Tag Archives: Euro

Why Torture a Victim Whose Will Is Already Broken?

14 Jul

The draft of the agreement between the Greeks and the Eurogroup is out and, as everyone has noticed, it is not just an act of revenge, it is a piece of legislative torture. It contains old demands, like pension reductions and higher taxes to fund primary surpluses, as well as new demands, like reduction in the power of unions and a massive privatization of state assets using a separate fund controlled by Greece but monitored by the EU’s institutions. In fact the document asks for a massive legislative program touching on every aspect of Greek economic life – tax policy, product regulation, labor markets, state-owned assets, financial sector, shipping, budget surpluses, pensions, and so on. This legislation is demanded within the next few weeks. Such a package is the kind of thing one sees during or just after wartime, not as the product of democratically negotiated decisions. Let’s remember that the programme on which Tsipras and the Eurogroup agreed is something asked of a country that has already experienced a very severe depression, already implemented a number of constraints requested by creditors, has 25% unemployment and a banking crisis. What is the point of torturing a victim whose will is already broken? To destroy all opposition.

I think this should not be read as a proposal for restoring growth to Greece or even as the reflection of an economic blindness in Europe but as the reflux of the EU political project, of which the euro is the purest expression: the preference for technocratic domination over popular sovereignty. This program describes an architecture of rule, one that expresses utter indifference to the attempt by peoples to manage their affairs democratically, and one that demands enormous reserves of discretionary power for the Eurogroup. Note not just the scope of the Eurogroup’s demands but the molecular level of detail with which they lay out demands. For instance, as part of their package of “ambitious product market reforms,” they insist on changes in “Sunday trade, sales periods, pharmacy ownership, milk and bakeries, except over-the-counter pharmaceutical products, which will be implemented in a next step, as well as for the opening of macro-critical closed professions (e.g. ferry transportation).” Then there are the new demands, like “rigorous reviews and modernization of collective bargaining [and] industrial action,” which is Eurospeak for rubbing out labor rights. Other demands make it clear that these decisions are not only extensive and fine-grained, but designed as much as possible to remove responsibility and control from the Greek people and their government. The “scaled up privatisation programme” is to “be established in Greece and be managed by the Greek authorities under the supervision of the relevant European Institutions.” And the “quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets” are “subject to prior approval of the [European] Institutions.”

Most telling of all, “The government needs to consult and agree with the Institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament.” That is to say, on every above named area of reform – from tax policy to labor markets – the government must consult first with its European managers. The piece-de-resistance, however, is that the Greeks are maximally accountable to the Eurogroup while the Eurogroup is minimally accountable and maximally arbitrary. Having listed its demands the document then says, “The above-listed commitments are minimum requirements to start the negotiations with the Greek authorities.” Later, the document says that an ESM programme is possible “Provided that all the necessary conditions contained in this document are fulfilled.” There is no guarantee the money is forthcoming. In other words, the Eurogroup retains maximum discretion to decide that Greece has failed to meet any of the impossible demands made upon it, while the Greeks possess no similar ability to hold the Europeans to account for their failures. Recall, for instance, that the agreement requires Greece to run budget surpluses that the Germans and French have never managed to achieve and that the ECB recently refused to extend sufficient emergency financing to the Greek banks, essentially engineering a near bank-failure in direct violation of its mandate to provide emergency liquidity to illiquid banks.

There are those who think that you can be pro-Euro and anti-austerity. As this round of negotiations show, the economics and politics of the euro are not separated like that. The Euro is a political project. It is unification without sovereignty. It is the delegation of national sovereignty to groups of finance ministers and supranational bodies whose main task is to suppress the re-appearance of the very source of their power. The political institutions and practices that have grown up around the euro and the EU are based on the belief that exercises of sovereignty are dangerous, irresponsible, and unaccountable. Although these institutions are in one sense nothing more than the product of agreements between nations, their raison d’etre is to prevent any further, outright expression of that sovereign power. That is why they insist on total subjection to their decisions, and why Greece became about more than Greece. The Greeks dared to assert popular sovereignty at the only level it is currently possible to do so. The bitter irony being that the discretion demanded by these post-sovereign entities is less accountable than when exercised as the outright power of a democratically elected government. And no less vindictive.

