Franklin Delano Roosevelt’s First Inaugural Address diagnosed the essential weirdness of recessions: “our distress comes from no failure of substance,” he noted. “Plenty is at our doorstop, but a generous use of it languishes in the very sight of the supply.” The reason for this? “Primarily this is because the rulers of the exchange of mankind’s goods have failed…they have tried, but their efforts have been cast in the pattern of an outworn tradition.”
This last factor, that in the grip of a massive decline in production, employment, and consumption, the world’s leaders decided to maintain the gold standard and free exchange of currency by balancing budgets, cutting spending, and raising taxes and then to do it over and over again, despite the failure of that policy to show any positive result, is to my mind an absolutely critical one. For all that the critiques of John Maynard Keynes and other dissident economists were eloquent and correct, the reality was that they had been making their arguments for over a decade to no avail.
Today, we seem to be stuck in a similar pattern, where the conventional wisdom on economic policy fails to produce results, but retrenches even more strongly despite this.
Why is this?
A Common Madness:
Here in the U.S, we have seen a sudden lapse into irrational political behavior. Despite the manifest reality that:
- the stimulus did, in fact, have a significant, positive (but insufficient) effect on employment and economic growth
- due to the recession, we have forgone $2.8 trillion in production, and stand to lose another $2.3 trillion before full recovery takes hold
- spending cuts mandated by the debt ceiling deal will reduce growth by 17% and cost over 300,000 jobs
Not only have we turned away from any further stimulus well before the 2010 midterms and adopted a national obsession with debts and deficits. We’ve had deficit commissions, ratings agencies, and now a Super Congress pushing and pushing the same line that we must choose austerity or the bond market will retaliate against us. And yet, at no point has the economy responded in the way they have predicted: interest rates on government debt have fallen into the negative for 5 and 7 year Treasuries, and 10 year Treasuries are virtually zero-interest. To the extent that the markets have reacted at all to almost two years of Chicken Littleism on public debts, they have acted out of fear that austerity will lower economic growth.
Normally, when reality does not merely fail to match with theory but runs completely contrary to it, one adjusts theory. Instead, we seem to hold in our minds at the same time that austerity will depress economic growth but that it is necessary for growth to continue.
The same is true across the Atlantic. Despite an increase in unemployment to 2.5 million and a slump in growth to a negligible .2% a quarter, the U.K’s Chancellor George Osborne continues to insist that there is no “Plan B.” In the face of zero growth or near-zero growth in both France and Germany, the two pillars of the Eurozone have called for cuts at home and a balanced budget amendment for the E.U while the European Central Bank still persists in its course of refusing further monetary stimulus.
At every turn, economic downturn has brought calls for austerity for Ireland, Spain, Portugal, Greece, and Italy, austerity depresses expectations for growth, which makes the bond markets demand higher interest rates and lower ratings, which brings renewed calls for austerity. Never has the definition of insanity as “doing the same thing over and over again and expecting a different result” seemed more apt.
The Etiology of Magical Austerity Thinking and “Demand Denialism”
Describing the current wave of “magical austerity thinking” is not hard – and the way is made even more smooth by the yeoman work being done by Paul Krugman, Brad DeLong, Dean Baker, and other public intellectuals in documenting the rise in irrational economic logic. Their work is especially useful in pointing to another key feature of “magical austerity thinking” – not only does it include a belief that austerity must be right no matter what actually happens, but it also includes a flat rejection of the position that deficient demand is the reason for economic stagnation.
The more difficult thing is to explain why this is the case without taking the easy way out of simply asserting stupidity or simple corruption. I think the condition is more complex than that; my own attempt at a diagnosis suggests instead a confluence of four factors: solicitude of the have-muches, distaste for redistribution, fear of state capacity, and fear for the rights of the managing classes, which I’ll discuss in pairs.
Solicitude of the Haves/Distaste for Redistribution:
Part of the problem with a “vulgar Marxist” interpretation of magical austerity thinking is its vulnerability to the counter-argument that, while austerity protects the short-term interests of bond-holders, by depressing economic growth, it damages the interests of stock-holders, corporations, and ultimately bond-holders themselves. If pundits, economists, elected officials and civil servants, and other members of the conventional-wisdom-forming classes are driven by their allegiance to the wealthy, why are they acting in a way that will cause long-term harm to the fortunes of the well-to-do?
