Austerity, which hits the poor and the middle classes, is the new mantra of governments in Europe even as private capital corners stimulus packages.
ACROSS the world it is a time of discontent, though governments claim that the worst is behind us. In the United States, a President who came to power against historic odds is fast losing popularity, with his ratings in the 40s. His party is also expected to slide significantly in the imminent midterm elections to the Senate and the House of Representatives. Barack Obama's popularity slump has been a puzzle to commentators since he has, in the form of medicare, financial re-regulation and much else, done more than many of his predecessors. But he came after the crisis had struck and roused aspirations that he has failed to meet. His failure is not that he has not done anything, but that what has been done is seen as too little.
In the event, the government is being blamed for creating the problems it did not solve. And, in a queer twist of fate, big money and the most conservative Right have exploited, however temporarily, the opportunity to undermine even the weak force that stands against them in the form of President Obama. At the forefront of this is the U.S. Tea Party movement, which has managed to convince some Americans that Obama's government is tyrannical.
In France, union workers striking against pension reforms that sought to raise the retirement age were soon joined by students who have called for a boycott of universities and taken to the streets in often-violent action. Memories of 1968 have been revived, giving the movement a radical flavour, even if the expressed demands are limited. With oil blockades being part of the strike action, it has brought the economy to a near halt. And contrary to the government's expectations, the protest did not peak early and decline but has spread widely and gathered momentum. Though the government has, despite this opposition, passed the pension reform through Parliament, Sarkozy's ratings have fallen sharply while support for the movement against reform is placed at around 70 per cent of the population.
The United Kingdom, where a massive austerity programme involving 81 billion in spending cuts and the loss of 500,000 jobs in the public sector has been launched by the David Cameron government, is among the few exceptions. As many have argued, this is not because there is no resentment among its people, the presence of which the recent change of government makes clear. It is because historical factors have weakened and silenced temporarily the forces that could stand up to the establishment.
In sum, resentment has taken different forms and triggered widely different responses across countries. In each country the trajectory of protest varies and the focal issues are different, but the fundamental challenges are the same. The evidence shows that the crisis has not gone away and unemployment remains high everywhere, leaving the middle classes and the poor in the dire straits they had been reduced to. Meanwhile, financial firms have been bailed out and put on the road to profit, allowing the rich to return to capital accumulation.
Further, even though the middle classes and the poor are still out in the cold, governments have turned away from an emphasis on stimulating the economy to ensuring fiscal consolidation through austerity in various forms. The evidence of high public debt-to-GDP (gross domestic product) ratios is being used to argue for a kind of fiscal consolidation that forces the middle classes to tighten their belts and the poor to forgo support from the government.
Conveniently, the fact that public debt is high because governments borrowed heavily to bail out private capital and consequently accumulated large volumes of additional debt in a short period of time is forgotten. Even where there is still talk of some stimulus, it mainly takes the form of quantitative easing, which is the codeword for pumping cheap liquidity into the system so that private capital can access credit at near-zero interest rates and speculate to garner huge profits.
In sum, the crisis does seem to have provided an opportunity to pressure and cajole the state into using taxpayers' money to deliver profits to the rich even when the unemployed remain without jobs, homeowners are being dispossessed, social security benefits are being curtailed and safety nets are being withdrawn.
This intensification of the process of engineering a shift in income distribution, reflected in the period prior to the crisis in the stagnation of real wages at a time when productivity and profits were rising, explains the anger that has led to intense social unrest in some contexts, such as in France. The slogans opposing pension reform or specific elements of austerity packages only reflect this deeper resentment.Slowing growth
What is surprising is that the austerity measures, budget cuts and changed priorities that precipitate resentment are adopted despite evidence that they worsen the recession. The optimism that overcame global governments when growth figures for the last quarter of 2009 were released is fast receding. Growth has slowed sharply in the subsequent two quarters and unemployment rates are in danger of rising further.
The Organisation for Economic Cooperation and Development (OECD), which had, like many other international organisations, been upbeat about the recovery of the world economy from the Great Recession, issued an interim assessment in September that reflected a new scepticism. The world economic recovery may be slowing faster than previously anticipated, it argued, with growth in the Group of Seven countries in the second half of 2010 projected at around 1.5 per cent on an annualised basis compared with its earlier estimate of around 2.5 per cent in the Economic Outlook released in May.
This is of significance because 2009, which was otherwise a depressing year, ended on an optimistic note. Considering the year as a whole, growth was negative in the leading economies and highly so in Japan, Germany and the United Kingdom. The recession that set in at the end of 2007 and revealed itself in 2008 intensified in 2009. What was most disconcerting was the sharp increase in unemployment rates in the U.S. (from 5.8 per cent in 2008 to 9.3 per cent in 2009) and the high levels at which they stood in Germany (7.5 per cent), France (9.4 per cent) and the U.K. (7.5 per cent).
However, as noted above, by the time the full year's figures for 2009 were available there was cause for optimism. The quarter-on-quarter annual growth rates seemed to suggest that the recession had bottomed out in the third quarter of 2009 and growth had touched respectable levels in the last quarter, especially in the U.S., Japan and France. The world, it appeared, was well on the way to recovery even though the high unemployment levels were still a cause for concern.
