Austerity or Keynesianism: Can’t we do better than this?

Austerity. Keynesianism. Voting for the Center-Right. Voting for the Center-Left. Let’s call the whole thing off.

Five years of the economic crisis has yet to shake the stubborn idea that, if only the right policy were implemented, prosperity would be here again. And so this week’s two turns of the electoral wheel — agreement on a “grand coalition” government in Italy and the return to power in Iceland of the two parties that presided over that country’s collapse — demonstrate that traveling in a circle leads you to where you just were.

(Photo by Jim Champion)

(Photo by Jim Champion)

The outgoing Icelandic government earned a reputation for “standing up” to banks and the International Monetary Fund, and refusing to saddle its citizenry with the massive debts of Iceland’s swollen banks. At first glance, it seems curious that Icelanders would vote out such a government and return to office the same government coalition that presided over the country’s meltdown. But a closer look reveals a much different story. So different, in fact, that the IMF praised the outgoing Social Democrat/Left Green coalition government of Jóhanna Sigurđardóttir. Here is an excerpt from an IMF report on November 19, 2012:

“Directors commended the progress made in fiscal consolidation, noting that it is broadly on track.”

That doesn’t mean that Iceland’s dose of austerity is coming to an end. The IMF report goes on to say:

“While welcoming the recent monetary tightening bias, Directors viewed the policy stance as still accommodative. They agreed that further monetary tightening is needed to bring inflation back to target and to normalize monetary conditions in advance of capital account liberalization.”

Iceland’s banks are too big to fail

Iceland didn’t tell the IMF, or the world’s bankers, to take a hike. Iceland, until recently, was unlikely to be at the center of any financial controversy — a country of 300,000 people with an economy traditionally based on fishing. Somewhere along the way, it was decided to convert the Icelandic economy into one based on financial speculation, with the result that the country’s banking sector grew to nine times the size of its gross domestic product. Iceland’s banks offered interest rates well above that of other countries, drawing in foreign depositors (much like Cyprus). Big pots of money led to the irresistible temptation to speculate, with bank-officer compensation tied to the volume of loans made. The usual result followed.

Not that regulators, or parliament, were zealous in checking the financial sector. An official report by an Icelandic parliament committee states:

“It appears that both the parliament and the government lacked both the power and the courage to set reasonable limits to the financial system. All the energy seems to have been directed at keeping the financial system going. It had grown so large, that it was impossible to risk that even one part of it would collapse.”

Iceland took over its three big banks, but quickly sold two of them to creditors, who in turn sold most of their interests to foreign hedge funds. The Icelandic government did agree to all conditions demanded by foreign creditors, the IMF and the British government, but had to somewhat back off only because the package was voted down in a national referendum. So it’s not accurate to say that the outgoing government stood up to anybody. As the Icelandic blog Studio Tendra pungently put it:

“Iceland didn’t bail out the collapsed banks, but that wasn’t for the want of trying. … [T]he Icelandic government tried everything it could to save the banks, including asking for insane loans to pay off the banks’ debts. … So the true story is that Iceland tried and tried and tried and tried as hard as we could to save the creditors. The only reason why we didn’t is that the Icelandic government, then and now, is completely incompetent.”

The outgoing Icelandic government did follow two Keynesian prescriptions in imposing capital controls and currency devaluation, but these did not do much to ameliorate the pain — Iceland can’t detach itself form global capitalism.

For the years 2009 and 2010, Iceland’s gross domestic product declined more than ten percent and its household consumption fell nearly 23 percent. Recovery has since been at a snail’s pace. Making matter worse, Icelandic personal debt is mostly pegged to the country’s inflation rate. As Iceland continues to suffer from inflation, the amount a debtor owes grows as his or her wages decrease. (Wages since 2008 have lagged the consumer price index, according to IMF statistics.)

