Early last year, even free market fundamentalists confessed that capitalism was in crisis. A Newsweek cover trumpeted, “We are all socialists now.” Alas, the headline was mistaken: Government responses to the crisis did little to democratize economic power or challenge narrow market values, as socialism implies. The U.S. government had simply bailed out big finance with remarkably lenient conditions (and, even now, inadequate regulation) and had passed a large – but still insufficient – package of spending initiatives and tax cuts to keep the economy from collapsing.
This government intervention saved capitalism from itself. So one might expect some humility and gratitude for the public sector from the titans of finance. You would be wrong. Instead, those same financial elites, from Europe to the United States, now oppose deficit spending to stimulate the global economy – rejecting the thinking of British economist John Maynard Keynes, let alone Marx.
Capitalist elites are engaged in a frontal assault on government workers, on government regulation and on the social safety net. In other words, they are attacking social democratic institutions – the heart of the welfare state. In the United States they’re often joined by right-wingers, from the “Patriot movement” to Glenn Beck, who attack government itself.
The financial crisis has mutated into a fiscal crisis of governments, and the perpetrators of the economic crisis are back calling the tune. “A year ago, capitalism was wobbling,” says John Monks, general secretary of the European Trade Union Confederation. “It was saved by the taxpayer, saved by the public realm, saved by welfare spending and tax cuts. Banks were saved in particular, and now the private sector is headed back to business as usual. In the present circumstance, it’s almost, ‘Let’s get down to cutting back the role of the state and restore primacy of the market in as many places as we can.’ “
The ostensible problems are government deficits and accumulated debt, whether in countries like Greece or states like Illinois. But in their opportunistic attack on government, the business and politically center-right elites are taking advantage of the worst economic collapse since the Great Depression to push their long-term (and longstanding) political agenda to secure more wealth and power at the expense of working- and middle-class families. But with the notable exception of the global labor movement, even many political leaders of the mainstream left – from “new labor” in Britain to more conservative Democrats – are unwilling to adopt the full range of government policies needed to recover from the crisis or avoid a repeat.
Beyond their substantial political influence, the financial elite wields power through the bond market, where governments turn for deficit financing. Once the choice of conservative investors, since the 1980s bonds have become much more a means for speculation, more globalized, and more a tool of political influence, says University of Michigan economist Gerald F. Davis, author of Managed by the Markets: How Finance Re-Shaped America. Bond markets – in conjunction with bond-rating agencies – decide whether and at what cost governments can borrow. Governments now fear what bond markets might do as much as what they actually do.
At the moment, fear – used to bolster neoliberal political ideology – is driving conservatives’ demand for government austerity programs and deficit reduction, as well as general cutbacks in wages and worker protections (or, as mainstream economists say, labor market “rigidities”). First, the most vulnerable governments come under attack. Then even the more economically secure countries – like Britain, under a new Conservative government – cut budgets, workers, wages and services to reduce deficits and avoid a loss of investor “confidence.”
Yet government austerity and cuts in workers’ wages will simply reduce demand, slowing recovery from the Great Recession or even creating a second downturn. And weak recovery will bring lower tax revenues, continued pressure for austerity and difficulty repaying debts. In short, the medicine the financial markets and their political allies prescribe will make the global economy sicker.
Politicians now seem frightened of deficits, even though nearly all U.S. public opinion polls show voters are far less concerned about deficits than jobs and the economy. President Barack Obama has partly succumbed to this deficit hysteria, pumped up by conservative institutions like the Peterson Institute and some supposedly center-liberal forces like the Washington Post. After adopting a moderate Keynesian policy last year, in February he shifted course and created a conservative-dominated commission to propose how to reduce future deficits.
Yet even if Obama is not promoting another much-needed big stimulus, he is at least still committed to smaller stimulus policies, unlike Republicans and a growing number of conservative Democrats, most notably Sen. Ben Nelson (D-Neb.), who in early June killed a crucial bill that would have extended unemployment benefits, saved state and city jobs and created new jobs.