Alex Gourevitch

 

The Grand Old Duke of Athens

11 Jul

Alex Tsipras has caved in to the demands of Eurozone creditors. He rightly claims that he has no mandate to leave the Eurozone. However he also has no mandate to accept the creditors’ demands. In the referendum that he called, Tsipras convinced the Greek people to vote decisively against accepting an austerity package very similar to the one he is now recommending. The Greek parliament’s approval of the package last night is an empty formality that does nothing to conceal the final surrender of Greece’s sovereignty and with it any remaining pretence of self-government. The parliamentary majority that Tsispras commanded was made up of the utterly compromised Syriza and the opposition parties whose arguments the Greek people decisively rejected in the referendum campaign less than a week before.

The contradiction in Syriza’s strategy and its mandate has been fully exposed. From its election as a government to the referendum, Syriza convinced the Greek people to vote for something that was not possible: staying in the Euro without the austerity that was the condition of staying in the Euro. This strategy has now come unstuck, as it was bound to. Faced with a stark choice of leading their country out of the Eurozone or giving it up to the control of Eurozone leaders, Syriza has opted for the latter. At the time of writing, it is still possible that the Eurozone will decide to kick Greece out, notwithstanding Syriza’s capitulation. But whatever the outcome, democrats need urgently to assimilate the lesson of this political debacle.

Tsipras and Varoufakis claimed that they could use the Greek people’s support in elections and the referendum to increase their bargaining power in an intergovernmental forum. They discovered that there was no truth in this claim. They fatally misunderstood the nature of the Eurozone and the EU. These are not institutions in which different sovereign nations reach a compromise on their interests, as they erroneously believed going into the negotiations. They are institutions in which national governments agree to subordinate their national will and interest to a set of technical rules dictated by market imperatives. As Syriza discovered, this institutionalized self-limitation of national sovereignty by European governmental elites is implacably hostile to the idea that policy should be accountable to electoral majorities. The essence of the Eurozone and the EU is anti-democratic.

Instead of being straight about this with his supporters, Tsipras, like the Duke of York in the English nursery rhyme, marched the Greek people up to the top of the hill only to march them back down again. This futile manoeuvre failed to cover up his retreat, and it is likely to have a profoundly subversive effect on democratic politics in Greece and beyond. After months of populism Syriza have flipped and now do the work of the technocrats. Voters have been forcefully reminded that neither their votes nor their views count for much in contemporary Europe. Many will react to Syriza’s capitulation with resigned acquiescence, while others will simply turn away from representative politics in disgust. The worst of it is that many people, and not only in Greece, will take away the lesson that democratic political action is impotent in the face of market power.

To have any chance of reversing the effects of this disaster, democrats need to be realistic about the anti-democratic nature of European integration and recapture the idea of popular sovereignty from the populist right.

Peter Ramsay

Europe’s internal adjustment

14 Feb

With all the talk of competitive currency devaluations and international currency wars, less attention is being paid on the arresting fact that some countries within the Eurozone are achieving what many thought they could not: an internal devaluation via wages and other production costs.

A consequence of this is that some Southern European economies are regaining shares in export markets, their products cheapened by a mixture of labour market reforms and downwards pressure on wages. The FT recently reported that in Portugal exports in 2012 rose by 5.8%, with exports to outside the EU rising 20% in this period. This was Portugal’s third consecutive year of plus 5% export growth. Writing about Spain, Tony Barber suggested that a similar phenomenon was occurring in the Spanish manufacturing sector. Car companies planning to reduce production in France and Belgium are boosting output in Spain. Nissan has committed 130 million Euros of extra investment into its Barcelona plant in order to raise annual production to 80,000 units. Ford, Renault and Volkswagen have all followed suit with their own investments. Barber explains that lying behind such decisions are changes in Spanish labour laws. A reform package last year introduced by the government has loosened up collective bargaining practices, making it easier for firms to negotiate favourable terms with workers.

The ability to boost export competitiveness by internally devaluing is not uniform across the Eurozone. France has enacted its own labour market reforms but labour costs remain significantly higher there than in Spain or Portugal. Monti in Italy has been less successful in pushing through labour market reforms. This unevenness has had the effect of exaggerating the competition between countries within the Eurozone. Unable to compete with one another via national currency manipulations, competition is realized via changes in the labour market. Accepting lower wages has become a matter of national duty in today’s Eurozone.

