Illustration by Katie Raso
Ten years from the onset of the Great Financial Crisis, and eight after the “turn to austerity,” provides a useful vantage point. From here we can clearly see how austerity quickly succeeded the panic-driven experimentation with economic stimulus of the 2008-09 period.
By 2010, “austerity” was the most searched word on Merriam-Webster’s online dictionary. It doesn’t make the top 25 today. Not because austerity has gone away, but because through experience most people now know what it means.
Looking back on the crisis and its aftermath, what have we really learned in the last eight years? Quite a lot, actually.
First, those who caused the crisis did not pay for it.
Second, the turn to economic stimulus was a “false dawn.”
Third, subsequent austerity policies have deep roots in liberalism and neoliberalism.
Fourth, austerity includes but covers more than fiscal consolidation.
Fifth, the intellectual case for austerity is weak but demolishing it did not lead to change.
Sixth, the socioeconomic impact of austerity is harsh and unevenly distributed by states, classes, gender and other social groups.
Seventh, the impact on democracy is significant and troubling.
Eighth, austerity politics is class politics.
Those who caused the crisis have prospered; those who had nothing to do with creating it have paid, and are paying still through austerity policies.
The behaviour of the (private) financial sector, seeking quick capital accumulation fixes in the realm of finance rather than real production, caused the crisis. Poor public regulation delivered at the behest of these same interests enabled this behaviour. Yet the crisis was swiftly transformed into a sovereign debt crisis, for which public authorities were responsible and to which public sector austerity is the solution. This blame shift was carried out in full public view and with very little criticism.
The empirical basis for reframing the crisis in this way is thin. The drivers of increased public debt include the costs of governments’ financial interventions to avert a collapse of the banking and financial sector. The rationale was that some financial institutions were “too big to fail,” as in if they did fail it would prove catastrophic.
Oddly, the idea that an entity that is too big to fail without catastrophic consequences is likely too big to be allowed to operate has not gained traction. Effectively, bad private sector debt was socialized and the costs loaded onto taxpayers.
The financial crisis triggered a major recession that states provided fiscal stimulus to moderate. Automatic stabilizers such as spending on unemployment insurance increased, government revenues declined. Increased public (sovereign) debt stemmed from the crisis, itself a product of neoliberalism. Yet the “solution,” public sector austerity, rests on the notion that sovereign debt results from state profligacy to which spending curbs provide the answer.
It stands as an impressive discursive achievement of big finance to have evaded responsibility for the crisis and shifted the blame to the state.
From 2008 to 2010, governments and central banks appeared to borrow from Keynes to avert a global collapse. Some economic stimulus was provided. Whether this really implied a turn to Keynesianism is more doubtful.
Keynesianism’s goal was full employment. The state engaged in countercyclical actions to maintain the economy at that level. Fiscal instruments (spending and taxes) and monetary policy (mainly through interest rate adjustments) were the state’s main tools in this pursuit.
But full employment is not a goal of neoliberalism. Rather, unemployment should gravitate to its “natural” level, or to what is called the non-accelerating rate of unemployment (NAIRU)—the level of unemployment consistent with stable rates of inflation. Sometimes this involved restrictive fiscal and monetary policy to ensure that inflation was kept within the target range. However, in the face of a deflationary threat, the settings might be adjusted to provide stimulus. This seems to have been the case with most post-crisis emergency government spending.
With respect to the use of unorthodox measures like quantitative easing (QE) in the U.K., for example, a 2009 article in the influential Bank of England Quarterly Bulletin explained that the Bank of England was “injecting money into the economy to provide an additional stimulus to nominal spending in order to meet the inflation target” (emphasis added). The bank’s “remit is still to maintain price stability—defined as an inflation rate of 2%…and, subject to that, to support the Government’s economic policy, including its objectives for growth and employment.”
QE was therefore applied for neoliberal, not Keynesian, purposes—not, in other words, to achieve full employment, but rather to obtain a level of inflation at which unemployment would stabilize at its “natural” (and non-inflationary) level.
In effect, QE functioned to redistribute money to corporations hoping that they would invest and thus trigger economic growth. With sluggish demand, however, which was almost guaranteed by austerity policies ensuring state debts are paid by working class people, pensioners and recipients of social programs, the effects of QE were bound to be muted.
In any event, fiscal stimulus measures were short-lived, and the monetary ones (QE) that persisted provided stimulus in ways more beneficial to capital than to labour.
Though austerity resurfaced in 2010, as Mark Blyth reminds us in his 2013 book, Austerity: The History of a Dangerous Idea, it is an old idea toward which elites gravitate in crises. It disempowers two potential sources of opposition to established economic and political elites.
The state was necessary for the development and protection of the capitalist system, but as it became more open to democratic pressures it represented a potential threat. The Canadian political economist C.B. Macpherson describes the process in his 1964 Massey Lecture, “The Real World of Democracy” (which can be streamed from the CBC website).
Austerity imposes financial limits on the state’s actions through fiscally constraining it in the name of balanced budgets and limitations on debt. Neoliberal doctrine always prioritized restraining, retrenching or redirecting state action. Austerity entrenches those priorities.
