Tuesday, August 30, 2011

False Premises of Austerity Measures

This past year we have seen an explosion of social unrest throughout the Global North – in Greece, France, states in the US, the UK – as austerity measures continue to be imposed on debt-ridden states. The debate about debt is often framed as one in which governments need to pay their bills and the way to do this is by slashing government spending.

There are a number of problems with how this ‘debate’ is framed. In a balance sheet there are credits and debits, or revenue earning activities and expenses, so if one is indebted, one can raise revenues and/or cut expenses. Austerity measures are sold on the premise that ‘paying one’s bills’ will happen by cutting expenses – not by gaining revenues. In other words, it is assumed that states like Greece will not pay their bills by earning more.

This is a convenient ‘assumption’ because many debts came from policies that stripped governments of revenue-generating capabilities. Governments around the world got into trouble by offering tax breaks, tax holidays, low tariffs and subsidies to the private sector – and usually to its biggest players. In this environment companies have been hopping from one tax scheme to the next, from one lower than the previous one, and on and on.

And not just. Under a system of “corporate welfare” states subsidize private industry through infrastructure development, all at considerable cost. Walmart is one exemplary beneficiary.

And not just. Under privatization governments have sold public assets, which in the short run actually translates into a windfall in state coffers. (Take, for instance, Egypt’s GDP figures in the late 1990s and early 2000s: The country’s GDP growth skyrocketed as it sold huge public assets into private hands.) But the huge surpluses don’t last long before being eaten up by public-private contracts. The government puts up for bid private contracts for the delivery of (currently or formerly) public services. Private contractors bid to provide a service that the government used to provide or could have provided. The government pays the contractors, often at exorbitant rates, often going into debt, to do something it could have done itself. (See this previous blog entry on public-private partnerships in Egypt.)

Take the US state of Wisconsin and the debacle of austerity that in early 2011 led the state legislature to end collective bargaining rights and cut funding for public services, including education. This was forced through under the premise that the state’s pension and other employee benefit trust funds were bankrupting the government. A closer look revealed however that the fund is nearly entirely funded and that it was not entirely so in part because of $195 million annually in Wall Street investment manager fees. If Wisconsin managed its own fund rather than contracting out management to Wall Street, then the fund would require a modest contribution from the government. And the government would be in an even better shape to ‘pay its debts’ if Governor Walker hadn’t early in the year pushed through $127 million in tax cuts!

These austerity measures have been the raison d’être of multilaterial agencies (International Monetary Fund, World Bank) in the Global South for the last thirty or more years, pushing debt-ridden countries like Egypt into slashing government spending in a way that led to major social dislocation and unrest. Without hard currencies (dollars, Euros, yen) countries in the Global South were sold the promise of devaluing their currencies in order to make their exports cheaper. The idea would be that they would earn hard currencies needed to buy industrial equipment with revenues from primary commodity exports. But this policy led to a rise in imports, especially essential staples, accompanied by a drop in the prices of commodities exported.

These ‘structural adjustments’ ushered in the ‘developing world’ an era of rising inequality, lower living standards, and heightened political repression (as ruling regimes undemocratically adopted policies that were unpopular). It is in this context – of decades of austerity – that we are now witnessing the Arab Spring and growing dissent to the last push of ‘adjustments’ in countries in the North (the US, European Union, Canada).

And it is based on false premises. If debt-ridden states ended corporate welfare in the form of subsidies, tax breaks and the like, then this would be the start of getting out of debt. If governments ended public-private contracts, then states would stop going further into debt by accumulating massive expenses in the form of contracts. If states ended currency devaluations, then trade imbalances may begin to correct themselves.

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