Think the deficit hawks have it all right about 'entitlements', spending cuts and the debt crisis? Think again.
A Panic Wave of Demand for Fiscal Austerity
The sovereign debt crisis in Greece has sparked a panic wave of radical policy demands for fiscal discipline throughout the European Union from a perverse coalition of neoliberal public finance ideologues and anti-government conservatives. Proponents of fiscal discipline argue that the EMU and its common currency, the euro, would not be sustainable without the drastic restructuring of public finance in all eurozone member states through a combination of tax increases and deficit reduction through fiscal austerity. But creditors, mostly transnational banks, will be protected from having to accept "haircuts" on their holdings of sovereign debt.
Yet such harsh approaches of tight fiscal austerity at a time when the global recession of 2008 is still waiting in vain for a recovery will risk increasing the danger of a double dip recession in 2011 in a secular bear market. The alarmist voices of these fiscal deficit hawks clamor for fiscal austerity programs that are essentially punitive for eurozone workers while continuing to tolerate abusive financial market manipulation that will benefit only the financial elite as the economic pain is passed on to the general public.
Bank Creditors against Wage Earners
Fiscal deficits across the eurozone are to be reduced by cutting public sector wages and social benefit and subsidy expenditures so that transnational bank creditors will be paid in full while turning a blind eye to blatant tax evasion and avoidance by the rich with non-wage income that contribute to loss of government revenue and fiscal deficits. The dysfunctional disparity of income and polarization of wealth between the wage-earning masses and the financial elite with income from profit and capital gain, are the main causes of overcapacity in the economy. In past decades, the neoliberal response to overcapacity was to shy away from the obvious solution of raising wages, turning instead to flooding the economy with huge mountains of consumer and corporate debt that eventually resulted in a tsunami of borrower defaults that turned into a global credit crisis. Yet repeating the same response to the current crisis will lead only to another global crisis down the road.
While the culprits of the global credit meltdown of 2008 have been bailed out with the public's future tax money, the sovereign debt crisis across the globe is blamed on innocent wage earners for receiving supposedly unsustainably high wages and excessive social benefits that allegedly threaten the competitiveness of economies in a globalized trade regime designed to push wages down everywhere.
Sovereign Debt Crisis not caused by the Welfare State
The rush by the rich and powerful to punish the trouble-causing working poor goes against strong evidence that the current sovereign debt crisis is not caused by high social welfare expenditure, but by a sudden drop in government revenue due to economic recession caused by credit market failure under fraudulent accounting allowed in structured finance for which the financial elite are directly and exclusively responsible.
Through devious "special purpose vehicles", the sole special purpose of which is to treat proceeds from debt issuance as revenue from sales to remove financial liability from government balance sheets to present a deceptively robust picture of public finance, phantom profits are siphoned off from the general economy into the pockets of greed-infested financiers while pushing the real economy out of balance, resulting in high real public debts that inadequate aggregate worker income cannot possibly sustain. As a portion of GDP, wages and benefits have been falling in past decades while the public debt has been rising. Transnational financial institutions routinely generate profits larger than government revenue of small economies.
Despite propagandist distortion, the sovereign debt problem has not been caused by the high cost of a welfare state; it has been caused by deregulated financial markets that allowed governments to borrow huge sums against future revenue from public sector enterprises without showing the liabilities on government balance sheets. Structured finance was providing participating governments with up-front cash while hiding the sovereign debts that had to be paid back in the future. But the bulk of the borrowed money went to the pockets of dealmakers of public sector privatization while the debts were left with society at large. A large amount of the national wealth is transferred from the local economy to international speculators through legalized manipulation made possible by deregulated financial market globalization. It is a new form of synthetic financial imperialism against weak economies through a scheme of naked shorts against the currencies and equities of vulnerable nations.
Fiscal Austerity will endanger the EU
Further, such punitive fiscal austerity solutions will render the EU unsustainable as a political superstructure due to violent popular opposition in the constituent nations. Third Way centrist synthesis of free market capitalism with the social democratic welfare state has provided the enabling conditions for the current sovereign debt crisis. Market fundamentalism has been exposed by unhappy but predictable events it helped create as an exorbitant and spectacular failure. And the exorbitant cost of this spectacular failure of market fundamentalism will be put on the back of the innocent working poor.