This development has various implications. The first is that it seems parts of the Eurozone are able to achieve what we thought was only possible in the olden days of the Gold Standard: internal adjustment where the burden falls upon societies, not currencies. This worked back then because there were far fewer public expectations about jobs and welfare to challenge the harsh assumptions of Gold Standard supporters. When such internal adjustment became intolerable, it collapsed. We might have expected something similar today. In fact, the quiescence of European labour has made internal adjustment possible. In some places, it has meant hollowing out national democracy in favour of more stable, technocratic alternatives, but the single currency remains. Differences between the constraints imposed by Eurozone membership and those of the Gold Standard help explain some of the stability of the former but not all. Much is also due to weak labour militancy.

Another implication dovetails with a previous post on falling productivity in the UK. In some Eurozone member states, productivity figures have improved. In Spain, productivity is has risen by 12% since mid-2008. However, such increases have not been achieved via any labour-saving investments. There have been no marked technological developments that explain rising productivity figures. Rather, gains have been made through labour itself. This tells us a great deal about European capitalism: it is far easier to claw back price competitiveness via assaults on labour than it is to boost productivity through capital investment in research, product development and technological improvement. Paradoxically, we can say that weak labour militancy results in low incentives for firms to channel capital into labour saving technology.

The kind of internal adjustment taking place within the Eurozone is thus hardly a victory for supporters of austerity. Competiveness is boosted in short-term ways, via downward pressure on wages. There is no longer term gain in productivity that might actually leave a socially useful legacy for societies as a whole. Recessions and social upheavals in the past had the same human cost in terms of wasted lives but they came with great labour-saving inventions and other gains. European leaders are so worried about currency wars precisely because Yen and Dollar devaluations threaten to wipe away the marginal gains in price competitiveness their businesses have made. And they know that were this to occur, there would be nothing much left. Only the waste.

The Zombie Currency and the Fetters of Europe

4 Sep

Hobbes once said that money is the “Sanguification of the Commonwealth” Wherever it circulates, so it brings goods from those who produced them to those who need them, and in the process sustains the life of the body politic, the same way blood sustains the life of the body. If Hobbes was right, that is a bad sign for the euro. The euro was supposed to be the lifeblood of the European Union, circulating through and nourishing the political institutions of the Euro-Leviathan. Instead it is sucking the life out of it.

Part of the problem is that the euro was not just supposed to nourish existing institutions but conjure into being a set of institutions that had not yet been fully created. It was a political project through and through. It was supposed to compensate for the EU’s democratic deficit and confusion of powers: a kind of European version of post-Tiananmen China – economic vitality in the place of more democratic institutions. But, unlike China, the EU never went all the way to creating a highly coordinated, if undemocratic, Euro-Leviathan. What the euro promised was financial integration, macroeconomic stability, and technocratic peace. A common currency managed via European Central Bank monetary policy would bring borrowing costs down, given the implicit continental wide guarantee. This is exactly what happened at first. Sovereign debt yields converged rapidly, such that where Greek yields had been almost 25% in 1992 compared with German 7% yields, by the end of 2000, two years after the introduction of the euro, their yield were nearly the same. Credit flowed freely across borders, as did capital, consumer goods, and even labor.

But as we have seen over the past months, the background guarantee of supranational monetary support was not actually there, the Leviathan was a many-headed hydra, and the underlying economies diverged rather than converged. The ECB’s mandate is to control inflation not save banks or engage in fiscal transfers. There is no coordinated continental-wide fiscal policy. The responses to the recent crisis have been short-term, ad hoc moves, like the Long Term Refinancing Operations, in which the ECB loaned money to national banks to buy sovereign debt, in an attempt to keep yields low and increase liquidity.

The effect has been to extend the sclerotic features of the European political system into the economy, rather than to have that economy breathe life into the political institutions. Consider the following three facts, which together reveal just how rapidly the European economy has financially dis-integrated, even as the euro ghosts along preventing this dis-integration from becoming an economic reorganization:

  1. First, as everyone has noticed, sovereign debt yields have radically diverged to reflect not the strength of a continental economy with a coordinated economic policy, but rather dramatic differences in national economic potentiality. Germany is safe, France moderate, the PIIGS increasingly risky. (Note both the convergence from 1999-2009, and the rapid divergence from 2009 onwards. Graph from the ECB)

