Austerity won't bring us out of the crisis, but that doesn’t mean it isn’t rational for elites.
There is one criticism of austerity politics that is both true and, simultaneously, flatly false: that it is ideological. This claim is ambiguous and needs to be unpacked.
The soft opposition to the British government’s austerity package essentially holds that it is “an ideological mission to shrink government,” as Labour leader Ed Miliband put it. The parliamentary opposition has an interest in putting it this way. Labour has committed itself to significant government shrinkage, much of which will harm its own base while the Tories protect their own.
In such circumstances, it distinguishes its cuts as merely necessary pragmatism, as opposed to the Tories’ ambitious, ideologically-driven demolition job. Yet Labour’s cuts, though slower and a little less deep, would in any other circumstances be considered a scandal.
During George Osborne’s emergency budget in 2010, the chancellor was able to remark that he had inherited from Labour plans for cuts averaging 19% across all departments. (Osborne had “merely” increased the planned cuts to an average of 25% across all departments.) This was why canny Labour right-wingers had urged colleagues to calm down the anti-cuts talk, knowing that a Labour government would implement similar policies.
If it is true, as I have argued, that there is no socially neutral way of resolving the crisis, it is hard to see how any strategy devised for doing so could not be overlaid with certain social interests, goals, and perspectives. It is difficult to see how it could not be ideological. But those dismissing austerity as ideological mean precisely that there is a purely technical, non-ideological means of crisis resolution.
In this sense, the criticism of austerity as ideological is obviously in bad faith. It simply says, “their cuts are stupid — ours are going to be super clever.”
Even if this was possible in principle, in practice it seems incredibly implausible. Simply to think about what this would mean is to expose it as an absurdity. It is not just that the scientific-technical jargon of power, its expertise, is profoundly ideological, expressing in some form the lived experience and perspective of the classes that dominate these discussions.
To have a non-ideological policy would mean that it entirely escaped any influence from the long-standing ideological assumptions embedded in all the dominant institutions where policy is deliberated, debated, framed, drafted, and institutionalized — from the media to the major parties, from the Bank of England to the exchequer, from the top universities to the courts. Ideology has a material existence in practices and institutions.
Even so, there is a narrow sense in which the claim that “austerity is about ideology” makes sense. No one can be totally sure about the effects of austerity, but, in the narrow sense according to which it is just a series of fast, deep spending cuts, there is ample reason to suspect that austerity by itself will not end the crisis in any sense that even banking and business elites would consider sustainable.
Business executives, City economists and investors generally seemed to believe in the arguments for austerity in this sense. Growth, and above all profitability, matter to investors. And this strategy, as I will suggest, may not be viable. In this sense, the criticism is that austerity politics disposes of ideology in a way that is counterproductive to the long-term interests of capital.
However, before laughing about how stupid the elites are — really, that’s why they have all the money — it is necessary to grasp the rational core of the austerity argument. As per my rule above, there is a sense in which it is correct, and its opponents would do well to appreciate its strengths. I want to illustrate this by describing the emergence and spread of the austerity narrative in the UK, first among elites.
The bank bailouts were initiated in earnest following the collapse of Lehman Brothers on September 15, 2008. In the US, it began with the Emergency Economic Stabilization Act, enacted on October 8, 2008. On this basis, the Troubled Asset Relief Program was created. In the UK, there were two significant bank rescue packages in 2008 and 2009, totaling at least £550 billion. This did not represent a sudden mass conversion to Keynesianism among the world’s elites, but a panicked attempt to prevent a complete global meltdown.
It is easy to forget in retrospect just how much panic there was about the coming disaster. As David McNally recounts:
“I am really scared,” US Treasury Secretary Hank Paulson confided to his wife on September 14, 2008, as the Lehman Brothers investment bank disintegrated, sending shockwaves through global credit markets. The next day brought Lehman’s collapse, followed a day later by that of AIG, the world’s largest insurance company. Before the month was out, Washington Mutual would melt down, registering the biggest bank failure in US history. Then America’s fourth-largest bank, Wachovia, went on life support. A wave of European bank collapses rapidly followed.
So panicked and bewildered were global elites that Alan Greenspan, former chairman of the US Federal Reserve Bank, informed a Congressional committee the following month that he was in a state of “shocked disbelief” over the failure of markets to self-regulate. Small wonder. By the fall of 2008, the global financial system was in full-fledged meltdown. Worldwide credit seized up as financial institutions refused to lend for fear that borrowers would not survive. Stock markets plummeted. Global trade collapsed. Banks toppled. As shaken commentators invoked memories of the 1930s, two US investment bankers openly compared the situation with the Great Depression.
