Austerity and the threat to Democracy, in the US, Europe and the Middle East

The “sequester” is actually, of course, the American form of austerity, or cut-backs in government spending during a recession. Austerity, or stingy government in Europe has kept employment extremely depressed compared to what it would have been with government stimulus, as Paul Krugman argues.

Saturday, there were massive protests throughout Portugal against Scrooge policies by the government, which have so destroyed the country’s economy that 2% of the population has fled abroad for jobs in the past 2 years alone. On Friday, Greek workers staged a huge general strike. In Italy, anti-austerity feeling made grumpy comedian Beppe Grillo and his party the swing vote in the new parliament. Grillo may single-handedly destroy the Euro zone. European newspapers rather amusingly demanded that Grillo now ‘take responsibility’ and ‘tell us what he wants.’ He is a contrarian comedian. It would be like having Robin Williams or Tracy Morgan as the swing vote in Congress, with the press hounding them for their agricultural policy and asking them about the dangers of deflation. But Grillo’s ascendancy, while less alarming than the resurgence of the Greek far Right, is a manifestation of the rejection by the Italian public of the long dreary road prescribed by the ‘troika,’ (The International Monetary Fund, the European Union, the Central Bank), of further government cut-backs, reductions in minimum wage, high unemployment, no hope.

While for some odd reason the Middle East does not usually get analyzed with the same social science tools as Europe, the political crisis in Egypt is related to the Muslim Brotherhood government’s austerity program. The latter, as Samuel Knight argues, is being pursued under pressure from the International Monetary Fund. Secretary of State John Kerry is in Cairo, also urging acceptance of the austerity program. Austerity is estimated to have reduced Egyptians’ real income by 3 percent in January alone. Tunisia is doing better than Egypt economically, but the parliament, dominated by the religious Right, is also tempted by austerity measures, seeking to trim a point off the budget deficit this year while seeking 4.5% growth. While letting the value of the Tunisian dinar fall would hurt consumers with regard to imported goods, it would make Tunisian textiles and tourism more affordable for those abroad. Tunisia’s exports are hurt by European economic problems, and the country would do well to develop more Asian customers (Brazil has had success reorienting exports to the Pacific Rim). Likewise, although Yemen’s economy improved in 2012 after a 10 percent drop in the revolutionary year of 2011, if anything the government budget deficit of 5.5% is not big enough to stimulate the economy properly.

Reducing the state budget at a time of economic contraction is the opposite of what the great economist John Maynard Keynes prescribed. When the economy is in the doldrums, the businesses are skittish about investing their money, and so keep it in the bank. The only force, Keynes argued, that can and will risk putting a lot of money into the economy during a deep recession is the government. Of course, the government has less money at that point, too, since tax receipts are reduced. So it will simply have to spend money it doesn’t technically have, i.e. go into deficit and print extra paper money. The extra paper will, obviously, lose some of its value. But that loss can have benefits, too, since it will make the goods produced by the country less expensive abroad, and spur exports.

This argument is straightforward for most countries, and it is mysterious why European and some Middle Eastern governments reject it. It is complicated in the US by the position of the dollar as a reserve currency and by the fall of manufacturing to only 20% of the US economy. The former means that large budget deficits don’t necessarily reduce the dollar’s value significantly, because the US only holds about a third of the world’s dollars and there is a lot of confidence in its value. The latter means that even when the dollar falls against the yen or euro, the jump in exports is limited to a fifth of the economy and domestic services don’t get much of a boost. But actually these peculiarities of the US economy are not arguments for austerity; on the contrary, the reserve dollar allows the US to do stimulus without as much pain as one would otherwise expect.

