There is a world-wide push for cuts in government spending. As the New York Times explains:
The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome. In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years.
In particular, the leaders of the group of 20 agreed at their recent meeting in Toronto to cut their respective national budget deficits in half by 2013 and stabilize or reduce their government debt to GDP ratios by 2016. Recognizing that this was not going to be an easy task, the leaders acknowledged that the timetable was to be thought of as a goal not a mandate.
Wow, here we are, in danger of a global double dip recession having never really recovered from the effects of the Great Recession, and governments have joined together to press for massive cuts in social spending. No wonder people like Paul Krugman are starting to talk of a new (third) Depression.
At the time of the G20 meetings, our papers were filled with reports describing how President Obama argued vainly against this policy (which was strongly supported by the leaders of Canada, Germany and Britain). But Obama’s own domestic policy record is not quite so pure. For example, he recently established a National Commission on Fiscal Responsibility and Reform and appointed two men to lead it that have a long history of advocating sharp cuts in social programs, especially social security. They are scheduled to give their report in December.
So, how do we explain what seems like insanity? The media tells us that this is what the American people want—that their biggest fear is of runaway national debt and no politician can stand against this popular demand for cuts in spending regardless of the short term consequences.
In reality, if people do believe that we are best served by slashing government spending on social programs, it is largely because the media and our politicians have done all they can to convince them that this is what needs to be done. However, there are strong reasons to doubt that people really buy the argument. For example, at the June 26 national Town Hall meetings (organized by AmericaSpeaks) that were designed to encourage support for cuts in government social programs, organizers found that a significant majority of participants were not buying the argument.
Regardless, the real question is why a large majority of government and business leaders have embraced this strategy of slashing government spending.
Arguments for austerity are generally based on the following reasoning: capitalism is a well functioning system. Right now we have problems because of excesses in the form of too much debt. Previously it was private debt and now it is public debt. We have to purge those excesses. The Great Recession helped purge the private debt—now austerity is needed to purge the public debt. Once that is accomplished, government borrowing will fall, interest rates will decline, and private business investment and production will soar, laying the groundwork for a long term expansion.
Of course, reality shows that this prediction is based on flawed reasoning. In broad brush, beginning in the late 1960s, profits took a hit as intense global competition limited price increases at the same time as relatively full employment pushed up wages. Government deficit spending kept the economy afloat during the 1970s but at the cost of growing inflation and stagnation (as business refused to invest because of the low profits). Finally, in the 1980s, government and business elites joined together to reverse course. They attacked unions, slashed regulations, and cut social programs. Wages fell and price stability was achieved, but growth and profits remained weak.
That changed in the 1990s. First a stock market bubble and then a housing bubble helped to generate growth and record profits. Eventually the bubbles burst, leaving us in crisis. We have again regained stability (but not growth) but at the cost of massive public debt. In short, as a consequence of past government and corporate policies, our growth has become dependent on debt; without it, we face stagnation or worse.
So, returning to the question—why are our political and business leaders arguing for a policy that is likely to produce an economic disaster? No doubt, some believe conservative fantasies about self-regulating capitalist economies. But I would guess a majority do not.
This majority is worried—our economic system did not serve majority needs even when our economy was growing. Now things are far worse. Elites fear that unless something is done, popular movements for real structural change could get traction, leaving them the big losers. This call for austerity has the virtue of shifting popular attention away from structural issues to government spending. The more people view the government and in particular government spending on social programs as our main problem, the better it is for elites.
Moreover, if elites actually succeed in getting cuts in social programs, their own structural position will be strengthened. For example, the weaker social security, the greater the demand for private pension programs; the weaker public education, the greater the demand for private education; and so on. Dismantling public programs ensures a future going forward in which private activity will become more, not less, essential.
Now, there is a very good chance that their strategy will create a long depression. Even that outcome doesn’t make their strategy self-destructive. No doubt small and medium businesses will be hurt, and there will be a global shakedown, but the end result is likely to be a further concentration and centralization of power in the hands of large corporations. And if social unrest does develop, they can always reverse course and support new stimulus programs and federal bail-outs, just like the financial sector did after the housing bubble burst.
So, where does that leave us—we know how austerity works—it punishes us in the short run while undermining the basis for healthy long-term growth. Unfortunately, our political and business elites seem content to pursue policies that will produce this outcome. If we don’t mount serious resistance, we face a very depressing future.
OK-lots of words here—if you want a fun way to understand the structural nature of our problems and why we need action, check out this wonderful animated video of David Harvey talking about the crisis, and how it is explained to us.