What are we to make of the current round of austerity? Should we believe Keynesians like Paul Krugman, when they argue that capitalists are acting against their own best interests in calling for cuts? Are government finances really under stress, or is it all just a ploy to undermine the last remaining gains won by workers' struggles? Some members of Endnotes throw in their hats...
A crisis is first and foremost a crisis for workers. But it is a crisis for workers because it is a crisis for capital. That this is the case is not always so obvious. Whenever GDP contracts, the representatives of capital invariably call for ‘shared sacrifice’—that is, sacrifice shared out among working people. It would be one thing if that meant only that public workers were laid off and state programs for the poor were reduced precisely when they were needed most. After all, cuts in state spending in the course of a crisis are compelled by the structure of the capitalist mode of production. For contrary to what Keynesians may say, state action is ultimately limited by the rate of growth of the private economy—not the other way around. But in reality, austerity never means only temporary measures to deal with a crisis. Social-spending programs have not just been cut back; they are being gutted or done away with entirely. In many countries, the crisis is being used as a lever with which to destroy long-held rights and entitlements, including the right to organize. These attacks do not appear to be mere cyclical adjustments in the unfolding logic of the capitalist mode of production. On the contrary, they seem to be key planks in capital’s programme of class war. On that basis, it’s easy to draw the conclusion that austerity is only a cover for the redistribution of wealth from wages to profits.
However, if we leave it at that, we come dangerously close to agreeing with the Keynesians in spite of ourselves. The latter also recognize the maneuvers of capital as efforts to redistribute wealth in favor of profits. But they go on to distinguish between capital’s short-term interests (fighting for a larger share of a shrinking pie) and its long term interests (working with labor to enlarge the pie). If both classes were acting strategically, according to the Keynesians, they would give up their battle over the distribution of wealth. In other words, there would be no class struggle. Capital would agree to invest in expanding production, and labor would agree to take only a portion of the resulting gains in productivity. The state would then regulate this accord in a neutral way: each time the economy stalled and the parties began to squabble, the state would lower interest rates and borrow money to stimulate demand, giving both classes something to chase after. Once growth resumed, the state would raise interest rates and pay down its debts. Of course, that is not what is happening now. Have capital’s representatives captured the state for a short-term, redistributive project—and thereby lost the ability to act in line with their own long-term, strategic interests? Even if green capitalism wouldn’t have averted ecological catastrophe, it certainly would have been an amazing PR campaign for capital, but it never got off the ground. Would the crisis come to an end if, as Keynesians advocate, the state shook off these calls for austerity and, with a big investment in infrastructure, tried to convince capital to renew its accord with labor?
We think this is the wrong way to understand the present moment. Capitalism is in the midst of a deep crisis, which is now bringing both classes face to face with the objective limits of this mode of production. That these limits exist is not in the interests of either class—nor can they be overcome through strong state-action. On the contrary, it is the weakness of the state that will become painfully obvious in the coming months, with a ‘double-dip’ recession all but assured. Christine Lagarde, the newly anointed head of the IMF, recently voiced her concerns about this turn of events in the pages of the Financial Times:
The situation today is different from 2008. Then, uncertainty came from the poor health of financial institutions. Now, it comes from doubts about the health of sovereigns ... Then the answer was unprecedented monetary accommodation, direct support for the financial sector and a dose of fiscal stimulus. Now monetary policy is more constrained, banking problems will again have to be addressed, and the crisis has left behind a legacy of public debt—about 30 percentage points of GDP higher than before, on average, in advanced countries. (FT, August 16, 2011)
What Lagarde fails to mention here is that debt-to-GDP ratios in the ‘advanced countries’ were already high before 2008, when they ballooned in response to the crisis (see table below). On the eve of the Great Depression, in 1929, the US public debt was valued at only 16 percent of GDP; ten years later, in 1939, it had risen to 44 percent.1 By contrast, on the eve of the present crisis, in 2007, the US public debt was already valued at 62 percent of GDP. It reached 99 percent just four years later, in 2011. The cause is easy to identify: for almost four decades, debt-to-GDP ratios in the high-income countries have tended to rise during busts (according to the Keynesian prescription), but they have refused to fall or have risen even further during booms. Is this due to poor planning on the part of elites? On the contrary, it is because the booms themselves have become increasingly weak, on a cycle by cycle basis. As a result, the state has been unable to raise interest rates or pay down its debts (except intermittently), since any sustained attempt to do so would risk undermining ever more fragile periods of growth.2 This is a problem for Keynesians, since it suggests something of the structural weakness of the capitalist economy—beyond the capacity of the state to address.