Instead, the Tea Party has forced the US into an artificial crisis with the ‘sequester,’ taking $100 bn. a year out of the economy for the next ten years, which will cut half a point of economic growth and harm workers, keeping unemployment high– not to mention the harm it likely will do to medical research, higher education, etc. That this austerity is being pursued by the GOP in part in hopes of disillusioning voters with President Obama in his second term is fairly obvious, but it is also in order to protect the 2003 Bush tax cuts for the wealthy, 80% of which have been retained. Sequester, as usual with these things in the US, is actually a tax on the middle classes to benefit the wealthy, since it preserves undeserved tax cuts for the latter by reducing government services for the former.

That austerity does not work economically should be clear. But that it creates populist discontents that are shaking southern Europe and could derail Middle East democratization is even more alarming. The world needs stimulus, not Scrooge government if it is to pull out of the crisis kicked off by corrupt bankers in 2008.

28 Responses

  1. A bad as the sequester is, there is a silver lining. The sequester is forcing a cut in the Defense Department budget. Already the deployment of another aircraft carrier to the Middle East has been postponed. They no longer talk of staying in Afghanistan forever. Perhaps the sequester will force a more rapid withdrawal from Afghanistan. Hopefully there will be no war with Iran if, for no other reason, we can’t afford it.

    This has caused a curious split in the Republicans. The fiscally responsible Republicans have split from the warhead Republicans. I much prefer the former to the later.

    Sometimes the worst of times forces you to do things that you should have done anyway. That is, unfortunately, human nature.

    • I agree with this, if only because we will never be able to restore any social spending in the future as long as the cult of the all-powerful military is not shattered. Because people don’t have objective measures of “security” and they are easily frightened by the outside world due to their vast ignorance, warmongering has become the right wing’s preferred tool to starve its enemies out of the federal budget.

      We need to have a forced cut, and then wake up the next morning to realize that we’re still alive. Only then will people even begin to question the premises of infinite military power.

      Whereas the cuts on the domestic side will definitely hurt a lot of people, and they should be radicalized into disruptive action on getting their cuts restored. If we won’t fight harder for justice than we do for our fantasies, what future could our country have anyway?

      • How the heck can there be any expectation of any kind of substantive change in or limit to the Infinite Threat Generator And Wealth Converter, when the substance of what goes on is so Stupid, every single day?

        One tiny example: Here’s what the War Department has to say about one of its “key systems,” in a stirring flood of Milbabble:

        link to dote.osd.mil

        Reduced to more common parlance, IT DOESN’T WORK AND IT HAS COST $2.7 BILLION TO DATE (and let’s not even talk about the F-35 “jobs program” thing):

        link to extremetech.com

        And here, and a whole lot more places: link to politico.com

        I doubt the average schmuck is likely to get radicalized to anything close to the same degree that flacks for the many Procurements in the Pipeline will manage, right out of the gate…

        Maybe the hope for less militarization of the future is that Murphy and the Second Law of Thermodynamics will conspire to bring all those Grand Interoperable Network-Centric Systems to a sand-in-the-gears, manufacturing-tolerance-error, friction-induced halt.

  2. It is odd that the IMF is still urging austerity on nations since it has published two major studies in the last six or seven months by its chief economist that demonstrate austerity has the opposite effect of what its proponents say will happen. Mainly, the IMF now argues, government austerity budgets kill economic growth when a country is struggling to come out of a recession.

    The best living example of this is Britain, where David Cameron’s pain plan is about to create an almost-unheard of triple dipped recession.

    In a Saturday blog post titled “Self-Destructive Europe,” Dr. Paul Krugman shows – again – how austerity forced on troubled nations by Germany coupled with contractionary fiscal policies in others is causing massive economic problems right across the Continent. (link to krugman.blogs.nytimes.com)

    Egypt has enough problems without the government deliberately forcing more difficulties on its people. That Secretary Kerry is in Cairo urging support of such a foolish policy is beyond belief.

    • ‘That Secretary Kerry is in Cairo urging support of such a foolish policy is beyond belief.’

      It’s only beyond belief it you expect Kerry to work for the good of the people of Egypt (or the USA or humankind). If you see him for what he really is, a member of The Elite, the 1%, the banksters, the corporations, the establishment (call them what you will), then what he is doing makes perfect sense.

