Austerity, fascism and the ‘science’ of economics

THE CAPITAL ORDER: How economists invented AUSTERITY and paved the way to FASCISM by Clara E. Mattei (2022)

Back in the 17th and 18th centuries, physicians had a universal remedy for serious illness.  It was to bleed the patients until they improved.

Mainstream economists have a similar prescription for national economic woes.  It is called “austerity.” The elements are holding down wages, letting prices rise, cutting public spending (except on the military and police) and raising taxes (except on the rich).

Austerity contributes as much to economic health as bleeding to biological health.  That is to say, austerity has, so far as I know, an unbroken record of failure in promoting economic recovery. So why hasn’t the economics profession abandoned austerity, as the medical profession abandoned bleeding?

That is because the purpose of austerity is not what its proponents say it is.

Clara E. Mattei, an economist herself, wrote this book to expose austerity’s overlooked, though not hidden, agenda.

She did it in an original way, by looking at the imposition of economic austerity in the immediate aftermath of World War One in two countries, Britain and Italy.

Among the victorious allies, these two countries were at opposite extremes.

Britain was the center of a vast empire comprising nearly a quarter of the world’s population and land era.  It was Europe’s leading industrial and financial power.  It was the birthplace of Adam Smith and free-market economic liberalism.  And it was known for being politically stable.

Italy, in comparison, was poor, powerless and backward.  Revolutionary parties were strong and had a good chance of coming to power. 

The Great War, as people then called it, upset a lot of people’s assumptions about how economies worked.  

Governments found the law of supply and demand worked too slowly for effective war mobilization.  Central planning with price controls worked much better.  

People began to think similar policies might achieve the goals of peace.   Some of them acted on their high hopes.

In the years immediately following the war, Britain seemed on the verge of radical change, and Italy on the verge of revolution.

Change was prevented by taking economic policy out of the hands of voters and into the hands of supposed economic experts.  In Britain, this was done by legal means.  In Italy, it required a violent coup by Mussolini’s Fascists.

But the actual economic policies followed by the two countries were similar.  Mattei pointed out how Mussolini was praised by Britain’s leading mainstream economists.

Failing to learn from the Great Depression

The Great Depression of the 1930s was made worse than it needed to be because European governments prioritized balanced budgets and stable currencies over putting people back to work and putting money into circulation.

As Matthew Yglesias noted—

In Germany, for example, the [ruling socialist] SPD took the view, roughly speaking, that capitalism was an inherently flawed system and the Depression just proved that.  But short of a revolution and a total transformation of the political universe, there was just nothing to be done to alleviate unemployment.

Similarly, in 1929 Ramsay MacDonald’s Labour Party swept into power in the United Kingdom and proceeded to … enact spending cuts necessary to keep the country on the gold standard.  As this led to left-wing defections, MacDonald eventually made up lost ground by forming a coalition with Conservatives that eventually ended up being mostly backed by conservative MPs.

Sweden was an exception where the local social democrats took bold steps to bolster employment. But mostly it was left to other parties with less worthy overall agendas — Hitler, for example — to step in and say that if the rules of the game led to prolonged spells of mass unemployment then the rules of the game had to be changed.

via Vox.com.

Brad  DeLong, an economist at UC Berkeley, said that he used to joke that governments would never again make the mistakes that prolonged the Great Depression, but instead would make new mistakes.  Now he admits he was wrong.  Governments are making the same old mistakes.

Europe’s governments are held back by fear of fiscal imbalance and undermining the Euro standard, just as they once were held back for fear of undermining the gold standard.  But, as in the 1930s, there are nationalist parties waiting in the wings to do the things that the mainstream parties fear to do.

The European public may well turn to parties such as the United Kingdom Independence Party, the National Front in France or the neo-Nazi Golden Dawn party in Greece.   As far as that goes, similar movements will arise in the United States if Democrats and Republicans fail to act.

LINKS

Depression’s Advocates by J. Bradford DeLong for Project Syndicate.

I don’t want to go back there by Matthew Yglesias for Vox.com.

As Greece goes, so go other debtor nations

The Greek debt burden is more than the people of Greece can ever repay.

