Social Policy in Times of Austerity: Global Economic Crisis and the New Politics of Welfare 9781447319139

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IN TIMES OF AUSTERITY Global economic crisis and the new politics of welfare

Edited by Kevin Farnsworth and Zoë Irving

Social Policy in Times of Austerity Global economic crisis and the new politics of welfare Edited by

Kevin Farnsworth and Zoë Irving

First published in Great Britain in 2015 by Policy Press North America office: University of Bristol Policy Press 1-9 Old Park Hill c/o The University of Chicago Press Bristol 1427 East 60th Street BS2 8BB Chicago, IL 60637, USA UK t: +1 773 702 7700 t: +44 (0)117 954 5940 f: +1 773 702 9756 [email protected] [email protected] www.policypress.co.uk www.press.uchicago.edu © Policy Press 2015 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book has been requested ISBN 978 1 44731 912 2 paperback ISBN 978 1 44731 911 5 hardcover The right of Kevin Farnsworth and Zoë Irving to be identified as editors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved: no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior permission of Policy Press. The statements and opinions contained within this publication are solely those of the editors and contributors and not of the University of Bristol or Policy Press. The University of Bristol and Policy Press disclaim responsibility for any injury to persons or property resulting from any material published in this publication. Policy Press works to counter discrimination on grounds of gender, race, disability, age and sexuality. Cover design by Policy Press Front cover photograph: Getty Images Printed and bound in Great Britain by CMP, Poole Policy Press uses environmentally responsible print partners

Contents List of figures and tables iv Notes on contributors vi Acknowledgements ix Introduction Social policy in the age of austerity Kevin Farnsworth and Zoë Irving

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Austerity: more than the sum of its parts Kevin Farnsworth and Zoë Irving

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Conventional wisdom on government austerity: UK politics since the 1920s Michael Hill

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The economics of austerity Stephen McBride

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Neoliberalism, finance-dominated accumulation and 87 enduring austerity: a cultural political economy perspective Bob Jessop

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Alternatives to austerity Dexter Whitfield and John Spoehr

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Crisis, convulsion and the welfare state Frances Fox Piven and Lorraine C. Minnite

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Conclusion A new politics of welfare Kevin Farnsworth and Zoë Irving

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Index

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List of figures and tables Figures 1.1 1.2 1.3a 1.3b 1.3c 1.3d 1.3e 1.3f 1.4 1.5 1.6 1.7

1.8 2.1 5.1 5.2 6.1 6.2 6.3

Public expenditure (percentage of GDP), 2005–7 and 2013 16 Social expenditure, 2007, post-2007 peak and 2014 17 Changes in public expenditure by department, 2007–8 to 19 2011–12 (2008 prices): Finland Changes in public expenditure by department, 2007–8 to 20 2011–12 (2008 prices): Greece Changes in public expenditure by department, 2007–8 to 21 2011–12 (2008 prices): Ireland Changes in public expenditure by department, 2007–8 to 22 2011–12 (2008 prices): Sweden Changes in public expenditure by department, 2007–8 to 23 2011–12 (2008 prices): United Kingdom Changes in public expenditure by department, 2007–8 to 24 2011–12 (2008 prices): United States Tackling fiscal imbalances: the ratio of tax increases to 26 spending cuts since 2009 Pre-crisis spending and planned austerity to 2019 (percentage 28 of GDP) Unemployment averages in least and hardest hit countries, 30 2008 and 2012 Total value of state contribution to working families as a 33 percentage of take-home pay (two children, two adults, one in work earning 40% average wage) Wage increases/falls in the post-crisis period, 2008–10 34 Public wealth in Britain, 1700–2010 44 Corporate income tax rates and average effective taxation 126 indicators, EU-27 (1995–2012) Trends in growth in average wages and labour productivity in 130 G20 developed economies (1999 = 100) European countries with poverty rate increase between 144 2008 and 2012 (based on poverty line fixed in 2008) Total public social protection expenditure (including 146 health) as a percentage of GDP, 1990 to latest year available Child poverty rates, 2009 (percentage of children living 146 in households with equivalent income lower than 50% of national median)

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List of figures and tables

Tables 2.1 2.2 3.1 3.2 3.3 3.4 3.5 3.6 5.1

UK unemployment rates, 1925–35 47 Annual unemployment rate averages and inflation rates in 55 the 1970s Unemployment rates 71 GDP per capita, 2007–12 72 Public sector deficits and debt, and private sector debt 74 (percentage of GDP) Gini coefficient change in market income inequality, 76 2007–11 (by percentage) Gini coefficient percentage change in disposable income 76 inequality, 2007–11 Annual percentage change in household disposable 77 income, 2007–11 (by income group) US comparison of estimated macroeconomic multipliers 119