Obama has also challenged European leaders to maintain stimulus policies, but the euro crisis – starting in Greece – has spooked virtually all of them. In a dramatic shift from last fall, both conservatives holding power in the major economies and some social democratic leaders have proposed austerity plans. European labor unions have led the opposition. Monks, for example, shares other labor leaders’ “despair and alarm at the prospects of growth in Europe as all countries, not just those in distress, move to cut their budgets.”
The GIIPS group
Clearly, the former Greek government seriously mismanaged its affairs. But so did international investors who loaned it money. The other countries in the troubled GIIPS group – Ireland, Italy, Portugal and Spain – did not suffer from the same kind of misrule. Both financial markets and economic pundits had considered Ireland and Spain as exemplary until the spread of the Eurozone crisis, including growing worries about Greek sovereign debt default.
In any case, the main problem plaguing these countries is not individual states’ finances but the worldwide financial crisis that hit in 2008. The recent euro crisis also stems from failures in the design of Europe’s currency union. In addition, European governments are slowly turning away from social democracy toward a more American, free-market, and finance-centered economy – an economy that as it becomes more American becomes less egalitarian.
When the euro was introduced in 2002, investors grew more confident about the GIIPS countries. Interest rates dropped, demand and debt increased, and current account (trade) balances worsened. Foreign capital flowed in, expanding financial services and housing – and producing price bubbles. According to former World Bank economist Uri Dadush, now at the Carnegie Endowment for International Peace, this was done at the expense of manufacturing and production of goods or services that could be traded.
When the crisis hit, the American-style bubble model of growth collapsed; GIIPS nations were left with few alternative ways to grow, prospects now worsened by European austerity. In some cases, but less so with Ireland and Spain, they face high ratios of debt to GDP. After the Socialists won power in Greece last October, they discovered that their predecessors had concealed the size of the deficits and debt – with the help of Goldman Sachs – and began to slash deficits. But credit rating agencies that had approved Greek debt changed their minds; investors lost confidence in Greece’s ability to pay debts, and Greek borrowing costs surged.
If Greece had borrowed in its own currency, it could have adjusted with a steep devaluation. But it had no control over its money, and eurozone rules prohibited bailouts of fiscally troubled governments. With German public opinion hostile to helping Greece, Chancellor Angela Merkel delayed a bailout as Greek protestors took to the streets over budget and pension cuts. But German and French banks held so much Greek debt that a default could have provoked a multinational banking crisis.
In May, eurozone leaders and the International Monetary Fund (IMF) finally arranged a €110 billion bailout of Greek debt, followed by a €750 billion fund for future crises. But the conditions imposed – including deep budget cuts, regressive taxes and “flexible” wages – are likely to deepen Greece’s deflationary recession, leaving the country both poorer and owing a higher proportion of its economic output to creditors for years. Bondholders most likely will have to restructure that debt eventually – taking a loss and stretching out payment.
The loans that the European Central Bank and the IMF made available to Greece momentarily, at least, stabilized European finances. The problem is speculators, such as hedge funds, could start a run on the debt of yet another country, such as Spain or Italy. That prospect pushes governments to cut budgets and incomes, even though none is as weak as Greece’s. But competition among European countries to grow by cutting wages and social benefits would be a downward spiral for the region’s economies, and for workers especially. It would slow recovery, and at the same time, it would give corporations and financial markets the upper hand.
America’s deficit hounds
Not surprisingly, in the United States, deficit hounds are baying that federal budgets threaten to turn the United States into Greece. They are gearing up for attacks on Social Security, Medicare and other social programs. But as Paul Krugman argues, the United States is no Greece. It can repay its debts, and even now investors seek out U.S. government bonds as a safe haven. Short-term deficits boost the economy and in large part pay back their cost with a more robust, earlier recovery.
The United States faces some longer-term budget issues, but popular debate distorts even those. Contrary to deficit hawks’ assertions, Social Security is secure through at least 2044 (and longer if taxes are collected on incomes above the current cut-off). Rising healthcare costs are a real problem, but could be solved with a single-payer plan.
If deficits persist, however, the government could easily raise revenue by imposing a financial transactions tax or a tax on large accumulations of wealth. And cuts could be made in the sacrosanct military budget, from the money spent on war (now officially more than $1 trillion in Iraq and Afghanistan) to the half billion dollars for a new F-35 Joint Strike Fighter engine the president, Pentagon and Air Force don’t want – but Congress may buy.
