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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Leader: The chaos and mendacity of Trump’s White House

That General Flynn was the first of the president’s men to fall should perhaps not have caused surprise.

In his inauguration speech on 20 January, Donald Trump used the phrase “American carnage” to ­describe the state of the US under Barack Obama. The description was correct, but President Trump had the timing wrong – for the carnage was still to come. Just a few weeks into his presidency, the real-estate billionaire and reality-TV star has become embroiled in more controversy and scandals than Mr Obama experienced in eight years. His ban on citizens from seven Muslim-majority countries entering the US caused chaos at airports both at home and abroad and damaged America’s global standing. It was a false claim that the executive order, since suspended by the courts, would make the US safer. By alienating and stigmatising Muslims, it may well do the opposite.

The decision to pursue the policy so recklessly and hastily demonstrates Mr Trump’s appalling judgement and dubious temperament. It also shows the malign anti-Islamic influence of those closest to him, in particular his chief strategist, Steve Bannon, his senior adviser Stephen Miller, and Michael Flynn, the retired general who on 13 February resigned as ­national security adviser after only 24 days in the job.

That General Flynn was the first of the president’s men to fall should perhaps not have caused surprise, given his reputation for anger and arrogance. As recently as August, the retired three-star general said that Islamism was a “vicious cancer inside the body of 1.7 billion people” and falsely claimed that Florida Democrats had voted to impose sharia law at state and local level. He also led the chants of “Lock her up!” aimed at Hillary Clinton during the Republican ­National Convention, which would have been appreciated by Mr Trump then and today by those who enjoy irony.

Now General Flynn is under investigation by justice officials. He resigned over revelations in the media, most notably the Washington Post, that before taking office he had discussed US sanctions against Moscow with the Russian ambassador. It is unlawful for private citizens of the US to ­interfere in diplomatic disputes with another country.

Before standing down, General Flynn had publicly denied talking about sanctions during calls and texts with Ambassador Sergey Kislyak in late December. He had also issued misleading accounts of their conversation to Vice-President Mike Pence and other Trump officials who went on to defend him. Given President Trump’s propensity to lie, General Flynn may have believed that he could get away it. As the former chief of a Pentagon spy agency, however, he should have known that the truth would come out.

The FBI had wiretaps of the ambassador’s conversations with General Flynn. In January, the acting US attorney general – later sacked by President Trump for opposing his “Muslim ban” – informed the White House that General Flynn had lied about his communications with the ambassador and was potentially vulnerable to Russian blackmail. Yet it took newspaper revelations about the intercepts to bring the national security adviser down. American carnage, indeed.

The disruptive present

How has capitalism shaped the way we work, play and eat – and even our sense of identity? Nine writers explore the cutting edge of cultural change in the latest instalment of our New Times series in this week's magazine.

The past decades have brought enormous changes to our lives. Facebook became open to the public in 2006, the first iPhone was launched in June 2007 and Netflix launched in the UK in 2012. More and more of us are ceaselessly “on”, answering emails at night or watching video clips on the move; social media encourages us to perform a brighter, shinier version of ourselves. In a world of abundance, we have moved from valuing ownership to treating our beliefs as trophies. The sexual vocabulary and habits of a generation have been shaped by online pornography – and by one company, MindGeek, in particular. We cook less but love cookery shows. We worry about “fake news” as numbers of journalists decline. We have become gender consumers, treating it as another form of self-expression. These shifts in human behaviour have consequences for politics and politicians. “The question should always be,” as Stuart Hall wrote in 1988, “where is the ‘leading edge’ [of change] and in what direction is it pointing?” The question is even more apposite today.

This article first appeared in the 16 February 2017 issue of the New Statesman, The New Times