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Notes on contributors Kevin Farnsworth is a senior lecturer in comparative, international and global social policy at the University of York, UK. His research interests include the political economy of welfare, welfare states and economic crisis, and corporate welfare. He has published widely on business influence on social and public policy, most recently in Corporate Welfare Versus Social Welfare (Palgrave, 2012). He is co-editor with Zoë Irving of Social Policy in Challenging Times (Policy Press, 2011) and the Journal of International and Comparative Social Policy. Frances Fox Piven is distinguished professor of political science and

sociology at the Graduate School and University Center of the City University of New York, USA. She is the author or co-author of more than a dozen books and hundreds of articles on social movements, the welfare state, and social policy, most notably (with Richard A. Cloward), Regulating the Poor: The Functions of Public Welfare, and Poor People’s Movements: Why They Succeed, How They Fail. Michael Hill is emeritus professor of social policy of the University of Newcastle, UK. Since leaving Newcastle he has held part-time visiting appointments at Queen Mary College (London), the London School of Economics and Political Science, and the University of Brighton. He is author of The Public Policy Process, Implementing Public Policy (with Peter Hupe), Social Policy in the Modern World and Understanding Social Policy (with Zoë Irving). In 2009 he was presented with the UK Social Policy Association’s Lifetime Achievement Award. Zoë Irving is a senior lecturer in comparative, international and global social policy at the University of York. Her research interests are in the social politics of economic crisis and austerity, and also in the development of comparative welfare theory that accounts for population size. She is co-editor with Kevin Farnsworth of Social Policy in Challenging Times (Policy Press, 2011) and the Journal of International and Comparative Social Policy, and co-author with Michael Hill of Understanding Social Policy (Wiley Blackwell, 2009). Bob Jessop is distinguished professor of sociology and co-director of the

Cultural Political Economy Research Centre at Lancaster University, UK. He is best known for his contributions to state theory, critical political economy, critical governance studies, the analysis of welfare

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state restructuring and, most recently, cultural political economy. He has recently completed a 3.5-year funded project on crises of crisis management in response to the North Atlantic financial crisis and the Eurozone crisis. Recent books include: Towards a Cultural Political Economy: Putting Culture in its Place in Political Economy (co-authored with Ngai-Ling Sum, 2013); Financial Cultures and Crisis Dynamics (co-edited with Brigitte Young and Christoph Scherrer, 2014); and The State: Past, Present, Future (2015). His personal website and archive are at bobjessop.org Stephen McBride is professor and Canada research chair in public

policy and globalization in the Department of Political Science at McMaster University. Current research interests include comparative labour markets and social policy, new constitutionalism and the political economy of austerity. Recent publications include Private Affluence, Public Austerity: Economic Crisis and Democratic Malaise in Canada, co-authored with Heather Whiteside (Fernwood, 2011), and Orchestrating Austerity: Impacts and Resistance, co-edited with Donna Baines (Fernwood, 2014). Lorraine C. Minnite is an associate professor of public policy at Rutgers University-Camden, where she serves as director of urban studies and mentors doctoral students in the Public Affairs/Community Development programme. She is the author and co-author of two books on electoral rules and racial and class politics in the US, The Myth of Voter Fraud, and Keeping Down the Black Vote: Race and the Demobilization of American Voters (co-authored with Frances Fox Piven and Margaret Groarke). John Spoehr is executive director of the Australian Workplace

Innovation and Social Research Institute at the University of Adelaide in South Australia. He is an associate professor and political economist specialising in economic, employment and social policy. He currently leads a project on the political economy of austerity in collaboration with the Don Dunstan Foundation. Recent publications include State of South Australia – Turbulent Times (2013) and The Engaging State – South Australia’s Engagement with the Asia Pacific Region (2012) with Purnendra Jain, both published by Wakefield Press. Dexter Whitfield is director of the European Services Strategy Unit

and adjunct associate professor, Australian Workplace Innovation and Social Research Centre, University of Adelaide. He has undertaken

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extensive research and policy analysis of regional/city economies and public sector provision, jobs and employment strategies, marketisation and privatisation. Publications include Unmasking Austerity (Spokesman, 2014), In Place of Austerity (Spokesman, 2012), Global Auction of Public Assets (Spokesman, 2010), Public Services or Corporate Welfare (Pluto Press, 2001), The Welfare State (Pluto Press, 1992) and Making it Public (Pluto Press, 1983).

