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To spend or not to spend: The austerity debate

Category : Uncategorized · by May 20th, 2014

Originally posted on 3QuarksDaily

Public sector austerity has come back to the West in a big way. Governments throughout the European Union are wrestling against striking civil servants, a stagnant private sector, and an entrenched public welfare system to drastically reduce spending. The budget cuts are broad, and they run deep. Under pressure from global financial markets and the European Central Bank to reduce public deficits, Spain, Italy, Portugal, and Greece have issued “austere” budgets for the coming year that simultaneously raise taxes and slash government spending. David Cameron’s new Conservative government has violated its campaign pledge to spare Britain’s generous middle class subsidies in an attempt to close a budget gap that is among the world’s largest, at 11 percent of GDP. Supposedly confirming the wisdom of austerity, the financial press has trumpeted the re-election of Latvia’s center-right government, which passed an IMF-endorsed budget with austerity reductions equal to 6.2 percent of GDP. Prime Minister Valdis Dombrovskis won his “increased mandate” – “an inspiration for his colleagues in the EU” – against a backdrop of 20 percent unemployment and a cumulative economic contraction of 25 percent in 2008 and 2009, the most severe collapse in the world.

Latvian electoral politics notwithstanding, austerity has been a tough sell worldwide. Both the protests that broke out across Europe at the end of September and the general strikes mounted against Socialist governments in Portugal, Spain, and Greece attest to the resistance all governments face in cutting public spending. And opposition has not been confined to the streets. At a G20 summit in Washington DC on April 23, the finance ministers and central bank governors of the world’s 20 largest economies agreed that extraordinary levels of public spending should be maintained until “the recovery is firmly driven by the private sector and becomes more entrenched.” Indeed, Larry Summers, the departing Director of the White House National Economic Council, still argues that the United States must continue its policy of economic stimulus in the form of deficit spending on infrastructure rather than pull back public resources, lest it cede the small gains of the nascent recovery.

Yet the pressure to embrace austerity continues to mount on governments on both sides of the Atlantic, crowding out calls for further stimulus spending; the stimulus vs. austerity debate has heated up in both policy circles and academia. On one side are the Ricardians, who argue that austerity budgets will boost confidence, by signaling that the recovery has taken hold, and spur private investment, because capital will no longer fear future tax hikes to pay for today’s deficit spending. We hear this story coming from three major institutions: the European Central Bank, which regulates the 16 Eurozone countries; the International Monetary Fund, which provided lender of last resort bailouts for countries struggling to meet their international obligations; and the global financial markets, which penalize debtor countries by demanding ever higher interest rates to refinance sovereign debt.

The Keynesians are on the other side, arguing that governments must maintain their economic stimulus programs to help make up the difference between the internationally depressed levels of aggregate private demand and the level of economic activity necessary to support full employment. Their argument against austerity-induced gutting of social welfare programs goes beyond moral claims about equity. Government spending, especially in programs that target the bottom end of the income distribution, circulates through the economy, multiplying the job-creating effects of the initial public expenditure. Of course, the root of the current economic problems is an overabundance of debt – both public and private. But as international political economist Mark Blyth explains, it is dangerous for governments to try to clean up their balance sheets with austerity at the same that the private sector is paying down its own debts from the housing boom instead of investing and hiring. Indeed, the US shed 95,000 jobs in September, after layoffs by local governments and the release of temporary Census workers cost 159,000 jobs. Until recently, the Obama Administration was the main proponent of the stimulus view, which is also supported by organized labor and hordes of protesting Europeans.

Strangely, when the G20 finance ministers reconvened on June 5 in South Korea, their message had changed. Instead of encouraging countries to continue supporting the recovery, they announced that “countries with serious fiscal challenges need to accelerate the pace of consolidation,” and identified monetary policy as the best tool going forward. This, despite the fact that monetary policy levers are at the “zero bound” worldwide, allowing no room for further expansionary movement. So, why the sudden shift? How might we characterize the compulsion governments have to engage in painful belt tightening when their belts are circled around their necks?

The austerity vs. stimulus debate is not just a policy disagreement between social classes with opposing interests; it is a confrontation between two entirely distinct modes of governing, two different ways of conceiving of the state and the economy. Austerity is a quintessentially Classical prescription for economic imbalances, a direct descendent of the vertiginous deflationary adjustments countries were forced to stomach under the gold standard. Now, as then, financial power compels states to sacrifice the health of their domestic markets in order to preserve international credibility. Politicians would not make this trade without compulsion; anyone concerned with reelection will rightly worry about the havoc this fiscal discipline wreaks on his constituents. This should not suggest, however, that the only benefit of a policy to stimulate the economy with government spending is its ability to create short-term construction jobs. Properly administered, a Keynesian stimulus will keep unemployment rates manageable by propping up aggregate demand, but the real goal of government spending is to make the short-term economic picture look rosy enough to improve private expectations of the future. As government money filters through the economy, businesses can count on boosted demand for their products and will hire more workers, so private demand can gradually recover.

