerity: The History of a Dangerous Idea (2013), a ‘credible program’ of fiscal consolidation is supposed to ‘shift expectations’ to bring forth an expansion greater than the contraction caused by budget cuts.’ Market stability and expansion depend, as much as anything else, on policies of fiscal conservatism restricting the profligacy of democratic states. In a fashion, the Maastricht fiscal-convergence criteria for EU member states, of annual deficits of no more than 3 percent of GDP and total debt no more than 60 percent, have become something of a technical global policy norm (compare the chapter on Mickey Mouse numbers in economic history). And the various parliamentary resolutions and mandates committing to balanced budgets serve as the most visible political symbol of the ideology and practice of fiscal consolidation.
The fiscal-consolidation strategy is misconceived, however, first in its diagnosis of the economic-policy history that preceded the Great Recession. As Wolfgang Streeck points out in his Buying Time (2014), fiscal consolidation had led to a decline in public debt from the policies of the Clinton administration in the 1990s to before the economic rupture of 2008. Streeck and many others have argued that government debt was only to be replaced by a ‘privatized Keynesianism’, as various forms of private debt exploded. As profits eroded and investment stalled at the top of an economic expansion, the conditions for a major crisis were set when the trigger of mortgage and consumer defaults set off an uncontrollable wave of further defaults and bankruptcies across financial markets and the world market.
Indeed, emergency anti-crisis measures had to radically reverse a decade and more of the consolidation strategy: a massive bailout of banks; an unprecedented monetary policy of quantitative easing, to drive interest rates towards zero, to facilitate private and public borrowing and to reflate the asset values of the wealthy; massive subsidies to industrial sectors, such as autos, plunged into insolvency, and increased government spending to support effective demand and contain a huge spike in unemployment. It is utterly misleading to attribute any of this to fiscal profligacy. As even liberal financial commentators like Martin Wolf have noted, the state deficits were the necessary offsets to the collapsing spending of households and corporations. This was an economic policy of necessity, as the economic authorities saw it, to rescue financial capitalism—with fiscal deficits of far less concern. (Thomas Fricke takes a look at the crisis-induced increase of state deficits in the eurozone in chapter seven.)
The fiscal-consolidation strategy is equally misguided in suggesting that a policy of austerity is crucial at this time to restore stable, market-led growth by re-forming an appropriate fiscal environment for capitalist investors. As even the IMF now concedes, in more recent research on the limits of budget cuts, this is to leave to the side the impacts of deficit reduction on inequality and the questionable benefits for sustainable growth: the cuts strategy transfers resources to the capitalist sector (especially finance) at fault for the crisis, while its working-class, small-business and taxpayer victims are dealt austerity (compare the 11th chapter on the two worlds of austerity). Keynesian and Marxian analyses have been adamant in rejecting the deficit-cutting strategy when consumers are deleveraging, corporations are using money hoards for stock buybacks and dividend payouts, and investment is stagnating. This is the well-known economic folly of generalizing from micro-economic changes to macro-economic outcomes. The slow growth in core countries, such as Britain and France, and the alarming under-performance in more peripheral countries—Greece, Portugal, Spain and others—are witness to the failings of fixating on fiscal deficits in circumstances which call for a radically different economic-policy regime.
There is, moreover, the misconception that the intent of fiscal consolidation is ‘sound finances’ (compare the chapters on ‘live within your means’ and privatization)—the alleged purpose being only to eliminate the ‘inefficiencies’ from state provisioning while allowing markets to provide dynamic gains in economic growth from competitive incentives (with tax credits addressing any redistributional shortcomings). This argument is not plausible. On theoretical grounds, there is no basis for claiming that cutting public services will be matched by available private providers able to supply similar goods with the same social mandates. Nor that private sector organization is by definition always more efficient and insulated from market failures (compare the chapter on ‘market good, public bad’). These are all ideological assertions: numerous studies of privatization, from Public Services International and other researchers, have found a deterioration in provisioning for social housing, healthcare, public transit, public parks and even core utility services such as water, electricity and roads. Whatever the failings of the ‘bureaucratic administration’ of the mixed economy (and there were many in the level, quality and democratic controls over public services), the provisioning cuts and ‘market administration’ of the capitalist sector, resulting from the fiscal-consolidation strategy, have outdone them and more.
The most elemental misconception of the fiscal-consolidation strategy is, to conclude, the presentation of deficits as simply a ‘technical problem’ of sound budgetary management. Such a view elides the political role of fiscal consolidation in undermining the redistributional and market-sanctioning dimensions of state policy and mandating, as writers as diverse as Donald Savoie and Wendy Brown have observed, the re-engineering and monetizing of state administration to enhance market controls over the public sector. The intent of this remaking of the state is, as set out in neoliberal theory by thinkers such as Friedrich Hayek and James Buchanan, to shift the balance of class forces, enhance the political conditions for the extraction of value from workers, reinforce the allocative role of financial capital in distributing savings and credit into investments, and support industrial capital in the unilateral restructuring of industry without reference to workers or communities.
More than a decade after the financial crisis triggered the Great Recession, the world market is again in danger of slipping into a downturn of unpredictable scale and consequence. Fiscal consolidation has been central to an economic-policy regime that has worsened inequality, reflated asset values and fostered a refinancialization which has rebuilt and even extended the stocks of global debt. There is now far less fiscal and administrative capacity available in central banks and treasury departments for crisis management. Coordination and cooperation between capitalist states is giving way to economic nationalism and new forms of competitive rivalry. The mythology of neoliberal fiscal consolidation has been one of cutting as a new path to prosperity. But the legacy of its theoretical and political misconceptions is one of hard right-wing populisms, authoritarian governments and anti-democratic practices spreading across all states. The search for economic alternatives cannot begin soon enough.