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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The failed French presidential candidates who refuse to endorse Emmanuel Macron

While the candidates of the main left and right parties have endorsed the centrist from nowhere, others have held back. 

And breathe.

At 8pm on Sunday night France, Europe, and much of the West let out a huge sigh of relief. After over a month of uncertainty, scandals, rebounds, debates and late surges, the results of the first round of the French Presidential Election was as predicted: Emmanuel Macron (24 per cent) will face off against Marine Le Pen (21 per cent) in the second round of the election on the 7 May.

While polls have been predicting this face-off for a while, the shocks of Brexit and the election of Donald Trump had thrown polling predictions into doubt. But France has a good track record when it comes to polling, and their surveys are considered some of the most reliable in the world. The irony is that this uncertainty has meant that the polls have never been so central to a campaign, and the role of polling in democracies has been a hot topic of debate during the election.

The biggest surprise in many ways was that there were no surprises. If there was a surprise, it was a good one: participation was higher than expected: close to 80 per cent – on par with the Presidential Elections of 2012 – whereas there were concerns it would be as low as 70 per cent. Higher participation is normally a bad sign for the extremes, who have highly motivated voters but a limited base, and who often do better in elections when participation is low. Instead, it boosts the traditional parties, but here instead of the traditional right-wing Republican (Fillon is at 20 per cent) or Socialist parties (Hamon at 6 per cent), it was in fact the centre, with Emmanuel Macron, who benefited.

So France has so far not succumbed to the populist wave that has been engulfing the West. The contagion seemed to be spreading when the Italian Prime Minister Matteo Renzi lost a referendum on reforming the constitution, but the fightback started in Austria which rejected the far-right candidate Norbert Hofer in its Presidential election and voted for the pro-European, former-Green independent candidate Alexander Van der Bellen. Those hopes now rest on the shoulders of Macron. After having dubbed Angela Merkel the leader of the free world during his farewell tour of Europe, Barack Obama gave his personal blessing to Macron last week.

Many wondered what impact Thursday night’s shooting on the Champs-Elysées would have. Would it be a boon for Marine Le Pen’s anti-immigration platform? Or even right-wing François Fillon’s more traditional law and order approach? In the end the effect seems to have been minimal.

In the second round, Macron is currently predicted to beat Marine Le Pen by more than 60 per cent of the vote. But how does Le Pen almost double her vote in the second round, from around 20 per cent to close to 40 per cent? The "Republican Front" that saw her father off back in 2002, when he received only 18 per cent of the vote, has so far held at the level of the two traditional political parties. Both Hamon and Fillon have called to vote for Macron in the second round to stop the Front National - Hamon put it nicely when he said he could tell the difference between political opponents, and opponents of the Republic.

But not everyone is toing the line. Sens Commun, the anti-gay marriage group that has supported Fillon through thick and thin, said that it will not call to vote for either party – a thinly veiled invitation to vote for Le Pen. And Nicolas Dupont-Aignan, a conservative, Catholic and anti-EU right wing candidate, whose 5 per cent is the reason Fillon didn’t make it to the second round, has also abstained from calling to vote for either. It is within this electorate that Le Pen will look to increase her vote.

The other candidate who didn’t call to vote for anyone was Jean-Luc Mélenchon, who fell back on a demagogic position of saying he would follow the wishes of his supporters after having consulted them. But as a spokesperson for the FN pointed out, there are remarkable congruities between their respective platforms, which can be categorised as a populism of the left and a populism of the right.

They in particular converge over the question of Europe. Aping Brexit, both want to go to Brussels to argue for reform, and if none is forthcoming put membership of the Eurozone to the electorate. While Le Pen’s anti-Europeanism is patent, Mélenchon’s position is both disingenuous and dangerous. His Plan A, as he puts it, is to attempt reform at the European level. But he knows fine well that his demands, which include revoking the independence of the European Central Bank and putting an end to austerity (the ECB, through its massive programme of quantitative easing, has already been trying to stimulate growth) will not be met. So he reverts to his Plan B, which is to leave the European Treatises and refound Europe on a new basis with like-minded members.

Who those members might be he hasn’t specified, nor has he explained how he would leave the EU - at least Le Pen had the decency to say she would put it to a referendum. Leaving the European Treatise has been in his programme from the beginning, and seems to be the real object of his desires. Nonetheless, having set himself up as the anti-Le Pen candidate, most of his supporters will vote for Macron. Others will abstain, and abstention will only help Le Pen. We’ve been here before, and the last thing we need now is complacency.

 

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