35 – The Austerity Epidemic (21 June 2011)

    I have said it elsewhere on this site: the notion of a ‘marketplace of ideas’ is nonsensical (jotting 24). Ideas are not traded, and are not scarce. They infect you, may cause intellectual and emotional fever and have frequently enough brought about epidemics that changed history. For the right metaphor in this case we should stick to the field of medicine, especially now a new epidemic, also known as the ‘austerity craze’, has been spreading in three of the most important industrial areas of the world; after having been allowed, in a chronic process in Africa and Latin America, to keep poor countries poor.
     Today, the very efficacious political command that belts must be tightened, budgets slashed, and welfare provisions thrown overboard is threatening to help make the future of Europeans, Americans and Japanese dimmer and more miserable.
     Before saying anything else about it we must be clear about the fact that the seductive power of the political/economic recipes that come with the craze does not derive from historical proof that these have been successful. Quite the contrary; starving the state of the means to cater to the common good has often enough lead to the kind of social unrest that produces false prophets and Pied Pipers who lead countries from bad to worse, or even to calamitous outcomes as in the case of the German Weimar Republic. Austerity measures will make unemployment shoot up and, when applied too deeply and for too long, tend to invite violence and repression.
     What is being offered as medicine for restoring economic health is a virus, one incubated in ideology. We may define ideology here as horse-medicine against uncertainty, which means that it is immune to demonstrated fact, commonsense reasoning or political argument. The ideology has worked its way deeply into the national discourse of many countries thanks to the fact that those who benefit from it have the riches as well as the political and media connections to create powerful but false received wisdom. It also works because the call for austerity deludes large numbers of people who are not rich, and who may well be among the most victimized, by the simple and direct manner it becomes an antidote to their feelings of guilt about anything they may have thought or done. A period of lax morals will do it. Anyone brought up in Calvinist surroundings readily understands this. Austerity is good for you; it is the quickest way, short of self-flagellation, to atone for your sins.
     The victim populations in Europe, the United States and Japan may in varying degrees share this self-disparaging response, but the reasons why the austerity epidemic spreads among them are different, and it is doing three different types of damage.
     Since the current mutant of the virus was produced in the United States we should start there. As James Galbraith recently noted about its effect: “we are witnessing one of the greatest waves of mass hysteria of all time. The result of one of history’s most intense and most successful propaganda campaigns.”
     He was referring to a cluster of related phenomena from budget plans that seek to dismantle whatever was left of provisions for the common good inherited from Franklin D. Roosevelt’s New Deal and Lyndon Johnson’s Great Society, to the success of the so-called Tea Party, and the ongoing attempt by America’s plutocracy politically to undermine the middle class. The fraudulent arguments of the propaganda campaign register with a public that was brought up to consider the state as either a necessary evil, or at the least something to regard with extreme distrust, something that all too easily stands in the way of the full flourishing of individual freedom. America’s top 1% of the population, which owns about 40% of the national wealth, is not interested in continuing with what it likes to picture as the coddling of a middle class that simply has not worked hard enough.
     The American idea of the state limiting the potential of the individual has of course deep roots, going back to pioneer days when government was far away and local communities managed to keep order by themselves. But Ronald Reagan most recently helped popularize this huge misconception of state-citizen relations once again with his famous line that the state is part of the problem rather than part of the solution for American problems. In fact, a considerable number of America’s political problems follow from the fact that in common understanding the state is not recognized as a legitimate entity representing all citizens. There would not be an austerity craze if this were otherwise.
     Questions about the state of affairs concerning the state are a good point of departure also for discussing the two other instances where the epidemic is wreaking havoc or threatening to do so. With regard to the European Union there is no state, and no federation of states conducting affairs as if there were a substitute for one. The single biggest built-in flaw of the European Union is the lack of competent political institutions to deal with the political problems that arise from the integration of its economic institutions. The problem in Japan is that there is no center to the state, in the sense of an accountable entity equipped and empowered to take and implement fundamental political decisions when circumstances demand a fundamentally new set of policies. This makes Japan vulnerable to policy routines that have outlived their capacity to deliver a desirable outcome, and the austerity routine is one of them.
