The hidden goal of austerity by Yanis Varoufakis
While everyone would agree that printing another trillion dollars to fund a basic income for the poor would not raise inflation or interest rates, the rich and powerful did. would always oppose. After all, their most important interest is not to conserve economic potential, but to preserve the power of the few to compel the greatest number.
ATHENS – In the 1830s, Thomas Peel decided to migrate from England to Swan River in Western Australia. A man of means, Peel took along, besides his family, “300 working class people, men, women and children”, as well as “means of subsistence and production in the amount of £ 50,000”. But soon after arriving, Peel’s plans were in shambles.
The cause was not disease, disaster, or bad soil. Peel’s workforce abandoned her, secured plots of land from the surrounding wilderness, and went into “business” for themselves. Although Peel brought labor, money, and physical capital with him, workers’ access to alternatives meant he couldn’t bring capitalism.
Karl Marx told Peel’s story in Capital, volume I to argue that “capital is not a thing, but a social relationship between people”. The parable remains useful today to illuminate not only the difference between money and capital, but also why austerity, despite its illogicality, keeps coming back.
For now, austerity is no longer in fashion. Governments spend as if there is no tomorrow – or rather to ensure is see you tomorrow – reducing budget spending to contain public debt is not among the political priorities. US President Joe Biden’s surprisingly broad – and popular – stimulus and investment program has pushed austerity further down the agenda. But, like mass tourism and big wedding parties, austerity lingers in the shadows, poised for a comeback, encouraged by pervasive discussions of looming hyperinflation and crippling bond yields unless governments let it go. embrace again.
There is no doubt that austerity is based on mistaken thinking, leading to self-defeating politics. The error lies in failing to recognize that, unlike a person, family or business, the government cannot rely on its income regardless of its spending. If you and I choose to save money that we could have spent on new shoes, we will keep that money. But this way of saving is not open to the government. If it cuts spending during periods of low or declining private spending, the sum of private and public spending will decline more quickly.
This sum is the national income. So, for governments seeking austerity, cutting spending means lower national income and lower taxes. Unlike a household or business, if the government cuts spending during tough times, it also cuts income.
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But if austerity is such a bad idea, undermining our energy savings, why is it so popular among the powerful? One explanation is that while they recognize that state spending on the impecunious masses is an excellent insurance policy against recessions as well as threats to their property, they are loath to pay the premium (taxes) . That’s probably true – nothing unites the oligarchs more than tax hostility – but that doesn’t explain staunch opposition to spending central bank money on the poor.
If you were to ask economists whose theories align with the interests of the richest 0.1% why they oppose monetary financing of redistributive policies that benefit the poor, their answer would depend on fears of inflation. The more sophisticated would go a little further: such largesse would end up harming the intended beneficiaries as interest rates would skyrocket. Immediately, the government, faced with higher debt repayments, would be forced to cut spending. An all-powerful recession would then ensue, hitting the poor first and foremost.
This is not the place for another interpretation of this debate. But suppose for a moment, and for the sake of argument, everyone agrees that printing another trillion dollars to fund basic income for the poor would not raise inflation or rates. of interest. The rich and powerful would always oppose it, due to the debilitating fear that they would end up like Peel in Australia: funded but deprived of the power to coerce the less wealthy.
We are already seeing evidence of this. In the United States, employers are report that they can’t find workers while the pandemic lockdown rules are lifted. What they really mean is that they cannot find workers who will work for the misery offered. The Biden administration’s extension of a weekly additional payment of $ 300 to the unemployed has meant that the combined benefits workers receive are more than double the federal minimum wage – something Congress has refused to lift. In short, employers are going through something similar to what happened to Peel shortly after arriving in Swan River.
If I’m right, Biden now faces an impossible task. Because of the way financial markets became decoupled after 2008 from real capitalist production, any level of fiscal stimulus he chooses will be both too small and too large. It will be too little because it will not create enough good jobs. And it will be too much, because, given the low profitability and high leverage of many companies, even the slightest increase in interest rates will lead to a cascade of business failures and tantrums in financial markets.
The only way to overcome this conundrum and rebalance both the financial markets and the real economy is to dramatically increase the incomes of working-class Americans and write off much of the debt – for example, loans. students – which keeps them from getting bogged down. But, because it would empower the majority and raise the specter of Peel’s fate, the rich and powerful will prefer a return to good old austerity. After all, their most important interest is not to conserve economic potential. It is to preserve the power of a few to constrain the greatest number.