There are strong signs that voters in countries with multiparty democratic political systems have been brainwashed into believing that free market capitalism with minimum government intervention is the only road to prosperity. Voters have been conditioned unwittingly to buy into an anti-government ideology that diametrically contradicts the public's other demand for generous safety nets of socioeconomic security that only government can provide.
When the gullible weak is convinced by the devious strong in society that government is the problem, not the solution, the weak are inadvertently trapped into a political climate that permits the destruction of their only institutional protector, since the existential function of government, regardless of political and economic color, is to protect the weak from the strong.
Government non-interference through deregulation and privatization of the public sector leads to the law of the jungle in free markets under which the economic function of the financially weak is to serve as the food supply for the financially strong. Historically, government evolves in civilization so that the weak masses can collectively resist the oppression of the strong elite. This is the reason why the strong in society always bash popular government.
Price of Saving the Euro may be EU Dissolution
Thus the attempt to save the euro from collapsing in exchange value under the weight of aggregate eurozone member state sovereign debts through coordinated fiscal austerity in all member states of differing socio-economic legacy and conditions will incur the price of political divergence of the member states from the European Union. Member state governments are pulled apart from the union by centrifugal nationalist forces generated by separate and divergent domestic politics. Popular sentiment against local fiscal austerity for the sake of preserving the European Union is spreading like wild fire in this sovereign debt crisis of the European Union.
But a weakening of convergence toward full integration of European nation states will prolong the euro's structural vulnerability as a common currency without a unified political structure and condemn it to remain a multi-state currency with high political risk. This internal contradiction is the Achilles' heel of the euro, which is the legal tender of a monetary union without a political union.
Stormy Political Weather for Incumbents
Stormy political weather has recently battered incumbent centrist political leaders in several countries by holding each of them separately responsible for the austerity measures they are now forced to implement to get their different economies out of unsustainable sovereign debt.
In order to meet a 2013 deadline for compliance with EMU's euro convergence criteria as spelled out in its Stability and Growth Pact (SGP), at the end of the preceding fiscal year, the ratio of the annual government fiscal deficit to GDP must not exceed 3% and the ratio of gross government debt to GDP must not exceed 60%. This means the eurozone governments need to slash their individual budget deficits to add up to a total of €400 billion. This huge sum will be taken primarily from the pockets of public service employees, pensioners, the unemployed and the indigent in the EU for decades to come.
Greece was forced to adopt on May 11, 2010 an austerity plan to reduce its budget deficit by €30 billion over the next three years through wage, benefit, subsidy and pension cuts, slashing social programs and an increase in VAT (value added tax).
On May 26, Spain announced cuts of €80 billion from its fiscal budget, shedding 13,000 public service jobs, reducing salaries of state employees by 5% and freezing pensions. The allowance of €2,500 for parents of a new birth to reverse declining population trends will be suspended.
Portugal has imposed a hiring and salary freeze in the public sectors and passed an increase in VAT in order to cut €20 billion from its budget deficit.
The Italian government launched measures that will result in cuts of €24 billion by 2012. They include a reduction in civil service jobs, salary cuts, raising the retirement age and cuts in the health care system.
France plans to reduce its budget deficit from 8% to 3% of GDP by 2013. This will be achieved by delaying the retirement age of public employees; cuts in housing benefits, employment compensation and museums funding; as well as a 10% cut in administrative costs.
The German government will decide upon concrete austerity measures on June 6 and 7. The so-called "debt brake", anchored in the German federal constitution, imposes a reduction in new debt of €60 billion by 2016. Among the many measures under discussion are cuts in social programs, such as family, child, welfare and disability benefits, annuities and pensions.
Delaying Retirement Age Counterproductive
The EU Commission suggests that the retirement age in Europe should continue to rise steadily. This is to ensure that in the future, no more than a third of a person's adult life could be spent in retirement. In the long term, this would mean raising the pension age to 70. This will add pressure on young new entrants to the job market for the next two decades, as fewer positions will be vacated by retirement of the currently employed.
