“In effect, lenders give government leaders a choice: impose sufficient austerity now or else we will demand higher interest payments or cut off your credit.”
Capitalism’s resilience is as impressive as its desperation. Initially panicked by its catastrophic failures and consequent plunge into global crisis, capitalism now strains to turn the crisis to its advantage. So it embraces an extended period of state-managed capitalism as a necessary departure from neo-liberalism. This is not only because the latter was badly tarnished by the crisis it produced. Two other considerations drive the current oscillation back from more private/neo-liberal to more state-interventionist/Keynesian forms of capitalism. The first is the need for government-imposed “austerities” across the developed capitalist world and beyond to shift the costs of capitalism’s crisis onto the mass of its working classes. The second is capitalists’ widespread envy of and desire to join in or replicate the economic growth achieved (even through the crisis) by relatively more state-managed capitalisms, especially China.
The goal here is to examine austerity policies and how they are being rewritten to work better and to blunt or deflect mass resistance.
The global capitalist crisis that started in 2007 has been neither short nor shallow. The real unemployment rate in the US, the “U6″ rate, has zoomed from 8 to 17 percent and remained there since May 2009. Home foreclosures have also soared and some 8 million households are currently behind on their mortgage or in foreclosure, according to the Wall Street Journal. Benefits are being cut, real median household income is declining and jobs are increasingly insecure. Substituting for “proletariat,” writers increasingly adopt the term “precariat” to describe the growing mass of insecure workers. 
To limit the crisis, governments in many advanced capitalist countries have poured massive sums of money, chiefly into banks and other large corporations, to unfreeze their credit systems and to “stimulate” private sector demand and production. Because governments dare not tax corporations and the rich to get those massive sums, they instead borrow the money, much of it from those same two groups by selling them government bonds.
In response to the crisis, governments have supported and subsidized the credit that capitalists depend on and that would otherwise have been unavailable to them. Governments have spent trillions to rescue and stimulate major banks. Their spending has also supported markets for private corporations’ commodity outputs that would not otherwise have been sold. To perform those functions, governments have borrowed from capitalist enterprises and the rich by exchanging safe, interest-bearing government bonds for the money that those enterprises and the rich could not otherwise have invested profitably in the crisis-ridden private economy.
Governments revived the credit markets by generously buying private banks’ bad loans; by guaranteeing and paying off banks’ debts; by increasing the money supply and lending it to banks at government-depressed interest rates; by purchasing private debt-backed securities; by paying off credit default swap (cds) obligations for nationalized writers of cds contracts; and by directly investing huge sums in banks and other corporations. Those who lent to governments included many of the same corporations that were being rescued by those governments.
Lenders began to worry as their outstanding loans to crisis-obsessed governments exploded. They focused particularly on governments with already large national debts who were borrowing large new sums to manage the global crisis (Greece, Ireland, etc.). Lenders foresaw that they would very soon confront those governments with fast-rising demands for interest and debt repayment. To meet those demands, those governments would have to pull more money out of their people and away from serving their needs.
The problem for lenders was and remains ultimately political. Would the masses of people in heavily indebted countries permit their governments to raise their taxes and/or cut their payrolls and public services in order to find the money to pay off lenders – chiefly banks, insurance companies, etc. Those lenders were, after all, (a) major causes of the economic crisis, and (b) major recipients of the governments’ costly bailouts.
The political issue pits banks and other lenders against the mass of workers/consumers in capitalist countries; it also positions governments between lenders and people. Lenders thus demand “austerity” from governments. By “austerity” they mean that governments must raise taxes or cut state spending (on services such as education, medical care, etc.) or both. Austerity’s purpose is to provide governments with more money to guarantee interest and repayment to lenders. Lenders threaten any government that does not practice austerity with ever higher interest rates or even the cutting off of credit. In effect, lenders give government leaders a choice: impose sufficient austerity now or else we will demand higher interest payments or cut off your credit. Because higher interest rates squeeze government budgets and reduce what politicians can do for their electorates, they endanger leaders’ careers. Because a cut-off of credit plunges modern credit-dependent countries into collapse, they threaten leaders with immediate political demise.
However, as political leaders move toward capitulation to lenders, toward the imposition of austerities, they fear and sometimes encounter rising resistance and opposition from victims of austerity measures. Angry people reject paying for the bad loans, speculations, and financial mistakes of bankers. The risk that such resistance might take a powerful political form necessitates an elaborate political theater to rewrite the entire austerity drama.
