John Quiggin on the Absolute Failure of Austerity

One of the other massively failing right-wing economic policies the Australian economist John Quibbin tackles in his book Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton: Princeton University Press 2010) is expansionary austerity. This is the full name for the theory of economic austerity foisted upon Europeans and Americans since the collapse of the banks in 2008. It’s also the term used to describe the policy generally of cutting government expenditure in order to reduce inflation. Quiggin shows how, whenever this policy was adopted by governments like the American, British, European and Japanese from the 1920s onwards, the result has always been recession, massive unemployment and poverty.

He notes that after the big bank bail-out of 2008, most economists returned to Keynesianism. However, the present system of austerity was introduced in Europe due to need to bail out the big European banks following the economic collapse of Portugal, Italy, Greece and Spain, and the consequent fall in government tax revenue. Quiggin then goes on to comment on how austerity was then presented to the public as being ultimately beneficial to the public, despite its obvious social injustice, before going on to describe how it was implemented, and its failure. He writes

The injustice of making hospital workers, police, and old age pensioners pay for the crisis, while the bankers who caused it are receiving even bigger bonuses than before, is glaringly obvious. So, just as with trickle-down economics, it was necessary to claim that everyone would be better off in the long run.

It was here that the Zombie idea of expansionary austerity emerged from the grave. Alesina and Ardagna, citing their dubious work from the 1990s, argued that the path to recovery lay in reducing public spending. They attracted the support of central bankers, ratings agencies, and financial markets, all of whom wanted to disclaim responsibility for the crisis they had created and get back to a system where they ruled the roost and profited handsomely as a result.

The shift to austerity was politically convenient for market liberals. Despite the fact that it was their own policies of financial deregulation that had produced the crisis, they used the pretext of austerity to push these policies even further. The Conservative government of David Cameron in Britain has been particularly active in this respect. Cameron has advanced the idea of a “Big Society”, meaning that voluntary groups are expected to take over core functions of the social welfare system. The Big Society has been a failure and has been largely laughed off the stage, but it has not stopped the government from pursuing a radical market liberal agenda, symbolized by measures such as the imposition of minimum income requirements on people seeking immigrant visas for their spouses.

Although the term expansionary austerity has not been much used in the United States, the swing to austerity policies began even earlier than elsewhere. After introducing a substantial, but still inadequate fiscal stimulus early in 2009, the Obama administration withdrew from the economic policy debate, preferring to focus on health policy and wait for the economy to recover.

Meanwhile the Republican Party, and particularly the Tea Party faction that emerged in 2009, embraced the idea, though not the terminology, of expansionary austerity and in particular the claim that reducing government spending is the way to prosperity. In the absence of any effective pushback from the Obama administration, the Tea Party was successful in discrediting Keynesian economic ideas.

Following Republican victories in the 2010 congressional elections, the administration accepted the case for austerity and sought a “grand bargain” with the Republicans. It was only after the Republicans brought the government to the brink of default on its debt in mid-2011 that Obama returned to the economic debate with his proposed American Jobs Act. While rhetorically effective, Obama’s proposals were, predictably, rejected by the Republicans in Congress.

At the state and local government level, austerity policies were in force from the beginning of the crisis. Because they are subject to balanced-budged requirements, state and local governments were forced to respond to declining tax revenues with cuts in expenditure. Initially, they received some support from the stimulus package, but as this source of funding ran out, they were forced to make cuts across the board, including scaling back vital services such as police, schools, and social welfare.

The theory of expansionary austerity has faced the test of experience and has failed. Wherever austerity policies have been applied, recovery from the crisis has been halted. At the end of 2011, the unemployment rate was above 8 percent in the United States, the United Kingdom, and the eurozone. In Britain, where the switch from stimulus to austerity began with the election of the Conservative-Liberal Democratic coalition government in 2010, unemployment rose rapidly to its highest rate in seventeen years. In Europe, the risk of a new recession, or worse, remains severe at the time of writing.

