The Science and Ethics of Austerity: Lessons from the US and Europe

John Buell
  is a columnist for The Progressive Populist and   
   a faculty adjunct at Cochise College. His most    
   recent book is, Politics, Religion, and Culture 
   in an Anxious Age.


Around the world, corporate media and even substantial segments of the working class have embraced an old religious creed, the celebration of austerity. Its cold bath is supposed to rid us of our sins. Its tenets stand in contrast to the academic wisdom of post World War II generation and to many of the metrics commonly accepted across the political spectrum. We cannot understand the power of this reborn orthodoxy without addressing its complex roots.  Several historical narratives converge. They reflect and sustain compelling social and personal identities. These seem especially comforting amidst cultural and economic turmoil. Nonetheless, if this austerity is not effectively challenged, it may unleash forces as destructive as those of the thirties. And stopping austerity will also require critical scrutiny of much of the liberal and neo-Keynesian critiques that thus far constitute the only serious systemic response to austerity’s lure.

The story of the new austerity is truly intercontinental and transhistorical. Its most recent vintage begins with a crisis narrative: The Eurozone stands on the brink of collapse because devious or shortsighted European politicians overspent and now are unwilling to curb excess government spending. Greece is the most flagrant example.

In this narrative, Europe is especially culpable because it has failed to learn from its own history. Excess spending in Germany under the Weimar Republic led to hyperinflation, social panic, and the rise of the Nazis.

Part three of this trilogy warns that the United States is about to become Greece, unable to pay its debts and soon to be bankrupt. President Obama, has presided over an inordinate expansion of the Federal Government.  Perhaps his most devastating blunder was an 800 billion dollar stimulus package that added to our debt and failed to produce any jobs.

Every element of this trilogy is now taken as gospel across sectors of the corporate media from Fox to NPR Every part, however, will not meet examinations that rely on the most generally accepted statistical checks and historical reckonings.

Pundits talk about Greek debt and tax evasion and then goes on to assume that other nations now experiencing difficulties financing their debt were similarly profligate. Dean Baker effectively combats these cliches:

“Spain had a budget surplus before the economic collapse. Spain had a budget surplus… Perhaps repeating this line three times will help the… people who have columns in the Washington Post… get some understanding of the issue. .the only euro zone country that looks much like Greece is Greece. The other euro zone crisis countries had hugely better finances in the years [before] the crisis.”

Europe’s embrace of austerity is especially troublesome because it evokes memories of fascism. Many commentators constantly reiterate that Weimar hyperinflation led to the Nazis. Hyperinflation, however, occurred in the early twenties when the Weimar Republic chose to pay its obligations by printing more money. The Nazis were and remained a minority party during the Weimar hyperinflation.  They grew during massive deflationary pressures occasioned by Depression and by the government’s harsh austerity measures taken in the face of contracting demand.

Thirdly, runaway government spending under Obama is another figment of the imagination that has become received wisdom. There has been virtually no expansion of discretionary government programs. The deficit has ballooned because the collapse of the housing bubble reduced government revenues and increased obligations under standard, long- time government insurance programs.

Why do these stories persist? They dovetail and resonate with each other, thereby lending plausibility to each. In addition, their prevalence reflects the state of economics education.  As Paul Krugman has pointed out, in many colleges and universities, Keynesian economics in any form is not even presented as an alternative. Students are not exposed to views that would question the efficacy of government austerity in the face of private sector collapse.

The power of austerity has other deep roots and so it is unlikely to be defeated merely by counterarguments based on standard statistical measures, Austerity is a moral ideal closely tied to a strong sense of identity, one that is grounded not merely on a formal conceptual level but in gut feelings and shared sensibilities.  We skimp, save, do our homework before we play. We are brought up on tales of the ant and the grasshopper.  Many working class citizens do harbor doubts—often semiconscious or half articulated-- about the future of the American dream or even its worth. There is, however, no widely articulated alternative to austerity. The pain and the doubts it occasions can be assuaged by ensuring its imposition on everyone. Nationalism, with its sense of a virtuous, parsimonious we and spendthrift foreigners, sustains and is sustained by the austerity religion. All of this is reinforced by today’s widespread “common sense” that just as families must pay off their debts so must governments.

