street roots
Jan. 20, 2012
Recovery demands a stimulus, not Draconian fiscal austerity
taxpayers are still “on the hook,” as former
Treasury Secretary Hank Paulson put it
when explaining to Congress in November
2008 that the big Wall Street Banks were
too big for the rest of us to allow them to
fail.
BY ROBIN HAHNEL
C O N T R IB U T IN G C O L U M N IS T
r ust as the European settler economies
J
in North America grew to eclipse the
’ economic power of “Old” Europe during
e 20th century, at least some of the
BRICS — Brazil, Russia, India, China, and
South Africa - were
already on a trajectory
to rise relative to both
Robin Hahnel is a
North America and
politial activist and
Europe in economic
visiting professor of
economics at
power during the 21st
Portland State
century. However, a
University. He is a
natural process that
co-creator o f the post
would have taken five
capitalist economic
decades or more may
model known as
now be shortened to
participatory
economics, along with only a decade or two
as the elites in charge
Z Magazine editor
of economic policy in
Michael Albert. He is
the North Atlantic
also Professor
Emeritus at
region seem hell-bent
American University
on committing
in Washington, D.C.
economic suicide.
During the 20th
century it was
common to distinguish
between the “advanced” or “more
developed” economies, and the “under” or
“lesser developed” economies. Soon it may
become commonplace to refer to Europe,
the US, and Canada as the formerly
advanced economies. What follows is a brief
anatomy of econocide being committed by
ruling elites in a region which long
dominated the global economy but soon no
longer will.
Ignoring Keynes at Our Peril
Escalating Inequality
What most distinguishes more advanced
from less advanced economies is the size of
the middle class. During the middle third of
the 20th century, political victories by
progressive movements raised a significant
portion of the workforce to middle class
status in Europe, the U.S., and Canada as
productivity gains from new technologies
and expansion of education were more
widely shared than ever before.
Unfortunately, this trend came screeching to
a halt at the end of the 1970s, and ever
since we have experienced the most
dramatic increase in economic inequality in
world history. Not only is this terribly unfair,
it has also proved to be destabilizing.
When wages rise along with increases in
productivity, demand for goods and services,
and the labor to make them tends to keep
pace with productive capabilities. But when
the top 1 percent appropriate the lion’s
share of productivity gains, as they have now
for over 30 years, more and more income
goes into purchasing assets rather than
more production, creating two problems:
Unemployment — which further aggravates
the lack of demand for production — and
asset bubbles — which eventually burst,
BY BRAD K AYAL
destroying illusions of wealth.
Financial Deregulation
Whatever one may think about the pros
and cons of markets in general, there should
be no doubt that free market finance is an
accident waiting to happen! Theory predicts
it, and history has proved it time and time
again. Whenever the financial industry is
allowed to do as it pleases, it will engage in
activities that increase its leverage and are
highly profitable for its members, but create
ever greater “systemic” risk for the rest of
us. Only when the financial industry is
subject to competent regulation can the risk
of financial crises be reduced to socially
acceptable levels.
In the aftermath of the financial crisis of
1929 which triggered the Great Depression,
governments in the North Atlantic region
imposed competent regulations on their
financial industries which produced decades
free from major financial crises in our
advanced economies. But the financial
industry predictably chafes under regulation
since restrictions prevent them from
engaging in activities they know to be highly
profitable. So the financial industry
constantly searches for ways around existing
regulations and relentlessly lobbies
politicians to remove restrictions. The more
successful they are, the more profits they
have to ply the political system to further
de-regulate their activities. As a result,
eighty years after the crash of 1929 the
financial system in the North Atlantic region
was, once again, an accident waiting to
happen.
However, this time there was one big
difference. Instead of a massive financial
crisis giving rise to successful political
efforts to erect a competent regulatory
system to prevent recurrence, Wall Street’s
influence with both major political parties
was so great that it easily forestalled
meaningful regulatory reform. The Dodd-
Frank “Wall Street Reform and Consumer
Protection Act” was neither. Instead, it was
a toothless fig leaf providing cover for
politicians but no real protections. Three
years after the crash of 2008, systemic risk
in the financial system is just as great as it
was before, consumers of financial services
are still without effective protection, and
Paul Krugman summed it up well in his
New York Times column on Dec. 29:
“Slashing government spending in a
depressed economy depresses the economy
further; austerity should wait until a strong
recovery is well under way. Unfortunately, in
late 2010 and early 2011, politicians and
policy makers in much of the Western world
believed that they knew better, that we
should focus on deficits, not jobs, even
though our economies had barely begun to
recover from the slump that followed the
financial crisis. And by acting on that anti-
Keynesian belief, they ended up proving
Keynes right all over again.”
In futile attempts to reduce deficits, the
Tory government in the UK and the
Conservative government in Canada have
subjected their own middle and lower
classes to crushing fiscal austerity. Hard line
fiscal conservatives in power at the
European Commission and European
Central Bank have visited even more
Draconian austerity policies on the citizens
of the so-called PIGS — Portugal, Ireland,
Iceland, Greece, and Spain — in exchange
for financial bailouts that have proven time
and time again to be too little, too late.
Germany, sheltered from unemployment
by favorable trade surpluses with the rest of
the Euro Zone, steadfastly refuses to engage
in fiscal stimulus. And when Obama aided
his mortal Republican enemies by pivoting
from an inadequate fiscal stimulus in 2009
to deficit reduction in 2010 the entire North
Atlantic economic region was united in fiscal
austerity. Unfortunately, what was, and still
is desperately needed, is exactly the
opposite — fiscal stimulus!
When consumers are tapped out, when
businesses have little reason to invest in
new plants and capacity since they can’t find
customers to buy what they are already
producing, government needs to step up to
the plate and provide the necessary demand
for goods and services to get the economy
going again. That was Keynes’ great truth.
Instead, ruling elites in the North Atlantic
region have united to reject the advice of
Keynes and instead repeat Herbert Hoover’s
mistake. Instead of fiscal stimulus they are
giving us ever more Draconian fiscal
austerity. This, more than any policy failure,
has the North Atlantic region on the road to
recession and mass unemployment without
end. As a result, for the first time in many
generations citizens of the formerly
advanced economies are left to ask
ourselves: “How does it feel/ To be on your
own/ With no direction home/ Like a
complete unknown/ Like a rolling stone?”