“Our economy stood at the brink,” Tim Geithner, [former] US treasury secretary, testified about those weeks. “The United States,” he continued, “risked a complete collapse of our financial system.” Canada’s finance minister, Jim Flaherty, echoed this view, stating that the world economy had hovered on the edge of “catastrophe.”
Within less than a year of the state taking on these debts, the story had entirely changed. The crisis was no longer one of markets and corporations, but a “sovereign debt crisis.” Overspending, not overproduction, was the problem.
The British austerity agenda was first signaled at the time of the pre-budget report in November 2008, at which time the Labour government was engaged in stimulus spending. The Conservatives, still in opposition, had been spending several years “detoxifying” themselves, attempting to shed their image as a ruthless party of competitive capitalism. As a result, they had committed themselves to a careful strategy of accepting existing government spending levels (about forty percent of GDP), while questioning the priorities.
However, the emergence of sizable deficits, and the government’s emphasis on temporary stimulus, gave the Tories a unique opportunity to say that spending would have to fall dramatically. At this point, they began to execute a careful, choreographed turn, qualifying each hawkish new announcement by blowing a kiss toward the poor.
In April 2009, at the Conservative Party conference, the Tory leader David Cameron announced an “age of austerity.” He suggested: &ldquoOver the next few years, we will have to take some incredibly tough decisions on taxation, spending and borrowing — things that really affect people’s lives.”
Without being too specific, he tried to link the drive for “significant savings” to a democratic desire for more transparent, honest government. This was at most a weak hint at what was to come but, given the Tories’ determination to be seen to be a party of “social conscience” willing to spend money on the “frontline stars” of public service, it was all the opposition could risk at that point. The narrative had, however, been established: the problem was not chiefly the banks, and it certainly wasn’t capitalism — it was government overspending.
Within a very short time, City economists were calling for fiscal retrenchment, and the austerity narrative was being laid in the press. A compelling example was an article by Larry Elliott — a left-wing Keynesian, hardly a cheerleader for neoliberalism — in the Guardian, announcing the “dawning of the age of austerity.” He wrote:
These are the facts of fiscal life. The City knows them. The chancellor knows them. George Osborne knows them. Public spending will be cut and taxes will rise. All that is at issue is when, for how long, and by how much. Certainly, the scale of the retrenchment will dwarf that of the 1990s, when policy was tightened aggressively after sterling’s exit from the European exchange rate mechanism.
John Hawksworth, chief economist at PricewaterhouseCoopers, estimates that a tightening of 10% of gross domestic product (GDP) — about £150 billion at today’s prices — will be needed over the next decade to both rein in the deficit and compensate for the effects on the public finances of an aging population . . .
The problems with the public finances began during the years 2003 to 2007. The economy was growing at a robust rate but fiscal policy remained lax. The Treasury had far too rosy a view of the government’s tax take, and ran up a sizeable structural budget deficit.
That meant that when the financial hurricane blew in, the public finances were in poor shape.
What Elliott reported as brute fact was, I would maintain, inescapably an ideological proposition. But the power of it as ideology was the fact that it appeared perfectly natural and inevitable. As the political scientist Mark Blyth puts it, austerity is an “intuitive, appealing” response to such a situation, “and handily summed up in the phrase you cannot cure debt with more debt.” This is linked to the old Thatcherite trope according to which the state is like a household, or a little corner shop, which must perforce keep its finances in order.
As the 2010 general election approached, the hints of future austerity became more regular, even if still subdued due to the obvious unpalatability of the idea. Importantly, it became increasingly clear that both of the dominant parties intended to implement far deeper cuts than Thatcher had accomplished.
This is where the Liberal Democrats were able to benefit temporarily. While not disputing the necessity for “tough choices” and “difficult decisions” — the preferred euphemisms which stress the emotional anguish of those enacting spending cuts as above the real distress of those affected by them — they professed opposition to the deepest cuts. They promised to oppose an increase in VAT, although in retrospect their industry spokesperson Vince Cable admitted that this was done to “score a point against the Conservatives . . . that was in the election. We have now moved past the election.” They also promised to oppose unpopular tuition fees.
Unlike either of the major parties, they seemed blissfully unentangled in the financial elites that had brought the country to ruin. Indeed, Cable was seen as someone who had anticipated the problems with unrestrained financial power. And the Liberals were the least damaged by the parliamentary expenses scandal.
In the election, partly due to the efficacy of stimulus spending, Labour’s crash was slightly less than anticipated, and the Conservatives didn’t get enough votes to obtain an outright majority of seats in parliament, with just 36% of the vote. The Liberals were in a clear position to negotiate to form a coalition government.
