The Austerity War

We're in the middle of a war. The war is between capital and labor. But what's strange about this war is that capital has lost faith in capitalism, at least the kind of modern capitalism of Keynesian economics as practiced in the twentieth century. How else to explain this lust for austerity, for steep cuts in government spending, while there is still high unemployment and low and slow growth? The only thing that makes sense is that the 1%, the plutocrats who control the Republican Party, no longer believe that capitalism can deliver high and persistent growth; so they're engaged in a smash and grab. The idea is to destroy the post-war Keynesian capitalist system as soon as possible and suck up all the resources; then hope that twenty-first-century technology can lock everything down in a way that was not possible for the robber barons of the nineteenth century.

Let's recall the last two years. First, we had the debt-ceiling crisis in the summer of 2011. Markets crashed, Standard and Poor's downgraded U.S. debt, and Obama signed off on huge government spending reductions while kicking the can of additional cuts down the road. Then in the fall of 2011 you had a big push back in the form of Occupy Wall Street which spread around the globe before sputtering out in the winter, giving way to the 2012 presidential campaign. Obama ran as a stalwart defender of post-war social democracy, and he won a historic election. He took that win into negotiations with the GOP on the fiscal cliff  and came away with a win; not a resounding victory, but a win. The 10% across-the-board reductions in federal spending that are a hold over from the summer 2011 debt-ceiling standoff got delayed until now. And that's where we are.

Binyamin Applebaum does a nice job in a frontpage story today of explaining how significant our current embrace of austerity is:

The federal government, the nation’s largest consumer and investor, is cutting back at a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war. 

And the turn toward austerity is set to accelerate on Friday if the mandatory federal spending cuts known as sequestration start to take effect as scheduled. Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years. 

The cuts may be felt more deeply because state and local governments — which expanded rapidly during earlier rounds of federal reductions in the 1970s and the 1990s, offsetting much of the impact — have also been cutting back. 

Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.

Yesterday in Senate hearings Bernanke had to defend the Federal Reserve's policy of quantitative easing against sniping from some Fed officials and Republicans. This from a story by Binyamin Applebaum that appears on the business page today:

Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, wrote that the testimony amounted to a “robust defense” of the aggressive efforts by the Federal Open Market Committee that “gives no ground to those within and without the F.O.M.C. who think asset purchases will soon need to be curtailed.” 

The reception on Capitol Hill was frostier, as several Republican senators challenged Mr. Bernanke’s assertion that the purchases were producing clear economic benefits, and questioned the potential costs. Senator Bob Corker, a Tennessee Republican, drew Mr. Bernanke into an unusually sharp exchange. 

Mr. Corker, asserting that low interest rates were “throwing seniors under the bus,” by reducing returns on some kinds of investments, asked Mr. Bernanke, “Do you all ever talk about the longer-term degrading effect of these policies?” 

“One thing we talk about is unemployment,” Mr. Bernanke responded. He added that the best way to increase interest rates was to increase growth. 

Mr. Corker then accused Mr. Bernanke of insufficient concern about potential inflation, saying, “I don’t think there’s any question that you would be the biggest dove since World War II,” using the term “dove” to denote a Fed official who is more concerned about unemployment than higher inflation. 

Mr. Bernanke, clearly piqued, responded, “You call me a dove, but my inflation record is the best of any chairman in the postwar period.”

And for a flavor of the direction that we are headed in check out the postmortem on Italy's election by Liz Alderman and Jack Ewing:

Few experts anticipated the depth of anger displayed by Italian voters over the austerity that Mr. Monti, the technocrat beloved by other European leaders but resented at home for pushing tax increases and spending cuts, represented. The electorate chose two men convicted of crimes — Mr. Berlusconi and Mr. Grillo — over the one Italian leader in whom the rest of Europe had put great faith. 

Mr. Monti initially resisted Ms. Merkel’s harsh austerity prescription, warning that it would stifle growth. But he nonetheless pushed a number of measures that reflected the Merkelian view that prudent finances were the fastest way to reduce Italy’s staggering debt and restore its reputation with international investors. In the end, Ms. Merkel’s embrace played a big part in Mr. Monti’s undoing. 

“The fact that Merkel was so involved and interested in our elections — her support was very negative for Monti’s fate,” said Tito Boeri, an economist at Bocconi University. “There is no doubt that in the Italian campaigns and vote there was a clear message against Europe.” 

Since the euro zone crisis began in 2010, European voters have generally shown remarkable forbearance in the face of recession, soaring unemployment, tax increases and cutbacks in government services. Ireland, Spain, the Netherlands, Greece and, last week, Cyprus chose centrist governments that offered the best chance of staying in the euro zone. 

Italy may just be being Italy. But this latest vote may be a sign that Europeans are reaching the limit of their patience. Experts said the developments here served as a warning that a new round of economically driven political turmoil could confront the Spanish prime minister, Mariano Rajoy, and France’s president, François Hollande. Both have grudgingly adopted austerity to keep the euro crisis at bay, despite recessions and rising unemployment. 

Italy, for its part, is mired in a recession that so far has lasted a year and a half. The economy is expected to contract further before improving — largely, many Italians say, because of a host of tax increases and spending cuts that Mr. Monti put in place. 

And like other countries, Italy is finding that austerity is making it harder, rather than easier, to stoke the growth needed to reduce the mountain of debt that set off the euro zone’s crisis in the first place. Its gross debt is expected to peak above 128 percent of gross domestic product this year — the highest level in the euro zone after Greece, and up from 126 percent last year.

Either austerity goes or the euro zone starts to disintegrate. There is more electoral freedom in Europe's multi-party parliamentary system than we have here. Syriza is likely to win the next election in Greece. In the United States, Obama has to step up. If he does not, if he becomes Clintonian in his second term, we'll see a big push for a third party that will equal or surpass the Nader-LaDuke challenge of 2000.