The new center-right British conservative government announced immediate budget cuts of £7.2 billion, including a hiring freeze in the civil services. The new Prime Minister, David Cameron, said Britain's budget deficit will be cut over the next four years by more than £100 billion. This will include slashing 300,000 posts in public service and a freeze on public sector pay.
For millions of workers and young graduates, the newly-adopted measures mean rising unemployment and poverty levels. In particular, old-age poverty will again become a mass phenomenon in Europe. Nothing will remain of the post-war welfare state. A study by the Carnegie Endowment for International Peace think tank in the US concludes that "the welfare states set up across Europe from the 1940s onwards with the aim of suppressing popular unrest and paying off tensions that could lead to another continental war" are "unaffordable". What was left unsaid in the study was that it would be unaffordable only if the disparity of income and polarization of wealth were to be allowed to continue. In an overcapacity economy, the people can afford what they produce if the system does not deprive the majority of their right to the wealth they create and hands it to a controlling minority. Revolution would have to come by policy or it will come by violence.
Crisis of Maldistribution of Income and Wealth
In a fiat money regime, it is the central bank's responsibility to ensure an adequate supply of money. The fiscal budget shortfalls that are being used to justify the dismantling of the welfare state are the result of the systematic maldistribution of income and wealth from those at the bottom of society who do the work to those at the top who do the manipulation.
For a quarter of a century since the late 1970s, both right-wing and center-left governments have reduced taxes on income and property for the rich, depressed wages through structural unemployment as a tool to fight inflation and have abdicated government responsibility in maintaining economic justice.
The concept of a living wage is regarded by new coalition as Utopian. Wages are set by their marginal utility to the return on capital in unregulated markets rather than by the economic law of demand management in a modern overcapacity economy of business cycles, the recessionary phase of which has become nearly continuous. Popular discontent is muted with unsustainable increases of the public debt. These are the main causes of the sovereign debt crisis, not over-consumption by the working poor.
Public Debt Crisis caused by Bank Bailouts
The public debt had been pushed up sharply in the last two years by the trillions that governments, run by free market policymakers, pumped into distressed banks to prevent their collapse from proprietary speculation in deregulated markets. Recent figures from the German Bundesbank showed that in 2008 and 2009, some 53% of Germany's new public debt was used to rescue distressed financial institutions. The total new public debt rose by €183 billion in those two years; the costs involved in supporting distressed financial institutions amounted to €98 billion.
Trade Union Leaders as Hatchet Men of Neoliberalism
To push through the austerity measures against the working poor, the ruling financial elite drafted the social democrats and the trade unions as their hatchet men. In the PIIGS (Portugal, Italy, Ireland Greece and Spain) countries, social-democrat-run governments impose the austerity measures, or, as in Britain, France and Germany, the social democrats have so discredited themselves by their previous cost-cutting measures that now the right-wing parties have reaped the political benefit. In all cases, the social democrats leave no doubt that they support the cuts, telling working people that there is "no alternative".
Trade union leaders have been willingly subscribing to the discredited "TINA" (There Is No Alternative) voodoo economics of Reagan and Thatcher, in cooperation with corporate-controlled governments to wage financial war on labor. The labor-organized demonstrations and strikes against austerity measures have all been suppressed by armed police, with the violence and deaths exploited as reasons why labor protects must cease.
Yet labor has a moral and functional obligation to force structural changes in this dysfunctional economic system, instead of continuing to remain a passive victim in the new age of wholesale anti-labor selfdom. Meanwhile, a conservative populist movement that calls itself TEA (Tax Enough Already) Party is gaining popular support and can easily be transformed into a fascist political force. Left unsaid in TEA Party rhetoric, beside protest on rising taxes, is protest on the prospect that the tax money should be spent on the poor, rather than bailing out the errant financial elite. Until labor takes the rein of reform, the EU's trillion-dollar stabilization package will end in failure.
Please see full article: Trillion Dollar Failure
Roosevelt Institute Braintruster Henry C.K. Liu is an independent commentator on culture, economics and politics.