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Acknowledgements This is the second edited collection we have published with Policy Press on the subject of social policy and the (after)effects of the global financial crisis. There is a sense in which this volume is a ‘sequel’ to Social Policy in Challenging Times (2011) and sometimes there is a worry that the successor will have less impact or originality than its predecessor. However, although benefiting from the collected works included in ‘Challenging Times’, this book has different aims and a different format. We are confident therefore that the quality and breadth of contributions in this volume, and the range of approaches to the examination and analysis of austerity, will provide readers with new insights and perspectives on the politics and economics of welfare after 2008. In developing the book, we are grateful to Policy Press and especially Emily Watt and Laura Vickers who have supported the project through several stages, and have demonstrated their unique blend of motivational skills and patience (often simultaneously) in its final production. We would also like to thank the contributors for agreeing to include their work in the volume. Each of them has brought something different and important to a better understanding of the austerity story, and they have all been a genuine pleasure to work with. As co-authors we would also like to thank all those who have attended the various papers we have delivered on the subject of austerity while preparing the book, and the anonymous reviewer of the manuscript; we hope we have done justice to the welcome comments we have received. As we go to press, there is little to suggest that a major change in policy direction will happen anytime soon. If anything, austerity appears to be spreading and deepening across welfare states. We hope, however, that the arguments and ideas presented in this book add force to the momentum for an alternative vision to the austerity future of welfare, or at least the possibility that an alternative vision exists.

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Introduction

Social policy in the age of austerity Kevin Farnsworth and Zoë Irving

The global financial crisis of 2008 was unprecedented in living memory. From the height of the very first wave of the crisis – the collapse of Lehman Brothers in the US – to the ongoing instability of the Eurozone, the economic and social impact has been world-changing (see Farnsworth and Irving, 2012). The period since 2008 has exposed the weaknesses of neoliberal economics and the role played by largescale social policy interventions in mediating its effects. At the very least, the financial crises illustrated that markets were not infallible. Yet, nearly a decade on, it is the welfare state that is on the defensive. The transformation in global capitalism has paved the way for a new age in the global economy, but this new age – the age of austerity – presents perhaps the biggest challenge yet to the future of welfare states. This book begins from the premise that the post-2008 global economic circumstance is best understood as a variety of crises proceeding in several waves, with differential impacts cross-nationally, world-regionally and internationally. Although there are differences in the journeys taken by nation states, the end result is transformed capitalisms and a fundamental resettlement of welfare. The idea that the world has entered a ‘new age of austerity’ is deeply embedded in both policy and popular discourse and is based on the assumption that there has been an irreversible change in the economic and political conditions that underpin systems of welfare. To say that the idea of ‘austerity’ has become ubiquitous in early twenty-first century social policy debate is, in fact, somewhat of an understatement, and although perhaps more explicitly so in Europe than in any other region, austerity is nevertheless the driving force in global welfare development. This is because it is shaping the welfare states in the most powerful economies and redrawing the terms of development in the less powerful ones. Towards the end of the twentieth century, social policy debate attended to the emergence of the ‘middle’ or ‘third’ way in Europe, but ultimately the hegemonic ideas of neoliberalism since the 1980s have transcended all borders, infused policy discourse and influenced the development of welfare in all the major economies, albeit to

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different degrees of magnitude. Nevertheless, the backcloth of the welfare settlement (the state as funder and provider of core services and redistributor of resources and opportunities) although frayed around the edges in the liberal states, remained as both a popular expectation and an intrinsic part of capitalist growth strategies (Hay and Wincott, 2012). It is these basic assumptions that are challenged by the contemporary ‘austerity’ project. This book attempts to make sense of the ascendance of austerity and its impact upon welfare systems; the power and influence of competing actors in the policy process and the ideas and discourse surrounding the future of welfare. It promotes the view that austerity policies and programmes risk locking countries into low-growth futures that further undermine the long-term sustainability of welfare systems. Examples of austerity are everywhere, from public sector job losses, reductions in support for unemployment to privatisation and increases in consumption taxes. Despite the ease in citing examples, however, the full nature of austerity is remarkably difficult to describe. Like the parable of the elephant in the dark, austerity can appear to be many things depending on the perspective from which it is approached, and this renders its analysis both conceptually uncertain and empirically problematic. There are different ways in which we might seek to interpret and understand austerity. We might conceptualise austerity in terms of its paradigmatic qualities, gathering together the many individual examples of retrenchment in welfare policy reform and the shift in discourse around public spending and welfare. We might then posit these as evidence of a fundamental shift in the understanding of the state–citizen contract. Another way would be to take a more positive position on the question of welfare state ‘resilience’, to look to the evidence of growth in state expenditure and conclude that austerity’s bark is worse than its bite. However, neither of these approaches would adequately capture the nature of austerity, which is both a continuation of the past (hence not paradigmatic) and a break with it (hence a challenge to previous understandings). In order to analyse these ‘back to the future’ dimensions of austerity it has to be approached as both concept and practice but within the much broader processes of social, spatial, political and economic transformation; its roots need to be traced, its scope examined and its ambiguities untangled if the complexity of its impact is to be understood. The book reflects this endeavour, recognising that ‘times of austerity’ are not entirely new, but that post-2008 they are different to the kinds of austerity that have existed in previous eras. The book also

