May 2012        

Bourgeois economics in a quandary

As capitalist economies attempt to restore growth, increasingly policy debate within the leading echelons of bourgeois economics revolves around whether cutting government spending and increasing taxes to minimise the expansion of state indebtedness vis-à-vis GDP will work.
     The austerity-works-best approach has dominated and continues to dominate thinking throughout Europe, Japan, and the United States. At its core it advances the idea that public-sector borrowing, if not curtailed, will simply push interest rates upwards and displace private investment and thus undermine profitability. Yet other bourgeois commentators are more circumspect, arguing that aggregate demand will be undermined by this strategy, in turn producing a vicious circle of stagnation. Instead, initial stimulus first, followed by holding off on debt reduction until later, as the multiplier effect in time pays off. This is at present the ICTU-SIPTU position.
     While progressives should have sympathy with the latter argument, it is not the silver bullet that its proponents believe. A stimulus, through public-sector borrowing and spending, can lift the economy in the short run, but in the long run its effect remains moot. This is so because, in the long run, state-led consumption subtracts from the profits of the private capitalist sector. In any case, the growth in debt carried by the public sector to finance stimulus just adds to the private-sector debt, further undermining private capital accumulation.
     Furthermore, an increase in taxes under capitalism undermines private-sector investment. Capitalists simply lose confidence when taxes rise. This is why the main sections of the capitalist class push austerity. Curtailing state investment and consumption is of more utility to their class, because inherent in such action is the accompanying cutting back on the provision of public services, thus providing opportunities for private investment and raising profitability.
     The Keynesians, of course, counter—correctly—that austerity can drive economies back into recession, and that excessive debt-to-GDP ratios are best reduced through faster economic growth. But much of the Keynesian argument is based on the immediate post-war experience, when mass destruction of capital had occurred, a historical feature not at present being repeated.
     Meanwhile, capitalist economies as a whole remain mired in either technical recession or sluggish growth. The American economy, while performing better than Europe or Japan, is struggling to escape from a low-growth trajectory. China is now contracting, admittedly from double-digit growth last year, while southern Europe remains in a slump. Northern Europe, Japan and Britain show very slow expansion.
     While there has been a recovery in capitalist profitability (in the United States and Britain, for example), there has still been a slow recovery, principally explained by the hoarding activities of corporations and a reluctance to invest. Part of this is being driven by concerns over the debt crisis in Europe, the slowdown in China, and persistent uncertainty over the international banking system. Furthermore, the Great Recession still lingers on, in the sense that private-sector debt has not fully de-leveraged, while the large burden of that debt (odiously imposed onto the government sector and households) has hindered the ability of capitalism as a whole to recover. Hence the problems facing the capitalist system, viciously rotating in a self-reinforcing cycle.

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