Austerity explained
The second pillar of a corporate policy agenda
As I discussed in my previous post the three pillars of a corporate policy agenda are:
Privatisation of the public sector
Austerity/cuts to public services
Deregulation of the corporate sector
The first post explained privatisation. This post will take on austerity.
What is it?
Austerity refers to a government agenda of cutting budgets and public spending. This could take the form of anything from cutting money for specific government programs, cutting money invested in various public or private enterprises or services, and often cutting government jobs.
Why do governments do it?
This is a bit of a tricky question. There are some economic beliefs and reasoning that might drive a government to pursue an austerity agenda. Often, however, the rhetoric around austerity is used to mask an alternate agenda, for example a massive transfer of wealth from the public to the private sector.
As for economic justifications, many of the reasons governments give for pursuing an austerity budget have to do with “balancing the government books.” This has become a mantra with modern governments in the neoliberal area. Often governments will campaign on “cutting wasteful government spending”, “balancing budgets”, “fiscal responsibility”, and “getting rid of government debt.”
This rhetoric resonates with the general public because we have been taught that being in debt is a bad thing and that the responsible thing to do is to try to pay down our debt when we can. But as shown by economist Ganesh Ahirao, the belief that government should be run like a household or business is unfounded, counterproductive, and actually harmful. Massive cuts to public spending has long-lasting negative impacts on people, communities, and the country. Government debt is not the same as personal debt, and needs to be understood on its own terms. It is not simply a matter of getting rid of it. Finally, the metaphor of the government as a household is not helpful or an accurate way of understanding government fiscal responsibility.
The other reason governments give for pursuing an austerity agenda is to get inflation under control. Since COVID, inflation has been an issue, with countries worldwide grappling with high inflation. The belief that cutting public spending will control inflation is based on statements and policy prescriptions by libertarian economist Milton Friedman, who I discussed here. Friedman is credited with popularizing the financial system of monetarism, which is basically the belief that a government can control most of a country’s economic issues by controlling the amount of money in circulation.
In relation to inflation, Friedman’s theory suggests that the reason for inflation is too much money in circulation. So, the thinking is that if governments decrease their spending, the reduced supply of money in circulation will decrease inflation.
Without going into too much detail here, this assumption about the relationship between money and inflation is wrong.1 But what it does provide is a good reason for governments to advocate for an austerity agenda.
How does austerity benefit corporations?
Austerity can have ripple effects into all areas of society. Cuts to public services and budgets reduce the ability of these agencies to deliver needed services. This in turn can lead to accusations of “inefficiency” or these systems not being “fit for purpose”. Once public services have been starved of funding for long enough, they are unable to function. Public sentiment is against them because they don’t provide the needed services. The government announces the public system is not working, and we don’t have money to fix it so…
You guessed it. Privatisation.
Austerity is used as a tool by those who govern for the corporate class to starve the public sector of funds and privatise it.
In addition, though balancing budgets is used as an excuse for an austerity agenda, the reality is that many governments don’t actually pay down their debt, but instead transfer the money saved by cuts to public spending to the wealthy and corporations. This is why Naomi Klein described this pillar of a corporate agenda as “tax cuts for corporations, paid for by public spending cuts.”
Austerity also increases unemployment, and has historically been used by the corporate class to “discipline” workers or increase the “flexibility” of the labor market. These are code words for taking power away from the working class by increasing their job precarity.
Austerity in Aotearoa today
The current coalition government is pursuing an austerity program viciously. In spite of campaigning on balancing a budget and getting New Zealand back on track and out of debt, Nicola Willis’ budget has slashed public spending, cut thousands of public jobs with more to come, and given nearly $15 billion in tax cuts which predominantly favor the wealthy and corporations. These tax cuts were paid for by her public service cuts, and she has indicated she is looking to further cut public spending. She’s also announced that the government will not have a balanced budget or surplus until at least 2029.
All of this is part and parcel of the corporate agenda playbook. These political moves have huge impacts on normal people. The government has reneged on its promise to fully fund a number of hospitals in the country, even though the money needed pales in comparison to the tax cuts they forced through under urgency within the first 100 days of their government. The health sector is breaking under the crushing weight of the need combined with the lowest government funding in a generation. This is causing preventable deaths. The government is moving to privatise the healthcare system.
All of this harm, and it looks like more austerity from this corporate government is on the way. As long as the wealthy and corporations get their tax cuts, the rest of us can suffer.