  1. Second, as Gillian Tett reported in May, cross-border private lending has seized up. An essential feature of eurozone financial integration had been the willingness of banks to make loans in one country backed by assets from another. Lending to Greek consumers were matched by German funds; lending to Spanish borrowers covered by French assets. Now, as Tett observes, “banks are increasingly reordering their European exposure along national lines…the fracture has already arrived for many banks’ risk management departments.”  Banks now demand that any loan to a particular country be backed by funding from that country. Where the economic strength of Germany thus facilitated borrowing, speanding and investment in weaker economies, it now subtracts from that same provision of credit. Given the economic contraction, Greece, Spain, Italy now have fewer good assets to put up against loans that now has to be backed nationally. This “asset-liability matching” is an indication that banks are already treating the european economies as breaking up, even if this break up is not registered at the level of different currencies able to register these different economic potentials. An April ECB report on financial disintegration notes that the standard deviation in interbank lending rates across countries has continued to grow and fluctuate wildly since 2009, and an August report confirms continuation of the trend in various financial markets: “the pricing of risk in the repo market…has become more dependent on the geographic origin of both the coutnerparty and the collateral, in particular when these stem from the same country.”
  1. Recently, the Financial Times reported corporations have had to seek financing from the corporate bond market, because bank loans are in short supply, and that the yields on corporate bonds are nationally divergent. According to the FT, “Interest rates paid by companies in the eurozone’s weaker economies have surged, highlighting the bloc’s fragmentation as the European Central Bank loses control of borrowing costs.” Further, this particular instance of fragmentation heavily favors large businesses that can sell bonds on corporate bond markets, and some countries have many more corporations with access to these markets than others. Money is going into already established avenues for investment, not new growth areas. Once again, financial markets are reflecting the fragmentation of the European economy.

In sum, diverging national bond yields, diverging bank loan structures, diverging corporate borrowing costs. The blood is running through the arteries of a foreign host.

The ECB is not so much keeping the euro alive as keeping it from dying. Public funding by the ECB is replacing private funding at the cost of sinking more and more money into going concerns, suppressing new avenues for investment. Banks are not lending to companies, they are investing in their own sovereign debt or parking cash back at the central bank. Major companies are sitting on cash hoards rather than investing.

The Euro is a zombie currency – a monetary undead, wandering around feeding off the flesh of living economic entities. Of course, there is an alternative to trying to goad skittish banks and bearish companies into investing. One could sequester savings and force investment through a massive, European wide investment plan. But that would require decapitating the zombie, or however else one finally kills the walking dead. The fetters of the EU political structure weigh too heavily on the economic forces of the Eurozone to allow such a radical act. There may be a European solution to the continent’s economic malaise, but it won’t come from the EU.

The Van Rompuy draft

28 Jun

This evening, heads of government will discuss a draft proposal put together by the President of the European Council, Herman Van Rompuy, and his team, prepared “in close collaboration” with the heads of the European Commission, the Eurogroup and the European Central Bank. Though it seems the terrain is already being prepared for an inconclusive summit, it worth looking at Van Rompuy’s draft to see exactly what is to be discussed.

The draft is striking by virtue of its conditional wording: there are many ifs, coulds, possiblies and maybies. The whole draft reads as a tentative and rather speculative account of what reforms the EU could take on board if it wanted to move forward with fiscal and monetary integration. There is none of the hubris or confidence one might find in earlier drafts produced by European institutions, confident of their authority and of member state compliance.

There are nevertheless a few measures that seem a bit more thought out and have a whiff of probability about them. One is the integrated supervision of banks, the so-called banking union. This measure seems likely largely because member states can all agree on the point that national regulators have been found wanting. Instead of national regulators that sign off on generous assessments of the state of national banks, something more robust is needed. What is surprising is that the draft – with the presumed agreement of ECB head, Mario Draghi – singles out the ECB as the institution most likely to take on this role. This is surprising because – as Dermot Hodgson as shown – the ECB is generally rather reticent about any attempt at expanding its competences. Far from being a power-hungry supranational actor, the ECB has shied away from taking on new roles. Its sole concern is its price stability mandate: anything else smacks of back-handed attempts at imposing some sort of political oversight onto the bank, a terrible idea according to mainstream central bank thinking. Either it has accepted this new role because it does see it as an opportunity to increase its power or it has had this forced upon it in some way. One reason may be a convergence between Draghi, Van Rompuy, Barroso and Juncker, on the need to set up this banking union in a way that avoids any messy involvement with domestic politics. By placing it within the ECB, Van Rompuy notes in his draft, existing treaty law (“the possibilities foreseen under Article 127(6) of the TFEU”, to be exact) should be sufficient. A tidy legal solution to a thorny problem, and one that Draghi can no doubt appreciate even if it means a slight expansion in the ECB’s remit.

