Friday, July 15, 2011

The Mendacity in Austerity

The notion that economies will somehow 'austere' themselves back into economic growth - perhaps best illustrated in the current budget negotiations in the United States and in the the emergency measures being undertaken in Greece - is perhaps the most damaging economic misconception being peddled today.  The notion that drastically cutting already limited services, especially at a time when populations are more dependent upon them, is not only irresponsible, but represents a form of wishful thinking.  Simply reducing spending, or balancing a budget, cannot in and of itself serve as an engine for economic growth.  Indeed, deficit spending on large-scale stimulus projects in order to put people back to work - or to subsidize wages in the short run (as Germany recently did to great success) in order to prevent people from being laid off seems the best way to insure that money remains flowing through the economy.  As Paul Krugman has repeated many times in his New York Times editorials, the economy is best served when people are capable for spending money.  Simply cutting services reduces consumer spending possibility and makes everyone suffer.

More worryingly, the Democratic Party in general and the Obama administration in particular has continued down the neo-liberal route of the Reagan, Clinton and Bush Administrations. As Krugman has also noted, the Obama administration has effectively shed itself of it's real economic advisers, turned to ex-Wall Street insiders for policy formulation and pursued policies that have (a) largely been far more amenable to banks than to citizens, and (b) allowed the Republican party to insist on even more extreme cuts.  Meanwhile, the nominal taxation rate for the richest 1% stands at a staggeringly low 31% and the US is well on it's way, as new research demonstrates, to becoming one of the least equitable countries on Earth.  With that inequity, as the book The Spirit Level (previously discussed on this blog both here and here) indicates, is that we will be faced with the greatly elevated host of social ills associated with that inequity.  Indeed, the notion that taxation rates may return to 35% for the top 1% of earners, generating potentially billions in revenue is being vehemently opposed by the Republicans in the debt ceiling debates, with the Obama administration seeming perhaps willing to cave into even these extreme demands.

Recent statements by Obama point to where the administration stands:
“Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.”
There is clearly very little real difference between the type of statements that represent free-market orthodoxy, the very orthodoxies that have seen the financial industry bailed out again and again while the Middle and Working Classes are forced to pay the bills.

Matt Taibbi, in typical clear eyed form, has come to the following conclusion about the Democrats:
I simply don't believe the Democrats would really be worse off with voters if they committed themselves to putting people back to work, policing Wall Street, throwing their weight behind a real public option in health care, making hedge fund managers pay the same tax rates as ordinary people, ending the pointless wars abroad, etc. That they won't do these things because they're afraid of public criticism, and "responding to pressure," is an increasingly transparent lie. This "Please, Br'er Fox, don't throw me into dat dere briar patch" deal isn't going to work for much longer. Just about everybody knows now that theywant to go into that briar patch.
Late last year, the economist Joseph Stiglitz published a thoughtful editorial entitled 'Alternatives to Austerity' in which he came to a similar conclusion, outlining a very clear plan for how austerity measures might be avoided and the economy, through modest increases in the nominal taxation rate for the riches, disentanglement from foreign wars, and the closing of laws to prevent the financial industry from running rough-shod over regulators and the system as a whole would secure a healthier economy.  He acknowledges that these solutions are unworkable because they would be certain to be opposed by those at the top and the financial industry as a whole.

Further, much as the Bush administration used raw fear as a means of garnering public acquiescence for their misadventure in Mesopotamia, current politicians are using debt panic as a means of advancing further economic policies that are beneficial to corporate interests but highly damaging for the public as a whole.  Most recently these attacks have been launched as a means of stripping Social Security of funding. This was exactly the same mechanism of aspersion that was used to bail out the financial sector, first with TARP and then with the additional measures.  The public was told that we needed to act before the economy melted down.  Panic was sounded and instead of meaningful, measured and thoughtful response that might have saved people their homes and jobs, we instead press forward with a policy of further corporate welfare.

This is exemplified by the recent discovery (via a freedom of information request) that in 2008, Timothy Geithner lent Goldman-Sachs an additional $30 billion from a discretionary fund at .01% interest.  This at a point in time where HUD was going wanting for a few hundred million to help keep people in their homes. This is the sort of act of government mis-use of public funds that can cause ones blood to curdle. Yet, in the face of this, austerity still remains the preferred government mechanism.

And of course, the austerity measures, without fail, hurt the poorest far more than they do the rest of the population.

I was recently sent the following article by John Lanchester on the current Greek crisis, where the full affects of this rush towards austerity as an economic balm is being felt.  The article should be read in full, but Lanchester summarizes that most Greek's are only dimly aware of how their countries economic evils began, and do not feel to have personally enjoyed the fruits for which they are now being made to pay the costs. Further, austerity hardly represents a sound means of putting the Greek economy on sound footing and simply insures at least a decade of misery.  To restate the point that I began this post with:
That was the old plan A, and it didn’t work. Papandreou made deep cuts across public-sector spending, but two things went wrong. One, the Greek economy kept crashing. Economists have varying theories about the practical effects of ‘austerity’, meaning sharp cuts in public spending. To an outsider, it’s a little alarming how they differ about something so big and basic as the effect of large public spending cuts. But if you ignore the economics and look at the history, it seems to be the case that you can’t simply cut your way to growth. (There are a couple of contentious counter-examples, but this is the broad rule.) Holding public spending flat while other parts of the economy grow is historically a more valid model – and, by the way, holding public spending flat is in itself a huge struggle, being roughly what Mrs Thatcher did in the UK. So the first problem was that the Greek cuts led to a worsening of the Greek predicament: the economy kept contracting, and unemployment hit a record high of 16.2 per cent. The second problem was that those richer Greeks who had never fancied paying their taxes showed no increased desire to do so, and, much worse, the state showed no new ability or desire to make them. Without the ability to raise more tax, the old plan A was invalid.
And thus, we shall see the poor continue to have crucial services cut cruelly and inhumanely from beneath them while the structural problems implicit within the financial system that wrought the current financial crisis remain ignored and we continue taxation and recovery policies that serve exclusively corporate interests. If there was hope for the Obama administration to embrace it's rhetorical progressive stance, now would be the time for it to prove that this is the case. Instead, the administration is hamstrung by it's corporate largess. The dishonesty is chilling.

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