If you are interested in a long, detailed explanation of this, see https://evonomics.com/the-truth-about-inflation-why-milton-friedman-was-wrong-again/
Simply put, the nations money supply is mainly made up of IOU’s for government debt, IOU’s for private debt, with a small amount of credits / debits for a overseas balance of payments surplus / deficit. Thus if both government and private sector pays down debt at the same time, the money supply disappears- there is no pool of money that circulates independently of those sources. For the government to pay down debt means that the private sector has to take on more debt for a given size of economy. Since household debt is limited by capacity to repay, and households will always want to pay down debt, it behoves government to carry sufficient debt to maintain the money supply. That governments are forced by convention and law to convert ‘free debt’ at the RB into ‘interest bearing debt’ held by the private sector, is a political choice, not a God-given commandment.
Money created as government debt (called ‘fiat’) and money created as private debt (called ‘credit’) are the two sources of the money supply. If Government debt goes to zero or into surplus, private sector banks become the de-facto monetary sovereign. This is somewhat like placing a nations defence in the hands of mercenaries- they become the de-facto military sovereign. There are countless stories throughout history of how that story ends.
Austerity brings with it fear of job-loss and, if not actual pay-cuts (yet), certainly an unwillingness to pursue better pay and working conditions. Thus it is seen as a means of disciplining the workforce both financially and psychologically.
In the context of NZ’s large Balance of Payments deficit, Austerity cuts discretionary spending power. As necessary spending is largely on NZ-produced goods and services like food and rent, and discretionary spending is more on imported goods and services like cars, iphones and foreign holidays, this, in lieu of the capacity to increase exports, has the effect of reducing the Balance of Payments deficit.
Counterpoint: Keynes never intended a world where fiat money was used to prop up a zombified, overly rigid global system of trade. He wanted the very opposite - free trade between nations with controls on flows. Support for deficit countries, curbs on surplus countries. Anglo-Saxon nations all suffer from the same problem. We can’t afford our standard of living. We import more than we export. Wages have been stagnant for 30/40 years & labour share of income has been declining. Instead of natural feedback loops suppressing production in response to declining demand (due to lower wages), we used fiat money to prop it all up. So companies can keep generating profits even though demand has fallen. Welfare - originally intended to help people dealing with unexpected, temporary shocks, has become a substitute form of wages. All paid for with fiat money. If Anglo-Saxon countries were honest they’d say: we can’t afford our trade deficits, we need to stop consuming imports until our production capacity has caught up. And producers (industry) would have to take surplus profits & reinvest to produce cheaper products instead of buying yachts, ski chalets & politicians. These are all feedback loops that have been destroyed by fiat money. A bit of magic money is fine of course - if you’re a young person buying a house (ha! That’s a joke) you’ll be able to persuade a creditor that your future production will cover the capital & interest cost. But if you’re a 60 year old. Not so much. Same for companies - if you can show a stable production surplus you can borrow against it. But if you’re losing customers & in decline? Not so much. Anglo Saxon economies can generate decent, reliable yields & can sell gov bonds on this basis. But we have debt levels that suggest we’re about to unearth new forms of energy & new production thresholds. Now maybe the US will use AI to create a new production thresholds. BIG MAYBE. Or maybe someone cracks nuclear fusion. But failing that, Anglo-Saxon nations are mature production economies wheee the low hanging fruit has been plucked & taking on debt is like eating yourself from the inside. There is a solution to all this - allowing feedback loops to re establish themselves. Allowing stock markets to respond to production not money printing. Forcing producers (industry) to innovate, lower prices or fail if they don’t pay workers enough. Forcing citizens to pay for public goods with taxes - trust me, these will be cheaper than what privatisation charges. Allowing companies to collapse for lack of demand. But we don’t do this. We subsidise low wages with welfare. We subsidise zombie companies with low interest rates. We subsidise global oligarchs with money printing - so that they don’t EVEN NEED TO CHARGE FOR TGEIR SERVICES! (NB: a third of Tesla’s profits are from subsidies against fossil fuel cars. Subsidies!) We tell voters that we won’t put up taxes. And all the time we keep consuming goods made by oppressed workers, controlled by fat Western oligarchs & sold to suckers in Anglo-Saxon countries who’ve been told the lie: it’s ok, if things look bad, we’ll print. The emperor has no clothes & MMT’s solution is to print more clothes. We need to restore feedback loops between consumers & producers so that the price of labour rises, the cost of welfare falls & bad companies collapse instead of turning into global overlords.