     Whereas in the United States, the austerity epidemic is accelerating the destruction of the middle class, and consolidating corporatist political arrangements as a substitute for democracy, in Europe it is endangering the Euro and undermining pan-European solidarity. It also fosters a kind of nationalism that many thought had gone forever, among populations who wrongly feel that they have to carry burdens piled up by irresponsible other populations in fellow member states of the Union. In Japan, the epidemic has not yet come to full flower, but the virus can easily be detected in the predilections of the Ministry of Finance and the current prime minister, Naoto Kan. There it may well derail possibilities of economic rejuvenation following Japan’s worst calamity and crisis since World War II.
     European states had already been infected in varying degrees by neoliberal notions enveloped in sloganeering such as ‘the third way’, which like in the United States have altered what used to be known as the social contract: welfare arrangements determining the relationship of government vis-à-vis the citizen. Fought over for decades by unions and the like, these were for most of the second half of the 20th century accepted by Europeans as a matter of course, and in consonance with desirable political morals. National governments of Union member states discovered a convenient escape argument when confronted with angry citizens by pointing at Brussels from where rules and regulations emanated that they were not at liberty to ignore. But also individually the Union member states have for some time been affected by the austerity virus. Almost everybody has been tightening belts and scrapping state-funded programs, which along with the privatization of many a public service has led in several countries to a noticeable deterioration of such things as health care, education, and public transportation.
     The European epidemic is now much aggravated by another horrible development that is likely to go down in economic history as one of the worst excesses of predatory capitalism. Tear gas has been seeping into parliament chambers in Athens, as the police battle angry Greeks who see their economic future being sacrificed for the sake of saving banks that before the credit crisis of 2008 tempted the Greek government with very low interest loans, allowing it to get stuck in an ever growing pile of debt. This crisis is further complicated through speculators who with so-called credit default swaps have been betting on a collapsing Greece. The European Central Bank as well as the IMF have entered the scene here, in attempts to postpone a moment of truth – either Greek bankruptcy or a much needed new European financial system – by adding more debt to the pile. Their putative help is given in exchange for the familiar neoliberal litany of demands for privatization and austerity. The Greek austerity epidemic is leading to actions in which entire organs are gutted from the body politic; with plans for Athens to sell state assets. Something that predictably attracts speculating business vultures.
     The notion that belt tightening and slashing budgets will solve the Greek problem and bring back economic prosperity is laughable beyond belief. You cannot pay off your debts any better if you shrink your economy. The same truth holds for Ireland, Spain and Portugal. The austerity packages that these members states, similarly victimized by the speculators that triggered the credit crisis and the subsequent recession, have been forced to swallow, can only push them deeper into trouble.
     Aside from the facts that the austerity formula does not work, and that privatization of public services usually leads to worsening their operations and higher costs, another crucial fact must be kept in mind: There is no choir of voices pointing all of that out. This means that the epidemic is not producing antitoxins.
    Which brings us to the broader perspective of what has happened to what used to be called the ‘free world’. The financialization of the European member state economies has only slightly lagged behind that of the United States. Because the trade of this rapidly expanded and relatively unregulated sector has become so intertwined on both sides of the Atlantic, speculating investment bankers are showing that they can hold entire populations hostage to their machinations. Recent experience teaches that governments and central bank authorities exist not, as we used to believe, to protect people and economies, but to rescue banks. Banks are in charge. While in the past 30 to 40 years the political power of financiers has reached heights that are unprecedented, never before covering as large a part of the planet, the political power of workers is no more, since labor unions have vanished as significant political players. Political parties that were built on a tradition of socialist or social democratic political thought have, already for some time now, betrayed the expectations of their electorates. The American as well as the European political elites now support policy positions usually associated with right-wing beliefs. Officeholders among them may expect highly remunerative late career opportunities as long as they do not rub businessmen and bankers the wrong way.
