Austerity: has it worked?

Most governments in capitalist economies have engaged in what is loosely called ‘austerity’ policies since the end of the Great Recession in 2009.  More precisely, austerity policies are those where the government aims to reduce its annual deficit on spending and revenues and shrink the overall debt burden, plus introduce ‘reforms’ to weaken the labour rights and conditions at work to keep wage costs down for the capitalist sector.  The fiscal part of these austerity measures mainly involved cutting back on government spending, both in public sector employment, wages, public services and investment projects.

Those economists and governments that advocated austerity claimed that by getting debt ‘under control’, costs would be reduced and companies would invest, consumers would spend and economies would recover quickly.  Keynesians and others who opposed these measures reckoned that austerity would drive down ‘aggregate demand’ as government spending was cut, taxes raised and wages held down.  The way out of the crisis was to borrow more, not less and spend more not less.

The debate continues.  In my view, both sides are right and wrong.  See my posts on this:
https://thenextrecession.wordpress.com/2012/04/14/the-austerity-debate/ and
https://thenextrecession.wordpress.com/2012/09/30/can-austerity-work/

The Austerians recognise that the key to a capitalist economy recovering is to reduce costs for the capitalist sector by cutting wages and government taxation so that profitability can rise.  Raising wages or increasing government spending, as the Keynesians advocate, would reduce profitability at a time when it needs to rise.  However, the Keynesians recognise that, once an economy is in a slump and labour incomes are falling, cutting them further can worsen the fall in consumer spending and investment demand and for some time.  It’s not quite Catch 22; but looks like it for a while.

In a recent study, the IMF considered the question of whether austerity worked.  The IMF found that if governments did not spend too much when economies were growing and spent more when economies were in a slump, then this would act as a counter-cyclical buffer to the volatility of the capitalist sector.  The IMF quantified this effect as cutting “output volatility by about 15 percent, with a growth dividend of about 0.3 percentage point annually”.  The IMF optimistically reckoned that “Stability, growth and debt sustainability could all greatly benefit if measures that destabilize output, such as spending increases in good times, were avoided”.

fiscal stabilisation

But this is the classic sort of fiscal management policy advocated by mainstream economics back in the 1960s that supposedly was the answer to controlling capitalist booms and slumps.  Governments could smooth economic fluctuations by judicious (and even automatic) fiscal ‘stabilisers’.  Yet this policy (in so far as it was even implemented) proved a total failure during the 1970s, when the major capitalist economies experienced inflation and unemployment together and government fiscal management failed.  Indeed, governments probably increased volatility by stimulating or applying austerity at the wrong times.

Anyway, has austerity worked in getting economies to recover quicker since 2009 or have austerity measures made it worse?  See the graph below covering 30 advanced capitalist economies for changes in real GDP growth and reductions in government budgets since 2010 (from http://www.economonitor.com/dolanecon/2015/04/08/did-austerity-work-in-britain-one-chart-tells-it-all/) .  The further to the right a country, the more austerity there has been – with Greece leading the way.  The further up the graph a country is, the more growth there has been since 2010.

austerity and growth

The graph trendline appears to show that tightening the budget by one percent of GDP cuts about half a percentage point off the growth rate, even if we omit Greece.  But the correlation is not very strong.  The US underwent more fiscal consolidation than the UK in 2010-2014, but it also had better growth. On the other hand, the countries of the Eurozone, on average, grew more slowly than the OECD average despite a similar average level of austerity.  So other factors than the fiscal policies of governments were much more important for post Great Recession growth (see my post,
https://thenextrecession.wordpress.com/2012/10/25/uk-and-us-gdp-and-anglo-saxon-angst/.

As for the other arm of austerity, ‘labour market reform’ (i.e. weakening trade unions, increasing the ability of employers to hire and fire at will, deregulating contracts and hours and job qualifications), have they worked?  These measures are advocated by the IMF, the OECD and by the European institutions in their current negotiations with Greece.  Well, a new study by IMF economists found no evidence that “deregulatory labour market reforms could have a positive impact in increasing economies’ growth potential”.  What they found was that more competition among capitalists in markets and higher investment spending contributed much more to boosting productivity than squeezing the conditions for the workforce.

What the IMF did not consider was that while more investment in new technology might raise productivity per worker more, cutting wage costs and weakening labour’s bargaining power can deliver more profitability quicker.  It might be short-sighted, but the capitalist mode of production does not take the long view.

In short, austerity has not worked in restoring trend economic growth, although it has not made things much worse either.  The problem is that cutting wage costs and holding back on government investment and spending has not sufficiently restored profitability and reduced debt to allow a significant rise in new investment.  But the alternative policy of Keynesian-type government spending might have helped labour a little, but it would not have boosted investment and growth either, as it would have lowered profitability.  Governments appear helpless to change things either way.  Another recession may do the trick.

9 Responses to “Austerity: has it worked?”

  1. Peter Thompson Says:

    Reblogged this on Ernst Blog.

  2. Tony Phillips Says:

    Nice balanced economic analysis — didn’t take into account the cost in people’s lives / jobs etc but even leaving that out which is quite painful in countries such as spain and greec with huge un- and under-employment — austerity doesn’t work anyway. Like the short-term view issue (this is key) you can run a company by financial quarters (but not a country.)

  3. johkari Says:

    What to do??
    Pray for another recession to fix the awkward situation?

  4. Mike Ballard Says:

    Comrade, you need to attend to a slight spelling error in your piece: “Raising wages or increasing government sending, as the Keynesians advocate….”

