Rise And Fall Of Global Austerity, The

E Ray Canterbery

• Publisher: WSPC
• Year: 2014
• eBook ISBN: 9789814603508
• Topic: Biological Sciences
• Subtopic: Science General
• Index: Biological Sciences

Since its onset in late 2007, few expected the Great Recession to be protracted for over half a decade across the world. The Rise and Fall of Global Austerity explains the origins and history of austerity, severe implications of the idea of it and how the continuation of the Great Recession was a by-product of austerity measures. Covering austerity policies that are in place in the United States, Europe, and other countries, E Ray Canterbery explains why austerity is detrimental for economies, economic policy and the general health of populations around the world. He highlights the connection between public debt and austerity policies and shows how the austerity lobby works in the United States to achieve its goals. Besides presenting a critique of the rationale for austerity, Canterbery also recommends monetary, fiscal, and incomes policy remedies, and stresses why economic growth and full employment are more ideal and pragmatic antidotes to the Great Recession.

Contents:

• A Brief History of Austerity
• Expansionary Austerity in the 21st Century
• The Housing Bubble Collapse
• Housing's Trickle-Down Effects
• The Great Recession
• Public Debt and Global Austerity
• Ultra-Austerity in Europe
• How Austerity Kills
• The Austerity Lobby
• Monetary Remedies
• Fiscal Remedies
• Incomes Policy Remedies
• The Importance of Economic Growth and Full Employment

Readership: Economic historians, researchers, students and members of the public who are interested in political economy and financial institutions.
Key Features:

• Provides a brief history of austerity
• Explains how the continuation of the Great Recession was a by-product of austerity measures
• One of the few books published after the recession of 2008 to provide detailed policy recommendations to deal with the forces of austerity

1

A Brief History of Austerity

Ideas, even bad ones, have intellectual origins. Austerity is not exceptional in this regard. Such good breeding gives such ideas respectability long after their usefulness has passed. The story of austerity begins with John Locke, one of England’s most renowned philosophers. Along with austerity is a list of bad ideas handed down by Locke. Locke’s writings were essential propaganda for the emerging merchant classes that were slowly taking power away from British aristocratic elites. His was a part of a movement that culminated in the Glorious Revolution of 1688 that unseated the king and empowered the rising merchant class.

John Locke: The Ultimate Defense of Private Property Rights

Locke was more than that: he was an economic revolutionary. Legitimate rule lay in individual property rights, required for economic liberalism and the separation of the state from the market. Capitalism as we know it today could not exist without this idea. Locke’s vision is displayed in his Second Treatise of Government (1690). The separation of state and the market place requires several things. Income and wealth inequality must be naturalized, the private ownership of land must be legitimated, there must be an emergence of labor markets, and money must be depoliticized. Through it all, the individual is pitted against the state. In this are the beginnings of austerity’s intellectual force.

Since the market did not exist, Locke had to imagine it. How is it possible for “God, who hath given the world to men in common” to allow the unequal, if not unlimited, accumulation of wealth?¹ To Locke, property resides in us all, in our persons, but it is only important because it resides with our labor. When we work on something, such as land, the laboring makes it our own. Thus, “whatsoever then he removes out of the state [of] nature . . . [and] mixed his labor with . . . [he] thereby makes it his property.”² Taking a portion of land in this way does not deplete it because of its abundance. Thus, property does not require a vote to apportion it because it is infinite. You have to wonder where economists got the idea of scarcity.

The only argument against the accumulation of property is spoilage, having so much that you cannot store it properly. This is why if we did not have money, we would have to invent it. Actually, the device called money was invented out of necessity. Money can be stored indefinitely without fear of spoilage. It is the greatest invention since . . . you know. Money also enables the creation of a labor market because hired labor requires money wage payments. Workers can store money and swap it for consumer goods. Conveniently, contends Locke, “men have agreed to a disproportionate and unequal possession of the earth . . . by . . . voluntary consent [they have] found out a way how a man may fairly possess more land than he can fairly use the product of, by receiving, . . . the overplus of gold and silver, which may be hoarded up without injury too anyone.”³ Convenient indeed: Liberal economists never let us forget this argument favoring benign inequality.

It is inequitable and therefore good that markets in land, labor, and capital are created unequally. It was the project of the propertied class. These new institutions must be protected from capitalism’s nemesis, the state.

And, so, Locke creates the imaginary state. The legislature is limited to the public good of the society, defined as freedom from intervention by government into private affairs, especially concerning property, unless citizens consent to it. Taxes can be levied but only with the consent of the people. Taxation without representation is a just cause for rebellion by the people.