  3. Government always serves the moneyed aristocracy so investment to stimulate the economy and improve the wretched condition of the working class will never happen. Cheap labor is the wellspring of great wealth so you can expect that government will do all it can to extend hard times.

  4. I can’t help but believe the drivers of austerity would welcome civil unrest. It would give them a chance to institute the fascist state they long for, controlled by the wealthy and the military.

  5. What I am finding is that there probably won’t be any real recovery until Basel III begins in 2019. What Oswald Gruebel said during the St. Gallen Symposium was quite revealing. We can point fingers all day long at each other (politicians), but what’s done is done. Decisions were made for all of us. I expect austerity measures to be more of a permanent thing. I am also dismayed at how Basel III works, like a giant game of ball and cup. It will be very difficult to trace who has what with the new bank union. I wish I could be more optimistic, but it seems the fox is creating the rules for the hen house.

  6. I wonder whether there will there come a point where sustained unemployment will force a change in austerity policies, for better or for worse.

  7. Juan I am on the other side of this argument about whether the world can spend it’s way back from epic deflationary depression but I think the US is the worst offender in terms of massive, prolonged excessive, corrupt and wasteful spending.
    One of the best examples of this is Homeland Security. It was rushed into law 12 years ago and hasn’t been questioned since. It can’t be audited and nobody seems to know what it does. It provides lots of jobs but the FEMA response lately seems to indicate most of the $$$ are for corporate security. outlined here: link to tomdispatch.com

    I would like to see you do a post like 10 top changes in military and foreign policy that would save us a trillion dollars. Also, I think the Italian Brillo Pad is right. Italy will be unable to pay anyone in 6 months.

  8. “… for some odd reason the Middle East does not usually get analyzed with the same social science tools as Europe …”
    Thanks for making me think about new and different things.

    ——

    “Sequester … preserves undeserved tax cuts for the [wealthy] by reducing government services for the [middle classes.]”
    My Tea Party hope is that sequester also drastically reduces certain government services for the wealthy, particularly wars of agression.

    Pentagon showmanship and theatrics resulted in the removal of one carrier strike force from the shores of Iran, trying to scare the Congress into reneging on their pledge to the Tea Party. The Imperialists actually thought that Americans support endless war and want to stay frightened. Now I hope we decide to live with ONLY 8 active carrier strike forces, more than twice the rest of the world, combined. Now the Chinese can suspend their crash nuclear carrier program.

    • I don’t see any evidence that the Tea Party wants the military reduced. Now that Rep. Paul is retiring, we can see everyone who joined his movement only wants to cut the money that goes to “inferior”, “lazy”, pinko welfare Negroes because surely they are to blame for all our problems. And in case the victims resist, take away their right to vote with Voter ID laws, and if they fight, herd them into privatized prisons to serve as slave labor.

      This has always been the plan. The Tea Party always wanted the 19th century back, so why wouldn’t it want all the horrors of that time as well? The corporations will be the new plantation owners, and the Tea Party will be proud to be the rednecks who whip the slaves.

      • Super 390,
        you may be portraying the Tea Party accurately, but I don’t think so. My evidence is only anecdotal, being one who identifies with the rubric and who has attended several meetings and rallies.

        At 55, I was usually the youngest one in the place. These were mostly retirees who had “earned” some sort of government entitlement, such as Social Security or military retired pay or both. And yes, they mostly didn’t want anyone else getting any of that largesse, but not because they wanted younger folks to suffer: they feared that fairness would cut into their share.

        You are free to read racism into that; I didn’t. Just lemmings that had been conditioned to fear at the sound of a bell.