Unfortunately, that optimism has been dashed by performance during the next two quarters, when growth has decelerated quite sharply in the U.S. and Japan, though it has gathered momentum in Germany and improved elsewhere in Europe. The difficulty is that Germany's success as an exporter is often at the expense of other countries in the eurozone. Therefore, it is the return to low growth over the first two quarters of 2010 that has affected the OECD's projections and precipitated a sense of gloom.Legacy of debt
The fundamental problems remain the same. Household balance sheets are under strain because of the legacy of debt accumulated during the boom. Unemployment is curtailing current incomes. And credit is either unavailable to or being avoided by those who need to expand consumption because of a collapse of net worth.
In the event, private consumption expenditure in much of the developed world, which stagnated in real terms in 2008 and declined significantly in 2009, is unlikely to recover substantially in 2010. On the other hand, governments across the developed world, overcome by conservative fears of excess public debt, are holding back on public expenditure or resorting to severe austerity measures. Aggregate spending, therefore, is low. Not surprisingly, output growth remains sluggish.
It is to be expected that if spending is cut back to deal with the problem of public debt, then the recession that was partly overcome by debt-financed public spending may return. This did happen during the Great Depression of the 1930s when as a result of the stepped-up federal spending under the New Deal, an economy that had been contracting for four consecutive years (1930-33) returned to growth and bounced back sharply. Impressed with that growth and concerned about deficit-spending and public debt, President Franklin D. Roosevelt cutback on deficit-spending, triggering a second recession in May 1937.
In sum, the fear that an early retreat from the stimulus would deliver a second dip is still with us, at least in the developed world. Even in the U.S., where talk of a stimulus is repeatedly heard, the requisite action to spur the economy is not forthcoming.Low inflation worries
The situation in the U.S. is most appropriate for recovery led by fiscal expansion. The unemployment problem persists and may be worsening as indicated by the fact that overall jobs fell by 95,000 in September. This was despite the fact that the private sector created 64,000 jobs that month and indicates that government spending cuts are substantially to blame. Unutilised capacity is rampant. And inflation is at a low that worries even Federal Reserve Chairman Ben Bernanke. Consumer prices in the U.S. rose by just 1.1 per cent over the year ending September 2010 and by just 0.1 per cent between August and September. Bernanke has declared that inflation is running at rates that are too low and called for an inflation target of two per cent or a bit below.
This would imply that a major stimulus is in order. Yet the power of finance ensures that such a push is abjured. The cause for concern over public debt levels in financial circles is understandable. During the crisis when governments borrowed to buy up worthless assets of banks and financial firms that were seen as systemically significant, in order to clean up their balance sheets and keep them solvent, financial firms themselves rode the yield curve. They absorbed the cheap liquidity that the government pumped into the system and used it to buy into bonds (with higher interest rates) issued by governments to raise more resources. Thus, their exposure to government debt, which partly helped strengthen their bottom lines, increased substantially. So when developments in Greece, Dubai and elsewhere raised the threat of sovereign default, they wanted governments to cap and even reduce debt.
This has also changed the very notion of what constitutes a stimulus. Increasingly, it takes the form only of a monetary stimulus or quantitative easing. This involves large doses or several billions of dollars worth of asset purchases by the Federal Reserve aimed at injecting liquidity into the economy and driving down interest rates. The problem with this approach is the belief that the desire or inducement to spend or invest exists and the problem is the lack of credit to fuel such spending. That is a belief that has been proved wrong many times over in recent history. Yet there are myriad ways in which liquidity is sought to be injected into the system. For example, the Treasury Department has announced a $1.5-billion programme aimed at small businesses and designed to trigger $15 billion in additional private lending.
What the quantitative easing does is it lowers U.S. interest rates, widens the differential between interest rates in that country and elsewhere in the world and encourages, therefore, the carry trade. When additional liquidity is injected, financial investors (rather than industrial firms) borrow dollars at low interest rates, convert those dollars into currencies of countries where interest rates or financial returns are high or just higher and make an investment to benefit from the differential in returns.
The consequence of encouraging movements of this kind is that there is a surge of capital flows into emerging markets in Asia and Latin America, which is strengthening their currencies and inviting intervention on their part to prevent currency appreciation that worsens their competitiveness. The fallout is the much-talked-about currency wars. It is in this light that we must see the optimistic view that the emerging markets are doing well enough to lift global growth. That unevenness is not the basis for combined growth but for conflict.
All countries want austerity at home and growth driven by an export push. The October meeting of G20 Finance Ministers in South Korea shows that the conflict cannot be resolved easily, even if such summits lead to pious declarations that countries will desist from currency wars and competitive devaluations.Finance wins
What is needed is a return to an effort at having a globally synchronised fiscal push with measures to distribute the benefits of that push across continents and countries. It is that option that governments obsessed with fiscal consolidation and austerity are avoiding even at the cost of considerable social unrest and loss of legitimacy.
This time too, therefore, finance has won. But it is a victory that worsens the conditions of populations that have been hit badly by a crisis that finance precipitated. Inevitably, therefore, resentment grows. As of now, the protests generated by that resentment have been manipulated and misdirected (as in the U.S.), have failed to realise their immediate objectives (as in France) or have been weak (as in the U.K.). But if, as it did when it kept speculating its way to a crisis, finance capital is able to capture governments and pressure them into worsening an already unbearable distribution of incomes and benefits between rich and poor, the protests could intensify and turn explosive. Unfortunately, who would win and who would lose at that point is still unclear.