Although the U.S. economy currently shows some superficial signs of recovery, the underlying reality is arguably even worse than it now is in Europe. Unemployment rates have fallen somewhat, but this mainly reflects the fact that millions of workers have given up the search for work altogether. The most important measure of labour market performance, the unemployment-population ration (that is, the proportion of the adult population who have jobs) fell sharply at the beginning of the cris and has never recovered. On the other hand, the forecast for Europe in the future looks even bleaker as the consequences of austerity begins to bite.

The reanimation of expansionary austerity represents zombie economics at its worst. Having failed utterly to deliver the promised benefits, the financial and political elite raised to power by market liberalism has pushed ahead with even greater intensity. In the wake of a crisis caused entirely by financial markets and the central banks and regulators that were supposed to control them, the burden of fixing the problem has been placed on ordinary workers, public services, the old, and the sick.

With their main theoretical claims, such as the Efficient Markets Hypothesis and Real Business Cycle in ruins, the advocates of market liberalism have fallen back on long-exploded claims, backed by shoddy research. Yet, in the absence of a coherent alternative, the policy program of expansionary austerity is being implemented, with disastrous results. (pp. 229-32, emphasis mine).

As for Alesina and Ardagna, the two economists responsible for contemporary expansionary austerity, Quiggin shows how their research was seriously flawed, giving some of their biggest factual mistakes and accuracies on pages 225 and 226.

Earlier in the chapter he discusses the reasons why Keynes was ignored in the decades before the Second World War. The British treasury was terrified that adoption of government intervention in some areas would lead to further interventions in others. He also quotes the Polish economist, Michal Kalecki, who stated that market liberals were afraid of Keynsianism because it allowed governments to ignore the financial sector and empowered working people. He writes

Underlying the Treasury’s opposition to fiscal stimulus, however, was a fear, entirely justified in terms of the consequences for market liberal ideology, that a successful interventionist macroeconomic policy would pave the way for intervening in other areas and for the end of the liberal economic order based on the gold standard, unregulated financial markets, and a minimal state.

As the great Polish economist Michal Kalecki observed in 1943, market liberal fear the success of stimulatory fiscal policy more than its failure. If governments can maintain full employment through appropriate macroeconomic policies, they no longer need to worry about “business confidence” and can undertake policies without regard to the fluctuations of the financial markets. Moreover, workers cannot be kept in line if they are confident they can always find a new job. As far as the advocates of austerity are concerned, chronic, or at least periodic, high unemployment is a necessary part of a liberal economic order.

The fears of the Treasury were to be realized in the decades after 1945, when the combination of full employment and Keynsian macro-economic management provided support for the expansion of the welfare state, right control of the financial sector, and extensive government intervention in the economy, which produced the most broadly distributed prosperity of any period in economic history. (p. 14).

So the welfare state is being dismantled, the health service privatized and a high unemployment and mass poverty created simply to maintain the importance and power of the financial sector and private industry, and create a cowed workforce for industry. As an economic theory, austerity is thoroughly discredited, but is maintained as it was not by a right-wing media and political establishment. Robin Ramsay, the editor of Lobster, said in one of his columns that when he studied economics in the 1970s, monetarism was so discredited that it was regarded as a joke by his lecturers. He then suggested that the reason it was supported and implemented by Thatcher and her successors was simply because it offered a pretext for their real aims: to attack state intervention and the welfare state. It looks like he was right.

Basu and Stuckler on the Privatisation of the NHS

Earlier this week I put up a piece about The Body Economic: Why Austerity Kills, by the medical researchers David Stuckler and Sanjay Basu (New York: Basic Books 2013). The book shows, using examples of recessions from the Great Depression of the 20s and 30s, to contemporary Britain and Greece, and the massive privatisation of the Russian economy after the Fall of Communism, how recessions and the austerity programmes that Conservatives use to try and correct them, also cause health crises. Conversely, welfare states that support people, not only give their peoples good health, but also create prosperity.

