by Michael Roberts
There seem to be two issues that are occupying the minds of
mainstream economics at the moment. The first is partly theory, partly
evidence and partly policy. It is the question of whether the dominant
economic policy solution to the crisis should be austerity, namely
cutting government spending and raising taxes to reduce government
borrowing and get public sector debt levels down – or not. This issue
is partly driven by what was the cause of the Great Recession and from
that what needs to be done. Mainstream economics is divided on this.
But it is agreed on one thing: that the aim is to put the capitalist
mode of production back on its feet.
The second issue is related to this. It is the debate that has
broken out between mainstream Keynesian Paul Krugman and left ‘Minsky’
Keynesian Steve Keen. Krugman reckons the cause of the capitalist slump
is to be found in Keynes’ traditional idea of liquidity preference and a
loss of ‘animal spirits’, leading to an increase in the hoarding of
money rather than lending it to boost investment and consumption. Keen
says that this is not the cause. Instead, it lies in the build up of
‘excessive’ debt in the private sector, particularly the banks, that
eventually led to a financial crisis, a Minsky moment. I’ll analyse
this debate in my next post. But let’s look at the first issue now.
Everywhere, governments are trying to reduce budget deficits and stop
public sector debt (relative to GDP) from rising any more. Apparently,
this is crucial to getting the economies of Europe, the US, Japan and
others back on their feet. In Europe, the ‘profligate’ weaker
capitalist economies of Greece, Ireland, Spain, Portugal and Italy are
being told that they must impose huge austerity measures to achieve
this. And indeed, such measures are also being applied in the stronger
capitalist economies of Northern Europe and the UK. In the US, once the
presidential election is over, whoever wins will impose a major
programme of government spending cuts and tax rises for the rest of the
decade. And in Japan, with a public sector debt well over 230% of GDP,
the government is looking to introduce a battery of new taxes to reduce
the budget deficit and debt level.
The question is whether this is the right policy for capitalism. The
Austerians say that it is necessary in order to reduce the cost of
capital – in other words, raise profitability. If the public sector
goes on borrowing more and more, the bulk of savings appropriated in an
economy will be eaten up by government. Government will ‘crowd out’
the private sector and stop it getting funds; or the extra demand for
savings from the government will drive up interest rates. And as the
public sector is inherently ‘unproductive’ – only the capitalist sector
is productive – this will lower economic growth and make things worse.
This is the mantra of the US Republicans, the British Conservatives,
most central banks and big business leaders.
The Keynesians disagree. If public spending is cut and taxes are
raised, that will contract domestic demand in the economy and thus lower
economic growth. Indeed, more austerity could mean too much
contraction and even cause a rise in debt ratios as a result. It is
better to keep austerity to a minimum in a period of depression until
the demand picks up and then try to get debt levels down later. “Not so
deep and not so fast” – is the mantra of Paul Krugman, Martin Wolf,
George Soros and the US Democrats and British Labour Party.
Before answering who is right, the first question is to look at why
the issue is there at all. It’s there because the capitalist mode of
production failed. The Great Recession came about because of falling
profitability in the capitalist sector from 1997 (in the US and
elsewhere) and the eventual failure in 2007 of the huge expansion of
private credit (what Marx called fictitious capital) needed to keep the
whole thing going. Then the state had to intervene in aid of capitalism
to avoid a banking meltdown and ameliorate the effects of the slump.
The IMF has shown that average public sector debt in the OECD rose
30% pts of GDP from 2007 to 2011. Of that rise, 9% of the points were due to
falling tax revenues and rising expenditure on unemploymnent and welfare
benefits during the Great Recession. Another 7% of extra borrowing went
on fiscal programmes to stimulate the private sector or to carry out
public sector investment programmes. The bailout of the banks cost
another 7% pts of GDP and then there were higher interest costs incurred
from the extra debt that had to paid to bond holders, which cost
another 6% pts. So only one-quarter of the rise in public debt since
the Great Recession began was due to a conscious Keynesian-type policy
of fiscal stimulus by governments in the mature capitalist economies.
Three-quarters of the rise was due to the capitalist slump and banking
collapse.
But this is the crux of the matter: are austerity policies to get a
reduction in public debt levels necessary to put capitalism on its feet
or will they make it worse? The Austerians say yes and the Keynesians
say no. What do Marxists say? It all depends on what is happening to
the profitability of the capitalist sector. The expansion of public sector
spending and borrowing can stimulate the capitalist economy for a while,
but just as with private debt, not forever. At some point, government
consumption becomes a deduction from the profits of the productive
capitalist sector (and here we mean the Marxist meaning of productive,
namely generating profit and accumulating capital, not making things). It is this difference between productive and unproductive labour
under capitalism that the Keynesians do not recognise. And that is
because Keynes did not have a law of value or any role for profit in
economic growth. For him, the production of things and services creates
incomes and profit is not an issue.
The Austerians want the process of “creative destruction” (as Joseph
Schumpeter characterised it) of unprofitable capital to play out. They
do not want the public sector to crowd out the restoration of
profitability when capitalism is being weighed down by excessive dead
capital in the private sector, which needs ‘deleveraging’. The
temporary boost to incomes created by state sector spending is no
overall solution to economic recovery under capitalism. Indeed, the
rise in public sector debt necessary to fund this state spending in an
environment of slump or low growth just adds to the already existing
burden of private sector debt weighing down profitability, even if there
is interest to be made by the financial sector from buying government
bonds.
This the mantra from the Austerians is that you cannot overcome
excessive debt by more debt. Moreover, if the public sector keeps
expanding, it calls into question the capitalist mode of production
itself – an issue that the Keynesians themselves start to worry about.
