Spending cuts and the threat to democracy

What America should learn from Europe and the Middle East.

The "sequester", which began on 1 March, is the American form of austerity, or cut-backs in government spending during a recession. Austerity, or stingy government in Europe has kept employment extremely depressed compared to what it would have been with government stimulus, as Paul Krugman argues.

On Saturday, there were massive protests throughout Portugal against Scrooge policies by the government, which have so destroyed the country’s economy that 2 per cent of the population has fled abroad for jobs in the past 2 years alone. On Friday, Greek workers staged a huge general strike. In Italy, anti-austerity feeling made grumpy comedian Beppe Grillo and his party the swing vote in the new parliament. Grillo may single-handedly destroy the eurozone. European newspapers rather amusingly demanded that Grillo now "take responsibility" and "tell us what he wants". He is a contrarian comedian. It would be like having Robin Williams or Tracy Morgan as the swing vote in Congress, with the press hounding them for their agricultural policy and asking them about the dangers of deflation. But Grillo's ascendancy, while less alarming than the resurgence of the Greek far right, is a manifestation of the rejection by the Italian public of the long dreary road prescribed by the "troika", (The International Monetary Fund, the European Union, the Central Bank), of further government cut-backs, reductions in minimum wage, high unemployment, no hope.

While for some odd reason the Middle East does not usually get analysed with the same social science tools as Europe, the political crisis in Egypt is related to the Muslim Brotherhood government’s austerity program. The latter, as Samuel Knight argues, is being pursued under pressure from the International Monetary Fund. Secretary of State John Kerry is in Cairo, also urging acceptance of the austerity program. Austerity is estimated to have reduced Egyptians’ real income by 3 per cent in January alone. Tunisia is doing better than Egypt economically, but the parliament, dominated by the religious Right, is also tempted by austerity measures, seeking to trim a point off the budget deficit this year while seeking 4.5 per cent growth. While letting the value of the Tunisian dinar fall would hurt consumers with regard to imported goods, it would make Tunisian textiles and tourism more affordable for those abroad. Tunisia's exports are hurt by European economic problems, and the country would do well to develop more Asian customers (Brazil has had success reorienting exports to the Pacific Rim). Likewise, although Yemen's economy improved in 2012 after a 10 per cent drop in the revolutionary year of 2011, if anything the government budget deficit of 5.5 per cent is not big enough to stimulate the economy properly.

Reducing the state budget at a time of economic contraction is the opposite of what the great economist John Maynard Keynes prescribed. When the economy is in the doldrums, the businesses are skittish about investing their money, and so keep it in the bank. The only force, Keynes argued, that can and will risk putting a lot of money into the economy during a deep recession is the government. Of course, the government has less money at that point, too, since tax receipts are reduced. So it will simply have to spend money it doesn't technically have, i.e. go into deficit and print extra paper money. The extra paper will, obviously, lose some of its value. But that loss can have benefits, too, since it will make the goods produced by the country less expensive abroad, and spur exports.

This argument is straightforward for most countries, and it is mysterious why European and some Middle Eastern governments reject it. It is complicated in the US by the position of the dollar as a reserve currency and by the fall of manufacturing to only 20 per cent of the US economy. The former means that large budget deficits don't necessarily reduce the dollar's value significantly, because the US only holds about a third of the world's dollars and there is a lot of confidence in its value. The latter means that even when the dollar falls against the yen or euro, the jump in exports is limited to a fifth of the economy and domestic services don’t get much of a boost. But actually these peculiarities of the US economy are not arguments for austerity; on the contrary, the reserve dollar allows the US to do stimulus without as much pain as one would otherwise expect.

Instead, the Tea Party has forced the US into an artificial crisis with the "sequester", taking $100bn a year out of the economy for the next ten years, which will cut half a point of economic growth and harm workers, keeping unemployment high – not to mention the harm it likely will do to medical research, higher education, etc. That this austerity is being pursued by the GOP in part in hopes of disillusioning voters with President Obama in his second term is fairly obvious, but it is also in order to protect the 2003 Bush tax cuts for the wealthy, 80 per cent of which have been retained. Sequester, as usual with these things in the US, is actually a tax on the middle classes to benefit the wealthy, since it preserves undeserved tax cuts for the latter by reducing government services for the former.

That austerity does not work economically should be clear. But that it creates populist discontents that are shaking southern Europe and could derail Middle East democratisation is even more alarming. The world needs stimulus, not Scrooge government if it is to pull out of the crisis kicked off by corrupt bankers in 2008.

This is a cross-post from Juan Cole's blog Informed Comment

Barack Obama holds a cabinet meeting at the White House on 4 March. (Photo: Getty.)
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Commons Confidential: When Corbyn met Obama

The Labour leader chatted socialism with the leader of the free world.

Child labour isn’t often a subject for small talk, and yet it proved an ice-breaker when Jeremy Corbyn met Barack Obama. The Labour leader presented the US president with a copy of What Would Keir Hardie Say? edited by Pauline Bryan and including a chapter penned by Comrade Corbyn himself.

The pair, I’m informed by a reliable snout, began their encounter by discussing exploitation and how Hardie started work at the tender age of seven, only to be toiling in a coal mine three years later.

The book explores Hardie’s relevance today. Boris Johnson will no doubt sniff a socialist conspiracy when he learns that the president knew, or at least appeared to know, far more about Hardie and the British left than many MPs, Labour as well as Tory.

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Make what you will of the following comment by a very senior Tory. During a private conversation with a Labour MP on the same select committee, this prominent Conservative, upon spotting Chuka Umunna, observed: “We were very relieved when he pulled out of your leadership race. Very capable. We feared him.” He then, in
a reference to Sajid Javid, went on: “We’ve got one of them.” What could he mean? I hope it’s that both are young, bald and ambitious . . .

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To Wales, where talk is emerging of who will succeed Carwyn Jones as First Minister and Welsh Labour leader. Jones hasn’t announced plans to quit the posts he has occupied since 2009, but that isn’t dampening speculation. The expectation is that he won’t serve a full term, should Labour remain in power after 5 May, either as a minority administration or in coalition in the Senedd.

Names being kicked about include two potential newcomers: the former MEP Eluned Morgan, now a baroness in the House of Cronies, and the Kevin Whately lookalike Huw Irranca-Davies, swapping his Westminster seat, Ogmore, for a place in the Welsh Assembly. Neither, muttered my informant, is standing to make up the numbers.

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No 10’s spinner-in-chief Craig “Crazy Olive” Oliver’s decision to place Barack Obama’s call for Britain to remain in Europe in the Daily Telegraph reflected, whispered my source, Downing Street’s hope that the Torygraph’s big-business advertisers and readers will keep away from the rest of the Tory press.

The PM has given up on the Europhobic Sun and Daily Mail. Both papers enjoy chucking their weight about, yet fear the implications for their editorial clout should they wind up on the losing side if the country votes to remain on 23 June.

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Asked if that Eurofan, Tony Blair, will play a prominent role in the referendum campaign, a senior Remainer replied: “No, he’s toxic. But with all that money, he could easily afford to bankroll it.”

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 28 April 2016 issue of the New Statesman, The new fascism