     Sane voices from knowledgeable Americans drown in the din generated by the strong propaganda machines of Wall Street, think tanks, deluded liberals, and a mainstream media sheepishly regurgitating what it is told by government, investment banks and business analysts. Wall Street powerholders have dictated austerity and the tea parties paid for by the oligarchs demand it as a matter of course. Just as with the corporate downsizing craze of a decade and a half ago, its fervent advocates, who are not in any way hurt by the consequences, call the austerity measures ‘courageous’.
     Anyone in the United States who starts a discussion about what this has done to the social contract will be accused of fomenting class warfare, which in the American public consciousness is supposed to be something horrible that must at all costs be avoided. As for the European Union, it has no public sphere in which such a discussion can take place. Hardly any antitoxins subduing the epidemic, aside from the news about rioting protesters and the threat to stability and status quo they have become, can be found in the European journalistic bloodstream. What Europeans get to learn collectively comes from the American International Herald Tribune and the Wall Street Journal, or the British Financial Times which is edited with one ear cocked to Wall Street and Washington. While the lastmentioned influential newspaper carries some superior reporting it appears to have changed its general stance toward a united Europe from prudently positive to fairly negative, sometimes giving the impression in its reporting as well as commentary that it would welcome the downfall of the Euro. For the first time since the introduction of that common coin such a development is seriously envisaged.
     If one state of mind could be said to rule the different aspects of the crisis it would be ignorance. Financial news overwhelms. Few can get a perspective on what it means. The necessity for populations to accept austerity pains and collapsing economic prospects has a seductive plausibility for the populations of the luckier member states in the context of their guilt and atonement perspective. Again, we are talking about sinners here. The countries in the southern periphery of Europe, and the one on the far Western edge, all had it coming to them. They lived beyond their means. They did not work hard enough. They, irresponsibly, voted profligate politicians into office. The epidemic has provoked the first truly serious symptoms of rupture in the Union.
     Many Greeks have taken to the streets with an energy and dedication that would seem to make a political explosion in the summer quite possible. Along with the Irish, the Spanish and the Portuguese, they do not on the whole feel responsible for what, in effect, the banks have brought on themselves. But Brussels-based official explainers make it appear as if the euro zone is divided into virtuous countries like Germany, the Netherlands or Finland and countries in which wages have been too high, retirement has come too early, and no attempts have been made to increase competitiveness. The taxpayers in the virtuous countries must not be forced to bear the cost of compensation for these wastrels.
     That those negatives about the victim countries, while perhaps true, are irrelevant in respect to what triggered their current difficulties is hardly ever made clear. Europeans are not well informed about the political setting in the United States that engendered the epidemic. They are mostly unaware that the judges of the creditworthiness of member countries in trouble, headlined in the newspapers and exciting the financial markets, are ratings agencies guilty of monumental fraud. This criminal fraudulent conduct was a significant factor in the operations of speculators that led to the credit crisis and the current recession, and they could and should have had their credibility erased, or at the least undermined, by European litigation.
     The standard premise that those in the IMF and in the European Central Bank who do the dictating are doing so on the basis of privileged knowledge, akin to science, ignores a critical fact. These professionals are beholden to theoretical economic models that were formed with scant reference to actual experienced economic and political reality. Institutional structures and their differences from one country to another does not interest them, since these spoil the models, and when in the past their policy solutions made things worse, these economists simply perscribed larger doses of the same disastrous medicine. The track record of the IMF supplies hundreds of illustrations. Neither side of the Atlantic appears to know how counterproductive from an economic development point of view the austerity recipes imposed upon Africa and Latin America have been. Studying the outcomes of the cures they have prescribed we can only conclude that the economists of the IMF are quacks. Or, more cynically, serve purposes other than the health of their patients.