So, unless profitability returns through creative destruction,
increased state spending and debt will start to aggravate the crisis or
at least mean that any recovery based on capitalist production will be
muted and insufficient.
That is the why the Austerians have a point. On the other hand, the
Keynesians have a point. Too drastic a cut in public spending, in an
attempt to reduce debt or stop it rising any further, will also kill the
ability of those sectors that benefit from government activity. Thus
the debate goes round and round.
As one mainstream economist put it: “we cannot know the answers definitively”, (G. Corsetti, Has austerity gone too far?,
Voxeu.org). Both sides of the mainstream agree that government
deficits must be reduced and debt eventually ‘stabilised’. Corsetti
again: “The debate is not about the desirability of restoring a
safer fiscal position after the large increase in gross and net public
debt in the last few years. This can safely be taken for granted”. That’s all right then.
But the Austerians want it done quicker and they want cuts targeted
towards government spending rather than raise taxes. They present the
evidence of 40 years of such ‘adjustments’ recently compiled by the IMF
for the mature capitalist economies. This database concludes (rather
cautiously) that adjustments through spending cuts are less
‘recessionary’ than those achieved through tax increases (see Devries,
Gaujardo, Leigh and Pescatori, A new action-based dataset of fiscal consolidation, IMF working paper 11.128.)
That’s not really surprising under capitalism. Tax increases
directly hit the profitability of the capitalist sector (even if taxes
are directed at workers incomes or sales rather than corporate tax) and
thus will deter investment. Reductions in competing government
investment and consumption, although hitting those capitalist sectors
that governments buy services from, is more beneficial to capitalists as
a whole. Of course, this has nothing to do with what would benefit
society.
‘Confidence’ among capitalists also falls when taxes are hiked and do
not fall when government spending is reduced. Reducing public sector
services and employment will also involve measures to reduce employment
protection, pension conditions and other rights of public sector
employees. All that will help capitalist accumulation by raising the
rate of surplus value.
But if severe austerity leads to a fall in employment and thus demand
for capitalist production, it could well lower growth and even drive
the economy back into recession. Such is the argument of the
Keynesians. Paul Krugman has correctly pointed out that the best way to
get the debt ratio down is through faster economic growth, as happened
after the second world war. Net public debt to GDP in the US stood at
80% in 1950 and fell to 46% by the end of the decade and yet public
spending to GDP rose! Why was that possible? Because average real
growth was 4.3% a year (with inflation at 2.3% a year – as it is more or
less now). Real GDP growth was decisive in driving down the debt
ratio.
But Krugman and other Keynesians do not put their fingers on why
economic growth was so high. The 1950s was also a period of high
profitability in the US capitalist sector. That was the real key to
investment and growth. Such profitability made it possible for the
capitalist sector to bear a high public debt level and accept much
higher tax rates than now, as well as strong government spending.
Profitability was high because of the ‘creative destruction’ of capital
that had taken place during the Great Depression of the 1930s and
physical destruction that had taken place during the war (at least in
Europe). Government spending was thus beneficial to post-war capitalism
– for as long profitability was high. But these conditions do not
apply in 2012.
The Keynesians are concerned that “accelerated austerity” risks weakening capitalism because it could lead to the “premature scrapping of fixed capital and human capital” (see JV Reehan, From Plan A to Plan B, 7
March 2011, Vox op cit). But that is precisely the purpose of a
capitalist slump. The slump eventually restores the profitability of
the remaining capital. Once again, the Keynesians see everything in the
terms of output and physical assets and not in terms of profit. Thus
they cannot understand the nature of the crisis and offer effective
policies to end it.
So instead, we have the attempts of the Keynesians to find a ‘middle
path’ between austerity and stimulus. Olivier Blanchard, chief
economist of the IMF (see my previous post, Olivier Blanchard and TINA, 28 March 2012), puts it: “substantial
fiscal consolidation is needed and debt levels must decrease. But it
should be a marathon rather than a sprint. It will take two decades to
return to prudent levels of debt (!). There is a proverb that actually
applies here: slow and steady wins the race”. (O. Blanchard, 2011′s four hard truths, 22 December 2011, Vox op cit)
More recently, two of the biggest gurus in mainstream economics,
Bradford de Long, the Keynesian professor at Berkeley University of
California and Larry Summers, the former US treasury secretary under
Clinton and well-known denier of any crisis before it happened, have
produced a paper that examines whether fiscal austerity is a good idea
or not for capitalism (B de Long and L Summers, Fiscal policy in a depression economy, March 201).
One of the big issues in this debate is the size of the fiscal
multiplier, as it is called. This measures the change in national
income that corresponds to a change in net government spending and tax
reductions. The Keynesians says that this is high: namely that a 1%
rise in spending leads a equally large rise in economic growth. The
Austerians say it is low, or zero or even negative, because any increase
in public spending leads to a fall in private spending as investment is
‘crowded out’ or consumers reduce spending and save more to cover
increased taxes; or because they fear the government will get into
difficulty. Thus any government stimulus would be counteracted by an
equivalent fall in private spending. This Austerian theory is called
the Ricardian equivalence, after the classical economist David Ricardo
who first argued it against helping the poor with government aid.
What do de Long and Summers conclude? They reckon that when interest
rates are near or at zero and central banks have done all they can to
stimulate the capitalist economy with injections of credit (quantitative
easing or printing money), as is the situation now, and there is still
no growth, then fiscal measures will help the recovery of the capitalist
economy not hinder it. But this is only true “for only as much fiscal stimulus as can be delivered in a timely and temporary way” . That’s helpful! How large any stimulus should be “remains for future research”. That means they just don’t know.
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