13.10.2010

Crisis, debt, and cuts

Yassamine Mather reports on the recent seminar organised by the Centre for Socialist Theory and Movement. The contributions of Christine Cooper and Hillel Ticktin were of particular interest as they tried to answer the difficult question of why governments are set on imposing austerity and savage cuts

The seminar took place on October 9 in Glasgow University and was attended by 44 students and staff. In her opening Christine Cooper noted that the coalition government’s announced plans for expenditure cuts of at least £60bn or 10%, will not fall equally on all government departments. Chancellor George Osborne has stated that spending on benefits, tax credits and pensions may face cuts closer to 15-20%. Higher education cuts in Scotland have not yet been announced but suggestions to the University and College Union by Michael Russell, Scotland’s education secretary, are that they will be 16%. The Chartered Institute of Personnel and Development Reform (a Conservative-supporting think-tank) suggested 750,000 to 1,000,000 jobs will be lost.

Referring to the effects of the cuts a generation ago, in the 1980s, Cooper said: “The number of children living in poverty rose from 1.5 million to 3 million. In 1976, death from adult diseases was 80% higher for men in the lowest social class than for those in the higher social class - this rose to 128% difference by 1989. The number of homeless people increased. How can people believe that it is in any way acceptable for this to happen again?”

Cooper discussed the role of language in legitimising action based on the perceived meanings of terms such as budget, deficit, etc; using Berger and Luckman^[1], she spoke also about the way myths, stories and other forms of anecdotal evidence are used to justify certain social events or relations (eg, ‘private sector businesses create wealth that the public services then spend. These public services may be nice but they hold back the private sector’). In reality, of course, the private sector couldn’t function without public services. Again, there is a myth that “the state sector is bureaucratic, cumbersome, fat and wasteful whereas the private sector is modern, efficient, slim and thrusting.” Of course anyone with any experience of the private sector would know this to be a falsehood.

She also questioned claims about the severity of the deficit. She showed a slide from the website, ukpublicspending.co.uk.

The 20th century began with the national debt at about 30% of GDP. It jerked above 150% in World War I and stayed high. During World War II it breached 200%, continuing to rise from 1945-50, the time of major spending in the welfare state: public housing, the national health service and state education. In the aftermath of the worldwide financial crisis of 2008 the national debt has certainly increased from the first years of the 21st century. However it is still well below the 200% of the 1950s or 150% of the 1960s. So the current cuts have little to do with the ‘deficit’ and everything to do with attacks on the gains made in the 20th century by the working class. Evidence suggests cuts do not work, she said. Ireland entered recession in September 2008 - the first eurozone country to do so. The Irish government started cutting in 2008 - earlier than other European states. Since then there have been major cuts to child benefit, unemployment benefit, education and transport. And very big cuts to public sector pay and pensions and a ban on recruitment and promotions. The younger generation is leaving the country.

The cuts have not produced a reduction in the deficit. The Irish government predicted that growth and employment would recover as a result of the cuts, just as the UK government is now predicting. In fact the Irish economy shrank and unemployment grew in 2009. As a result tax revenues are falling and the deficit has not improved. The planned UK cuts will damage lives and weaken the economy. Cuts are the worst way to reduce a deficit. In higher education, she added, one should also consider the economic benefits of higher education qualifications.

PricewaterhouseCoopers was commissioned to do a review of the benefits of higher education by The Royal Society of Chemistry and the Institute of Physics in January 2005. The review found that over a working life, the average graduate will earn around 23% more than his/her equivalent holding two or more A levels.

The average monetary value (NPV), in today’s terms, of completing a degree over and above two or more A levels is approximately £129,000.

In the last part of her talk, professor Cooper dealt with taxation, an area about which she has some expertise: “in February 2009, the Tax Justice Network’s Richard Murphy produced research for the BBC’s Panorama programme, estimating conservatively that the UK loses about £18.5 billion per year to tax havens, including avoidance and evasion. First of all there are legal tax loopholes: in February 2008 a TUC report estimated tax avoidance at £25 billion annually - £13 billion by individuals and £12 billion by the 700 largest corporations^[2]. This included both tax avoidance and ‘tax planning’ by the very wealthy. Tax avoidance is the process of getting round taxation law without actually breaking it. Tax planning is the use of the opportunities parliament has provided to citizens to reduce their tax rate. In March 2008 an HM Revenue and Customs report estimated the UK tax gap, the result of both avoidance and evasion, at between £11bn and £41bn - compared with total 2003-04 revenues from direct tax and national insurance of £246bn.”

She ended her talk by emphasizing the need to expose falsehood about the deficit and the level of cuts, and reminded everyone that the coalition government is not yet as battle-hardened as the last one. She also added that the current situation presented a window of opportunity for challenging myths and false information.

Analysing the crisis

Hillel Ticktin gave a brief analysis of the current crisis with references to his articles in recent issues of the journal Critique. He discussed a synthesis through the concept of surplus capital, based on the limits to investment set by monopoly/oligopoly, plus the over-extension of producer goods relative to consumer goods, under conditions where governments provide or fail to provide a safety valve. His debt to Hilferding and Lenin is clear.