The stimulus debate is a good place to examine some of these cultural issues and connections. It did add a small amount to the deficit, but again there is substantial evidence that it prevented the loss of jobs that would otherwise have occurred. Christina Romer, drawing on studies that strive to control for the effects of other variable that might influence consumer spending, makes a strong case. These include examination of spending patterns of families before and after they received the $500 tax rebate check. Examination of the effects of military spending on individual Congressional districts also reveals that when military spending increases, consumer spending goes up more in states with a large defense presence for reasons having nothing to do with current economic conditions in the state. (page 11, Romer Talk, link in Krugman blog, February 19)

Most conservatives acknowledge and even advertize the job- creating effects of military spending. The current wisdom is that military spending creates jobs, whereas spending on schools and public transit systems is wasted.  Yet the same methodologies that demonstrate the job- creating effect of military spending show gains for domestic spending as well. Why is evidence in one case accepted but not in the other? The military budget is coded in terms of opposition to an external enemy and in support of our free enterprise, self-reliant system. The other is often portrayed as unmerited support for the poor, those who are as not merely lacking in self-reliance and hard work but as thereby active enemies of and threats to our values, thus in much the same terms we construe foreign enemies. Speaking to Nationwide Insurance employees in Des Moines, Iowa Newt Gingrich said “Really poor children, in really poor neighborhoods have no habits of working, and have nobody around them who works. So they literally have no habit of showing up on Monday… They have no habit of ‘I do this and you give me cash’—unless it’s illegal."

Combating these degrading moralisms makes demands that are more than merely cognitive. Some on the liberal/left argue that the factual case for stimulus etc is overwhelming. As Romer puts it: 

“When I was in the White House, I used to bristle when people would say I was a Keynesian economist. They acted as if I believed that fiscal stimulus mattered because of some theoretical book written in 1936… I used to say I am not a Keynesian economist, I am an empirical economist. I believe what I do because of the empirical evidence.”  

I agree with the case Romer builds and especially appreciate the way she presents the obvious contradictions in the current mainstream line. Nonetheless, I have several qualms. George Lakoff and Elisabeth Wehling argue: “voting decisions are fundamentally taken on the basis of values and empathy. Policies and facts matter; they are, however, not absorbed in isolation but are moreover embedded in values. Politicians therefore need to communicate a value framework in which policies are embedded and add up to a coherent programme….” (Common Dreams,   )

Combatting this worldview requires more than statistics on the number of applicants for every open job. This identity politics is inscribed not merely through abstract ideas but also in gut feelings that resonate across social space and amplify and focus themselves in the process.  A recent post by LSU scholar John Protevi in The Contemporary Condition blog contends: “affect is "in the air," something like the mood of a party, which is not the mere aggregate of the subjective states of the party-goers. In this sense, affect is not emergent from pre-existing subjectivities; emotional subjectivities are crystallizations or residues of a collective affect:

“To take a concrete example: what counts in the effective social machine demonizing welfare in the USA is the shame attached to receiving public aid without contributing to society with your tax dollars. It's shameful to have lost your job or your home; you're stupid, a loser to have been in a position to lose it, and you're a lazy, stupid loser if you haven't found another one…And so you don't combat this shame by trying to change individual people's ideas, one by one, with information about unemployment trends; you combat it by showing your face, by embodying your lack of shame, by putting a face on unemployment or homelessness. You thus counteract the existing collective affect by creating a positive affect of, shall we say, joyful solidarity. Shame isolates (you hide your face); joyful solidarity comes from people coming together. It's joy released from the bondage of shame.”

The narrative surrounding government spending is complex and evolving. Government is not some timeless abstraction. Yet even where Keynesian ideas are invoked within the university, Keynes’s insights are narrowed or slighted. As Greek economist Yanis Faroufakis points out, neo Keynesians, most notably Paul Samuelson, tried to synthesize Keynes’s macro with neoclassical micro economics and its core faith in determinate models and market equilibriums.  Keynes had argued that capital and labor markets were inherently indeterminate because they were driven by multiple agents speculations as to the intentions of other agents. Governmental institutions and policies needed to be crafted periodically to cope with the self-intensifying spirals of optimism or pessimism.

In Samuelson’s iconic text, this broad critique is reduced to a simple model, the famous IS/LM model specifying employment and GNP as determined by the intersection of an investment saving curve—all points where desired savings equal desired investment-- and a liquidity preference curve, where the supply of money equals the demand for funds for speculative and transactional purposes. When shocks from outside the system lead to less than optimal employment or inflation, mere injections of government stimulus or interest rate changes can right the system.

Thus with minor and easily modeled adjustments, the basic integrity of a deterministic market framework is maintained. As Varoufakis points out, however, this sort of Keynesian fine tuning, which seemed to work in the fifties and sixties, was backstopped by a broad international political economy that included the fashioning of two other major economic and currency blocks, Japan and the German led Euro common market. These could and did sustain demand in the face of any substantial decline in the US market. In addition, an entire world economy heavily dependent on the US dollar as reserve currency cushioned the dollar against severe reactions to changes in US interest rates or fiscal deficits.      