This weakness is putting pressure on the state, from two directions. First, because of the frailty of the economy, the state now finds itself in the very situation that Keynes himself faced in the Great Depression. Over the past four years, the Federal Reserve, in tandem with other central banks, has held short-term interest rates near zero percent. Yet the economy failed to recover. That’s supposed to be impossible: businesses should be taking advantage of free money to invest, and households to buy houses. If no one wants to borrow money today, it’s because they are already so heavily in debt. Of course, they acquired these debts during the bubble years (1998-2001 and 2003-2007), when both firms and wealthier families saw the value of their assets rise. They borrowed against those rising asset-values to invest or make big purchases—even as profits and wages stagnated.3 Now that asset values have fallen dramatically, everyone is trying to save money to pay down their debts. However, this savings spree has put the economy in jeopardy. Under normal conditions, when firms and individuals save money, they deposit it in banks, which then lend money to other firms and individuals to spend. In that sense, no spending ‘goes missing’. When everyone saves simultaneously, some spending does go missing, causing the economy to contract. The difference between the Great Depression and today is that governments have stepped in to make up for the spending gap by spending money themselves—that is, through fiscal stimulus (even if that stimulus consists mostly in automatic increases in payouts for existing unemployment and welfare programs). By contrast, during the first few years of the Great Depression, the US government did not make up for the spending gap, and the economy contracted by 46 percent. Fiscal stimulus today thus has a different function than it does in the course of a normal business cycle. Its purpose is not to restart economic growth—that would only happen if people spent the additional money that the stimulus put in their pockets. Instead, they are mostly using it to pay down their debts. In the present crisis, the point of state spending is merely to buy time, to give everyone a chance to pay down their debts without causing deflation—which, by lowering asset values, would only make existing debt burdens even worse. For these reasons, fiscal stimulus is the only thing that can keep the economy from contracting today.4
Yet the pressure on the state to spend money is counteracted by an equal and opposite pressure—to reduce the public debt. Contrary to what Keynesians are saying, states have spent a lot of money since the crisis broke out. Over the past four years, the US government took on a debt slightly smaller than the entire yearly output of the country in 1990—just to slow the rate at which the economy returns to recession. The problem is that the state is accumulating this massive debt in a historical context in which it has, alongside businesses and households, already heavily indebted itself.5 This historical context is what is missing from the Keynesians’ account: they haven’t noticed that the weakness of the economy over the past four decades—the fact that it was already growing more and more slowly before the present crisis—has limited the ability of the state to take on debt today. That is what has Lagarde so worried (in the above quotation). The public debt is so large that it is dangerous to spend more money stimulating the economy: spending in the present will only use up the state’s dwindling capacity to take out debt in the event of future financial emergencies. It might even accelerate the crisis, since rapid increases in the public debt raise the spectre of sovereign default.6 Under these conditions, the state has an obligation to keep its powder dry—that is, to maintain, for as long as possible, its ability to draw on inexpensive lines of credit. The state will need this credit as it attempts to ride out the coming waves of financial turbulence (e.g. for more bank bailouts). In that sense, austerity is perfectly rational. That any turn to austerity will also cause deflation, endangering the stability that it is meant to prop up, is a real contradiction, which the state will face in this period. These two pressures—to spend in order to stave off deflation and to cut spending in order to stave off default—are equally implacable. Indeed, it is here, on the balance sheet of innumerable governments, that the crisis is now playing itself out. If in 2008, the solvency of the private economy was preserved by shifting its liabilities onto the public books, then today state action to protect its own solvency threatens to endanger the private sector once again. To paraphrase Marx, all this juggling of debt only serves to shift the crisis of insolvency to a broader sphere, and give it a wider orbit.
Nevertheless, we must guard against the tendency to mistake this weakness of the capitalist mode of production for a weakness of capital in its struggle with labor. Crises have always tended to strengthen capital’s hand in the class struggle—and the Keynesian notion that the state could convince capital not to press this advantage is nothing more than a technocratic fantasy. In a crisis, the demand for labor falls at the same time as, due to mass layoffs, its supply rises. That alone weakens the bargaining position of workers. Moreover, while it is true that capital suffers losses in the course of a downturn, individual capitalists rarely find themselves in the sort of existential danger that workers face when they lose their jobs. Capitalists have much larger reserves than working people, so they can usually wait out a crisis, especially when demand for what they produce is depressed. For all these reasons, we have to recognize that the crisis has weakened the position of workers with respect to capital. It is thus no surprise that the latter’s representatives are using the crisis to their advantage by claiming that this or that measure is necessary to restore the rate of profit. Restoring the profit rate really is the only way to create jobs. And in the absence of a massive, working-class assault on the very existence of class society, workers have no other interest than to find jobs or try to keep them. These are the conceptual difficulties presented by the capitalist crisis. The weakness of the system as a whole is at the same time the weakness of workers in their everyday struggle with capital—and not, as we might expect, their strength. If we don’t separate these two moments, we are liable to misunderstand the contradictory nature of austerity in the current crisis.