On the “integrated budgetary framework”, another important chunk of Van Rompuy’s draft, it is obvious what might be accepted by national leaders and what remains pretty unlikely. The key suggestion is that stronger measures to control the upward end of government spending need to be introduced. Van Rompuy suggests that in the end “the euro level area would be in a position to require changes in budgetary envelopes if they are in violation of fiscal rules”. This begs the question of what the sanction would be exactly – probably, fines of some sort – but it also makes clear how the evolution of economic governance in Europe is following well-trodden lines. What is being suggested here is really a constitutionalizing of limits to what governments can spend: exactly what national governments have been discussing for some time and what former French President Nicolas Sarkozy had proposed in France.

The push to make excessive spending truly illegal is hardly new and the ideas are familiar to anyone who followed the events of the 1990s and the Maastricht criteria. Overwhelmingly, economic growth is assumed to come from private sector activity, supply-side reform and from a focus on exports. There is to be a minimal role for public spending in any national growth strategy. National government discretion with regard government spending, and especially the idea that market instability should be compensated by discretionary uses of the public purse, has little role to play in the draft. That the fiscal excesses were more consequence than cause of the present crisis, and were initially the result of massive wealth transfers in the form of bank bail-outs after the Lehman Brothers collapse, is not taken into account. Even the part of the draft that mentions a “European resolution scheme” to be funded by bank contributions – “with the aim of orderly winding-down non-viable institutions and therefore protect tax payer funds” – pales in comparison to the tax-payer funded European Stability Mechanism that is vaunted as a possible “fiscal backstop to the resolution and deposit guarantee scheme”.

What remain far more tentative are the parts that describe the issuance of common debt and the creation of a fully-fledged European treasury: ideas that are being firmly resisted by Chancellor Merkel. And the mention of strengthening democratic legitimacy is an afterthought in a draft that focuses on measures intended to restrict as much as possible the room of manoeuvre for nationally-elected representatives.

There is little evidence of federalizing ambition in Van Rompuy’s draft. The most likely measure – the banking union – is proposed in a way that avoids having to rewrite any existing laws. The suggestions about common budgetary rules are driven by national governments so lacking in authority that they need binding external frameworks in order to impose any sort of fiscal discipline on their own societies. The reaction to this end of week summit will most likely be disappointment at what is not in the final communiqué. But judging from Van Rompuy’s draft, the real problem is what is in it.

The problem with Eurobonds

7 Jun

As the Eurozone crisis deepens, some new ideas are emerging. Some have been aired for a while but are only beginning to be taken seriously. In this post, The Current Moment considers the issue of Eurobonds. In future posts, we will consider some of the other solutions being suggested, such as the idea of a banking union, the plans for which have been recently floated by the European Commission.

 

In a continued deepening of the Eurozone crisis, attention is focusing on Spain. Rather than investing in production during the boom years, bank capital in Spain was mainly channelled into property development. As the bottom fell out of the property market, Spanish banks have been left with worthless loans on their balance sheets. The regionalized nature of its banking system has made these problems less transparent than elsewhere and the scale of the problem has only recently emerged. Even now, there is considerable speculation about exactly how much it would take to stabilize Spanish banks. The IMF’s most recent estimate is that Spanish banks will need at least 40 billions Euros of new capital. In the meantime, loans are drying up for business and Madrid is being shut out of the international bond market.

There is some debate about whether in the longer term the Spanish economy will be able to raise competitiveness levels. The boom years were not entirely devoid of productive investment and optimists point to a weaker Euro boosting the country’s exports. Portugal, according to the FT (29/05/12) specializes in high end shoes and black toilet paper. Spain may find some of its exports benefiting from a falling Euro. But these competitive gains are not shared across the Eurozone as a whole: countries dependent on exporting to within the Eurozone will not benefit from a falling Euro. Any Spanish gains in competitiveness in the medium to long term are likely to come at the expense of the French, the Italians and other Eurozone member states.

For many, this all points to Eurobonds as the solution to the crisis. Far from exaggerating the differences between national economies within the Eurozone, Eurobonds are seen as a way of mobilizing these differences (especially German competitiveness) for the common good of the Eurozone as a whole. The basic idea of Eurobonds is that instead of national governments issuing bonds, the EU as a whole would do so. Those countries currently facing punitively high interest rates on new bond issues would find their borrowing costs falling. German bonds, currently serving as safe havens for international investors, would see a rise in interest rates, costing the German taxpayer but stabilizing the Eurozone as a whole. This idea was raised back in 2010 by the Bruegel think tank with its blue bond proposal. The idea here was that a Eurobond could be issued for debt of up to 60% of GDP for Eurozone members. Debt in addition to that would have to be financed by purely national government bonds. This would mean lower rates for sustainable debt levels and higher rates for excessive debt levels. The idea was batted away by Chancellor Merkel as a poor substitute for supply-side reform in crisis-stricken countries.