        What attracted me was the “buzz” that participants wanted to get back to the Constitution, and to a lesser extent, the values in the Declaration of Independence.
        What they were less clear on was that the Constitution is not settled in interpretation in every respect.
        The “promote the general welfare” clause, for example, trips a lot of them up.
        I stand with them on the current and recent interpretation of the 2nd Amendment as conferring an individual right to own guns. I understand the role and limitations of police protection better than most.
        But I am more concerned with the 4th Amendment, and Habeas Corpus, and the unconstitutional “war on terror,” and torture, and employing Mercenaries, and the general trend toward a unitary fascist executive in the White House.
        That’s my vision of the Tea Party movement.

        But hey, Super 390,
        if you cannot deal with the real Tea Party and need to create a grotesque caricature in order to put me in a pigeon-hole and dismiss me,
        more power 2 ya.

        • Brian,

          The problem is, I’ve never seen anyone in any faction of the far right say that there was anything BAD about the 19th century. But I’ve seen:

          a. a movement to repeal the 13th Amendment
          b. movements by a former slave state to secede (again)
          c. a Tea Party congressman call for the repeal of general election of senators – a reform that dates all the way back to Andrew Jackson
          d. Rep. Paul call Lincoln a tyrant
          e. a consistent refusal by Republicans to categorize abortion clinic bombers or the KKK as terrorist groups

          (a) is crucial. You talk as if the TP was spontaneous. In the ’90s I was paying attention to right-wing extremists, who had not yet been given the opportunity by the Kochs, et al to go mainstream. Many extremist ideas are first broached in places like gun magazines, then mainstreamed over time. The right-wing argument against the 13th Amendment is chilling, and consistent with the neo-Confederate, theocratic, and libertarian wings of the movement. To wit: blacks can never be citizens of the USA unless state legislatures vote it in.

          Now do you believe that any legislature that would go through the trouble to nullify the 13th Amendment or restart the Civil War would then grant blacks the right to vote?

          I’ve never heard any of these people say that they MIND that their beloved, omnipotent, infallible (once reinterpreted by David Barton) Founding Fathers gave the vote to so few Americans.

          If you ever see in a far-right publication the words “The Founding Fathers made America a Republic, not a Democracy” (as I have many times), what does that mean other than that the vote should be restricted the way it generally was in 1789 – meaning only white males who meet property quotas?

          Our history was grotesque, and these folks embrace it without reservation. They must know that minorities will go to war to keep their right to vote. The gun magazines are full of articles about “civil unrest”, almost salivating at the prospect. Again, it’s unlikely that any movement that takes over a state with the intent to restore the white monopoly on power will desire any less of a monopoly on violent force.

    • “Pentagon showmanship and theatrics resulted in the removal of one carrier strike force from the shores of Iran”

      It was indeed showmanship and theatrics, as there is enough fat that can be cut in the Defense Department while still maintaining a robust strike capability. Should it be necessary, that second carrier strike group will be redeployed to the Persian Gulf. In fact, this is typical of the Obama Administration. Obama and his minions have been saying the sky is falling. Note Education Secretary Arne Duncan mouthing the outright falsehood that teachers in West Virginia were being laid off, even before the sequester took effect! It was found to be totally baseless. Such actions undermine their credibility.

      “Now the Chinese can suspend their crash nuclear carrier program.”

      Not a chance. The Chinese military and naval build-up is not subject to the vicissitudes of the US defense budget. The Chinese want to develop the capability to eventually deny the US access to waters within the “first island chain” (i.e., Japan, Taiwan, the Philippines, and the South China Sea (at least the part they claim). Their strategy of “Anti-Access/Area Denial” capability is just that, a capability they are trying to develop. It does not mean they will put it into effect, but they want to have the capability should they determine the situation requires it to go operational. Of course, we are developing “Air-Sea Battle” plans to counter it, as we should.

      • Bill,
        we (the USA) cannot afford to power 100 navy ships with nuclear reactors. That’s subs, carriers and a few others. I really don’t think the Chinese can afford that method.

        Their current 5-year-plan for the PLAN (navy) calls for laying keels for 4 nuke-powered carriers. If they had the technology today to power those, I think they wouldn’t burn so much anthracite (which is less harmful) or bituminous coal.
        But if we can scale back the number of our nuke-powered super carriers, maybe, thru negotiations, they can scale back their corresponding aspirations.

