Around the world, corporate media and even substantial segments of the working class embrace an old religious creed: the celebration of austerity. Its cold bath is supposed to rid us of our sins. Its advocates reject the wisdom of the post World War II generation. We cannot understand the power of this reborn orthodoxy without addressing its complex roots. Several historical narratives converge. They reflect and sustain compelling social and personal identities. Nonetheless, if this austerity is not challenged, it may unleash forces as destructive as those of the 1930s.
The story of the new austerity is intercontinental and transhistorical. It begins with a crisis narrative: The Eurozone faces collapse because devious European politicians overspent and now are unwilling to curb excess government spending. Greece is the poster child.
In this narrative, Europe is especially culpable because it has failed to learn from its own history. Excess spending under the Weimar Republic led to hyperinflation, social panic, and the rise of the Nazis.
Part three of this trilogy warns that the United States is about to become bankrupt like Greece. President Obama has presided over an inordinate spending spree, including an $800 billion stimulus package that added to our debt and failed to produce any jobs.
Dean Baker writes: “Spain had a budget surplus before the economic collapse. Spain had a budget surplus...Perhaps repeating this line three times will help the ... people who have columns in the Washington Post ... get some understanding of the issue ... the only euro zone country that looks much like Greece is Greece. The other euro zone crisis countries had hugely better finances in the years [before] the crisis.”
The deterioration of their balance sheets has been a consequence of the bubble collapse and TARP-style bailouts of their banks. Europe’s embrace of austerity is especially troublesome because it evokes memories of fascism. Many commentators constantly reiterate that Weimar hyperinflation led to the Nazis. Hyperinflation, however, occurred in the 1920s when the Weimar Republic chose to pay crushing obligations imposed on it by Britain and France by printing money.
The Nazis remained a minority party during the Weimar hyperinflation. They grew during massive deflationary pressures occasioned by Depression and by the government’s harsh, counterproductive austerity measures.
Thirdly, there has been virtually no expansion of discretionary government programs under Obama. The deficit has ballooned because the collapse of the housing bubble reduced government revenues and increased obligations under standard, long- time government insurance programs.
Why do these stories persist? They dovetail and resonate with each other, thereby lending plausibility to each. The power of austerity has other deep roots and so it is unlikely to be defeated merely by counterarguments based on standard statistical measures.
Austerity is a moral ideal closely tied to a strong sense of identity, one that is grounded not merely on a formal conceptual level but in gut feelings and shared sensibilities. We skimp, save, do our homework before we play. We are brought up on tales of the frugal ant and the profligate grasshopper. Many working class citizens do harbor doubts — often semiconscious or half articulated — about the future of the American dream or even its worth. There is, however, no widely articulated alternative to austerity. The pain and the doubts it occasions can be assuaged by ensuring its imposition on everyone. Nationalism, with its sense of a virtuous, parsimonious we and spendthrift foreigners, sustains and is sustained by the austerity religion. All of this is reinforced by today’s widespread “common sense” that just as families must pay off their debts so must governments.
The stimulus debate is a good place to examine some of these cultural issues. Christina Romer, former chair of the Council of Economic Advisors, has published studies that control for the effects of other variables that might influence consumer spending. She concludes that the stimulus prevented job loss. She cites spending patterns of families before and after they received the $500 tax rebate check. Examination of the effects of military spending on individual Congressional districts also reveal that when military spending increases, consumer spending goes up more in states with a large defense presence.
Most conservatives advertise the job-creating effects of military spending while charging that spending on schools and public transit systems is wasted. Yet the same methodologies that demonstrate the job-creating effect of military spending show gains for domestic spending as well. Why is evidence in one case accepted but not in the other? The military budget is coded in terms of opposition to an external enemy and in support of our free enterprise, self-reliant system. The other is often portrayed as unmerited support for the poor, those who are as not merely lacking in self-reliance and hard work but as thereby active enemies of and threats to our values, thus in much the same terms we construe foreign enemies.
Consider Newt Gingrich’s statement: “Really poor children...have no habits of working, and have nobody around them who works. So they literally have no habit of showing up on Monday...They have no habit of ‘I do this and you give me cash’ — unless it’s illegal.”
Combating these degrading moralisms makes demands that are more than merely cognitive. Some on the liberal/left argue that the factual case for stimulus etc is overwhelming. As Romer puts it: “When I was in the White House, I used to bristle when people would say I was a Keynesian economist. They acted as if I believed that fiscal stimulus mattered because of some theoretical book written in 1936 … I used to say I am not a Keynesian economist, I am an empirical economist. I believe what I do because of the empirical evidence.”
A recent post by LSU scholar John Protevi in The Contemporary Condition blog contends: “affect is ‘in the air,’ something like the mood of a party, which is not the mere aggregate of the subjective states of the party-goers. In this sense, affect is not emergent from pre-existing subjectivities; emotional subjectivities are crystallizations or residues of a collective affect. …
“What counts in the effective social machine demonizing welfare in the USA is the shame attached to receiving public aid without contributing to society with your tax dollars. It’s shameful to have lost your job or your home; you’re stupid, a loser.