As opposition to austerity politics as strengthened, consolidated in recent months by the election of François Hollande in France and the inconclusive Greek elections, Eurobonds have come back onto the agenda. The term is used by Hollande as a rallying cry and as a measure of his success in Europe: if he is able to get the topic onto the EU agenda, he will have won his battle of wills with Merkel. Ever supportive of measures that may increase its own powers, the European Commission supports Eurobonds, as do leaders such as Mario Monti in Italy.

The more technical discussion about the exact modalities of any Eurobond issue asides, there are two major problems with this idea. The first is that as a solution to the Eurozone’s economic crisis, Eurobonds essentially rest upon the idea that borrowing more money can help Europe grow out of its current recessionary state. Given the performance of this particular growth model, that seems unlikely. As already argued on The Current Moment, Europe faces an impasse on growth: stuck between Hollande’s European neo-Keynesianism and Merkel’s insistence on national supply-side reforms, there are few alternatives to these two positions, neither of which inspire confidence.

The second problem is that Eurobonds present us with a direct clash between technocratic rationale and political reality. From the technocrat’s perspective, Eurobonds appear as a sensible solution to a thorny problem. Politically, they run against almost all the trends in place today in Europe. They would imply wealth transfers across national boundaries, something that is firmly resisted by national publics who would be expected to pay more. They would require considerable institutional strengthening at the European level in order to put in place the mechanisms needed to make decisions about how Eurobonds should be issued and how the funds raised should then be distributed. This comes at a time when the EU, according a recent Pew poll, is experiencing a “full blown crisis of public confidence” (see here for an overview of the poll).

Eurobonds would only exacerbate the democratic failings of European integration whilst at the same time they fall short of answering key questions about Europe’s growth model.

Was there austerity? Is there still?

22 May

As the Euro debate trades one nostrum for another, shifting from ‘pro-austerity’ to ‘pro-growth,’ it is worth asking ourselves what ‘austerity’ was about. After all, as Tyler Cowen and others have argued, if austerity means an absolute decline in spending, then that hasn’t happened. As this graphic from Veronica de Rugy shows, there has been an overall slowing of the growth rate of spending, with slight absolute declines in Spain, Ireland and Greece from 2009 highs:

 

But the graphic does not show dramatic cuts in real dollars. So is all this talk of austerity a ruse or rhetorical flourish? Is ‘austerity’ simply defined according to one’s economic preferences? That is sort of Cowen’s view, at least insofar as Cowen believes there is no good definition of austerity, which is why the word austerity just ends up measuring the distance between the amount of spending one thinks is correct relative to the actual amount of spending.

While the Left might be inclined to jump at Cowen et al.’s approach to austerity, it is worth separating a few things. Data on overall state spending blurs together at least two distinct issues – changes in popular consumption (and expectations about that consumption) as compared with the role of the state in managing capitalism. Increases, or non-dramatic decreases, in state spending are perfectly compatible with across the board belt-tightening when it comes to popular consumption. War-time austerity, after all, is just that – sudden increases in overall state-spending, but simultaneous limitations on popular consumption. The graph below shows the rapid increase in US public spending during WWII despite belt-tightening at home:

Given the long-term trend over the twentieth century of the state’s increasing involvement in managing various aspects of capitalism, it would be very surprising if state spending dramatically declined. But it can still remain the case that the state is withdrawing from various welfare functions, or limiting its role in maintaining popular consumption – either through direct redistribution or through employment programs.

Consider, for instance, the fact that, over the same period that Cowen et al. think there have not been ‘savage cuts,’ we have seen the US, Spain and Greece cut public employment. The US government, for instance, has cut about 586,000 jobs since the recession began. As Doug Henwood pointed out a month ago (and the WSJ later agreed), state and local cuts to employment are responsible for about 1 to 1.5% of the unemployment. Put another way, were it not for cuts in public employment, the unemployment rate would be closer to 7%, not 8.5%. The Greek agreement includes cutting 15,000 jobs, despite a 22% unemployment rate. A similar story can be told for Spain. So it is worth separating discussions of austerity from overall state involvement in the economy. Spending can remain constant or even increase even as the state imposes new limits on its willingness to support popular consumption.

 

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