It is a virtue of contemporary Marxism that there are a variety of schools of thought on the nature of the present crisis. In principle, a Marxist can stress the imbalance of finance and the rest of the economy, the tendency of the rate of profit to fall over time (whether as a secular or periodic tendency), underconsumption, disproportionality, or a combination of these.

Regarding the second stage of the crisis and government cuts, he said, the question of government and business attitudes to the downturn and ostensible recovery are discussed in the articles, but cuts and the resistance to those cuts are still evolving.

Things have taken a sharp turn to the right in the middle of 2010, with the apparent endorsement by the G20 and the eurozone of the conservative line for sharp reductions in government deficits and government borrowing.

It remains very unclear why a section of the ruling class is going for these cuts. It is one thing to reduce government spending and raise taxes during an upturn, as Canada did in the 1990s, and quite another to do so today. The large scale unemployment consequent on such reductions in the public sector is being matched with substantial salary reductions. As there are often disproportionate numbers of female employees in the sectors being proposed for downsizing, the measures will bear heavily on women and families. There are suggestions that the poorest will be protected, but this is a fig leaf to provide a semblance of humanity. The poorest may be protected but most people are by definition not in that category, but are nonetheless scraping by, with incomes a fraction of the so-called upper middle class. Whatever their present views, they will be jolted into opposition to the government and ultimately to the system.

The government and bodies associated with the ruling class, or influenced by them, are doing their best to supply reasons why the cuts are necessary and inevitable to sustain the various economies affected. There is no doubt this is having an effect, depending on the country. It may even win the day for a short period, but only due to a hard sell. The appearance of the downturn was that bankers caused the crisis itself, for which governments have then had to borrow money. Why then should ordinary individuals have to bail out those bankers? This question is being, and increasingly will be, asked. The effect of what amounts to a coordinated system of reductions in government expenditure over Europe will at best inhibit an upturn and at worst force a ‘double-dip recession’, which has every potential of lasting some time. People will turn against government policy and an increasing minority will go further and turn against a system which has so patently failed.

It may well be that all trade union action and all the coming demonstrations will have little effect on government policy, apart from toughening up law and order. There is no left of any substance today, so we might anticipate spontaneous action, coordinated up to a point by such left groups as exist or come into being. There can be no doubt that the initial forms of action will be outmanoeuvred or defeated. A new generation of activists will be formed, which, like the 70s, will turn young people into the militants of today and tomorrow. As the atomisation of the Soviet Union cannot be duplicated, history cannot be wiped out and we may expect a return to the socialist demands of yesterday, shorn of Stalinism and social democracy. There is little doubt that this process is slowly getting under way. What is less certain is the nature of the reaction of the ruling class. Are they really as stupid as they seem? Do they not have an alternative plan to deal with the failure of the contemporary cuts?

Capitalism today is less rational than it was in its heyday. That much is obvious, given imperialism, fascism and two world wars. Short-termism rules, and it has indeed worked remarkably well up to now. If capitalism is doomed then delay is a sensible tactic and pragmatic delay is one way of doing it. The ruling class is divided on a national basis, under the hegemony of the leading finance-capitalist power, the US - inevitably, the latter acts in its own narrow interests. In other words, since the US is in decline, it acts to preserve its own position, which may be at the expense of its role as the guarantor of capitalism. It may not be able to see the wood for the trees.

As capitalism declines the dominant capitalist power necessarily declines, and vice versa: as the dominant capitalist power declines, capitalism itself declines. This would not be inevitable if there were room for another finance capitalist power to arise, but there is not. China, India, Brazil and other emerging economies are not going to fulfil that function. The eurozone is clearly too weak, but is also based more on industry than on finance capital. And the UK, the original imperial/finance capitalist power, has ceded its position, lost its empire and has lost most from the current crisis.

The capitalist class today is less united than it has been since before World War II. The end of the Cold War has had a series of important effects, particularly in the decline of ideological control and the economic use of the arms sector. To these has to be added the absence of an overriding enemy which allowed a form of international control through Nato, the IMF and other institutions and meetings. As a result, it is much harder to impose a single line on capitalist policy today.

This makes it more difficult for a consistent policy to be followed. When the US was able to impose its policy, whether it was stupid or intelligent, it had to be followed. Today, the situation is almost a nightmare for capitalism. In the first place, they did not a have clear policy as to what to do in the course of the crisis. They have simply been reacting to events, often rather late in the day. This is a policy of muddling through which may be regarded as intelligent pragmatism by apologists, but it is obviously not working too well. In the second place, there are clear differences between the more conservative wing, which wants balanced budgets at all costs, and the Keynesian wing, which is more worried about ending the downturn and avoiding a double-dip recession. In the third place, the leading eurozone nations want to check, regulate and possibly muzzle finance capital, irrespective of the conservative politicians at their helm. Thus, Angela Merkel’s unilateral banning of short selling of German bonds was in clear conflict with policy in the financial markets of London and New York. This, of course, is expressive of a more general conflict between industrial and finance capital, which is partly taking a national form at this time.

