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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We can't rush to war in Syria without a plan for peace

A recent visit to Iraq has left me doubtful that the Prime Minister's plan can suceed, says Liam Byrne.

As shock of the Paris lifts and the fightback starts, all eyes are now the prime minister and, at last, the 'full spectrum response' we were promised months ago.

But what's needed now is not just another plan to bomb the ground -  but a plan to hold the ground we win. Four days in Northern Iraq has made me deeply sceptical about air strikes alone. It's convinced me that after the mistakes of Iraq and Libya, we cannot have yet another effort to win the battle and lose the war. Without politics and aid, projectiles and air-raids will fail. It's as simple as that.

After the horror of Paris it's easy to ignore that in Iraq and Syria, Isil is now in retreat. That's why these animals are lashing out with such barbarism abroad. In the ground war, Kurdistan's fighters in particular, known as the Peshmerga - or 'those who face death' -  have now shattered the myth of Isil's invincibility.

A fortnight ago, I travelled through Northern Iraq with a group of MP's arriving on the day the key town of Sinjar was stormed, cutting the umbilical cord - route 47 - between Isil's spiritual home of Mosul in Iraq and Isil HQ in Raqqa. And on the frontline in Kirkuk in north west Iraq, two miles from Isil territory, Commander Wasta Rasul briefed us on a similar success.

On the great earthwork defences here on the middle of a vast brown plain with the flares of the oil pumps on the horizon, you can see through binoculars, Isil's black flags. It was here, with RAF support, that Isil was driven out of the key oil-fields last summer. That's why air cover can work. And despite their best efforts - including a suicide attack with three Humvees loaded with explosives - Isil's fight back failed. Along a 1,000 km battle-front, Isil is now in retreat and their capitals aren't far from chaos.

But, here's the first challenge. The military advance is now at risk from economic collapse. Every political leader I met in Iraq was blunt: Kurdistan's economy is in crisis. Some 70% of workers are on the public payroll. Electricity is free. Fuel is subsidised. In other words, the Government's bills are big.

But taxes are non-existent. The banks don't work. Inward investment is ensnared in red tape. And when the oil price collapsed last year, the Government's budget fell through the floor.

Now, in a bust up with Baghdad, cash has been slashed to Kurdistan, just as a wave of 250,000 refugees arrived, along with over a million internally displaced people fleeing Da'esh and Shiite militias in the south. Nearly 6,000 development projects are stalled and people - including the Peshmerga - haven't been paid for months.

We have brave allies in the fight against Isil - but bravery doesn't buy them bullets. As we gear up the battle against Isil, it's now vital we help boost the Kurd's economic strength - or their sinews of war will weaken. There's an old Kurdish saying; 'the mountains are our only friends'. It's an expression born of years of let-down. In the fight against Da'esh, it's a mistake we can't afford to repeat today.

Second, everyone I met in Iraq was clear that unless the Sunni community can find alternative leadership to Isil then any ground we win may soon be lost, if not to Isil, then “Isil II”. Let's remember Isil didn't just 'emerge'. It grew from a tradition of political Islam decades old and mutated like a Frankenstein monster first by Al-Qaeda, then Al-Qaeda in Iraq, then the Al-Nusra front and now Isil.

Crucial to this warped perversion has been the total breakdown of trust between Iraq's Sunni residents - and the Shi'ite dominated government in Baghdad. In Mosul, for instance, when the Iraqi security forces left, they were stoned in their Humvees by local residents who felt completely humiliated. In refugee camps, it's not hard to find people who didn't flee Da'esh but Shi'ite militia groups.

Now, tracking surveys in Mosul report tension is rising. The Isil regime is sickening people with an obsessive micro-management of the way everyone lives and prays - down to how men must style their beards - with brutal punishment for anyone stepping out of line. Mobile phone coverage is cut. Food prices are rising. Electricity supplies are sporadic. Residents are getting restless. But, the challenge of gaining - and then holding a city of 3 million people will quite simply prove impossible without alternative Sunni leaders: but who are they? Where will they come from? The truth is peace will take politics.

There's one final piece of the puzzle, the PM needs to reflect on. And that's how we project a new unity of purpose. We desperately need to make the case that our cause is for both western and Islamic freedom.

I serve the biggest Muslim community in Britain - and amongst my constituents, especially young people, there's a profound sense that the conduct of this debate is making them feel like the enemy within. Yet my constituents hate Isil's violence as much as anyone else.

In Iraqi Kurdistan, I heard first-hand the extraordinary unity of purpose to destroy Isil with total clarity: “Your fight,” said the Kurdistan prime minister to us “is our fight.” In the refugee camps at Ashti and Bakhara, you can see why. Over a million people have been displaced in Kurdistan - grandparents, parents, children - fleeing to save their children - and losing everything on the way. “Da'esh,” said one very senior Kurdistan official 'aren't fighting to live. They're fighting to die. They're not battling a country or a system. They're battling humanity".

Here in Europe, we are hardwired to the fortunes of Central Asia, by trade, energy needs, investment and immigration. It's a vast region home to the seminal struggles of Israel/Palestine, Sunni/Shia and India/ Pakistan. Yet it's a land with which we share traditions of Abrahamic prophets, Greek philosophy and Arabic science. We need both victory and security. So surely we can't try once again to win a war without a plan for winning a peace. It's time for the prime minister to produce one.

Liam Byrne is Labour MP for Birmingham Hodge Hill, cofounder of the UK-China Young Leaders Roundtable and author of Turning to Face the East: How Britain Prospers in the Asian Century.