  5. vallebaeza Says:

    Reblogged this on Alejandro Valle Baeza.

  6. Boffy Says:

    “But the alternative policy of Keynesian-type government spending might have helped labour a little, but it would not have boosted investment and growth either, as it would have lowered profitability.”

    Surely all historical evidence, and Marx’s own view is that its only when wages rise particularly high, due to a using up of the available labour force – which itself then causes a squeeze on profits (not the same as the falling rate of profit) – that causes capital to invest in new technology so as to recreate a relative surplus population?

    Marx cites Ricardo to that effect that machines are only introduced when labour becomes expensive. Marx himself cites the reverse of this that capitalists continued to use women to pull canal barges, even in preference to horses, because the women were cheaper and more easily replaced than horses.

    As he and Engels point out, labour saving machines are only introduced by capital when their cost is less than the paid part of labour, and as productivity rises, this paid part of the day gets ever smaller, particularly in respect of the advanced rather than laid out capital, as the rate of turnover rises.

    If the aim is to encourage additional investment in labour saving machines, then surely a rise in wages, which squeezes profits, and makes such intensive accumulation profitable would be the way to go. Its the kind of policy that Singapore adopted as a development strategy to move its production on to ever higher value production. China seems to be adopting a similar approach now.

    But, as Marx says, this kind of intensive accumulation is not the only or even most important kind of capital accumulation undertaken. As he sets out in Volume III, Chapter 15, for long periods of time accumulation takes place on the basis of the same technology – and so as he says creates NO tendency for the rate of profit to fall, because it causes no rise in the organic composition of capital.

    All of the emphasis on whether INVESTMENT is rising or not is framed in terms of whether investment in fixed capital is rising, but the whole point about Marx’s analysis, is that the organic composition of capital rises not because fixed capital rises, but because circulating constant capital rises, because newer cheaper fixed capital is far more productive, and thereby process much greater quantities of that material.

    As Marx says way back in Capital I, expansion of capital is increase in the proletariat. Capital for Marx after all is not a collection of pieces of equipment, but a social relation between capital and wage labour. That has other consequences too, as he again set out in Capital I, and which relates to the experience in Singapore.

    Marx points out that it was precisely the introduction of the Ten Hour Day, and factory legislation, which caused employers to develop and introduce new forms of technology. He cites the earthenware manufacturers in the Potteries who had claimed that they could not possibly survive if the Ten Hour Day was introduced. But Marx writes,

    “In 1864, however, they were brought under the Act, and within sixteen months every “impossibility” had vanished.

    ‘The improved method,” called forth by the Act, “of making slip by pressure instead of by evaporation, the newly-constructed stoves for drying the ware in its green state, &c., are each events of great importance in the pottery art, and mark an advance which the preceding century could not rival…. It has even considerably reduced the temperature of the stoves themselves with a considerable saving of fuel, and with a readier effect on the ware.’

    In spite of every prophecy, the cost-price of earthenware did not rise, but the quantity produced did, and to such an extent that the export for the twelve months, ending December, 1865, exceeded in value by £138,628 the average of the preceding three years.”

    (Capital I, Chapter 15 p 447)

    Moreover, and this is a point that Marx makes in general about this consequence of the introduction of new technologies bringing about an increase in profits, the expansion in production also led to an absolute increase in the number of workers employed, even thought the relative number fell due to the higher rate of productivity.

    Because more workers were thereby employed in total, and because the value of labour-power of each worker had fallen, due to the rise in social productivity, not only did the surplus value for each worker rise, but the number of workers producing surplus value also rose, so that the mass of surplus value rises on both counts, facilitating further accumulation.

    In fact, this is why there has been continual growth in population over the last 250 years, as well as continual growth in productivity, and yet far from this resulting in ever rising unemployment, ever falling living standards, and ever falling profits, it has led to the opposite.

  7. sartesian Says:

    “In fact, this is why there has been continual growth in population over the last 250 years, as well as continual growth in productivity, and yet far from this resulting in ever rising unemployment, ever falling living standards, and ever falling profits, it has led to the opposite.”

    The opposite being ever rising employment, ever rising living standards, and ever rising profits.

    Of course, no such “ever rising” exists in capitalism. Cycles of rising, and falling, employment, living standards, and profits do.

    Structural changes in levels of unemployment, rates of improvement, stagnation, and decline in living standards, in profitability, in rate of growth occur as capital accumulates.

    All Boffy has said, in his usual long winded way, is that capitalism has expanded since the 18th century. No shit Sherlock.

  8. sartesian Says:

    And this:

    “All of the emphasis on whether INVESTMENT is rising or not is framed in terms of whether investment in fixed capital is rising, but the whole point about Marx’s analysis, is that the organic composition of capital rises not because fixed capital rises, but because circulating constant capital rises, because newer cheaper fixed capital is far more productive, and thereby process much greater quantities of that material.”

    is absolute nonsense.

    Marx iterates and reiterates that the the organic composition of capital rises due to amplification of labor productivity, an amplification that is expressed in the proportional expulsion of living labor from the production process. The point of capital accumulation in the means of production is to convert the increased mass, and value, of those means into greater mass and value of commodities, which are the circulating capital.

    Advanced in technology, in improving the productivity of labor, in expelling living labor, are “cheaper” in that less of the “sunk” capital value is transferred to the commodities in the labor process. The value of the means of production, the fixed capital, expands, increases and yet less can be realized in a circulation period. Hence the “turnover time” lengthens for the total capital deployed in production which is another way of expressing the decline in the rate, the RATIO, of profit realized in the capitalist cycle.

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