Austerity also disempowers labour, another potential threat to the power of capital. Through reduced and conditional social and labour market policies (in which benefits are based on activation of recipients), a labour market characterised by flexibility, and associated pressures on collective bargaining, labour’s potential power is weakened.
What is austerity anyway?
Austerity consists of three linked components. The first two are fiscal consolidation through balanced budgets (typically spending cuts rather than revenue increases) and restructuring of the public sector (devolution, downsizing, marketization, privatization and public-private partnerships), along with structural reform of social policy programs (e.g., changes to disability and health compensation, eliminating early retirement schemes, reducing employment benefits and ending short-work schemes).
These two components of austerity contribute to the third, which is a restructuring of labour markets toward greater flexibility (for employers) and promoting competitiveness through internal devaluation, i.e., lowering production costs primarily through wage adjustment.
This austerity policy trio can be seen with absolute clarity in those European countries subjected to memorandums of understanding with the European Commission, European Central Bank and the International Monetary Fund (a.k.a. the Troika) after the crisis. In Greece and elsewhere, financial assistance was conditional on neoliberal, pro-austerity policy changes; in other EU countries, like the U.K., these same measures were voluntarily adopted rather than imposed.
There are varieties of austerity from country to country, but generally the list of measures includes wage cuts, hiring freezes, increased use of interns and temporary workers, “internal devaluation” (by reducing wages and living standards for greater competitiveness), major cutbacks in social welfare spending, as well as labour market flexibility reforms. This basket of measures transfers the burden of adjustment onto workers.
European austerity also resulted in deepening recession, persistence of very high unemployment (especially among youth), rising discontent and waves of protests that have fuelled the rise of radicalism, mostly on the right.
Demolition of the intellectual case for austerity
Well-known U.S. economists, notably Carmen Reinhart and Kenneth Rogoff in 2010, asserted that once public debt reached 90% of GDP, growth fell dramatically. But in another study published several years later (using the same data as Reinhart and Rogoff), Thomas Herndon, Michael Ash and Robert Pollin concluded that:
when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 per cent is actually 2.2 per cent, not -0.1 per cent…. That is, average GDP growth at public debt/GDP ratios over 90 per cent is not dramatically different than when debt/GDP ratios are lower.
Similarly, a 2011 IMF working paper by Jaime Guajardo, Daniel Leigh and Andrea Pescatori found there was little empirical evidence in favour of the “expansionary fiscal contraction” hypothesis, which states that under certain circumstances major cuts to government spending will expand private consumption leading to GDP growth. The theory nevertheless played an important discursive role in the crisis by offering hope that short-term pain would lead to long-term gain.
The IMF is, let us recall, a proponent of austerity. However, in two subsequent working papers, one by Olivier Blanchard and another by Blanchard and Leigh, the institution admits that austerity policies hindered economic growth: too much austerity, too fast, based on miscalculations of the multiplier effect of spending cuts, could do more harm than good.
Heterodox economists like Jim Stanford and John Quiggin, among many others, had long criticized neoliberal claims of austerity-led growth. They were joined following the crisis by some mainstream figures like Paul Krugman and Joseph Stiglitz in calling for fiscal stimulus as a more appropriate response.
Nor can a credible case be made for the rationale for public service restructuring—the belief that market-type mechanisms within the public sector and full or partial privatization through contracting-out or public-private partnerships will be more “efficient.” (In rebuttal, see, for one of many examples, Steve Letza, Clive Smallman and Xiuping Sun’s 2004 Policy Sciences article.) Likewise the claim that labour market restructuring—making employment more flexible “for employers”—results in better performance. As I pointed out in a 2001 Global Social Policy article with Russell A. Williams, the case is just not there.
In all these instances, rebutting the evidence did not produce policy change.
The impact of the crisis varied by country depending on location in the international political economy, the pre-crisis situation, whether austerity was imposed (as in Greece and Portugal, for example) or chosen voluntarily (U.K.). The impact varied also by social class (with the biggest impact on the working class), age (young people most affected), gender (women more affected than men), region and ethnic or migrant status (with greater impact on migrants than on native born).
Existing inequalities were deepened. Unemployment increased, dramatically in some countries and especially for young people. In many countries workers experienced direct wage cuts, or lost income through loss of hours.The effects of greater inequality, higher unemployment and insecurity are exacerbated by austerity measures such as cuts in social and health care spending.
Inequality and poverty had increased in the decades before the crisis struck and have been linked with a number of social ills, many documented by Richard Wilkinson and Kate Pickett in their book, The Spirit Level. They include: increased mental health problems, drug use and addiction; lower life expectancy; higher obesity levels; low education achievement and aspirations; more violence; emigration, often of the most skilled; and less social mobility.
All these factors impose human and social costs on individuals and communities and carry economic costs such as increased spending on health care, law enforcement, foregone production, and unused or underutilized talents. Inequality also contributes to diminished trust and lower levels of social capital that are of increasing concern.