One must build support for an institutional and policy framework that will spend money appropriately in the face of severe downturns. The narrative about government was positive in the immediate post World War II period. Yet that narrative was dependent on a Cold War mindset that bred its own hubris and overshoot.  The stability bred by Cold War inspired military Keynesianism became the source not merely of increased speculation in financial markets ala Hyman Minsky but also of social tension. Manufacturing workers gained far more than women and minorities in the service sector.  In addition, the stability that government spending and incomes policies delivered to unionized industry in terms of families’ standards of living during the golden age of capitalism may have opened up other problems and modes of consciousness, including questions about the nature of work life, the need for leisure, the role of women. But even most liberal economists failed to recognize let alone address any such considerations.

Part of the problem here is a failure to be sufficiently empirical, to recognize that what we conclude about an economy and society is in part a consequence of what we choose to examine. And mainstream economists, left and right, like to study what is most easily measured.  Varoufakis has called attention to this profound bias at the heart of much liberal theorizing. He contrasts Alfred Marshall’s caution that “most economic phenomena do not lend themselves easily to mathematical expression” to Sasmuelson’s reversal of this notion, that economists not waste time with that which is not quantifiable.

Jobs and spending patterns seem easier to quantify and thus receive the first and for many the only billing. It is harder to quantify such notions as quality of life and thus these receive too little attention from even many liberals. As Christian  Kroll and Sergio Grassi  point out: “In many countries, there are now intense discussions about what makes life worth living, how quality of life can be measured and how government can re-orient itself accordingly. The use of GDP as the main yardstick for public policy was prominently criticized by the Commission on the Measurement of Economic Performance and Social Progress (Stiglitz-Sen-Fitoussi Commission)... the Commission’s recommendation in 2009 was to shift the emphasis from measuring economic production to measuring people’s well-being«. Quite different decisions would be taken if people’s well-being was made the central guideline of public policy and measured in a prominent way. In its final report, the Stiglitz-Sen-Fitoussi Commission therefore writes: "What we measure affects what we do.” Some European social democrats are now organizing forums in which citizens participate in formulating the questions and categories they deem most relevant to quality of life.

Economists of course should not eschew construction of regularities, mathematics and simplifying models. They are useful tools in certain circumstances and can place limits on obviously outlandish claims.  Nonetheless, they work only in specific cultural and social settings and time frames, settings that are complex and mutable, in part in response to these very purported regularities.
  Seventies stagflation, occasioned in part by OPEC and the breakdown of the post WWII international political economy, was something that  technocratic neo Keynesian models had failed to predict or control. These failures led to a return to older faiths in pure markets driven by classical microeconomics. If Samuelson’s IS/LM model failed to explain stagflation why not throw out the whole Keynesian corpus.  Since Samuelson had explained sub-optimal equilibria and the need for periodic fiscal stimulus or interest rate cuts in terms of such ad hoc factors as wage stickiness, why not just do away with such stickiness. Eliminate unions and repeal minimum wage laws.

Doubts about government spending may have been put aside briefly during the height of the 2008-2009 financial crisis, but Obama’s premature declaration of victory over the Great Recession allowed those doubts to reassert themselves.
  In this context, Keynesian economists need to spend more time considering job creation strategies like shorter work hours that might both reduce unemployment, ease burdens on those currently in the workforce, and touch new quality of life concerns. The chance for a little shared leisure and collective joy would go a long way to foster receptivity to others who for whatever reason have not shared the long work grind. Nationalism itself, both here and in Europe, needs closer scrutiny. Today the concept of whole nations as profligate or frugal drives a destructive economic policy in both Europe and the US. Yet Germans are not all frugal ants and Greeks not all spendthrift grasshoppers. And rather than talk abstractly about job creation, let’s discuss and illustrate schools, bridges, and the aesthetic experience of public parks, transit systems etc.  

Thirdly, and most fundamentally, to borrow once again from Varoufakis, an economist is like a meteorologist, but one whose predictions influence the weather. The empirical conclusions we establish will become part of political discourse and will perhaps alter political action. Political views, individual emotions, social science theorizing, and collective affect all interact with each other in complex ways and develop a momentum of their own. Thus we must be attentive to and acknowledge both the role of our own assumptions and the emergence of new unpredictable rights claims and concerns.