It became clear that the banks were worried by the absence of a clear mandate. Many preferred a Conservative-led government to implement austerity with maximum severity. Some investors made this clear to the press: the “market is looking for a Conservative government”; “A Labour-Lib Dem coalition would be an unmitigated disaster for the markets.”
Worse than another exhausted Labour-led government, though, would be a weak, ramshackle minority government susceptible to sudden collapse, and new elections. The civil service, however, had prepared for the possibility of a hung parliament leading to a minority government, and acted to prevent it. Sir Gus O’Donnell, the Cabinet Secretary — then the most senior civil servant and head of the permanent apparatus which governs the country — explained that the civil service had role-played scenarios involving a hung parliament in order to ensure a stable government.
They told the negotiating parties that if they didn’t form a coalition, there was the risk of a Greek-style default and social breakdown. And they drafted “guidance” for the negotiating parties, newly codifying certain practices in the state, in order to make a coalition more likely than a minority government. This ensured that a government could be formed on the basis of an ad hoc agreement between two parties that had never been put to the electorate.
Why did the state bureaucracy feel it was so important to control the outcome of an electoral process? The impeccably ideological answer they would give is that they acted “in the national interest.” But what a senior civil servant thinks is in “the national interest” is unlikely to be identical to what his driver or valet thinks is in “the national interest.” Thankfully, O’Donnell explained his motives very bluntly: a minority government “would not have had the strength in parliament to be able to pass the tough measures that would be needed to get us through this problem.”
This view was absolutely consistent with civil service orthodoxy — the unelected leaders of the British state (particularly O’Donnell) are fully assimilated to the neoliberal orthodoxy that colonized that state during the 1980s. So, for the civil service leadership, “the national interest” meant a strong executive implementing austerity.
Once in office, the coalition government acted quickly and implemented an “emergency budget.” The overall impact was to begin the process of deep cuts and redistribute wealth toward the rich, despite the government’s professed interest in helping the poor. For the business press and investors, this was exactly what was required.
The government was perhaps overly sanguine about growth forecasts but, as an economist at BNP Paribas argued, “The pace of fiscal consolidation is larger than we thought and is probably rapid enough to keep the ratings agencies happy . . . on paper at least this is going in the right direction at the right pace.” Miles Templeman of the Institute of Directors argued that the budget was “likely to improve the economic outlook by showing the public finances are finally being brought under control.” The Economist expressed commonplace business wisdom when it breathed a sigh of relief that the pre-election taboo on cutting welfare “beyond a few token items” was over.
This cautiously optimistic consensus was not to last for long. But here we have a thumbnail sketch of how the ideology of austerity took root within the banks and corporations, the dominant parties, the state apparatus and the media — all in a mutually reinforcing and consistent fashion. In each case, the ideology is embedded within a distinct scientific-technical discourse: that of the economist, the company manager, the state administrator, etc. But the basic premises are constant:
- The crisis is first and foremost one of overspending, and demands “fiscal consolidation.” No recovery is possible unless the country’s finances are put in order.
- Cutting spending will bring down the structural deficit and improve credit ratings.
- By demonstrating the fiscal probity of the central government, it will give businesses confidence in the future state of the economy and thus encourage them to begin investing in growth.
The rebuttals to this are by now quite familiar:
- In most cases, the sovereign debts were accumulated mainly as a result of the banking crisis, not because of spending beforehand. They were a result of reduced tax receipts and governments absorbing the costs of banking bust.
- Those being asked to pay the debt through spending cuts are necessarily the poorest, the least responsible for incurring the debt, and also the least able to pay it.
- States are not like households. They cannot cut their way to fiscal security, because spending cuts undermine growth. This is the famous Keynesian “paradox of thrift.” If one person cuts back spending during an economic downturn, they improve their ability to cope by saving cash. If everyone “saves” during an economic downturn, the reduction in aggregate demand will drive down growth, incomes and thus also aggregate savings.
Not only are the rebuttals convincing in principle — they are winning in fact. By 2013, the UK’s economic performance was hardly stellar, and any reduction of the structural deficit was entirely contrived. As John Lanchester writes:
In June 2010, in his first budget, Osborne said the structural deficit was 4.8%, and that with three years of reduced spending, the figure would be down to 1.9%. So how’s that going? Well, by the end of those three years, after £59 billion of tax rises and spending cuts, the figure is set to be 4.3%. Even that number was achieved only thanks to a kitchen sink’s worth of special inputs, including a £3.5 billion windfall from auctioning off the 4G telecom spectrum, and some exuberant, almost rococo creative accounting to do with the transfer of Royal Mail pension liabilities, state ownership of the Bradford and Bingley building society, and interest credit from the Bank of England’s quantitative easing scheme . . .
