Austerity - A Fracturing Consensus?

by Hugo Radice, Alex Doherty

Political economist Hugo Radice is a Life Fellow at the School of Politics and International Studies at the University of Leeds.  He spoke to NLP's Alex Doherty on the decline in confidence in the coalition's economic policy. 

The government's austerian policies have recently come in for criticism from sources hardly renowned for their advocacy of expansionary fiscal policy, such as the IMF, Boris Johnson, and Jim O'Neill of Goldman Sachs. Moreover Mark Carney has hinted at a change of policy at the Bank of England - do you think the political pressure is now going to force at least a partial retreat from austerity?

Criticism of the pace of the cuts has indeed been building up for some time now.  When the Eurozone sovereign debt crisis intensified in the autumn of 2011, a relaxation of austerity was part of a wider set of policy adjustments by the global business and political elite.  There has been some relaxation of the terms of the Greek bailout, and the overriding of German resistance to the European Central Bank’s refinancing of the Eurozone banking sector, which over the last six to nine months has dramatically improved the ability of the Eurozone states, especially Spain and Italy, to refinance their debts. In addition, Osborne’s timetable for implementing banking reform in Britain - ringfencing of investment banking by 2019 - has now been adopted by the Bank for International Settlements, which has postponed enforcement of the Basel III rules to the same date, as well as easing up on the proposed bank liquidity rules.

You could argue that the elites have changed course because of political pressure from below, from the street protests and demonstrations.  But we need to be realistic.  First, whenever people have had the chance to carry this opposition into the electoral arena, the result has been disappointing.  In Greece, in the Netherlands and in France, surges in support for radical left parties have faded away once the elections actually took place.

Second, the idea that pressure from below might moderate the policy of austerity does not fit with what’s been happening in workplaces during the recession. Here, employees have not unreasonably sought to preserve their jobs if at all possible.  This is hardly surprising, after decades in which trade union power has been in retreat, and workers have responded to defeat by preferring compromise to confrontation.  After an initial surge in 2009 in strikes and occupations all across the world, in most countries employers have in fact responded in similar vein, often with political and financial support from governments.

The elites may often be fractious, and bicker among themselves over the details of sharing out their loot, whether it’s between national groups or between sectors of the capitalist economy. But that’s why they have visible organisations like the IMF, the OECD and the World Economic Forum, as well as less visible ones like the bankers’ Group of 30, where they reach compromises among themselves and determine the most appropriate course of action - not for the good of working people, but to secure their own wealth and power in the long term.

Meanwhile, whether a recovery gets under way at last depends very largely on whether confidence is restored.  There are many signs that in financial markets, confidence is returning: borrowing costs for both governments and banks in the Eurozone have come down significantly, stockmarkets have been rising, and most recently the fourth-quarter halt to growth in the US economy has not reversed these trends.

One of the peculiarities of the British recession has been the partial decline of unemployment and a significant drop in productivity, the reverse of what one usually expects in a recession. How do you explain those outcomes?

Despite repeated expressions of surprise over the figures, and self-congratulation from Coalition ministers, it’s not too difficult to understand why employment has gone up, and aggregate unemployment has gone down, even while aggregate output, measured by Gross Domestic Product, has gone down.  For a start, real wages - that is, money wages adjusted for inflation - have dropped significantly since 2008, because this has been an important way in which workers have saved their jobs, along with reductions in working hours and in other ‘terms and conditions’ of work.  But in addition, as Bill Martin and Bob Rowthorn of Cambridge University have argued,  many employers have learned from previous recessions that they need to have skilled and experienced workers in post as and when the recovery gets going. After years of outsourcing of less skilled staff, the remaining core of employees are indispensable, if a firm intends to stick around for the long haul.  The solution is to keep pay in check, and cut hours rather than jobs.

There are other factors too as regards the employment figures. First, much of the jobs growth has been in low-wage sectors like retail and social care, which do not face international competition in the way that engineering or textiles do. Second, increasing numbers who are unable to find jobs have become self-employed, usually on a very precarious basis. And finally, we should also remember those who are below the usual retirement age, but have become so disheartened by age-discrimination that they have stopped looking for work and are no longer counted as belonging to the labour force.