Because different strings are being pulled at the same time, policy has tended towards irrationality. We have to ask why, for instance, the Con-Lib Dem coalition wants to cut so severely when the risks are so obvious. There are four arguments being used to justify the cuts.

Firstly, and least unbelievably, they argue that increased borrowing will frighten investors and the rating agencies. However, this is not automatic. Most of UK borrowing is from UK investors and the time period for redemption is over 12 years - points made time and again in newspapers and journals and, presumably, well understood by investors. So, the UK does not have the same issue about balance of payments, and the need to redeem bonds, as is the case in Greece and elsewhere. In any case, the previous Labour government had already implemented cuts, but was intending to restore balance over a longer period than the Tories. Neither party was bent on destroying capitalism or taking a reckless populist line. Why then would investors be concerned, under conditions where there is a vast surplus of capital? After all, investment in the US is the only other solution and it is fraught with problems, given the precarious nature of the dollar. It is true that if the pound were to fall further against the dollar investors would try to hedge their bets; but the pound, which has risen against the euro in the last period, will only fall if money is taken out of the country. This is more likely to depend on factors other than the budget deficit.

Secondly, it is argued that inflation will take off and cause the pound to devalue further, sparking a flight of money from the UK. In addition, inflation is regarded as necessarily a bad thing, as it leads to, or is caused by, rising wages, and can result in increased power for the trade unions. Under conditions of diminished demand this scenario is highly unlikely, leaving aside some price rises due to devaluation. This debate has taken place quite widely. Apart from the difference between monetarists and Keynesians, there are also differences in the assessment of the political situation.

Thirdly, supporters of private enterprise hold that the public sector is crowding out the private market, or indeed the market itself, by absorbing the lions’ share of available funds. This is a simple ideological argument, which has obvious and important political consequences. If one rejects the implicit view that private enterprise is necessarily superior to the public sector, the argument falls. Indeed, it is very likely to be tested in the next few years, as the only way that the deficit can fall substantially is through growth, particularly industrial growth. Leaving it to private enterprise to grow is an over-optimistic policy, given British history over the last 50 years. The problem is that without government intervention, industrial growth is unlikely to take off by itself, if it will take off at all.

Fourthly, there is worry over the British balance of payments, given the decline of British industry and the new problems of British finance capital. However, reliance on rising taxes and a reduced public sector does not do the job of raising British exports in itself, unless it is felt that private enterprise will automatically build up industry, which is unlikely, as indicated above.

In one way or another these issues are part of the current crisis for most countries, though differently for different countries. However, there appears to have been a common policy to use Keynesian deficit financing and monetary expansion in 2008-09, whereas at the mid-2010 meeting of the G20 it was agreed to do the reverse: cut deficits and restrain the money supply for the developed countries. The US did not agree, continuing to support an expansionary policy, even if it is somewhat limited. It also did not fight very hard to impose its own viewpoint. As a result, there are two views as to the effects of adopting a restrictive economic policy, with various influential figures warning of a double dip-recession.^[3]

Indeed, it is hard to see how it could be avoided. If all the countries of Europe cut back, while China is also reducing the money supply, given the inflation and rising wages in China, growth can only be reduced, if it is not actually negative, while unemployment will continue to rise, as it is doing in the US.^[4]

It is hard to avoid the conclusion that capitalism has no way out. If it cuts its deficits the downturn continues, but if it expands it risks all the effects described above, including sovereign crises. In addition, China is now experiencing widespread strikes for higher wages and better conditions, while the trade unions and left political parties are demonstrating and striking in many of the countries of Europe. Harsh political measures will lead to the rapid growth of the far left and new generation of leftwing militants, while concessions risk market failures in bonds and currencies.

In reality, the right-wing arguments for cuts to the public sector have another agenda, as former chancellor of the exchequer, Alistair Darling, made clear.^[5] Keynesian arguments are more sensible concerning the immediate crisis, indeed they are irrefutable. However, the crisis is not simply a periodic crisis, but a crisis in both the strategy of capitalism and its structure, and Keynesians are not addressing these issues, whereas the right, consciously or unconsciously, is trying to come to terms with the real underlying political economic problems of capitalism. The only solution, from their point of view, even if historically limited, is a restoration of capitalism back to the controls existing before the Great Depression, or before World War I. This requires mass unemployment, a very limited welfare state applicable only to the very poorest, and the restoration of commodity fetishism, in part by privatising everything that can be privatised including health and education. It amounts to an epoch-making defeat of the working class and the establishment of the unlimited supremacy of capital.

The mediating mechanisms whereby capitalism continued to function in the past century are no longer applicable. Logically, capital is forced back onto its unmediated form. They have no alternative but to go that way but, at the same time, it is historically impossible.

Notes

1. Peter L Berger and Thomas Luckmann  The Social Construction of Reality 1966.
2. The Missing Billions (www.tuc.org.uk/touchstone/Missingbillions/1missingbillions.pdf)
3. www.informaworld.com/smpp/ftinterface~db=all~content=a924314656~fulltext=713240928
4. www.informaworld.com/smpp/ftinterface~db=all~content=a924314656~fulltext=713240928
5. www.informaworld.com/smpp/ftinterface~db=all~content=a924314656~fulltext=713240928