The two authors are also very much aware that the British National Health Service is being privatised, and are very critical of this. They write

Today the NHS’s founding principles are being forgotten, as the conservative Tory government seeks to make the NHS more like the American profit-driven, market-based system. When the Tory government came to power, they revisited a pamphlet developed under the previous Tory government of John Major that called the NHS a “bureaucratic monster that cannot be tamed” and in need of “radical reform”. In 2004, Oliver Letwin, the pamphlet’s lead author, said the “NHS will not exist” within five years of a Tory election victory. Indeed, after the Tories came to power they proposed the Health and Social Care Act, which embodied the free-market principles of the radical pamphlet.

It was difficult for us to understand this decision. Overall in 2010, before the Tory government began dismantling the NHS, the UK spent less of its GDP on health (8 percent) than Germany (10.5 percent), France (11.2 percent) or the United States (19 percent). Ultimately, the Tories’ position was not based on evidence but ideology-the idea that markets, competition, and profits would always be better than government intervention.

A highly divisive public debate over the Health and Social Care Act ensued. Over staunch opposition from the Royal College of Nursing and almost all of the medical Royal Colleges (the UK equivalents of the American Medical Association), Parliament approved the Act in 2012. Thus began what many regard as a major move towards privatization of the NHS. Repeatedly, David Cameron promised the British public that the Act was not “privatising the NHS” and that he would “cut the deficit not the NHS.” The Liberal-Democratic leader Nick Clegg said, “There will be no privatisation.”

The Department of Health website even stated that “Health Ministers have said they will never privatise the NHS.” But the data tell a different story: increasingly, the government is transferring large swaths of healthcare provision to private contractors.

Private profiteers are replacing dedicated doctors. In October 2012, the government awarded 400 lucrative contracts for NHS services, worth a quarter billion pounds, in what was called “the biggest act of privatisation ever in the NHS.” Virgin, for example, won lucrative contracts to deliver reproductive care (no pun intended). But the result was not the efficiency of private enterprise, but what had already been seen in the US market model-profits at the expense of patients. One journalist found this to be the case at health clinics in Teesside, northeast England. After Virgin won contracts to take over the services, the clinic repeatedly missed targets for screening people for chlamydia. It was a simple task that the NHS fulfilled easily. The journalist found a memo that revealed “staff were asked to take home testing kits to use on friends and family to help make the numbers up.” In Oxford, patients complained about increasing wait times to see their doctors after Virgin took over a local practice. Virgin responded that the practice had been underperforming when it was taken over, and that “there are still improvements to be made but we’re pleased that progress so far was recognised and applauded by councillors.” And so began what continues to be a highly sophisticate public relations campaign.

The UK’s next step toward US-style market-based medicine is moving forward at the time of this writing. It encourages patients to spend out of their pockets for healthcare rather than use the government-funded NHS. The Tory government is extending pilot projects to offer those with chronic illnesses “personal budgets” so that they themselves can make choices about how to manage their care, with few safeguards against profit-seeking swindlers or predatory insurance companies despite a government evaluation that highlighted many problems with this approach.

Early evidence suggests the Health and Social Care Act may in fact be hazardous to the health of the citizens and residents of the United Kingdom. Just before the Coalition government came into power, the NHS had the highest patient approval ratings in its history, over 70 percent. Within two years, approval fell to 58 percent, the largest decline in three decades. There are already warning signs that the healthcare situation in Britain may come to resemble that in the US before Obama. Patients are being turned away from privately managed clinics, some of which simply close their doors after meeting a daily quota to fulfill their contractual obligations. And in the first year of reform, emergency room visits jumped to the highest in the decade- perhaps because more people are neglecting preventive care, like Diane. As the editor of the Lancet warned, “people will die.”

Whether the British people will fully accept this radical privatisation of their healthcare system remains unclear. But once market incentives take hold of a public system, it becomes difficult, if not impossible, to reverse course. In the UK, the recession-fueled combination of austerity-and-privatisation seems to be creeping into every dimension of the social protection system. But evidence of its harms should give us all pause. (pp. 105-7).