But evidently the creditor nations will not accept this until Greece is bled dry.

Their “austerity” plan is for higher taxes, lower wages and higher prices and the sale of Greek national assets at bargain prices.

Greece is being treated like a nation defeated in war, and, like a defeated nation, it will never prosper until it can free itself from the power of its conquerors.

A trust fund created by Greece’s creditors will sell off 50 billion Euros worth of Greek national assets, with half the money to be used to pay Greece’s debt and half to recapitalize Greek banks.   Greeks will not have a voice in what is sold or at what price.

Heather Stewart of The Guardian recently listed 23 nations that, like Greece, are in an external debt crisis, and 14 at high risk of an external debt crisis.

The 23 nations also in external debt crisis are Armenia, Belize, Costa Rica, Croatia, Cyprus, the Dominican Republic, El Salvador, The Gambia, Grenada, Ireland, Jamaica, Lebanon, Macedonia, Marshall Islands, Montenegro, Portugal, Spain, Sri Lanka, St. Vincent and the Grenadines, Sudan, Tunisia, Ukraine and Zimbabwe.

The 14 high risk nations are Bhutan, Cape Verde, Dominica, Ethiopia, Ghana, Laos, Mauritania, Mongolia, Mozambique, Samoa, Sao Tome e Principe, Senegal, Tanzania and Uganda.

My guess is that Ukraine is the next country in line to lose its national sovereignty to creditors; this is likely as soon as the government no longer needs financing to crush the rebellion in Donetsk and Lugansk.

We Americans should remember that the United States is a debtor nation like Greece, not a creditor nation like Germany, Japan or China.  What happens to Greece today and to Ukraine tomorrow could happen to the USA someday, too, when our debts are in yuan or some other currency instead of dollars.

LINKS

Beyond Greece, the world is filled with debt crises by Heather Stewart for The Observer.

Global Debt Can’t Be Paid by Briton Ryle for WealthDaily.

Mark Blyth on ending the creditor’s paradise

An American economist, Mark Blyth, author of Austerity: the History of a Dangerous Idea, gave a talk to members of the German Social Democratic Party on why so-called austerity is a bad idea.

I write “so-called” because the dictionary meaning of austerity is doing without things you don’t really need.  Food rationing in the UK and USA during World War Two is an example of austerity.  It doesn’t mean prioritizing the requirements of holders of financial assets over the needs of everybody else.

Here’s why Blyth had to say.

Back in the 1970s, a period that now seems quite benign, corporate profits were very low, labor’s share of income was very high, and inflation was rising.  We were told that this was unsustainable, and new institutions and policies were constructed to make sure that this particular mix of outcomes would never happen again.

In this regard we were singularly successful.  Today, corporate profits have never been higher, labor’s share of national income has almost never been lower, and inflation has given way to deflation.  So are we happier for this change?

What we have done over the past thirty years is to build a creditor’s paradise of positive real interest rates, low inflation, open markets, beaten-down unions, and a retreating state — all policed by unelected economic officials in central banks and other unelected institutions that have only one target: to keep such a creditor’s paradise going.

In such a world, why would you, the average worker, ever get a pay rise?

Germany on the same path as the USA

Wage and productivity growth in Germany

Via VoxEU

Some years back I wrote a post holding up Germany as a role model for the United States.  I said Germany’s policies showed that a nation can have a strong labor movement and a strong social safety net and yet have a growing economy and success in world markets.

I failed to recognize that Germany was and is following the same path as the United States—high profits, wage stagnation and financialization.  Germans are better off than Americans only because their starting point was higher when they started on the road to decline.

The chart shows that German productivity is increasing, just as in the United States, but German wage-earners aren’t getting the benefit of it.

Just like in the USA.

Protecting wealth vs. promoting growth

There’s no single principle that explains everything, but there is great explanatory power inn the French economist Thomas Piketty’s idea that inequality always increases whenever the rate of return on investment exceeds the rate of growth of the economy, that is, when r > g.

This is not something that results from impersonal economic forces.  During the past 30 years, the policy of the U.S. government, and of governments that follow the U.S. lead, has been to prioritize return on investment over economic growth.