This theater substitutes debts among countries and international institutions aimed to “help troubled economies” in place of debts to private lenders incurred by governments bailing out their private capitalists. Ireland provides a classic example. Ireland’s government took over major Irish banks that had gone bankrupt and whose bankruptcy threatened the entire Irish economy. When the Irish government promised to honor the nationalized bank’s debts, the stage was set for the Irish government to impose austerity on its people. Austerity would take money from the mass of people in order to pay off those private lenders whose loans to Irish banks had become the Irish government’s obligations. But as austerity bit ever deeper, as the losses of the taken-over Irish banks proved far larger than had been anticipated, mass anger and resistance rose.
So then the main act of the financial theater began. The European Community, the IMF, and European governments pressed the Irish government to “request” a loan from them. The billions in loans being forced on the Irish government would be used to pay back most of Ireland’s debts to private lenders (including those massive debts taken over from failed private Irish banks). Massive publicity stressed that these loans to Ireland were “help” for a broken economy and carried lower interest rates than Ireland faced from its private lenders. The official line was that Europe was helping its weaker economies in an act of solidarity, support for the common currency, etc.
Now the austerity imposed on Ireland was recast as necessary to pay back the European governments, people, and institutions that had “helped” Ireland. The private lenders who had made fortunes from their participation in the wild speculations and imprudent lending of the Irish banks and those banks themselves were thus neatly removed from the public stage and perhaps saved from public anger.
It is also important to understand that major private lenders to Ireland included the biggest private banks in Germany, France and the UK. Had the Irish banks or government defaulted on their debts to those banks, it would have forced the latter to go to their governments for further bailouts inciting their people to anger and resentment. Leaders in Germany, France, and the UK wanted desperately to avoid the political costs of doing that. So by “helping” Ireland to pay off its nationalized bank’s debts, those leaders also avoided bailing out their own banks.
German, French, and British citizens could thereby have their anger redirected to “those Irish people” as if they, rather than their banks, had caused the crisis and benefited from the government bailouts. As the German, French and British governments impose austerities on their people to raise the money to “help” Ireland, their peoples’ resistance could be redirected to “those Irish people” rather than to the real purposes of this theater and the austerities it justifies. Those purposes include saving private capitalist banking and overcoming the larger capitalist crisis.
The capitalist gamble in Europe is to maintain and secure the national programs of austerity for the masses by redefining them as obligations of economically “rescued” nations to repay the generous European assistance required when their past misdeeds, errors, and excesses brought them to crisis. Not only Ireland, but also Greece has already been integrated into this theater. Portugal, Spain, Belgium, Italy and others wait in the wings.
Further back in the wings stands an anxious US government that has undertaken huge borrowing to bailout the US credit system, etc. Its leaders also see the risks of lenders demanding ever more interest payments. So they too impose austerity, so far chiefly in the form of state and local government cutbacks in payrolls and public services. In the US, the theater surrounding that austerity rewrites it not as the burden imposed on the masses to bail out failed capitalists. Instead, austerity reflects the government’s need to atone for and correct its past errors in borrowing and spending far too much especially on poor, old, and sick people. Thus, to avoid worsening austerity in the future, we must now both impose austerity and sharply reduce those excessive government outlays. Thus Obama’s Deficit Reduction Commission promotes cutbacks in social security outlays, etc.
Austerity policies aggravate contradictions and conflicts always simmering inside capitalism. Who will pay for government programs and who will those programs serve? Will capitalist enterprises and the rich pay more or will the taxes fall more on the working class? Will subsidies to business and services provided to the rich be spared the cutbacks in public services for average citizens?
During 2010 millions of workers in Greece, France, Portugal, Italy and elsewhere in Europe organized general strikes under the slogan, “We have paid for their profits; we will not pay for their crisis.” Many tens of thousands of British students marched against the cutbacks threatening public higher education there. Europe-wide days of protest began on September 29, 2010. In the United States, the long decline and atrophy of left institutions (labor unions, left political parties, and organized mass movements) have delayed comparable actions.
Yet the basic issue remains for those who can see through the theatrics. Capitalism is seeking to emerge from its worst self-induced crisis since the 1930s, stronger than before. To achieve that goal, the costs of this crisis must be shifted onto the working classes. Will those classes permit this shift to proceed, pay those costs, and submit to a strengthened capitalism? Or will a new opposition and alternative program develop in the centers of advanced capitalism?
Richard D. Wolff is Professor of Economics Emeritus, University of Massachusetts, Amherst where he taught economics from 1973 to 2008. He is currently a Visiting Professor in the Graduate Program in International Affairs of the New School University, New York City. Much more of his work can be found on his website: http://www.rdwolff.com/.