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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On the "one-state" solution to Israel and Palestine, what did Donald Trump mean?

The US President seemed to dismantle two decades of foreign policy in his press conference with Benjamin Netanyahu. 

If the 45th President of the United States wasn’t causing enough chaos at home, he has waded into the world’s most intricate conflict – Israel/Palestine. 

Speaking alongside Israeli Prime Minister Benjamin Netanyahu, Trump made an apparently off-the-cuff comment that has reverberated around the world. 

Asked what he thought about the future of the troubled region, he said: “I’m looking at two-state and one-state and I like the one that both parties like.”

To the uninformed observer, this comment might seem fairly tame by Trump standards. But it has the potential to dismantle the entire US policy on the Israeli-Palestinian peace process. Trump said he could "live with" either a two-state or one-state solution. 

The "two-state solution" has become the foundation of the Israel-Palestine peace process, and is a concept that has existed for decades. At its simplest, it's the idea that an independent state of Palestine can co-exist next to an independent Israel. The goal is supported by the United Nations, by the European Union, by the Arab League, and by, until now, the United States. 

Although the two-state solution is controversial in Israel, many feel the alternative is worse. The idea of a single state would fuel the imagination of those on the religious right, who wish to expand into Palestinian territory, while presenting liberal Zionists with a tricky demographic maths problem - Arabs are already set to outnumber Jews in Israel and the occupied territories by 2020. Palestinians are divided on the benefits of a two-state solution. 

I asked Yossi Mekelberg, Professor of International Relations at Regent's University and an associate fellow at Chatham House, to explain exactly what went down at the Trump-Netanyahu press conference:

Did Donald Trump actually mean to say what he said?

“Generally with President Trump we are into an era where you are not so sure whether it is something that happens off the hoof, that sounds reasonable to him while he’s speaking, or whether maybe he’s cleverer than all of us put together and he's just pretending to be flippant. It is so dramatically opposite from the very professorial Barack Obama, where the words were weighted and the language was rich, and he would always use the right word.” 

So has Trump just ditched a two-state solution?

“All of a sudden the American policy towards the Israel-Palestine conflict, a two-state solution, isn’t the only game in town.”

Netanyahu famously didn’t get on with Obama. Is Trump good news for him?

“He was quite smug during the press conference. But while Netanyahu wanted a Republican President, he didn’t want this Republican. Trump isn’t instinctively an Israel supporter – he does what is good for Trump. And he’s volatile. Netanyahu has enough volatility in his own cabinet.”

What about Trump’s request that Netanyahu “pull back on settlements a little bit”?

“Netanyahu doesn’t mind. He’s got mounting pressure in his government to keep building. He will welcome this because it shows even Trump won’t give them a blank cheque to build.”

Back to the one-state solution. Who’s celebrating?

“Interestingly, there was a survey just published, the Palestinian-Israel Pulse, which found a majority of Israelis and a large minority of Palestinians support a two-state solution. By contrast, if you look at a one-state solution, only 36 per cent of Palestinians and 19 per cent of Israel Jews support it.”

 

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.