For Locke, there is an unfortunate side-effect from the use of money. Money enables individuals and states to buy time; to incur debt. Recall that Locke is making these arguments in 17th century England, where public debt is the debt of kings, kings who invoke rights given by God (and the church) to appropriate the property of others willy-nilly. Hereby hangs a liberal dilemma. It is similar to the argument sometimes made by men about women: “You cannot live with them, cannot live without them.” The same can be said for money. The state: cannot live with it, cannot live without it, does not want to pay for it. The narrowest of state business requires the expenditure of money. The expenditure of money over time inevitably leads to debt. Debt is to be avoided. Austerity is born.

David Hume, Money, and Debt

Locke’s are narrow foundations, but bricks can be laid on narrow foundations. The intellectual bricks of the Scottish enlightenment are laid by Adam Smith and David Hume. We first consider Hume. Hume is still remembered today for the idea that a monetary stimulus can in the short run stimulate economic activity but in the long run must either show up as inflation or dissipate without effecting real variables. This is the centerpiece of his essay “ On Money.” It remains a cornerstone of contemporary macroeconomic theory of the liberal variety. Hume also writes much about “public credit” or what we know as government debt.⁴

Like Locke, Hume sees money as an instrument, as “nothing but the representation of labor and commodities . . . a method of rating or estimating them.”⁵ Money defines wages and prices. Contrary to Locke, money does not relate to spoilage; rather, money follows trade, which places Locke’s merchant classes, and not the state, at the center of everything. For Hume, merchants are the catalyst for trade and the creators of wealth. They are the most useful race of men; they are to be admired and served. Thus, “it is necessary, and reasonable, that a considerable part of the commodities and labor [produced] should belong to the merchant, to whom, in great measure, they are owing.”⁶ Only merchants can expand industry and by increasing frugality, give command of that industry to particular members of society, namely members of the merchant class.

Make no mistake about it. Public debt, to Hume, is bad. His arguments against debt are used to this day. The problem with public debt is that it has no limit, no limit until the interest payments on the debt become crushing. Debt will always be abused. Worse, the issuance of public debt diverts funds away from industry; there is a crowding out effect. Worse still, when issuance of debt eventually hits a ceiling, governments will sell more of it to foreigners, which will give foreign governments power over us. Then, liberty is undone.

This sounds all too familiar. Northern European criticism of the budget policies of Greece and Italy was that debt is politically easier than taxation. The Obama stimulus was criticized as government debt crowding out private investments. Quantitative easing was criticized for driving up prices, even though the price level was stable. “China owns the USA” was the fear of foreigners owning the U.S. The fact is that foreigners hold less than one-third of outstanding U.S. Debt. As for Hume, he predicted the demise of Great Britain due to excessive debt issuance just at the moment that Great Britain was about to dominate the world for a century. The truth is that facts seldom triumph over good liberal ideology, and when it comes to that, we must turn to Adam Smith.

Adam Smith: In Defense of Markets

Adam Smith was Hume’s more famous contemporary. He too was troubled by the problem of public debt. While Hume had no solution to the problem of debt, Smith claimed to solve it. He embraced the principal of austerity, otherwise known as the parsimony of the Scots. Smith’s notion of austerity is close to its modern incarnation. Personal frugality and parsimony is the engine of capitalist growth. Undermine this, and capitalism collapses. To fully understand Smith’s position, we need to know his view of banking.⁷

Banking is all about having confidence in the banker. Given confidence in the banker’s paper money, the banker will be able to lend out more in paper than he keeps in reserve in gold to cover his withdrawals. Today, we call this “ fractional reserve banking.” It is magical. Like Hume, Smith sees money as being unable to affect real variables in the long run, which means that adding paper money to the economy will not lead to economic growth. Rather, the key to growth is the inherent frugality of the Scots — their parsimony. The Scots would rather buy investment goods than foreign wines. Thus, the act of saving drives investment, not consumption. Then, the wealth of the nation is its total income. Once wages are paid out of this income, what is left is profits. Profits are then reinvested in the economy via merchants’ savings. Today this is called supply-side economics, and it was the passion of President Ronald Reagan. This idea behind austerity has moral force to this day, especially among Republicans and the rich.

What could go wrong? What could upset this natural desire to save and invest? The answer is easy money, which is what credit markets (debt) offer. By perverting the sensibility of saving into lending of the government, “great nations are … impoverished by … public prodigality and misconduct.”⁸ Lest there be any misunderstanding: The market can do no wrong, it is all the fault of government.