The U.S. Congress and many state governments are in the process of cutting back scientific research, education, maintenance of public works and other things that are needed for our nation’s economic future, in order to keep tax rates low for corporations and upper bracket taxpayers.

These are the same “austerity” policies being enforced by the World Trade Organization, International Monetary Fund and European Central Government on vulnerable governments, which are forced to sacrifice the well-being of their citizens in order to satisfy powerful financial institutions.   In both cases, there is a tradeoff to sacrifice economic growth in order to maintain returns on investment.

One part of austerity is to sell off government property at bargain rates and delegate public services to corporations.  Most of the time this amounts to a transfer of wealth from taxpayers to well-connected business owners, who have no financial incentive to maximize service.

Some other ways that government policy fosters investor income at the expense of economic growth are (1) bailing out banks that have failed due to reckless financial speculation, (2) refusal to prosecute financial fraud by the “too big to fail” banks or claw back profits due to fraud, (3) expansion of patent and copyright monopolies, (4) failure to regulate cable and telecommunications laws, (5) failure to enforce antitrust laws, (6) the ban on student loan refinancing or bankruptcy …. The list goes on.

Increasingly corporate management seeks profit not by increasing the size of the economic pie, but by giving investors and executives a larger part of the pie — through financial manipulation and excess fees in the case of banks, through driving down wages and increasing executive compensation in the case of corporations in general.  I don’t say all corporate managers behave in this way.  I say that this has become common and acceptable.

The result has been a concentration of wealth and income in a tiny minority of the population, and economic stagnation for everybody else.   So the first step in reducing inequality is to stop promoting it.

Piketty’s preferred solution to undue concentration of wealth is a progressive tax on capital, sufficient to prevent the wealth of the economic elite from expanding at a faster rate than the economy as a whole, along with progressive taxes on income and inheritance.  I don’t object to any of these, but higher taxes on the rich do not, in and of themselves, benefit the middle class, wage-earners or the poor.   I think it is more important to  strengthen labor unions, raise the minimum wage, maintain essential public services and invest in the future.

Government spending cut without a sequester

Double click to enlarge

If you look at government employment and government spending, you have to look at state and local government spending as well as the federal government.  Efforts by the Obama administration to stimulate the economy have been offset by austerity on other levels of government.

The current economic recovery has had weaker job growth than in any recovery since the Great Depression.   I think the reasons for this are deeper than lack of governmental economic stimulus, but the charts show that is false to say that increased governmental spending has caused the recovery to be weak.

Hat tip to occasional links and commentary.

Al Jazeera on tax havens, austerity, drone war

There is an expression, the “informal economy,” which refers economic activity that goes on outside the purview of government regulators and tax collectors.  As used by economists such as Hernando de Sota, it refers to street pedlars and people who do odd jobs, but panelists assembled by Al Jazeera English discuss another informal economy, which includes the world’s super-rich and involves trillions of dollars.  This report and panel discussion, which focuses on Europe, is a good reminder that the billionaire shadow economy is a worldwide and systemic problem, and consists of more than just a few bad apples in the United States.

This report and panel discussion by Al Jazeera English, dating from last May, is a reminder that other countries face the same difficult economic choices as does the United States—economic austerity, which is likely to prolong or deepen the recession; or deficit spending, which may put governments even deeper in debt without stimulating the economy.  The discussion is somewhat fragmentary.  Panelists thought the U.S. government is doing a better job of coping with the recession than the European governments, but it wasn’t clear to me exactly what they thought the United States was doing right.

This documentary by a team of Dutch filmmakers is a good report on the technological advantages and political and ethical problems in waging warfare by means of remotely-controlled unmanned aerial vehicles.

Medicine for an economy sick with debt

Ratio of total U.S. debt to U.S. economic output

Our great recession is due to the bursting of a debt bubble, and not just the normal ups and downs of the economic cycle.  We had an economy in which many and maybe most Americans were unable increase their earning power, but maintained their material standard of living by going deeper into debt.  As long as the real estate bubble and the stock market bubble lasted, they were able to keep on borrowing.  Now that the bubble has burst, and it is time to pay up.