“And so you don’t combat this shame by trying to change individual people’s ideas, one by one, with information about unemployment trends; you combat it by showing your face, by embodying your lack of shame, by putting a face on unemployment or homelessness. You thus counteract the existing collective affect by creating a positive affect of, shall we say, joyful solidarity. Shame isolates (you hide your face); joyful solidarity comes from people coming together. It’s joy released from the bondage of shame.”
The narrative surrounding government spending is complex and evolving. Government is not some timeless abstraction. Yet even where Keynesian ideas are invoked within the university, Keynes’s insights are narrowed or slighted. As Greek economist Yanis Faroufakis points out, neo Keynesians, most notably Paul Samuelson, tried to synthesize Keynes’s macro with neoclassical micro economics and its core faith in self-regulating markets. As Varoufakis puts it, he elided Keynes key insight, that “in a complex, dynamic capitalism where, at the first scent of an impending recession, capitalists go on an investment strike and the recession occurs, confirming their gloomy forecasts. It echoes nicely John Maynard Keynes’ famous description of investment decisions as a realm “… where we devote our intelligences to anticipating what average opinion expects average opinion to be.”
Or as he wrote in his General Theory, “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic.
“Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”
In Samuelson’s iconic text, this broad critique is reduced to a simple model, the famous IS/LM (investment saving/liquidity preference) model specifying employment and GNP as determined by the intersection of an investment saving curve — all points where desired savings equal desired investment — and a liquidity preference curve, where the supply of money equals the demand for funds for speculative and transactional purposes.
Samuelson then goes on to prove that simple injection of government spending or tax cuts will restore full employment equilibrium. Thus with minor and easily modeled adjustments, the basic integrity of a deterministic market framework is maintained.
As Varoufakis points out, however, this sort of Keynesian fine tuning, which seemed to work in the ’50s and ’60s, was backstopped by a broad international political economy that included unions, extensive regulation, and the fashioning of two other major economic and currency blocks, Japan and the German-led Euro common market. These could and did sustain demand in the face of any substantial decline in the US market. In addition, an entire world economy heavily dependent on the US dollar as reserve currency cushioned the dollar against severe reactions to changes in US interest rates or fiscal deficits. When the international economy collapsed in the ’70s, Samuelson’s simple Keynesianism was easily discredited, and conservatives went after sticky wages as the major villain in the piece.
In the current context, Varoufakis credits Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, for his continuing opposition to austerity in Europe and the US, but worries that he has lost sight of the role of uncertainty in European politics: “when economists like Paul Krugman surmise that a country like Greece is better off exiting the euro, he is setting aside crucial factors. “They are not absent just because the IS/LM is static but because it fails analytically to capture the fragility of business sentiment (Keynes’ animal spirits) when such an exit is touted … The uncertainty about average optimism becomes even more crushing than ever when additional tiers of uncertainty are added: uncertainty about how a plethora of contracts denominated in euros will be denominated post-exit; uncertainty about the… new drachma’s devaluation rate...”
Both here and to an even greater extent in Europe, one must build support for an institutional and political framework that will regulate and recapitalize banks and spend money appropriately in the face of severe downturns. The narrative about government was positive in the immediate post-World War II period. Yet that narrative was dependent on a Cold War mindset that bred its own hubris and overshoot.
The stability bred by Cold-War-inspired military Keynesianism became the source not merely of increased speculation in financial markets but also of social tension. Manufacturing workers gained far more than women and minorities in the service sector.
In addition, the stability that government spending and incomes policies delivered to unionized industry in terms of families’ standards of living during the golden age of capitalism may have opened up other problems and modes of consciousness, including questions about the nature of work life, the need for leisure, the role of women. But even most liberal economists failed to recognize, let alone address, any such considerations.
Jobs and spending patterns seem easier to quantify and thus receive most attention. Some European social democrats are now organizing forums in which citizens participate in formulating the questions and categories they deem most relevant to quality of life. Economists of course should not eschew construction of regularities, mathematics and simplifying models. They are useful tools in certain circumstances and can place limits on obviously outlandish claims. Nonetheless, they work only in specific cultural and social settings and time frames, settings that are complex and mutable, in part in response to these very purported regularities.
Today the concept of whole nations as profligate or frugal drives a destructive economic policy in both Europe and the US. Yet Germans are not all frugal ants and Greeks not all spendthrift grasshoppers. And rather than talk abstractly about job creation, let’s discuss and illustrate schools, bridges, and the aesthetic experience of public parks, transit systems etc.
To borrow once again from Varoufakis, an economist is like a meteorologist, but one whose predictions influence the weather. The empirical conclusions we establish will become part of political discourse and will perhaps alter political action. Political views, individual emotions, social science theorizing, and collective affect all interact with each other in complex ways and develop a momentum of their own. Thus we must be attentive to and acknowledge both the role of our own assumptions and the emergence of new unpredictable rights claims and concerns.
John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email jbuell@acadia.net.
From The Progressive Populist, May 1, 2012
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