Part of the way the government is selling its privatisation of the NHS to the public is through artificial funding crises, in which hospitals develop massive budget deficits. They are then amalgamated with another hospital under a PFI scheme, or given over to a private healthcare company to manage. Points West, the local BBC news programme for the Bristol region, last night revealed that Southmead hospital was also in the red to the tune of £48 million. And I suspect a similar fate is being lined up for it here.

This privatisation must be stopped, and those who support it – the Conservatives, and the Blairites in New Labour, must be thrown out of office immediately. Only Jeremy Corbyn has said that he will reverse the NHS privatisation. It is up to us to support him, regardless of the smears from the media and the Right.

The Body Economic: Why Austerity Kills

By David Stuckler, MPH, PhD, and Sanjay Basu, MD, PhD (New York: Basic Books 2013)

This is another book I picked up in the £3 bookshop in Bristol’s Park Street the other day. Written by two American health researchers, it examines the way economic recessions and austerity affect people’s health from the Great Recession of the 1930s, the Fall of Communism, Greece and Iceland, and today’s recession, which began with the banking collapse in 2008. The authors are medical researchers, whose own experience of poverty and ill health has led them to examine its effect on entire societies. They conclude that while recessions often lead to high – frequently devastatingly high outbreaks of disease and mortality, what is really crucial is the state’s handling of them. In countries which have a strong welfare state, and are determined to invest into getting their citizens back into work, such as Denmark in the 1990s, public health may actually improve. And as public health improves, the economy begins to pick up. In countries where the opposite is true – where the state just cuts, and is intent on dismantling the welfare infrastructure, like Greece and Cameron’s (and May’s) Britain, the result is higher disease and mortality.

As well as giving the impersonal stats, they also illustrate the damaging effects of austerity on public health through personal case studies. These include ‘Olivia’, a little girl, who suffered terrible burns when her unemployed father tried to burn their house down in a drunken rage, and an elderly Greek man, Dimitris Christoulas. Unable to see any way out of his poverty, he publicly shot himself outside the Greek parliament building.

One of the victims of austerity mentioned in the very first pages of the book is Brian McArdle, a severely disabled man, who was nevertheless declared ‘fit for work by ATOS. Basu and Stuckler write

‘”I will never forgive them,” wrote thirteen-year-old Kieran McArdle to the Daily Record, a national newspaper based in Glasgow. “I won’t be able to come to terms with my dad’s death until I get justice for him.”

Kieran’s father, fifty-seven-year-old Brian, had worked as a security guard in Lanarkshire, near Glasgow. The day after Christmas 2011, Brian had a stroke, which left him paralyzed on his left side, blind in one eye, and unable to speak. He could no longer continue working to support his family, so he signed up for disability income from the British government.

That government, in the hands of Conservative Prime Minister David Cameron since the 2010 elections, would prove no friend to the McArdles. Cameron claimed that hundreds of thousands of Britons were cheating the government’s disability system. The Department for Work and Pensions begged to differ. It estimated that less than 1 percent of disability benefit funds went to people who were not genuinely disabled.

Still, Cameron proceeded to cut billions of pounds from welfare benefits including support for the disabled. To try to meet Cameron’s targets, the Department for Work and Pensions hired Atos, a private French “systems integration” firm. Atos billed the government £400 million to carry out medical evaluations of people receiving disability benefits.

Kieran’s father was scheduled for an appointment to complete Atos’ battery of “fitness for work” tests. He was nervous. Since his stroke, he had trouble walking, and was worried about how his motorized wheelchair would get up the stairs to his appointment, as he had learned that about a quarter of Atos’s disability evaluations took place in buildings that were not wheelchair accessible. “Even though my dad had another stroke just days before his assessment, he was determined to go,” said Kieran. “He tried his best to walk and talk because he was a very proud man.”

Brian did manage to reach Atos’s evaluation site, and after the evaluation, made his way home. A few weeks later, his family received a letter from the Department for Work and Pensions. The family’s Employment and Support Allowance benefits were being stopped. Atos had found Brian “fit for work”. The next day he collapsed and died.