The suicide mission of Italy’s “Left”

So much for the “Icelandic miracle.” Icelanders have yet to question the economic system that brought them misery, instead opting to swap one set of mainstream parties for another set. That has been the pattern in advanced capital countries. Italy is not yet an exception, although the dramatic rise of the Five Star Movement — sort of an electoral Occupy movement — as a third force in the Italian parliament may be the start of a pushback. Or it could be a brief protest vote without lasting effect. For now, however, Italy’s Center-Left standard-bearer, the Democratic Party, has apparently chosen to complete its suicide mission by forming a “grand coalition” with the main Right party, the wildly misnamed People of Freedom Party.

Italy’s post-war political parties may have collapsed two decades ago, but the same personalities and the same policies and the same interests nonetheless continue to dominate the political sphere. The Democratic Party is the main remnant of the Communist Party of Italy, and is also is a receptacle for the late Christian Democratic Party, a centrist formation that once dominated Italian politics. The new Democratic prime minister hails has roots in the Christian Democrats, but is the nephew of an important aide to Silvio Berlusconi, Italy’s morbid combination of Rupert Murdoch, George W. Bush and the U.S. right-wing corporate “populist” Ross Perot.

Mr. Berlusconi is one of Italy’s richest persons, owns most of Italy’s mass media and is continually mired in multiple legal entanglements; he dealt with the last of these by forming his own political party, the recently renamed People of Freedom, which catapulted him into the prime ministership. “Freedom of Capital” Party or “Silvio’s Get Out of Jail Card” Party would be more accurate, but nonetheless Italians voted this personal vehicle into office three times.

Italy’s Democratic Party is as eager to implement austerity as the Italian Right — voting for it changes nothing. Italy’s outgoing “technocratic” prime minster, Mario Monti — appointed without the tiresome pretense of elections — and the head of the European Central Bank, Mario Draghi, both enjoy Democratic Party support, and the new finance minister has worked closely with Mr. Draghi.

The main potential fracturing point in the grand coalition is personality, which might make for interesting reading but is nothing more than a diversion from a serious discussion of alternatives.

The Five Star Movement’s leader, Beppe Grillo, now the main opposition in the Italian parliament, characteristically didn’t mince words in his blog this week:

“In the last few decades many sides have admitted that this political class lacks credibility, this same class that for the umpteenth time is asking for your vote of confidence. It’s as though this governing team had come down from the moon, as though they are not the ones directly responsible or jointly responsible for what has happened up until now.”

Alternating parties but the same austerity

There’s nothing unique about Italy here. With the exception of Greece, where Syriza (the Coalition of the Radical Left) missed winning the last Greek election by two percentage points, voters in all advanced capitalist countries have been content to alternate the main capitalist parties in office while beginning to voice displeasure through social movements and in polls. One important reason is that the dominant alternatives to the Right — Socialist, Social Democrat, Labour, Democratic & etc. — offer no alternatives to the Right; at best they offer “austerity lite.”

Various reasons, each with some measure of validity, can be assigned as the cause: dependence on corporate money, corruption, domination of the mass media by the Right, philosophical and economic myopia, cowardliness. Although these factors form a significant portion of the answer to the puzzle, an underlying cause has to be found in the exhaustion of social democracy in Europe and liberalism (as the term is used there) in North America. These political formations are trapped by their fervent wishes to stabilize an unstable capitalist system.

They wish to discover the magic reforms that will make it all work again. They do have criticisms, even if they are afraid of saying them too loud, but are hamstrung by their belief in the capitalist system, which means, today, a belief in neoliberalism and austerity, no matter what nice speeches they may make.

The Right, on the other hand, loudly advocates policies that are anathema to the working people who form the overwhelming majority but have the mass media, an array of institutions and the money to saturate society with their preferred policies. But, perhaps most importantly, they have something they believe in strongly — people who are animated by an ideal, however perverted, are motivated to push for it with all their energy.

In contrast, those who are conflicted between their belief in something and their acknowledgment that the something needs reform, and are unable to articulate a reform, won’t and can’t stand for anything concrete, and ultimately will capitulate. When that something can’t be fundamentally changed through reforms, what reforms are made are ultimately taken back, and society’s dominant ideas are of those who can promote the hardest line thanks to the power their wealth gives them, it is no surprise that the so-called reformers are unable to articulate any alternative. With no clear ideas to fall back on, they meekly bleat “me, too” when the world’s industrialists and financiers, acting through their corporations and the “market,” pronounce their verdict on what it to be done.