The burden of carrying or repaying debts assumed from the private sector’s reckless investments can be immense. As documented by Tom Healy in a 2013 report, when the Irish state assumed private banking debts it imposed a huge burden on its population: over 41 billion euros (about $50 billion CDN at the time), or over 25% of Ireland’s GDP, or 8,981 euros per capita (if that makes it easier to imagine). If transferred pension funds were included this boosted the total to 64 billion euros (40% of GDP).
In Greece, GDP fell by 25% even as public debt continued to increase. Structural reforms removed rights and employment standards from workers, flexibilized the workforce and bankrupted many small businesses, while privatizations of state-owned enterprises removed a future policy tool for the Greek state, leaving it ever more reliant on foreign and internationally oriented Greek capital. For more on this, see Maria Karamessini’s article in the European Trade Union Institute’s 2012 book, A Triumph of Failed Ideas.
Increased suicides and alcohol related deaths have been attributed to poverty. Manifest in the longer term, childhood poverty has demonstrable negative impacts on health as an adult. Occupational health and safety standards are likely to be lower for the working poor than for other income levels and thus they are more likely to suffer injuries or other work-related problems, as Yvonne Ebner described in a 2010 paper.
In many countries, long-term pension sustainability is threatened by the inability of the younger generation, or anyone employed precariously, to contribute adequately. Unemployment, underemployment, precarious employment and the associated sense of insecurity have an impact even on those who remain in work. Precarious workers particularly experience insecurity that is associated with poorer health indicators, as described in the 2008 book Working Without Commitments by Wayne Lewchuk et al.
Toward undemocratic liberalism
Standard definitions of liberal democracy refer to things like free and fair elections, the rule of law, and protection of basic freedoms—to speech, assembly and religion. Essentially this is a procedural definition of democracy. But originally, it meant much more.
A central component of democracy is the ability of people to use their political power to choose ends they decide upon. Most accounts of today’s liberal-democratic states ignore the often tense relationship between liberal democracy and capitalism, democracy being based on the political equality of citizens, and capitalism inevitably generating inequalities of wealth and income. Theoretically, the possibility exists of using political power to control private economic interests for some public purpose.
The age of austerity has spawned questions about the long-term compatibility of economic capitalism and political democracy. The Financial Times columnist Martin Wolf asked in August 2016, “Is the marriage between liberal democracy and global capitalism an enduring one?” He answered as follows:
Democracy is egalitarian. Capitalism is inegalitarian…. If the economy flounders, the majority might choose authoritarianism…. If economic outcomes become too unequal, the rich might turn democracy into plutocracy…. [S]hared increases in real incomes played a vital part in legitimizing capitalism and stabilizing democracy. Today…capitalism is finding it far more difficult to generate such improvements in prosperity. On the contrary, the evidence is of growing inequality and slowing productivity growth.
Often, when concerns about the future of liberal democracy are expressed they focus on the rise of populism and illiberal tendencies, such as in Orban’s Hungary. But “undemocratic liberalism,” or “authoritarian neoliberalism”—the effort to reconfigure “state and institutional practices from social and political dissent,” as Ian Bruff put it in a 2014 article—is just as much of a threat.
Policy instruments that could be used to control or moderate capitalism increasingly are insulated from democratic influence. Far advanced along this path are key instruments of economic policy, including monetary policy (through central bank independence and, in Europe, the EMU and European Central Bank), trade and investment (through provisions of international treaties that constrain nation-states and empower investors), and fiscal policy. The Fiscal Compact in Europe gives neoliberal economic orthodoxy quasi-constitutional status. Labour policies are not far behind.
The scope of decision-making that is open to democratic processes, choice and accountability has been narrowed dramatically. Austerity has either highlighted these trends or sometimes triggered their further development. Add the European Commission’s contempt for elected governments, and its role in ousting democratically elected leaders in Italy and Greece in 2011 (to be replaced with technocratic administrations prepared to implement EU-imposed austerity measures), and a clearer picture emerges of liberal democracy in crisis.
Austerity politics is class politics
The age of austerity is the culmination of four decades of neoliberalism, the proponents of which promised, as the Guardian’s economics editor Larry Elliott recounted in a 2017 column, “higher growth rates, higher investment rates, higher productivity rates and a trickle down of income from rich to poor.” In fact, writes Elliott, it “delivered none of these things.”
Quite the opposite, in fact. Wolfgang Streeck, the German economic sociologist, argues that states are now accountable to two constituencies that have divergent interests: the staatsvolk, or nationally based general citizenry, and the marktvolk, creditors with global rather than national interests. It is clear which constituency has won.
Viewed in class terms, working class individuals face unemployment, underemployment, precarious employment, diminished social mobility, declining social wage, reduced public sectors, structural reforms to the labour market and heightened insecurity. This stands in dramatic contrast to the privileges and benefits enjoyed by the upper classes—the top 10% of income earners, and in particular the top 1%.
Class may not be the most fashionable concept in today’s social sciences, but clearly these outcomes are the product of class conflicts and class politics aggressively waged from above.
Stephen McBride is Canada Research Chair in Public Policy and Globalization at McMaster University.