It was hard for us, as public health researchers, to understand the government’s position. The Department for Work and Pensions, after all, considered cheating a relative minor issue. The total sum of disability fraud for “conditions of entitlement” was £2 million, far less than the contract to hire Atos, and the department estimated that greater harm resulted from the accidental underpayment of £70 million each year. But the government’s fiscal ideology had created the impetus for radical cuts. (Pp. 3-4).

I don’t know whether Mr McArdle was one of those, whose deaths has been commemorated by Stilloaks on his blog, or whether his case was one of those which Cameron and aIDS laughed at when they were read out in parliament. But is notable that such cases are coming to the attention of health researchers and medical doctors, and are a cause of serious academic and medical concern.

Stilloaks, Mike, DPAC, the Angry Yorkshireman and very many other disability activists have covered individual cases, and the way the ‘fitness for work’ tests have been fiddled by Atos and now their successors, Maximus, in order to provide the pretext for throwing the vulnerable off benefits. Mike’s called it ‘Chequebook Genocide’. Jeff3, one of the great long-term commenters on this blog, refers to it as the Tories’ Aktion T4 – the Nazi’s extermination of the disabled during the Third Reich. There have been about 490 cases in which people have died of starvation, neglect and despair thanks to be thrown off welfare. And according to mental health profession, about 290,000 or so people have seen their mental health deteriorate – sometimes very severely – due to the stress of these tests.

Books like this show how counterproductive such austerity policies are, as well as their purely destructive effects on human life. But this will not be heeded by the Tories, nor by the baying, right-wing rabble who blindly follow them. They want to grind the poor even further into the dirt, to create an impoverished, desperate working class willing to take on any kind of work, no matter how low-paid, not-paid – think of all the unpaid ‘internships’ – and degrading. All so they cut taxes and give more power to the rich, the bankers, big business and particularly the hedge funds and vulture capitalists.

And so the many are killed, all for the privileged few represented by Theresa May.

Friedrich Engels: Principles of Communism

Looking through one of the secondhand bookshops in Cheltenham last wee, I found a copy of Friedrich Engels’ Principles of Communism, published by Pluto Press. It was written in 1847, and is a very short introduction to Marx and Engels’ ideas of what constituted Communism. It’s 20 pages in length, and is written in the form of a catechism, Engels presenting their ideas as answers to the following questions: What is Communism? What is the proletariat? Proletarians, then, have not always existed? How did the proletariat originate? Under what conditions does this sale of the labour of the proletarians to the bourgeoisie take place? What working classes were there before the industrial revolution? In what way do proletarians differ from slaves? In what way do proletarians differ from serfs? In what way do proletarians differ from handicraftsmen? In what way do proletarians differ from manufacturing workers? What were the immediate consequences of the industrial revolution and the division of society into bourgeoisie and proletariat? What we the further consequences of the industrial revolution? What follows from these periodic commercial crises? What will this new social order have to be like? Was not the abolition of private property possible at an earlier time? Will the peaceful abolition of private property be possible? Will it be possible to abolish private property at one stroke? What will be the course of this revolution? Will it be possible for this revolution to take place in one country alone? What will be the consequences of the ultimate disappearance of private property? What will be the influence of Communist society on the family? What will be the attitude of Communism to existing nationalities? What will be its attitude to existing religions? How do Communists differ from Socialists? What is the attitude of the Communists to the other political parties of our time?

It’s basically the first draft of The Communist Manifesto, and Engels himself wrote to Marx saying the catechetical form should be dropped, and it should just be called the above.

What I found particularly interesting flicking through it was Engels’ discussion of modern industrial capitalism, which he saw as producing periodic economic crises. It was the task of the proletarian – the working class – not just to liberate themselves from capitalism by taking control of the means of production, but also to prevent further commercial crises occurring through the establishment of Communism, which would also be a more efficient economic system.