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Introduction

reflects both unease with the notion of a post-crisis paradigm change, but the recognition that an, as yet, unresolved reshaping of welfare solidarities and social relations is in progress that is national, regional and international in nature. In putting together this collection, the aim has been to include contributions that explore some of the more familiar but also less prominent questions associated with debates on austerity. These include questions around the ‘costs’ of austerity and who bears the brunt of them but also the future impact of austerity rather than simply its current effects on patterns of spending – an attempt to address the dimension of ‘criticality’ that is suggested as sometimes lacking in the analysis of social policy (Williams, 2015). It is also important to guard against ahistoricism, where a concern with the ‘new age’ neglects what went before. As Blyth’s (2013) analysis demonstrates, austerity has a long history both as an idea and in practice, although it has taken many other names, but in the weighing of evidence of a welfare paradigm change, much of the basis for what is now fixed in public discourse as ‘austerity measures’ is forgotten. Questions around austerity as a symptom of a deeper malaise in the power of states and deeper economic systemic failure are also often clouded by a preoccupation with the ‘here and now’ of expenditure cuts. While concern with the current state of welfare is in the job description of social policy analysts, it is also necessary to locate this in the wider context of what is becoming of the whole welfare state. The chapters in this volume make clear the complex interconnections between the economics and politics of austerity. In the immediate aftermath of 2007, the Occupy movement and the notion of the ‘99%’ indicated a potential brake on the widening inequalities that had contributed to financial collapse, but this has not yet happened, resistance has seemed to weaken and, despite the severity of expenditure cuts in many European countries, the limits of tolerance for austerity do not seem to have been reached. This is not to imply that questions around the legitimacy of austerity are moribund, however, and these represent the final line of enquiry attempted in this volume. The contributions included here thus explore a range of questions on the theme of austerity in the context of its emergence as a welfare and public spending strategy in the context of the post-2008 crises, but also in the context of previous crises and with reference to the longstanding debates since the 1970s on the ‘crisis’ of the welfare state. The chapters also engage with the symbiotic relationship between austerity and neoliberalism (or neoliberalisms), a fusing of ideology and economics that is both subtle and obvious, and represents a significant

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transformative process hiding in plain sight. Although not following a particular comparative methodology and sometimes focusing on individual states as points of reference, the chapters also present a (necessarily) outward-looking international analysis of the ways in which the so-called ‘new age’ of austerity is being shaped by its past, and how it is shaping the future of social policies, the social contract and the welfare mix. Chapter One addresses themes that are developed in detail in the subsequent chapters in attempting to show that austerity is multidimensional – concerning short- and long-term expenditure cuts, fiscal consolidations and the potential reconfiguration of welfare states. The chapter engages with questions of ‘newness’ and the ways in which austerity is identified and presents an analysis of the development of austerity economies of welfare, in the context of austere times. What this chapter seeks to demonstrate is that although in many ways welfare states have ‘been here before’, the options for recovery in the current welfare circumstance are far more limited than in previous times. Not only are the possibilities for the reversal or even the restraint of austerity more constrained, but given the expanse of public intervention in both the market and everyday lives that have so far characterised the advanced economies in the twenty-first century, targeting the ‘public’ to cover the extrapolating costs of the ‘private’ will be all the more damaging in the long term. One of the many ways in which austerity has been framed is as a reminder that we have to ‘live within our means’. In Chapter Two, Michael Hill considers this idea as both a constraint on government and a constraint on people. In the British context on which he writes, austerity can thus be viewed as a re-emerging factor in the twentieth century development of a politics of welfare and associated strategies for economic management. His historical account of the politics of austerity in the 1920s–30s, 1940s–50s and 1970s–80s suggests that the essence of the ‘age of austerity’ that characterised the post-Second World War period was not characteristic of other two periods. This was a period when private thrift was emphasised rather than ‘public austerity’, and debt was not regarded as an intolerable burden, and in this sense is very different to the kinds of austerity imposed in the 1930s and the 1980s. The kinds of austerity seen in the depression years and following the 1970s were more resonant of an ‘acceptance of economic orthodoxy’ across political parties and amongst the electorate, although more reluctant in the 1930s than in the era that established neoliberal credentials in the management of the economy.