Smith is painfully aware of another thing: the market cannot exist without the state. The state is necessary to supply external defense, internal justice, and even the training and education of workers. And, he readily admits, wherever there is property there is great inequality. The acquisition of valuable and extensive property necessarily requires the establishment of civil government. A civil government is required for the security of property and is instituted “for the defense of the rich against the poor, or to those who have some property against those who have none at all.”⁹ Once again, we have the liberal dilemma. You cannot live with the state, and one cannot live without it, but worse, you must pay for it, and that is what undermines capitalism itself. To pay for it requires the issuance of debt.

How do we pay for the state? Smith begins by favoring progressive taxation. This implies that the rich carry more of the tax burden than the poor. However, Smith downplays progressivity, and recommends consumption taxes on luxuries — anything above the bare essentials as the best way to fund the state. Consumption taxes are perhaps the most regressive form of tax. Still, a consumption tax on non-essentials will not suffice to fund the state. Thus, government debt enters the picture.

Great states are filled with merchants who have lots of cash and can lend to the government. Easy money undermines the incentive to save by both the merchant class and the state and undermines the state’s incentive to tax. More debt is issued. Eventually, this strategy hits a ceiling, a debt ceiling, and taxes are then imposed for the sole purpose of paying the interest on the debt. The only possible option left to the government is to default upon the debt it owes.

There are distributional consequences. Lenders will be paid in devalued coin to stave off the inevitable sovereign default. As a consequence of this inflationary financing, the fortunes and hence, the ability to invest via saving will be destroyed. The easy money offered by purchasing government debt subverts parsimony, the engine of economic growth. For this reason, government debt must be resisted: Austerity, in the form of parsimony, must be embraced. Austerity’s genesis is found in the pathological fear of government debt that sits at the heart of economic liberalism. Government debt perverts savers, distracts merchants, and ruins accumulated wealth. Liberalism must limit the state at all costs.

Today, Smith’s moral critique of debt is as familiar as Hume’s economic one. Saving is a virtue, spending is a vice. Austerity as we know it today, an active policy of budget cutting and deflation, may not be readily apparent in the history of early economic thought. But the conditions of its appearance — parsimony, frugality, morality, and a pathological fear of the consequences of government debt — lie deep within economic liberalism’s fossil record from its inception.

In the bustling world of commerce at the edge of the early Industrial Revolution, Smith was the right scholar for the time. It was too much to expect religion to cover all the alleged sins of the rapidly expanding merchant class, and the merchants needed a new economic philosophy. The merchants and the rising manufacturing class seized on those ideas from Smith that provided justification for a growing economy in which money facilitates the efficient market exchange of goods and services. Adam Smith is remembered not for his intent, but rather for the social uses to which a distillation of his ideas was put. Ever since, Smith’ ideas have been put into service by commercial interests.

There is still more to Smith. Historically, self-interest has been as unpopular as money lenders. In Smith’s Wealth of Nations, the individual pursuit of self-interest in a two-way exchange economy guarantees social harmony. In his economic behavior, an individual neither intends to promote the public interest nor knows that he is promoting it. He intends only to provide for his own security. Smith famously wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Such self-interest and economic self-reliance were perfectly natural, grounded in “the desire of bettering our condition,” which “comes with us from the womb, and never leaves us until we go into the grave.”

Economic self-interest is morally beneficial, too: “I have never known much good done,” says Smith “by those who affected to trade for the public good.” But the self-interested action of one person is “good” only if it is limited by the self-interested actions of others. Free to pursue self-interest, the individual has no need for government.

We must not neglect the roles of natural law and private property. By the mid-18th century, most educated people believed that God did not control people and events personally but only indirectly, by means of laws at work in nature. Isaac Newton’s story of God creating the universe as a self-propelled machine gave a more lasting spin to the virtue of self-interested individualism. After all, what harm can one worker or one manufacturer do to the rest of society as long as the outcomes will always be determined by natural law? This view was bolstered in politics by the aforementioned John Locke (1632–1704), who claimed that natural laws and natural rights existed prior to governments. Never mind empathy; persons...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• About the Author
• Introduction
• 1. A Brief History of Austerity
• 2. Expansionary Austerity in the 21st Century
• 3. The Housing Bubble Collapse
• 4. Housing’s Trickle-Down Effects
• 5. The Great Recession
• 6. Public Debt and Global Austerity
• 7. Ultra-Austerity in Europe
• 8. How Austerity Kills
• 9. The Austerity Lobby
• 10. Monetary Remedies
• 11. Fiscal Remedies
• 12. Incomes Policy Remedies
• 13. The Importance of Economic Growth and Full Employment
• Index