The Lib-Con coalition is already showing itself intent on slashing state spending, reducing the welfare state, and using unemployment as a means of cutting the budget deficit. Everyone is told, and many believe, that there is no alternative. And with so many accepting that as truth, the government doesn't even have to provide any evidence.
But we should, as ever, be skeptical of arguments for which there are no good reasons. Is there any reason to believe that slashing state spending in such a Draconian fashion will lead to increased growth, and secondly does that growth result in an increase in the public good?
Certainly over the last thirty years of relatively high growth, the living standards of the average working family in the UK stayed static or fell slightly. In the US, the change was dramatic and downwards. In the US, real wages dropped in comparison to rises in productivity. It was that drop in purchasing power relative to the available goods that resulted in a crisis of falling demand.
The problem for business in the US and in the UK was how to increase demand without increasing wages. In other words, how to we get families to buy things without giving them the means to do so? The answer was to increase the available credit, by issuing credit cards and loans. The lenders of course charged interest. The increased loans were secured against mortgages and the debts represented by those mortgages were themselves wrapped up as products and sold on by the banks, often multiple times.
Since they were rated as secure as government bonds, even foreign countries bought these products thinking they were guaranteed a share of every mortgage payment made. But of course, if you borrow more and more against the equity of your house, pretty soon you can't borrow any more, and you can't pay your mortgage either. The banks got scared, stopped lending, and the whole sorry pack of cards came down.
This is a clear illustration of how illusory some economic claims can be. Ben Barnanke of the Federal Reserve Bank said he had no idea how the crisis happened! Everyone was arguing that growth, regardless of how it came about, was a good thing. In fact, as we now know, it was a very bad thing indeed. Millions lost their homes and jobs, and almost every advanced economy in the world is bailing out the banks at the expense of wages and jobs.
Perhaps surprisingly, over the last two years, while everyone else was talking about austerity and cuts, the rich and especially the super-rich became much more wealthy. They had protected their assets with hedge funds and actually made money out of the financial crash.
So what of these austerity measures? How do they shape up? Essentially, because the governments have spent trillions on bailing out the banks, they now have to find the cash. The strictures imposed by the IMF and World Bank means that each state has to turn itself first and foremost into a debt-repayment machine. The austerity measures are the means of filtering capital back out of the state to the owners of the major financial institutions.
And that requires that the welfare state be privatised and state investment is reduced. This provides investment opportunities for private capital to make money out of the austerity programme, at the expense of working people who rely on it. As it becomes more privatised, they will pay more, through taxes and direct charges. The growth that is talked about is not the same as growth in services, or growth in the public good. No, they are referring to the growth in profitable business. These are not the same things.
The business argument assumes that working people need to be paid less so that there is a bigger opportunity to make profit. The assumption is that business will then take on people and they will be paid wages which will buy increasing numbers of goods.
But the reality is that with any austerity programme, domestic demand actually falls. People have less cash because more of us are unemployed. So where does the extra demand come from? It can't come from increasing credit card debt or borrowing or we get the same problems all over again. Unfortunately we are just asked to believe the government with no good reason. They have blind faith and we are expected to believe it too. It's just like alt-med Woo.
A sketical, questioning approach to these government claims is important. Their economic arguments just don't add up. For example, you can have business and profit growth with increasing unemployment so although they might think everything is improving, working people become relatively worse off.
We all owe it to ourselves to find out about these issues if we are not to be conned by Economic Woo.
Bob Lloyd has studied in four universities and has degrees in Biochemistry, Mathematics, and Computer Science. After a long career in publishing, teaching, and software engineering, he is now retired and lives in Andalucia in the South of Spain with his wife and rather ancient cat.