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Chapter Three continues the story of austerity’s relationship with debt and debt management and begins by making two key interrelated points regarding the costs of the crisis – firstly that its costs have been social as much as economic and secondly that the response has been defined narrowly in fiscal terms. As history has shown, and as Michael Hill noted in the previous chapter, social costs (such as unemployment) very quickly become economic costs, and a failure by policy makers to engage adequately with the wider economic context risks serious political costs for both those in government and political democracy more generally. What Stephen McBride demonstrates most forcibly in this chapter is that understanding austerity, as the ‘price’ of crisis, requires a full recognition of the breadth of its economic ‘costs’, and their wider and long-term economic impact. This breadth requires looking at the private and corporate dimensions of debt, for example, as well as the more obvious concern with ‘the deficit’, but also recognising the costs of social progress forgone. The long-term impact requires that we consider the future costs to generations to come of the kinds of legal–technical agreements that are being established to ensure fiscal consolidation in the present. As noted earlier, one of the concerns of this book is to consider how, what and why the emerging patterns of social policy reform post-2008 contribute to and/or challenge existing theoretical frameworks of international political economy, comparative welfare state analysis and global social policy. In Chapter Four Bob Jessop provides an account that explores elements of all these questions. In presenting a cultural political economy perspective this chapter adds weight to the notion of austerity as a ‘cognitive lock’ (Blyth, 2001) but further explores the structural processes though which this lock has occurred. In an analysis that addresses association between taxation, the economic and political ‘double life’ of money and the state’s weakening capacity to control either, the discussion highlights how a notion of variegated capitalism allows interpretation of the core problematic of the fiscal crisis within a dynamic complex of economic relations that is not contained in the cross-national ‘flat world’. This international and multiscalar complex resides in all kinds of economic spheres from the US–China to the Germany–EU, to the national experiences of Greece and the UK, amongst regions and cities within states and in the structures of global labour and global finance. In seeking to locate ‘austerity’ within this omni-complexity of social, political and economic change some important distinctions can be identified that enable a ‘simplified understanding’ and a way to ‘go on’.

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As observed earlier, the grip of austerity is strengthened because it connects with established neoliberalism. In Jessop’s terms, the politics of austerity is linked to the type of neoliberalism with which it connects – system transformative (post-Soviet), regime shifting (Reaganomics/ Thatcherism), coercive (structural adjustment in poor debtor nations) and partial (German ordoliberalism for example); but it can also be considered within the framework of (temporal) difference represented in distinctions between policy, politics and polity. Thus austerity can be regarded as temporary measures (such as those enacted during the period of post-war mass production), as an enduring change that secures the privileges of capital (the response to the crisis of Fordism) or as an institutionalised politics that forms an ‘austerity state’. While all these variations are economically ill-founded, it is the latter that is most politically dangerous and socially pernicious, and, as Jessop concludes, in ascendance. Given the rather bleak prognosis for welfare states that the earlier chapters imply, the final two chapters of the book attempt to address two further questions – what are the alternatives to an austere future; and how can an alternative future (or futures) be realised? The chapters are not, however, a futurologist’s excursion into the perfect world of granted welfare wish lists, but rather a more realistic assessment of, firstly, the kinds of alternative policies that have been developed and proposed by stakeholders in the policy process and, secondly, what recent history can teach us about the power of people in securing change. In Chapter Five, Dexter Whitfield and John Spoehr present a collection of policies that together represent the alternative of public investment led growth. This is not the same as the ‘social investment’ agenda but rather a detailed response to what governments, international organisations and social partners have promised, what has been delivered and what has not. The chapter rests on the central idea of a Keynesian investment strategy, an idea that though disparaged and discredited amongst the key proponents of expansionary fiscal contraction, remains significant and powerful in presenting ‘the possible’ in the face of crisis and austerity. The proposals discussed present their own forecasts for potential growth, savings and sustainability, with evidence as valid as that which underpins the strategy of austerity. They also demonstrate that the entrenched idea of ‘private good, public bad’ not only fails to recognise the strengths of the ‘public’ but fails to take account of its role in making the ‘private’ good. Many of the policy initiatives noted in this chapter already have a basis in law and practice and do not require revolutionary renovation to expose their Keynesian

