December 2012        

Austerity is both stupid and cruel

It is obviously stupid to pursue a policy of austerity in the midst of a recession—and not just stupid but cruel, as it prolongs the pain of unemployment and emigration. Recession is caused by a deficiency of aggregate demand. To overcome it, it is necessary to increase demand, and this requires larger expenditure.
      Private expenditure on consumption is restrained in a recession by the fact of unemployment and low income. Private expenditure on investment is restrained by the fact that when markets are not expanding, capitalists have little desire to increase their productive capacity.
      The sole feasible way that the recession can be overcome is through an increase in government expenditure, that is, through a fiscal stimulus. Austerity, being the very opposite of this, will clearly worsen rather than improve things.
      But then why is there a push for austerity even in the midst of a recession? Part of the explanation is that finance capital does not want a state actively engaged in demand management.
      If the state intervenes to fix the level of activity in a capitalist economy, the “state of confidence” of the capitalists ceases to matter as the determining factor in the economy. This removes any need to appease capitalists, to bolster their “state of confidence” through all kinds of inducements, in the “interests of society.”
      State intervention in demand management through fiscal means is anathema for finance capital, which therefore uses all the resources at its command for preaching the virtues of “sound finance” through balancing budgets.
      The demand for austerity in the midst of a recession, for cutting down government expenditure in tandem with the reduction in tax revenue that occurs in such a period, is thus in keeping with the predilections of finance capital. To effect this self-serving policy, finance capital and its spokespersons advance the argument that such austerity will actually overcome the recession, which is stupid.
      That is why the so-called “Fiscal Stability Treaty” that was foisted on us in May is such a pernicious legal-political instrument. It requires a maximum public deficit in any year of 0.5 per cent of GDP, with automatic penalties for breaches. The effect is to clamp permanent austerity on the euro-zone countries and make it impossible for governments to run a deficit to counter slumps in private domestic and foreign demand for their countries’ products.
      Measures such as these for enforcing balanced budgets and draconian fiscal rules on the seventeen euro countries do nothing to address the sovereign debt and bank solvency problems that are at the very root of the present crisis. Between now and 2031 the Government has agreed to pay debts of €31 billion, plus interest of €17 billion, for Anglo-Irish and Irish Nationwide alone, at the insistence of the European Central Bank.
      Irish government debt is 117 per cent of GDP. According to the Bank for International Settlements, the Republic’s total debt in 2010, combining government debt, household debt, and private business debt, was the highest in the world, at nearly five times GNP. This was 50 per cent higher than Greece’s.
      All this debt must be met by Irish people in the form of taxes, mortgage debt, and payments to private lenders.
      To suggest, as many progressive economists seem to do, that the crisis is simply the result of Government “policy failure,” and that once the Troika-imposed curtailment of “economic sovereignty” is lifted it becomes possible to argue credibly for stimulus policies, is to ignore very real systemic obstacles to such a course of action.
     The Irish state cannot serve its own people while it is constrained by the austerity regime that membership of the euro zone imposes. And it gets worse. The only way in which the euro zone can be given a temporary lease of life is for euro-zone states to give up all or most of their control over their national budgets, and for the euro zone to push towards a fiscal union in which fiscal deficit rules are rigidly enforced.
      An Irish Government that put the Irish people’s interests first would seek to build alliances with the other peripheral countries in seeking ways to rid both itself and them of the burden of private bank debt, which the euro-zone authorities have insisted should be imposed on the people. It would also seek the early dissolution of the euro zone and a reversion to national currencies in as organised a manner as possible.
      It follows that state intervention through a fiscal stimulus to overcome the recession must reckon with the need to confront finance capital. The state must be willing to run fiscal deficits not just as a temporary phenomenon but even persistently (since the “state of confidence” of the capitalists may be undermined by the very fact of fiscal deficits to a point where private investment does not easily revive). And it must also be willing to exert adequate control over the financial system to ensure that public borrowing is always financed, so that the state does not become a prisoner to the whims of financiers.

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