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Holes in the Keynesian Arguments against Neoliberal Austerity Policy--Not "Bad" Policy, But Class Policy

By       Message Ismael Hossein-zadeh     Permalink
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Instead of calling the recent G-20's brutal austerity declaration (issued at the conclusion of its annual summit in Toronto last month) an orchestrated declaration of class war on the people, many progressive/Keynesian economists and other liberal commentators simply call it "bad policy." While it is true that, as these commentators point out, the Hooverian message of the declaration is bound to worsen the recession, it is nonetheless not a matter of "bad" policy; it is a matter of class policy.

"Bad" policy for whom?

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For the powerful international financial gamblers the declaration is a good, not bad, policy. Indeed, it represents a monumental victory for these gamblers--an economic coup--as it converts tens of trillions of their gambling losses into gains by virtue of having their bought-and-paid-for governments force the people to cut on their bread and butter in order to pay for the fraudulent credit claims of the financial moguls. What is bad for the people is, therefore, a boon for the captains of high finance, who are the main architects of the G-20's austerity policies.

Viewing the savage class war of the ruling kleptocracy on the people's living and working conditions simply as "bad" policy, and hoping to somehow--presumably through smart arguments and sage advice--replace it with the "good" Keynesian policy of deficit spending without a fight, without grassroots' involvement and/or pressure, stems from the rather naïve supposition that policy making is a simple matter of technical expertise or the benevolence of policy makers, that is, a matter of choice. The presumed choice is said to be between only two alternatives: between the stimulus or Keynesian deficit spending, on the one hand, and the Neoliberal austerity of cutting social spending, on the other.

Experience shows, however, that economic policy-making is not independent of politics and policy-makers who are, in turn, not independent of the financial interests they are supposed to discipline or regulate. Economic policies are often subtle products of the balance of social forces, or outcome of the class struggle.

Keynesian economists seem to be unmindful of this fundamental relationship between economics and politics. Instead, they view economic policies as the outcome of the battle of ideas, not of class forces or interests. And herein lies one of the principal weaknesses of their argument: viewing the Keynesian/New Deal/Social Democratic reforms of the 1930s through the 1960s as the product of the Keynes' or F.D.R.'s genius, or the goodness of their hearts; not of the compelling pressure exerted by the revolutionary movements of that period on the national policy makers to "implement reform in order to prevent revolution," as F.D.R. famously put it. This explains why economic policy makers of today are not listening to Keynesian arguments--powerful and elegant as they are--because there would be no Keynesian, New Deal, or Social-Democratic economics without revolutionary pressure from the people.

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A closely related flaw of the liberal/Keynesian "bad policy" argument against the Neoliberal austerity strategy stems from the optimistic perception of the State that views its power as above economic or class interests; a perception that fails to see the fact that the national policy-making apparatus is largely dominated by a kleptocratic elite that is guided by the imperatives of big capital, especially finance capital.

Liberal critics of the vicious austerity policies passionately argue against such policies as "bad," "misguided," or "unwise" as if the governments that make such policies do not know what they are doing. Accordingly, these critics offer all kinds of elegant Keynesian arguments in favor of stimulus deficit spending that could lead to improved economic conditions, increased tax revenues, and decreased debt and deficit. What these critics tend to overlook, however, is the fact that the governments that impose austerity policies are serving as bailiffs or debt-collecting agencies on behalf of their corporate/financial masters.

If you plead with a court-appointed bailiff who is about to foreclose a debt-burdened family's house, "please, have mercy, don't you see this poor family is going to be homeless?" his/her answer would most probably be "I already know that; I am sorry, but I have no choice, or that's not my problem." The difference between this type of traditional or ordinary bailiffs and today's governments serving as bailiffs to collect the fraudulent claims of the international financial moguls is that while the former honestly admit that they have no choice because they have orders, the latter pretend that they are independent of special interests, and that they are simply carrying out policies of national interests!

Liberal/Keynesian critics of the Neoliberal austerity measures as "bad policies" can also be faulted for their belief that the Democratic Party is very different from the Republican Party, and that the blame for the atrocious cuts in social spending should be solely or primarily placed at the doorsteps of the Republicans. The reality, however, is that both parties are beholden to powerful financial interests, and that, individual exceptions aside, their public posturing as opposition parties are essentially tantamount to the proverbial good cop bad cop game. As Shamus Cooke recently pointed out, "Both Democrats and Republicans agree that "financial markets' should dictate the economic policy of the U.S. The two parties disagree only to what degree and how quickly to implement the same policy."

