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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Emmanuel Macron's "moralisation of politics" comes at a heavy price for his allies

"Fake" jobs in French politics, season 3 episode 1.

Something is rotten in the state of France. No political party – at least none that existed before 2016 – seems immune to the spread of investigations into “fake” or shady parliamentary jobs. The accusations sank centre-right candidate François Fillon’s presidential campaign, and led to Marine Le Pen losing her parliamentary immunity in the European parliament (and proxy wars within her party, the National Front). Both deny the allegations. Now the investigations have made their way to the French government, led by Edouard Philippe, Emmanuel Macron’s Prime Minister.

On Wednesday morning, justice minister François Bayrou and secretary of state for European affairs Marielle de Sarnez announced their resignation from Philippe’s cabinet. They followed defence minister Sylvie Goulard’s resignation the previous day. The three politicians belonged not to Macron's party, En Marche!, but the centrist MoDem party. Bayrou, the leader, had thrown his weight behind Macron after dropping his own presidential bid in April.

The disappearance of three ministers leaves Emmanuel Macron’s cross-party government, which includes politicians from centre left and centre right parties, without a centrist helm. (Bayrou, who has run several times for the French presidency and lost, is the original “neither left nor right” politician – just with a less disruptive attitude, and a lot less luck). “I have decided not to be part of the next government,” he told the AFP.

Rumours had been spreading for weeks. Bayrou, who was last part of a French government as education minister from 1993 to 1997, had been under pressure since 9 June, when he was included in a preliminary investigation into “embezzlement”. The case revolves around whether the parliamentary assistants of MoDem's MEPs, paid for by the European Parliament, were actually working full or part-time for the party. The other two MoDem ministers who resigned, along with Bayrou, also have assistants under investigation.

Bayrou has denied the allegations. He has declared that there “never was” any case of “fake” jobs within his party and that it would be “easy to prove”. All the same, by the time he resigned, his position as justice minister has become untenable, not least because he was tasked by Macron with developing key legislation on the “moralisation of politics”, one of the new President’s campaign pledges. On 1 June, Bayrou unveiled the new law, which plans a 10-year ban from public life for any politician convicted of a crime or offence regarding honesty and transparency in their work.

Bayrou described his decision to resign as a sacrifice. “My name was never pronounced, but I was the target to hit to attack the government’s credibility,” he said, declaring he would rather “protect this law” by stepping down. The other two ministers also refuted the allegations, and gave similar reasons for resigning. 

Macron’s movement-turned-unstoppable-machine, En Marche!, remains untainted from accusations of the sort. Their 350 new MPs are younger, more diverse than is usual in France – but they are newcomers in politics. Which is exactly why Macron had sought an alliance with experienced Bayrou in the first place.

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