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foundations. Others, such as restructuring and reregulation of financial institutions and the prevention of tax evasion, have widespread political and popular support. Clearly it is those that are most challenging to the existing economic order that fail to make it onto the policy agenda and it is to the ways in which this agenda can be rewritten that the final chapter turns. Frances Fox Piven and Lorraine Minnite’s account of progressive popular movements and their successes in Chapter Six offers a more hopeful picture of the still cloudy future of social policy. In examining what kind of resistance impedes the march of the market, their chapter provides a sharp comparison between the declining egalitarianism of the welfare settlement in the global North and the plain universalism of public social provision in the South. In considering this difference, they question the utility of traditional explanations of welfare state development. The ‘economic determinist’, the ‘capitalisms vary’ and the nation state-centred ‘politics matters’ approaches, they argue, fail to account for the disruptive effects of poor people’s movements. Consequently these explanations are as unable to adequately theorise the developments in the South as they are the lack of defence against austerity in the North, especially Europe. Piven and Minnite point instead to the ‘insulation’ of the political institutions of the Eurozone from the effects of popular protest as an example of the ways in which the politics of the poor have been managed out of the democratic process by globalisation and financialisation. In contrast, and taking a longer view of ‘austerity’ as practised in the structural adjustment programmes of the 1980s, the authors describe the ways in which poor people’s protests transformed both national invocations of IMF (International Monetary Fund) policy reform prescriptions, the approach to welfare in most of Latin America and the global institutions’ presentation of self. In conclusion they argue that the popular foundation of solidaristic provision in Latin America should provoke new ways of theorising and interpreting the politics of the poor in the North. While this is not to suggest that history can be repeated, it does indicate that there are limits to austerity. In a book such as this, which is focused on events and processes that seem to sound a death knell for the welfare state as we know it, it is important to recognise that historically the social conscience has tended to save the day. Welfare states have weathered crises in the past; indeed, if the historical literature on welfare state crises indicates anything, it is that the problems currently engulfing economies and polities are far from new. However, what is also apparent is that the responses to these problems are currently far less socially aspirational than those of

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the past. Considering the contributions to this volume, the message is clear: that progressive social policies offer a better way to cure the present economic condition than is offered by austerity. References Blyth, M. (2001) ‘The transformation of the Swedish model: economic ideas, distributional conflict, and institutional change’, World Politics, vol 54, pp 1–26. Blyth, M. (2013) Austerity: The history of a dangerous idea, Oxford: Oxford University Press. Farnsworth, K. and Irving, Z. (2012) ‘Varieties of crisis, varieties of austerity: Social policy in challenging times’, Journal of Poverty and Social Justice, vol 20, no 2, pp 133–47. Hay, C. and Wincott, D. (2012) The political economy of European welfare capitalism, Basingstoke, Palgrave Macmillan. Williams, F. (2015) ‘Towards the welfare commons: contestation, critique and criticality in social policy’, in Z. Irving, M. Fenger and J. Hudson (eds), Social policy review 27, Bristol: Policy Press.

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Austerity: more than the sum of its parts Kevin Farnsworth and Zoë Irving

Introduction Austerity defines the shape, conditions and ambitions of the post-2008 welfare state. But despite its currency within social policy debate, ‘austerity’ itself remains under-scrutinised and under-theorised. We argue here that austerity is about more than spending cuts and deficit reduction. It concerns the transformation of welfare states in the face of structural economic weakness and antithetical politics that exist within, but also go beyond, nation states. It is about the unwillingness or inability of citizens and policy makers to defend the welfare state in the face of ongoing economic, political and social crises. It is also about the underlying structural weaknesses of contemporary capitalist economies, the delegitimisation of government, the ineffectiveness of governance and the fact that successive welfare state reforms have both steered social policies in less progressive directions and have rendered social policy less, rather than more, compatible with post-crisis economies. The precise impact on developed welfare states is, as we have argued previously (Farnsworth and Irving, 2011, 2012), uneven and variable, but most are encountering austerity in one form or another and many of those that have not so far imposed deep expenditure cuts plan to do so over the next decade. Some welfare states are simply being retrenched, others are undergoing a process of restructuring, and still others are experiencing wholesale reconfiguration. However austerity is manifested, the prognosis for welfare states is not good. Contrast this with the early post-financial crisis period: initial indications were that a progressive politics of welfare expansion could emerge. The financial crisis, unprecedented in terms of its depth and international reach, exposed the inadequacies of the prevailing neoliberal experiment and held the promise of a Keynesian revival. UK Prime Minister Gordon Brown, speaking after a world summit on the crisis in 2009, pronounced the old Washington Consensus ‘dead’, and,