President Obama himself has frequently stressed fiscal "responsibility" as a catch phrase to justify cuts in social spending. For instance, in a news conference at the conclusion of the Toronto G-20 summit, the President expressed satisfaction at the G-20's commitment to cut their deficits by half in three years, arguing that "" if financial markets are skittish and don't have confidence in a country's fiscal soundness, that is also going to undermine our recovery."

Another major weakness in the liberal/Keynesian criticism of the Neoliberal austerity strategy as "bad policy' is that, aside from the contractionary/recessionary argument, they have not thoroughly explained why this strategy is a "bad policy"; in other words, they have not vigorously challenged or exposed the flaws and myths of the Neoliberals' fiscal "responsibility" claim. This claim, self-righteously touted by deficit hawks, rests upon these theoretical presumptions: lower social spending would lead to lower deficits; lower deficits would lead to lower interest rates; lower interest rates would lead to higher borrowing for investment/spending purposes; which would then lead to economic growth. In this way, austerity hawks can (and indeed do) claim that it is their fiscal "responsibility" strategy, not the Keynesian deficit spending strategy, that is pro-growth.

Despite its prima facie reasonableness, this theoretical postulate is not as foolproof as it sounds. Investment decisions depend on more factors than just interest rate. Business or market environment in terms of certainty, or lack thereof, and the prospects of sales or effective demand is one such factor. This explains why despite the extremely low interest rates of recent years lending/borrowing/spending for productive purposes remains stagnant, if not frozen. Burdened by too much debt, neither traditional borrowers dare or can afford to take on more debt, nor lenders dare to part with their cash--a classic situation of the so-called "liquidity preference," or "liquidity trap," as Keynes put it.

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The claim of the champions of austerity policies that cuts in social spending would necessarily lead to lower deficits has also been disproved by the experience of recent decades. Since the late 1970s and early 1980s, social spending has been systematically cut while, at the same time, debt and deficit have been rising--except, of course, for the second half of the 1990s, when deficits shrank, not due to cuts in social spending but because of economic expansion of that period.

As long as the liberal/Keynesian proponents of deficit spending do not or cannot expose these flaws and fallacies of the claims of the neoliberal champions of fiscal "soundness" they are bound to be entangled in an ineffectual, circular debate with the deficit hawks without much success. These proponents may argue elegantly and passionately in favor of "bold, additional deficit spending in order to grow ourselves out of this crisis," but without compelling grassroots pressure on policy makers they would not get very far with those arguments. Furthermore, as was just pointed out, champions of fiscal "responsibility" can just as forcefully claim to be "the real champions of economic growth" as do the liberal proponents of additional deficit spending." Indeed, due to its prima facie reasonableness, the fiscal "responsibility" argument often wins over stimulus spending argument--again, as long as the Neoliberal-Keynesian debate remains within the narrow circles of the elite policy makers and their intellectual talking heads on both sides, that is, as long as the broad masses of people are not actively involved in the fight against the obfuscationist arguments of fiscal "responsibility."

Perhaps the most important weakness in the liberal/Keynesian arguments against the Neoliberal austerity measures is the presupposition (or the acceptance of the premise) that deficit spending is the only alternative to cuts in social spending. This weakness, in turn, stems from another flaw in their arguments: neglect of the issues of accountability and/or culpability. The three major factors that are largely responsible for the colossal debt and deficit are: the multi-trillion dollar Wall Street bailout, the out-of-control military/security expenditures, and the huge supply-side tax giveaways to the wealthy since the early 1980s. Doggedly focused on additional deficit spending, Keynesian partisans (like Neoliberal deficit hawks) let these culprits of the global debt crisis go scot-free, so to speak. They either do not mention these real sources of debt and deficit, or mention them only in passing--just for the record! Unwilling to challenge these sacred cows (their election/reelection benefactors), they tout deficit spending as the only viable alternative to cuts in social spending.

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Ismael Hossein-zadeh is a professor of economics at Drake University, Des Moines, Iowa. He is the author of the newly published book, The Political Economy of U.S. Militarism His Web page is http://www.cbpa.drake.edu/hossein-zadeh

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