The reformers can call themselves Socialist, Social Democrat, Labour, Democratic or Liberal, but the label makes no difference. The are dancing to the same tune as their legislative rivals. All dancers will back reforms when there is concentrated public pressure; when the pressure subsides, the reforms are taken back and austerity attacks are relentlessly pushed forward. Major reforms in the United States came in the 1930s and in Europe following World War II thanks to rulers’ fears of being swept away; when the movements responsible for forcing these major reforms became content with reform, the rollback began.

Keynesian reforms would be better than austerity, but would be no more permanent than those of last century; moreover, Keynesianism keeps the capitalists in the saddle, allows them to regain their confidence and gives them the breathing space necessary for them to methodically take back the reforms.

The working peoples of the world’s advanced capitalist countries are living through a structural crisis of capitalism, not simply a rather nasty downturn similar to the repeated recessions of the past. Reforms, not even those on the scale of the mid-20th century, are a panacea. The solution is to be found not on a ballot but rather in organized mass action working for a more humane system not content to settle for reforms that will be taken away. If not today, when?

4 comments on “Austerity or Keynesianism: Can’t we do better than this?

  1. Alcuin says:

    I think I recommended Catastrophism: The Apocalyptic Politics of Collapse and Rebirth, by Sasha Lilley, David McNally, Eddie Yuen, and James Davis, some time ago. Here is an excerpt from Chapter 2, by Sasha Lilley:

    “When the financial crisis unfolded in the early years of the new millennium, many radicals hoped the end was nigh. The capitalist system had finally arrived at its terminus – the last stop on the line. Where the left had failed, the inexorable limits to capitalism would deliver. Needless to say, it has not turned out that way.”

    “Rather than functioning in stark opposition, determinism and voluntarism can overlap, their adherents oscillating between the two in a dialectic of disaster. In this essay, I argue that, irrespective of the form, what binds together this catastrophic dyad of determinism and voluntarism is a deep-seated pessimism about mass collective action and radical social transformation. Political despair lies at the center of left-wing catastrophism. The defeats underlying such despair are complex and beyond the scope of this essay. Neither does it attempt to furnish prescriptions for mass action and revolt. What it does point to is what does not, and will not, work. A militant radicalism with any prospects of success embraces catastrophism at its peril.”

    From the Introduction:

    “The left has long held that a crisis can cause a rupture with the existing order, allowing people to throw off blinders with accreted prejudices that result from lifelong socialization. A cherished example is that of one of Pavlov’s dogs, conditioned to salivate at the ring of a bell, who unlearned all training when its kennel flooded. But worse is not always better. Worse can just be worse. As partisans of the radical left, we are particularly concerned with how catastrophic politics can backfire on leftists and radical environmentalists. We also take a keen interest in catastrophism on the right, but for quite different reasons. While it short-circuits the left, right-wing catastrophism frequently helps shape the agenda of those in power.”

    Interesting reading. I highly recommend it.

    • You did recommend it, and I am interested in reading it. I haven’t been able to get a copy of it yet.

      Catastrophes have caused massive ruptures that overturned existing orders; World War I certainly is an example. But if the criticism is that many on the Left are waiting for a catastrophe to bring about radical change, it is not really possible to make an argument against that thesis. Capitalism is nearing its end, but it won’t be a short, or steady, process; without the intervention of mass movements the unraveling of capitalism will unfold over several decades, in my opinion. It won’t be a big bang.

      It is probable that there will be at least one more (and likely more than one) uptick in the course of capitalism, and by no means would I exclude that there will be another bubble or two out there to inflate to once again give the illusion that happy times are here again. But we do have to face the fact that infinite growth is impossible on a finite planet, and that capitalists can’t infinitely suppress living standards to buoy their profits. Capitalism is unsustainable in the long run. The question is: How do we transition to a better system? How do synthesize theory and practice to create a movement to bring about a better system?

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