The old Keynesian medicine doesn’t seem to work.  As long as the government pumps money into the economy, there is some recovery, but noy enough to keep going when the government stimulus ends.  Paul Krugman proposes a stronger stimulus.  If deficit spending can spark sustained economic growth, he says, that growth will make it possible to pay down the debt in the long run.  Very true, but what if it doesn’t?  What if deficit spending just adds to the deficit and nothing more?

“Austerity” doesn’t work either.  Cutting necessary government services — schools, road maintenance, public health — just creates a different kind of deficit, if you look at things that way.   This “saving” is going to have to be made up by much more spending in the future.

Meanwhile we’re stuck.  As Sarah Jaffe of AlterNet put —

The student loan debt alone is going to be a trillion dollars sometime in the next couple of months. That’s a trillion dollars that we’re all paying in interest to Sallie Mae, to Citibank—mine was with Citibank for several years—to Wells Fargo, to Discover Card Services, which bought a bunch of student loan debt recently, and to the federal government. But we’re not paying that into our local businesses. We’re not paying this into the corner store. We’re not paying this to the farmer’s market. We’re not paying this to anything. We’re not buying a home because we have student loans or we’re not going back to school because we have a home loan.

Debt has been a substitute for wage increases in this country for about the last thirty years, give or take.  Real wages haven’t gone up in a really long time.  We’re mortgaging our future on credit cards and home equity.  And when the housing bubble popped, and the credit markets froze, we suddenly realized exactly how little we had that wasn’t promised to somebody else already.  It becomes a drain on the future. 

via n + 1: Debt.

Inflation is one historic method by which nations have made their debts go away.  We don’t want to go that route.

The other historic way to address the debt problem is to “restructure” the debt—have people pay what they can afford, so much on the dollar, and chalk it up to experience.  The creditors learn to be more careful in the future when they lend money.  The debtors find that it is much more difficult to borrow money.  Both are able to move on to new things.

During the 2008 election campaign, there was talk of something called “cramdown”—giving federal bankruptcy judges the authority to restructure mortgages in hardship or legally cloudy cases.  Various proposals have been advanced for giving relief on student debt.  Internationally, government debt crises almost always result in a restructuring of debt, but usually after a period of “austerity” in which the public is subjected to higher prices, lower wages, higher taxes and denial of essential government services.

I think that when you borrow money, you have a moral obligation to make a good-faith effort to pay back the money.  But when a borrower is honestly unable to repay a loan, it means both the borrower and the lender have acted unwisely (or are the victims of bad luck), and they both should suffer.  The lender suffers by taking a loss; the borrower suffers by having to pay up to the limit of what they can and by not being able to borrow in the future.  But you cut short the agony.  You make it possible to start fresh.

Click on n + 1: Debt for a panel discussion of debt by David Graeber, author of Debt: the First 5,000 Years; Mike Konczal of the Roosevelt Institute; Brian Kaltenbrenner of Occupy Student Debt; and Sarah Jaffe of AlterNet.

Click on Okay, Folks, Let’s Put Aside Politics and Look at the Facts for useful charts and information from Henry Blodget of Business Insider.   Blodget is a Wall Street guy who thinks the answer to the federal budget deficit is a combination of tax increases and cuts in Social Security, Medicare and Medicaid.  My problem with this is that Social Security (contrary to the propaganda) is solvent and Medicare delivers health insurance more efficiently and at lower cost than for-profit health insurance systems.  It is true that Medicaid spending is a problem, but I think a solution needs to be something other than denying essential medical care to poor people.  That said, Blodget provides a great deal of good information.

Click on Hubbert’s Third Prophecy for more useful charts and information from ClubOrlov.  The post concludes with an argument against banking as such, which I don’t understand and with which I probably would disagree if I did understand it.  That said, there is a lot of good information, as well as food for thought about exponentially increasing debt in a world that cannot sustain exponentially increasing economic output.

Click on Parsing the Data and Ideology of We Are the 99% for an analysis by Mike Konczal of the demands of the people on the “We Are the 99 Percent” Tumblr page.  His conclusion was that their basic demands were debt relief and the means of basic economic survival.