     The plans in the drawers of IMF economists are ready-made for use with some adjustments everywhere, and are designed for the economies of poor countries to have neocolonial relationships to the rich countries. As subcontractors. Once the peripheral countries of the European Union implement the austerity packages they also sentence their economies to permanent subservience.
     The European Central Bank is manned by bureaucrats who are similarly steeped in neoliberal bias, and who now outdo each other as stern moralists, except when the fault lies with the speculating banks. Moreover, some of them have made a career that has included employment by the banks that have engaged in the betting operations that led to the crisis that has made the austerity epidemic ever more virulent.
     Available knowledge is carefully kept separate from delusional ideology. Relevant history does not play a role. If it did, it would be better known that a sustained austerity approach does not lead to economic resurgence. It was disastrous in the Chili of Pinochet (contrary to the propaganda you may have heard about it), and until the Argentinians told the IMF to go home and not come back their economy had no prospects other than ruin. The Russian example, once Communism had been abandoned, should have taught the world a never-to-forget central lesson. Its neoliberal austerity package delivered by America’s free-market academics reduced the national product roughly by half, reduced life expectancy, and vastly increased the suicide rate. Further back in history, before neoliberalism made its appearance, we have the dreadful example of a Germany bled to a point of desiccation that made room for the biggest and most destructive false populist of the 20th century.
     The political knowledge of the putative experts amounts to next to nothing in situations as the one today. Whereas they may sometimes vehemently disagree with each other about best possible solutions, their approach to the subject stays within ideologically determined conceptual boundaries, and excludes radical policies inspired by the recognition that a new, independent, centrally coordinated and directed European financial system is called for, something that will give the euro a credible political basis, and something that fulfills the implicit promises of protection to those member states that have joined the euro zone.
     At first sight Japan appears not to belong in the list of areas threatened by an ideologically inspired epidemic. Its economic system is not organized in a way resembling that of the United States or European countries, and is run by a funny kind of capitalism whose incentive structures only partially overlap with the familiar Western patterns. The powerholders who designed post-World War II institutions that turned Japan into the most applauded case of a rapid industrializing economic miracle, considered the market at best as one of an arsenal of instruments, alongside those of a dirigiste nature, to attain desirable economic outcomes. They understood that you can allow market forces to do a bit of corrective work for a while, and at the same time remain ready to interfere when something is needed that markets cannot accomplish. Good outcomes made them immune to the ideology that has proven to be fateful to both sides of the Atlantic. But economic success brought forth problems demanding solutions that the political system was insufficiently equipped to figure out. Japan has a relatively superb record of producing bureaucrat-administrative decisions, but lacks a center of political accountability with the wherewithal to plot a policy course diverging greatly from what has become routine.
     Almost all participants in the economic and political worlds of Japan have long agreed that this situation calls for reform. And because Washington has throughout numerous frustrated attempts to gain entry to Japan’s domestic market and other trade friction been pestering Japan’s officials for reforms it would benefit from, these two kinds of calls for new political approaches got mixed up. This created a receptiveness for neoliberal reform notions in the minds of Ministry of Finance officials. The current uncertain political situation, and the loss of confidence in the wake of Japan’s great calamity, is rendering the country unprotected against the austerity virus.
     The last thing Japan needs at the moment is a national guilt attack that comes in the guise of ‘responsible finance’. Japan’s budget deficit may be enormous, but virtually all government debt is held domestically, in a system where private and public sectors are intertwined to such an extent that the division is close to meaningless.
    The wholesale destruction of homes and industrial structures wrought by earthquake and tsunami in large areas last March, obviously calls for huge reconstruction projects. These could, in the way of post-World-War-II reconstruction efforts, turn into engines of rejuvenated economic activity, which Japan in the past couple of decades has been waiting for. To make that happen Tokyo must inoculate against the austerity virus by asking its recently trendy deficit hawks to remember their own history, and to say to foreign well-wishers who also wish to help make Japan fit better in the globalized world of predator capitalism to mind their own business.