I think the explanation is that wealth is not merely material, but contains its own ideology as well – a belief in property rights as well as property itself, even when the defense of the right might hurt the property itself. Part of this ideology includes a distaste for redistribution to the non-wealthy, even when redistribution is in the long-term interest of the wealthy, because the wealthy see their wealth as making them morally or personally superior to the poor – who they see as unworthy, lazy, and dangerous.
In the Great Depression, enlightened businessmen like Edward Filene, who supported the minimum wage, Social Security, and other New Deal programs because he wanted to ensure that consumers had money to spend in his stores, were few and far between. Far more common was the attitude of Andrew Mellon, who called for the liquidation of farmers and workers along with stocks, bonds, and real estate in order to “restore business confidence.”
Today, we see the same dog in the manger attitude – wealthy people bitterly opposed to economic stimulus, foreclosure reform, the extension of unemployment insurance, and so forth, not because it wouldn’t benefit them, but because they are both afraid and outraged that it would benefit the poor. This has to be understood not merely as class sadism, but as emerging from a world view that combines the Calvinist obsession on the parable of the talents and economic success as a market of the Elect (or the modern fundamentalist “prosperity gospel”) with a Social Darwinist conception of the marketplace. The result of this concoction – as you can see in the video clip above – is an inversion of the classic labor republican ideology of producerism, whereby the wealthy become the producing classes and workers and consumers are turned into parasites.
Fear of State Capacity/Defense of the Rights of the Managing Classes
While distaste for redistribution stems more from an individual distaste for taxes and government benefits, there is also a systemic component. Just as above, part of “magical austerity thinking” comes from an unspoken fear that Keynesian demand management might work – which would greatly expand state capacity for states that have been on the retreat on economic matters for thirty or more years. In this view, socialism follows the Keynesian flag – if people come to expect that governments can and should provide steady economic growth and low unemployment, they might demand state provision of health care, housing, or employment itself.
This anti-statist attitude also has to be understood as more than just abstract theory. Behind the rhetoric of the wealthy as the “producing classes” lies some unspoken approval of the Schumpeterian centering of the entrepreur as the “world-historical individual” of modern capitalism. If the market is self-regulating and the acme of efficiency, then the businessman is elevated as the savior of the world, the font of prosperity, both a rugged striver and a paternalist provider of work and civilization to the passive masses. What the “demand denialists” want, therefore, isn’t just profits, but the unfettered power to determine prices, wages, working conditions, economic development, and public policy – to direct the course of the world’s development.
If the government is needed and capable of providing economic prosperity, if business is ultimately dependent on the power of the exchequer and the purse, then the wealthy aren’t the heroic Atlases they want to be. And when one’s self-image is threatened, one will believe anything that wards off that threat.
Conclusion: the “Respectability Complex”
Theoretically, the “magical austerity thinking” of the center-right shouldn’t matter – the left should be able to win victory on a straightforward agenda of Keynesian stimulus, regulation of the financial sector, direct job creation, and an expansion of social protections more generally. The problem is that, following the right-ward retrenchment of “Third Way” movements in center-left parties in the 1990s, a significant fraction of center-left political parties believe in “magical austerity thinking.”
An even larger chunk don’t, but act as if they do because of an inherited belief that in order to win elections, they must pander rightward to be accepted as a “respectable” political party. This is the larger victory of the “Third Way” – because even outside of the ranks of the DLC in the United States or the arch-Blairites in the Labour Party in the U.K and their continental counterparts, there is a quiet conviction that the electorate is hostile to a forthrightly social-democratic economic program.
This might have been true in the 1990s, so close to the fall of the Soviet Union and a bubble-fueled economic boom. In the era of the Great Recession, it no longer describes reality. The problem is now that the center-left has nothing to differentiate itself from the right; neoliberalism with a human face requires economic growth to spread around, and that isn’t available now. The rising far right in Europe isn’t economically conservative; voters in the U.S approve enthusiastically of taxing the rich and direct job creation.
What’s needed is a center-left party willing to gamble on dis-reputability.
– Steven Attewell