Only the federal government can run deficits (all states except Vermont balance budgets each year), but Congress seems unwilling to use its fiscal power to aid the states in any meaningful way. So in the United States the front lines of the battle over the public sector are now in state and local governments, especially states like California and Illinois, where the recession has compounded longstanding budget shortfalls (as it did in Greece).
Despite federal aid that saved tens of thousands of jobs nationwide, state and local governments, including school districts, have eliminated 231,000 jobs since 2008. According to the Center on Budget and Policy Priorities (CBPP), these cutbacks have slowed economic growth by half a percent in the first three months of 2010. CBPP also estimates that if Congress fails to extend Medicaid relief to states, the United States will lose 900,000 public- and private-sector jobs. With the steepest drop in state revenue since the Depression, CBPP projects that states will have to come up with $610 billion by cutting budgets or raising taxes in order to make up for losses from fiscal year 2009 through 2012. That virtually neutralizes the boost to the economy from last year’s stimulus package.
The pain is bad across the country, but worst in states where the local economy plummeted (like Michigan) or where governments have poorly managed their finances (like Illinois). In the Land of Lincoln (and Blagojevich), “there have been looming structural problems for decades, but the recession magnifies them,” says Anders Lindahl, the spokesperson for AFSCME (public employee union) Council 31. “Smoke and mirrors that concealed the day of reckoning are not working any more.”
Illinois’ smoke and mirrors includes not paying bills – now approximately $6 billion worth – and underfunding public employee pension plans (now $78 billion in debt and the worst funded in the country). In roughly 10 hours last March, the Democratically controlled legislature created a two-tier pension system that raised retirement age for new hires. Though the savings won’t appear for years, they were booked into this year’s budget.
In a state already near the bottom in terms of the number of state employees per capita, Illinois has 15,000 fewer state workers than in 2002 (and like city and county workers, many take off unpaid furlough days). Local governments have also been laying off teachers, bus drivers and other workers. An anticipated 20,000 teachers will be without work this fall.
With one of the lowest levels of tax as a share of personal income (and the sixth-most regressive tax regime), Illinois revenue covers only half the $26 billion budget dependent on state taxes. Budget problems worsened in the past decade as Democratic Gov. Rod Blagojevich opposed any tax increase, and key Democratic legislative leaders were too politically timid to act. “In a recession there’s not enough money in every state, but in Illinois we were deep in the hole before the recession – and the recession put us more in the hole,” says Hank Scheff, the AFSCME state research director.
With such skimpy, underfunded budgets in many states, state workers might seem a dubious target. The right, however, has made public employees the villains of the fiscal crisis, their putatively huge paychecks and pensions likened to “leeches” on the public coffers. But taking into account public workers’ higher average education and age, two recent studies – one from the Center on Economic and Policy Research and the other from the Center for State & Local Government Excellence – concluded that state and local employees earn less than their private counterparts (even calculating in public workers’ often superior pensions).
We should remember that government – especially big government – stabilizes the economy, as the late economist Hyman Minsky demonstrated: It can run deficits at the federal level. It provides consistent, countercyclical employment and contracts. It regulates the economy – though not enough. And most of the time, government makes society more egalitarian and protects the needy or vulnerable, actions that also serve to strengthen the economy.
But having turned government into a means for its own survival – after dragging the global economy over the precipice – the financial sector has turned its crisis into a crisis of the state. In doing so, they have undermined one of the main instruments that helps capitalism survive and in turn, to a lesser extent, helps working people survive. The crisis demonstrated the need for stronger regulation of the economy, especially financial markets, as well as a larger role for the public sector. But in both Europe and the United States, the mainstream left parties were unwilling or unable to take advantage of the opportunity – and necessity – posed by the crisis. Too bad we aren’t really all socialists after all.
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David Moberg, a former senior editor of In These Times, was on staff with the magazine from when it began publishing in 1976 until his passing in July 2022. Before joining In These Times, he completed his work for a Ph.D. in anthropology at the University of Chicago and worked for Newsweek. He received fellowships from the John D. and Catherine T. MacArthur Foundation and the Nation Institute for research on the new global economy.