        • The Chinese aspirations are to eventually have the capability to deny the US access within the “first island chain,” and whether they develop carriers (nuclear or otherwise) or submarines (which they are already developing) to accomplish that, they will do it. Again, it does not depend on our budget and plans. That’s not to say they will be successful in denying us access, but their goal is to reach that level of capability.

      • Bill once again demonstrates his fealty and fixity when it comes to carrying on and apologizing for the vestiges of the Cold War. And for one who disses and dismisses others who claim to have some understanding of his mental processing, it is interesting that he knows, KNOWS, what is in the group mind of Those Chinese who just naturally want to Take Over The Far East that our war leaders are now “pivoting toward” with whatever energies and money they have left from their “pivots toward” the African continent and South and Central America.

        Too bad the average US taxpayer, all fearful and ignorant, can’t or won’t take the trouble to read the reams of documents and track the procurements and deployments that make up the comforting “Air-Sea Battle” plans “we” are developing, along with the planning for and implementation of Dronegemony Forever, to see just exactly how little”security” they are getting for their trillion dollars a year.

        • “it is interesting that he knows, KNOWS, what is in the group mind of Those Chinese who just naturally want to Take Over The Far East”

          It appears that you are incapable of understanding the subtleties of power and influence. It is not that the Chinese want to “take over the Far East.” But they do want to deny the US the ability to exercise our influence as a Pacific power in order to be able to exercise their influence, particularly in Southeast Asia, without having to contend with the US in the region. If you had the perception of a rapier, rather than that of a meat cleaver, you might pick up on these nuances.

  9. I would say the problem is with gluts. There are so many products and services available and people are expected to buy them. When the demand declines due to market saturation, there is corresponding decline in the need for people to be hired, thereby causing the bosses to constrict their workforces in order to preserve value in the various companies. [This is all very basic, I know.]
    The trouble is caused when the various corporate enterprises are less inclined to reduce their value by distributing the available monies by keeping people perpetually employed. I recall that this happened with the Japanese who went from an economy that ensured life-long employment to one that put a greater value on business income and less on worker longevity. Detroit is another example in that the auto industry has gone away, leaving a skeleton of rusting and decaying infrastructure. Now, there are stories about the average family not being able to afford a new car.* Thus, there is a glut of vehicles that cannot be sold to a surplus of people. Even Samsung recently had an offer to give their Galaxy SIII cell tels away for free (WalMart is now advertising them for about $125), something that would only happen in a market that was so overwhelmed with devices that supremacy relied on severely undercutting the competition.
    Austerity might be a good thing if the holders of the income and revenues downsized their expectations and distributed the available funds more equitably. With CEO salaries at somewhere above 400 times the average workers’, with banks too big to fail, with pResidents starting wars to boost cronies’ coffers, with nonsensical noise makers who see themselves as musicians rapping in the cash, with a lack of prioritisation of what societal needs are, austerity is going to have to be the ‘remedy,’ putting the controls in the hands of those who are essentially the servants dictating to the masters and mistresses of the house.** Austerity is at the wrong level of the organisational structure! When the real crisis comes, the planners will be there to administer their solutions.

    * link to thedetroitbureau.com
    ** link to en.wikipedia.org

  10. I do not think that the sequester is the US austerity program. It was a scare program with cuts that were absolutely stupid across the board slashes.
    It will not take long for howls of outrage to go up as jobs are cut, local areas dependent on the military will be up in arms, education programs will suffer, and then the politicians will be forced to get together to implement the real austerity programs using the cloak of saving the nation from the cuts.

    • I pay attention to the federal procurement community.
      They are saying that, now that we are actually into sequester territory, the cuts are neither rigid nor across-the-board.

      They are going about their business as if the cuts are permanent, and no core missions are being cut back.
      Interestingly, they are more interested than ever in new and more efficient ways of doing things.