In a recent article in 'The London Review of Books' John Lanchester suggests that there is a certain air of unreality about the scale of prospective cuts in public sector jobs and that it is hard to believe they can be enacted. What is your view?

John Lanchester argues very effectively that the multiplier effect of the cuts may be a lot bigger than the Treasury and the Office for Budget Responsibility believe.  One reason why they like the low estimate of the multiplier is that it works both ways: with a low multiplier for public spending, they can argue not only that the effect of the cuts won’t be as bad, but also that any reversal of the cuts, any increase in spending, would not have much effect.

But although the scale of the cuts is indeed unprecedented, whether or not they can be carried through is a matter of political will and political resistance.  John Lanchester goes on to note the success that the Coalition has had in persuading the public of the necessity of the cuts, and in peddling the whole ‘strivers vs. shirkers’ argument.  He ends up being pretty pessimistic about any real change, and I have to say that I agree with him.  We have to recognise that the Coalition’s vision is a long-term one. They want to destroy the post-war, broadly social-democratic type of welfare state once and for all. What they want is a lean, mean welfare state, centred on means-tested benefits, and run by the private sector.

However, even if the cuts in public sector jobs are carried through, it is important to note that they won’t necessarily mean much of a cut in the public sector deficit, because like all job losses, they will lead to reductions in tax revenues and increases in benefit expenditure.

Lastly, one point that John Lanchester doesn’t discuss is the effect of staffing cuts on efficiency in government departments, and indeed in local authorities and other parts of the public sector.  It’s all too easy to assume that the people who leave were just useless bureaucrats, sitting around waiting for their pensions.  Because those leaving tend to be older staff with more experience, staff cuts are leading to loss of expertise, more mistakes - remember the West Coast rail franchise fiasco - and plummeting morale.

The mainstream media generally reports on recessions in a bland, statistics focused manner that ignores the human cost. What are the human implications of such a protracted downturn?

In a word, the human implications would be dire. The changes in housing benefit, and the extension of council taxes to households currently exempt, are expected to lead to increased homelessness and the forced removal of vulnerable families to lower-cost locations.  Increasing numbers are already having to turn to food banks, or at best to rely on family and friends who can often ill afford the extra spending.  But more generally, the longer the recession goes on, the more will communities in the most-affected parts of the country suffer from the physical and emotional consequences of unemployment and poverty. Meanwhile, remaining workers in the public sector will experience increased stress, especially for those providing ‘front-line’ services directly to the public.  If you want to see the really long-term consequences of the destruction of the welfare state, read Joe Bageant’s remarkable book, Deer Hunting with Jesus, about the American white underclass; it will make you weep.

Remember, however, that all of this could easily be averted if the current improvement in confidence in financial markets persists.  With lower-cost credit available to governments, there would be no sense in continuing the present austerity policies.

Of course in the long run, we want to end the present unjust and exploitative economic system once and for all. This means that we have to fundamentally rethink the sort of society we want to live in, going well beyond the current fight against the cuts. For example, we need to give much greater priority to the issue of inequality, campaigning around the issues highlighted by Wilkinson & Pickett’s The Spirit Level.  A national movement based on grass-roots responses, like local food banks, could bring pressure to bear on political parties, enlisting the support of existing networks among churches, professional bodies and local authority associations.  This is as much a social crisis as an economic one, so the response needs to become more about people than about statistics.

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First published: 07 February, 2013

Category: Economy

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1 Comment on "Austerity - A Fracturing Consensus?"

By Lewis MacKenzie, on 07 February 2013 - 15:14 |

“Remember, however, that all of this could easily be averted if the current improvement in confidence in financial markets persists.  With lower-cost credit available to governments, there would be no sense in continuing the present austerity policies.”

I’m pretty skeptical about this point, at least in the case of the UK. The yields on UK government bonds were very low when the Tories came to office, and they have remained so - indeed at no point was there any credible evidence to suggest that they would rise because of the size of the national debt/deficit/debt to GDP ratio. And yet austerity policies were still enacted, despite the low cost of borrowing (which is set by the Bank of England anyway) because the crisis provided an opportunity for the government to significantly restructure the relations of production in the UK.  If the government chooses to reverse course in the future I doubt very much that the cost of borrowing will play an important part in their decision.

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