Gross Debt as a Percentage of GDP, Selected Countries, 2007-11
- It is true that the US public debt skyrocketed to 121 percent of GDP in 1946 at the end of the Second World War—that is, 17 years after the depression began. But that was during a war, and the debts accrued were almost entirely funded with bonds purchased by US citizens. In the 1940s, the US was an international creditor borrowing domestically, not (as now) an international debtor borrowing externally.
- In the period of strong growth after World War II, the US public-debt fell from 121 percent of GDP in 1946 to 32 percent in 1974. The only time, since then, that this ratio has fallen (from 70 to 55 percent) was also the only time the economy grew at a rapid pace, 1995-2000.
- See Robert Brenner, ‘What’s Good for Goldman Sachs is Good for America’. Other texts we found useful when writing this dispatch include Richard Koo’s memo, ‘QE2 has transformed commodity markets into liquidity-driven markets’ and Paul Mattick’s new book, Business as Usual.
- In the end, the government can only use monetary policy to encourage businesses and households to spend; it can’t make them spend (by contrast, when the government engages in fiscal policy, it spends its own money—or at least, as much as it can borrow). This limitation of monetary policy was recently demonstrated by the failure of ‘quantitatve easing’. The Federal Reserve and other central banks, notably in the UK, purchased massive quantities of their own governments’ long-term bonds, effectively injecting money into the banking sector. This action should have been inflationary, but it wasn’t, since people didn’t borrow the additional money that banks had to lend. In fact, quantitative easing was never intended to cause inflation—even if the Fed was frequently accused of ‘printing money’. By purchasing bonds, central banks were only trying to push investors out of the bond market and thus into riskier assets. The success of this action was reflected in the return, during the first half of 2011, of rising stock-markets, which made businesses and wealthier households suddenly seem a lot more wealthy than they had been a few months before. The hope was that the rising stock prices would repair everyone’s balance sheets. But the effect of quantitative easing lasted only as long as the easing itself. After all, stock markets weren’t rising because the economy was actually recovering; they were rising because the central banks made them rise. A spate of bad news about the economy—and worst of all the news that the Fed would end quantitative easing—caused this miniature stock-market bubble to collapse. In truth, any positive effect that quantitative easing had on the balance sheets of investors was more than counteracted by the fact that it also caused the prices of commodities (e.g. food and fuel) to rise, endangering the tepid recovery.
- The US total debt, including the state, businesses and households, was roughly 350 percent of GDP in 2010. In other countries—the UK, Japan, Spain, South Korea and France—total debt levels were even higher, up to 500 percent of GDP. Deleveraging has only just begun.
- Sovereign debt crises occur when high debt-to-GDP ratios (historically, those approaching 100 percent) pose a real threat to the ability of states to service their debt, both because interest payments rise relative to government revenue and because interest rates on rolled-over debt have a tendency to rise rapidly (as we are seeing now all along the northern coast of the Mediterranean and in Ireland). The fact that states do not default very often, or that, when they do default, they are eventually able to resume international borrowing, is of no particular consequence for this story. After all, the fact that anyone can be fired from their job is not negligible just because most people do not get fired; the very possibility of losing a job regulates the activity of everybody who has one. In the same way, the very possibility of losing access to international credit markets regulates the activity of state borrowers, however often defaults actually occur. Yet as Reinhart and Rogoff show in This Time It’s Different, sovereign defaults—when examined on a world-scale—aren’t actually that rare at all. They come in waves and play a major part in the global unfolding of crises. Is it possible to imagine that, in this period, states will somehow defy the working of the law of value, increasing their debts massively without corresponding increases in their expected rate of growth of GDP? Those who believe that states will be able to do so will have their thesis tested in the coming period (and we can’t rule out this possibility, given the fact that a massive accumulation of debts—held by corporations, households and states, and always in novel ways—has deferred the onset of a new depression over and over for the past forty years).