In answer to question 12: What were the further consequence of the industrial revolution? Engels writes

Big industry created in the steam engine and other machines the means of endlessly expanding industrial production, speeding it up, and cutting its costs. With production thus facilitated, the free competition which is necessarily bound up with big industry assumed the most extreme forms; a multitude of capitalists invaded industry, and in a short while more was produced than was needed. As a consequence, finished commodities could not be sold, and so-called commercial crisis broke out. Factories had to be closed, their owners went bankrupt, and the workers were without bread. Deepest misery reigned everywhere. After a time, the superfluous products were sold, the factories began to operate again, wages rose, and gradually business got better than ever. But it was not long before tooo many commodities were again produced and a new crisis broke out, only to follow the same course as its predecessor. Ever since the beginning of this (nineteenth) century, the condition of industry has constantly fluctuated between periods of prosperity and periods of crisis; nearly every five to seven years a fresh crisis has intervened, always with the greatest hardship for workers, and always accompanied by general revolutionary stirring and the direst peril to the existing order of things.

13: What follows from these periodic commercial crises?
First: That though big industry in its earliest stage created free competition, it has now outgrown free competition; that for big industry competition and general the individualistic organisation of production have become a fetter which it must and will shatter; that so long as big industry remains on its present footing it can be maintained only at the cost of general chaos every seven years, each time threatening the whole of civilisation and not only plunging the proletarians into misery but also ruining large numbers of the bourgeoisie; hence either that big industry must itself be given up, which is an absolute impossibility, or that it makes unavoidably necessary an entirely new organisation of society in which production is no longer directed by mutually competing individual industrialists but rather by the whole society operating according to a definite plan and taking account of the needs of all.

Second: That big industry and the limitless expansion of production which it makes possible bring within the range of feasibility a social order in which so much is produced that every member of society will be in a position to exercise and develop all his powers and faculties in complete freedom. It thus appears that the very qualities of big industry which in our present-day society produce misery and crises are those which in a different form of society will abolish this misery and these catastrophic depressions. We see with the greatest clarity:
(I) That these evils are from now on to be ascribed solely to a social order which no longer corresponds to the requirements of the real situation; and
(II) That it is possible, through a new social order, to do away with these evils altogether.

14: What will this new social order have to be like?
Above all, it will have to take the control of industry and of all branches of production out of the hands of mutually competing individuals, and instead institute a system in which all these branches of production are operated by society as a whole, that is, for the common account, according to a common plan, and with the participation of all members of society. It will, in other words, abolish competition and replace it with association. Moreover, since the management of industry by individuals necessarily implies private property, and since competition is in reality merely the manner and form in which the control of industry by private property owners expresses itself, it follows that private property cannot be separated from competition and the individual management of industry. Private property must therefore be abolished and in its place must come the common utilisation of all instruments of production and the distribution of all products according to common agreement – an a word, what is called the communal ownership of goods. In fact, the abolition of private property is doubtless the shortest and most significant way to characterise the revolution in the whole social order which has been made necessary by the development of industry, and for this reason it is rightly advanced by Communists as their main demand. (pp.10-12).

In practice, central planning of a large, complex industrial society is far too difficult, and the results are massive economic inefficiencies and an acute shortage of goods. It’s one of the reasons Communism fell. However, since the adoption of neo-liberalism as the economic creed of the main political parties in the West, we’ve seen the same kind of economic crises that afflicted 19th century capitalism return with the banking crisis in 2008, along with the ‘iron law of wages’ which Marx and Engels observed in the Communist Manifesto was forcing down more and more of the lower middle class into the ranks of the workers, and impoverishing the workers as employers tried to cut wages.

But if it’s impossible to plan a nation’s economy absolutely completely, nevertheless Ha-Joon Chang in his book, 23 Things They Don’t Tell You About Capitalism makes the point that governments still carry out some forms of economic planning, not least in supporting research and development, in which private industry is reluctant to invest on its own. Thus some form of state planning is nevertheless effective in avoiding and ameliorating the economic crises which neoliberal economics create.