Michel Foucault, who is known for his studies of “governmentality,” developed a philosophical framework that helps distinguish these approaches to dealing with recession. In his 1978 lectures at the College de France, Security, Territory, Population, Foucault argues that there are three forms of power: juridical law, discipline, and security. Juridical law maintains order by establishing prohibitions and doling out punishment. Its model is a hanging, commanded by the sovereign to punish a subject who violated the law. Foucault is most famous for his theory of discipline, wrought from his meticulous studies of the techniques of power used in prisons, schools, barracks, asylums, and hospitals. A disciplinary institution aims for efficiency; it structures power relations so that the surveillance, and transformation of individuals can proceed with the least possible expenditure of resources. Its ultimate goal is, in a sense, utopian: to forge subjects who have internalized the law and follow it by themselves. The model disciplinary institution is the panopticon, in which the prisoner must always behave as if someone is watching. Finally, a security apparatus handles problems with measurement. Recognizing that it is impossible to completely engineer away social ills, a security apparatus sees a problem as the result of a series of probable events and enters it into a calculation of cost. Rather than focusing its attention on the legal boundary between the permitted and the prohibited, a regime of security “establishes an average considered as optimal on the one hand, and, on the other, a bandwidth of the acceptable that must not be exceeded.” And benefits of any policy are weighed against the costs of implementing it. Instead of deploying mechanisms to transform deviant individuals into ideal subjects, the techniques of security act on a new object: the population. Its tools are statistics, which uniquely make meaning from uncertainty and direct power to most effectively manage a large ensemble. Its model is the modern management of epidemics. While the differences between these three categories do rely on innovation, Foucault stresses that they do not represent distinct eras but rather alternative, and coexistent, ways that power organizes the social world.

Foucault deploys this framework on economic problems to show different ways of allocating resources to deal with the problem of scarcity. He begins with a juridical mode of resource allocation: price controls. For a long time, authorities attempted to control the food supply by instituting rigid price ceilings, intended to keep food affordable; regulations on food storage, intended to prevent hording from precipitating an artificial shortage; and export restrictions, meant to protect domestic supplies. Of course, in practice these price controls actually functioned to exacerbate food shortages, as the law prevented peasant farmers from charging enough to recoup their investments and plant enough grain the following year.

Foucault then studies the prescriptions of the Physiocrats, who advocated that governments reduce these restrictions and allow supply and demand to set prices according to the dynamics of the market. By allowing individuals to decide when and for how much to sell their grain, guided only by competition and informed by market prices, laissez faire policies leave the problem of managing scarcity to the decentralized decisions of many market actors, who sold their grain where high prices indicated it was most needed. Foucault shows how, historically, this shift to a new mode of governance alleviated the food shortages that had plagued Europe. But here, Foucault gets it wrong. He incorrectly classifies the Physiocrats’ free markets as a technique of security. Instead, laissez faire ought to be considered a disciplinary mechanism, since it aims to solve the problem of scarcity by conditioning individuals to make the “right choices” on their own about how much grain to grow and where to sell it.

Political economy first entered the realm of security when Keynes invented macroeconomics as a way of managing unemployment and taming the business cycle. For the first time, economists could attend to a population and direct their policies at the economy as a whole. Indeed, the concept of unemployment only makes sense for a whole economy; it has no microeconomic analogue. In his General Theory, Keynes shows how governments can use fiscal policy to keep their unemployment rates within reasonable bounds, consistent with long-term economic growth and social stability. Government’s deficit spending is the distinctive technique of this regime of Foucauldian security. An economic stimulus is not intended to help any particular individuals – though some sectors certainly benefit more than others – but rather boost aggregate demand. Its target is the whole economy, the population. Indeed, classical economics did not admit the economy per se as an organic object, since it was seen as merely a large collection of individual, rational actors. Insofar as macroeconomic policy has this population as the target of its interventions, Keynes can be said to have invented the economy as an object.

It is easy to see where austerity fits in Foucault’s taxonomy: It is a disciplinary force exerted against free-spending governments. Just as the structures of school buildings make rambunctious children into docile bodies, pressure to embrace public austerity is an effort on behalf of international capital to restrain the free-spending tendencies of welfare states. This fiscal discipline, sold as a virtuous and commonsensical “pain after the party,” is intended to produce chastened governments, which maintain capital-friendly tax policies at the expense of social services and in the name of stability, predictability, and job creation. Even though newly streamlined corporations are again flush with cash but have not rehired the workers laid off during the worst of the financial crisis, business leaders continue to argue for an emergency loosening of labor laws that would allow them to fire employees more cheaply.

Although these revisions to the modern welfare state’s social contract may seem draconian, they are hardly unprecedented. The IMF has been pushing public austerity and business-friendly labor reforms on financial crisis-plagued developing countries for decades under the banner of the “Washington Consensus.” Yet these stringent retrenchments, required as conditions on IMF rescue packages for countries from East Asia to Latin America to Latvia, have almost always exacerbated recessions. Indeed, the country that avoided the most damage in the 1997 East Asian financial crisis was Malaysia, which was condemned at the time for eschewing these familiar neoliberal fixes and setting up strict currency controls. Today’s massive foreign currency reserves in East Asian treasuries exist precisely so that these countries will never again have to turn to the IMF for another many-strings-attached bailout. The citizens of the global West are finally experiencing an economic pain all-too familiar to previous recipients of IMF bailouts. In all spheres of economic life, laissez faire prescriptions discipline states with the same old, capital-friendly mantra: “That government is best which governs least.”

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