Austerity Is About Preserving The Power Of The Few To Compel The Many

project-syndicate |   Even if everyone agreed that printing another trillion dollars to finance a basic income for the poor would boost neither inflation nor interest rates, the rich and powerful would still oppose it. After all, their most important interest is not to conserve economic potential, but to preserve the power of the few to compel the many.

ATHENS – Back in the 1830s, Thomas Peel decided to migrate from England to Swan River in Western Australia. A man of means, Peel took along, besides his family, “300 persons of the working class, men, women, and children,” as well as “means of subsistence and production to the amount of £50,000.” But soon after arrival, Peel’s plans were in ruins.

The cause was not disease, disaster, or bad soil. Peel’s labor force abandoned him, got themselves plots of land in the surrounding wilderness, and went into “business” for themselves. Although Peel had brought labor, money, and physical capital with him, the workers’ access to alternatives meant that he could not bring capitalism.

Karl Marx recounted Peel’s story in Capital, Volume I to make the point that “capital is not a thing, but a social relation between persons.” The parable remains useful today in illuminating not only the difference between money and capital, but also why austerity, despite its illogicality, keeps coming back.

For now, austerity is out of fashion. With governments spending like there’s no tomorrow – or, rather, to ensure that there is a tomorrow – fiscal spending cuts to rein in public debt do not rank high among political priorities. 

US President Joe Biden’s unexpectedly large – and popular – stimulus and investment program has pushed austerity further down the agenda. But, like mass tourism and large wedding parties, austerity is lingering in the shadows, ready for a comeback, egged on by ubiquitous chatter about impending hyperinflation and crippling bond yields unless governments re-embrace it.

There is little doubt that austerity is based on faulty thinking, leading to self-defeating policy. The fallacy lies in the failure to recognize that, unlike a person, family, or company, government cannot bank on its income being independent of its spending. If you and I choose to save money that we could have spent on new shoes, we will keep that money. But this way of saving is not open to the government. If it cuts spending during periods of low or falling private spending, then the sum of private and government spending will decline faster. This sum is national income. So, for governments pursuing austerity, spending cuts mean lower national income and fewer taxes. Unlike a household or a business, if the government cuts its spending during tough times, it is cutting its revenues, too.