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although unspecific about what had been put in its place, it seemed clear that the recovery would be state led and state funded. But this revival of the state was short-lived. The rhetoric may have changed, but five years on the strange non-death of neoliberalism described by Colin Crouch (2011) is a clear reality – the anticipated demise deflected through the dissociation of politics and economics in a new ‘age of austerity’. This chapter sets out what, if anything, is new about this ‘new age’. First we consider the question of timing: the advent of a ‘new age’ for social policy would indicate paradigmatic change, and this can only be truly confirmed in retrospect and usually through the agglomeration of various social, political and economic threads that always have historical precedents. Historically, the dimensions of essential change in the nature of welfare states are international and are determined by the interplay of political imperatives (such as waging wars) and economic– technological advances. Therefore we take the 2007–8 global financial crisis as a starting point and briefly set out the pressures on welfare states created by this event and its aftermath. Second, we examine the ‘idea’ of austerity, contrasting its use as a simple ‘value-free’ tenet in contemporary economic management with both its history and its more value-laden political intentions for social policy. Third, we present an analysis that aims to demonstrate that although austerity is difficult to determine empirically, it is a defining force in the shaping of postcrisis social policy. Considering public spending and fiscal risk, work and inequality, it is argued that whether through ideological preference, institutional fit or fiscal necessity, the reach of austerity economics is redrawing the social contract. Having established the shape of austerity in terms of its impact and implications for state capacities to maintain the welfare of citizens, the final section argues for the importance of viewing austerity as ‘more than the sum of its parts’. We argue that the real challenge posed by acquiescence to the current economic ‘reality’ established through the austerity project is acknowledging the future social and political reality that its acceptance implies.

From crises to austerities The 2008 global financial crisis and its associated bank-runs, bailouts, credit-ratings alerts and growing debt burdens was the catalyst for the strategy of austerity rapidly adopted by national governments, the European Union and international financial institutions, in the political quest to roll back the state and the economic quest for a return to growth. The precedents to the collapse of Lehman Brothers, the processes by which financial skulduggery in the US subprime mortgage

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Austerity: more than the sum of its parts

market grew into a global economic tsunami and the economic and political responses are now well-rehearsed (see for example Gamble, 2009; Bermeo and Pontusson, 2012; Watson, 2014). Here we will simply outline the key elements of the crisis that are important to social policy. First, the early banking crisis presented governments (and the EU Commission) with limited choice: support the banks and other key industries at huge financial cost to government, or allow them to collapse along with the rest of the economy. Second, existing social policies played a crucial role in protecting citizens and maintaining some demand within economies faced by increasing unemployment and falling wages. Third, subsequent lengthy and, in some countries, multiple recessions created yet more fiscal strains and placed pressure on welfare state services to do more for less. Within the Eurozone, tight fiscal rules prevented governments from utilising macroeconomic tools similar to those employed by the US, UK and other economies to increase liquidity and boost credit, and hence demand. The crisis deepened, especially in Southern European economies within the Eurozone. Fourth, growing debt led to calls for greater fiscal rebalancing at the international level at the same time that some governments, including the US, continued to call for expansionary measures in the interests of generating growth within the global economy.

A new age of austerity? In common usage, the term ‘austerity’ is shorthand to describe a deliberate policy to impose deep and sustained across-the-board cuts in public expenditure (van Kersbergen et al, 2014). More broadly, according to Mark Blyth (2013, p 2), austerity involves a ‘voluntary deflation in which the economy adjusts through the reduction of wages, prices and public spending to restore competitiveness’. Thus, for Blyth, austerity is not simply about cutting expenditure – it is about endeavours to restore a particular economic equilibrium that has been disturbed by seismic economic events. This has implications for taxation and spending and the difficult task of balancing the two, but also implications for jobs and employment. In the post-crisis context of recessions and budget deficits, austerity measures are presented as an antidote to crisis – especially by the political right. Such ‘solutions’ are also present in discussion and prescription at the international level amongst organisations engaged in regional and international economic management – the EU (European Union), ECB (European Central Bank), IMF (International Monetary Fund), OECD (Organisation for