If you reverse the creative accounting and add the interest from the quantitative easing back where it used to be, as a Bank of England asset, it adds 0.6% to the structural deficit. That takes it back up to 4.9% — higher than it was when the coalition came to power.
Far from austerity encouraging business to invest and generate a windfall of growth and good times, companies are sitting on a large quantity of cash — the proper collective noun is “shitload” — which they refuse to invest due to a dearth of good profit-making opportunities. From this vantage point, it looks as though austerity in the narrow sense of immediate fiscal retrenchment is a losing bet.
However, it is far more to the point, and far more interesting, to understand the rational core of this ideology, because that is what makes it resonant.
In general, large deficits are unsustainable. When governments borrow, they borrow against future earnings, future social product. In periods of weak growth, there is less notional future product to draw against. If governments become more leveraged and growth fails to resume, bond traders can tend to lose confidence in their ability to repay the debt, and thus drive up the cost of further borrowing. Beyond a certain level, the interest payments begin to eat away at future spending and thus growth. This doesn’t mean that cutting spending solves the problem. The Keynesian critics are right about this. It just means that in a sense all the options are bad.
Further, there was an underlying problem brewing for capitalist democracies. New Labour had run up a significant deficit in the context of a precarious, finance-driven boom. Many European economies maintained deficits at higher than 3% of GDP in violation of the “Maastricht rule.” This included Germany, the most zealous advocate of neoliberal stringency.
As for the US government, the Bush administration had deficit-financed war crimes of staggering proportions before Wall Street’s property bubble burst around it. The point here is not to condemn “profligacy” in spending, but to identify a structural gap between the neoliberal commitment to balanced budgets and the cost of running a modern capitalist democracy.
Since businesses were unwilling to tolerate high taxes, and politically powerful enough to resist them, governments could only raise revenue through growth, which wasn’t tremendously high, or politically unpopular taxes on consumption. The alternative was to cut spending which, protecting core infrastructural investments and business subsidies, would mean cutting popular services and welfare provisions.
Such are the competing pulls in a democratic class polity, and states found that running a deficit was the only feasible way to reconcile all of their commitments. Austerity in this sense can be seen as partially an attempt to shift the balance of class forces and thus change the definition of what is politically viable. And provided one shares the interests of businesses and state managers, or merely accepts their purview as the most valid, it makes perfect sense.
Finally, there is a paucity of plausible alternatives. Despite the brief revival of Keynes (and even risqué references to Marx in some quarters), the most prestigious technical expertise came from within a neoliberal purview, particularly that offered by neoclassical economists. Policy is almost always framed with reference to policy-relevant academic and think-tank research.
When the British government implemented the first of its spending cuts, it explicitly referenced research by the leading economists Kenneth Rogoff and Carmen Reinhart, suggesting that fiscal consolidation was the most effective means of restoring growth. These were not just extremely high-profile experts: They condensed in their biographies the perspectives and experiences of having worked in Bear Sterns, the Federal Reserve and the IMF. They were part of the elite, and part of the system they were trying to conserve.
Of course, the British government could have chosen to listen to other expert opinion, from the likes of Paul Krugman, or former monetary policy committee member Danny Blanchflower, who argued for investment and stimulus. But they were marginal within their profession, and within the dominant institutions (including the monetary policy committee). And their recommendations did not gel with the interests of the dominant fractions of capital, above all the bankers.
It transpired that Rogoff and Reinhart’s research was fatally undermined by some spreadsheet errors, which were exposed by an economics student. It has been suggested that this could undermine the chancellor’s austerity program. But this is simply not to think through what is involved. The Treasury is stacked with eager experts, all more or less trained in the same neoclassical economic theory. It is part of a state dominated by a civil service elite that shares the broad precepts of this thinking.
It is linked with a series of institutions, from academia to the City, which reinforce it. The Rogoff/Reinhart debacle does not significantly alter the balance of ideological forces within British elites. Short of a more severe crisis, a profound social disturbance, or a more concerted challenge from the political left and labor movement than has been seen since the poll tax, the most likely result is that the Treasury will prudently adapt its course in response to fluctuating events while remaining within the same broad paradigm.
The dominant ideology, the ideology of the ruling class, is not a malign conspiracy, but nor is it stupidity. The ruling class lives this ideology, because it resonates with its interests, its experience, and its accumulated expertise.