      I get the impression that the major contractors in the various government sectors have been preparing for this for at least a year. They took the sequester seriously as soon as it was signed into law, and never assumed that Congress and the White House would figure out a way to avoid it.

      • You could be right but then this means that many of the projections about the effects on the economy of the sequester are either incorrect or not all that scary. The reaction of stock markets in the US fit in with your view in that up to last Friday the markets had been rising. Profits have been good as well.
        However employment growth is not matching that of profits nor is the income of the average American. This surely is not a good sign for future demand. Austerity measures such as these cuts can only make that worse.However, perhaps US global corporatios are depending on emerging markes to take up any slack.
        Anyway we will soon see how much negative reaction there is to the cuts and whether they will spur Congress into a deal.

  11. Haven’t there been some recent studies that have shown that because of “hysteresis” that austerity in fact makes the prospects for paying back public debt worse, rather than better. The theory is that a sustained slowdown damages future prospects enough that the economy won’t recover back to the precrisis trendline, and that that future lost economic output will hurt government revenues by more than any supposed savings from austerity? I think the vast majority of economists are simply looking the other way, practicing what Sinclair said about ,a man can’t understand something, if not-understanding it is essential to his employment.

  12. It has to be understood that austerity is not an option. It appears to be an option and may sort of be in some places more than others but only to the extent that central banks are buying the government debt which funds the things that are being cut in austerity.

    Added together the proposed austerity cuts in the EU periphery and here add up to perhaps a trillion dollars over the next two years. Let’s not forget that those governments have borrowed 4 or 5 or 6 trillion over the last 4 years and obviously self sustained ‘organic’ growth has not occurred.

    There is simply no possible way the markets are going to buy up the bonds of those governments at low rates. So the option if you want to call it that is for central banks to buy those bonds. Printing money to support governments was until recently considered an original sin for central banks. During WWII the Fed did not purchase government bonds in amounts similar to what today’s Fed is. Now one can argue that central banks should support governments fiscal wants but please be aware that if you do you are proposing a radical break the history of modern central banking and thus of all finance and really all markets.

    It is not that I have some alternate plan. Histories arrow points, from my view anyway, to a strong and persistent loss of wealth for a majority of people in the developed world. Not as a result of austerity or the willingness to lend more, to extend more credit but rather as a price to be paid for 30 years of previous massive expansion of credit. We are living in and have been in credit bubble. It is invisible to most because it is engrained in our culture, our political economy. It seems so natural. So much in fact that most everyone thinks the cure for too much debt is simply more credit.

  13. All this fuss over overtly taking $100 billion yearly from the economy when the gradual shift of wealth from the middle class to the top 1 percent has taken ten times that from the economy annually. The shift of 1 trillion per year to the top reaches of the economy means that money is not available for buying appliances, dental care, houses, vacations, cars, restaurant meals, legal services, bicycles, and all the other goods and services generally consumed by the middle class. In addition it is not available to pay income taxes. The grand weakness of the US economy is directly attributable to this shift. As long as Americans could play with borrowed money during the housing bubble the economy survived but once that popped nothing has replaced it, revealing how the economy has been hollowed out. We are already past a tipping point and withdrawing another $100 billion just steepens the slippery slope.

  14. Jack,

    I believe you are looking at the right problem—income inequity. If the top 10% receives about 1/2 of the nation’s personal income of about $11 trillion/year, then what does one do about it? How does government unwind the shift in personal income that has happened over the last three decades?

    I don’t know how. Perhaps you can tell us. Or better yet, maybe Juan has some ideas.

    Compound interest is the enemy here. Let us say, a rich person, with $1 million in savings, pays a federal income tax of 50% on investments that earned 5%. That means, in one year, the rich taxpayer will have an after-tax income of $25,000. Or, a total wealth of $1,025,000. And, each year his/her wealth will keep growing.

    Bill Buckel

Comments are closed.