11

Social policy in times of austerity

Economic Co-operation and Development). Within this context of ongoing national and international economic challenges the strategy of austerity has sometimes been questioned, but its basic premise as described by Blyth remains the default solution to restoring economic growth. The argument that we pursue here is that austerity is a powerful organising concept which is prevailing in welfare reforms and welfare ideology at the international level and across the majority of nation states today. Despite its power and influence in determining welfare change, however, austerity is contested. Indeed, it is the ambiguities which surround austerity that add to its hegemonic qualities. For Clarke and Newman (2012), austerity has become a ‘magical’ idea that promises to transform economic strife into economic prosperity, regardless of ample evidence to the contrary. What is clear is that austerity is based primarily on the idea that government borrowing needs to be reduced and that deep cuts in public expenditure, as opposed to tax increases, will have a positive effect in rebalancing economies (so that no one sector dominates) and in creating growth and prosperity in the long term (Fontana and Sawyer, 2011). Pain in the short term is therefore considered to be a price worth paying. Despite the increasing grip of austerity ideals across nations and international governmental organisations, however, austerity is difficult to pin down empirically. This is because cuts in one area of welfare spending do not necessarily constitute an austerity measure, but nor does expansion in one area of welfare spending mean that austerity is not present. Austerity, as Blyth’s (2013) work suggests, may well exist even where it does not explicitly speak its name or where it is termed ‘structural adjustment’, ‘fiscal correction’ or ‘efficiency savings’. Nevertheless, it is clear that states are presently subject to a range of economic structural constraints and social and political pressures that are limiting political choices and undermining the tenability of the welfare state As an idea, ‘austerity’ has some pedigree in both its intellectual origins and its more recent twentieth century incarnations (see Blyth, 2013; and also Hill, this volume). Although it is often contrasted with the economic response to the Great Depression of the 1930s, as a direct approach to economic management (rather than a philosophical underpinning) it gained most traction after the Second World War. In the UK in particular, it spoke to the importance of household thrift and common hardship in the pursuit of national reconstruction (see also Bramall, 2013). Across Europe, states were heavily indebted and in need of substantial state intervention in order to recover. Post-war

12

Austerity: more than the sum of its parts

economies also needed to be reconfigured away from war production towards consumer production and, in this respect, austerity was necessary in order to dampen consumer expectations in line with the availability of consumer goods. However, austerity in this period also coexisted with unprecedented increases in government spending and expansion as welfare states were established and nurtured, and thus, despite its connotations of privation, ‘austerity’ was, as Sissons and French (1964, pp 9–10) imply in their introduction to Age of Austerity 1945–1951, the collective price of the ‘great social experiment’. Austerity today is different from its previous versions in two key respects. Firstly, its contemporary relationship to hardship is not shored up by the collective forging of a new social contract and new construction of a socially protective state, but rather an economically elite driven construction of a new capital-centric, shrunken welfare state model within the post-crisis economy. Public spending and investment is now the problem not the solution, and austerity has become the organising logic of public spending rather than a strategy to permit its growth. The political mechanisms through which this new understanding of austerity has emerged are based in its assimilation into neoliberal thought and re-presentation as a policy panacea ‘du jour’ which, for neoliberalism, fortuitously captures the historical desire to shrink the (social welfare) state and emphasise private markets as the driver of growth. In its current usage, austerity has taken on hegemonic proportions; it has been so well framed that, as the New Economics Foundation (NEF) puts it, in the UK the concept now shapes how most people think, and talk, about the economy (NEF, 2013). The existence of such an effective ‘cognitive lock’ (Blyth, 2001) is possible because the analysis of what was wrong (welfare spending and public debt) and how to put this right (through spending cuts and rapid debt repayment) has become a non-ideological, pragmatic economic ‘truth’. Given the scale of the cuts being made in some quarters, and the ‘esoteric irrelevance’ attributed to modern economic theory (Ormerod, 1994), this truth has been remarkably effective in closing down dissent (although see Piven and Minnite this volume). Secondly, within the plan for post-war welfare state construction, the presence of a clear exit strategy legitimated austerity and made its existence more tolerable, while in its modern form austerity is ‘permanent’. This permanence, presaged but not exactly envisaged by Paul Pierson (1998), is potentially questionable where the exit is located in economic growth, but less so where the exit is located in political will, given the balance of winners and losers in the post-crisis global political economy. It may be that ‘enduring’ is a more appropriate

13

Social policy in times of austerity

term for contemporary austerity than ‘permanent’ (see Jessop this volume), but the failure to grow out of recessionary risk amongst advanced economies, combined with the excavation of welfare state foundations which has begun, renders the ‘new’ age of austerity one of social division rather than civic promise. What the above suggests is that austerity is a political response to crisis and prevailing economic conditions. Yet, as a procession of theorists from Marx to Poulantzas (1972) to Charles Lindblom (1977) would remind us, it is important not to forget in the analysis of political agency the very real structural constraints faced by governments from hostile economic environments, even if those environments are of their own making. Indeed, in the new age, the possibilities for austerity lie in the success of government in manufacturing and creating a shared national vision that cuts in the state will open up new opportunities for growth and recovery in the future. And the more that such endeavours run counter to the evidence, the harder governments have to work in creating the myth (Clarke and Newman, 2012). We will return to these points later, but in the following sections we consider some of the empirical problems in determining whether austerity is happening, and if it is, how much of it there is.

Questioning austerity In contrast to the position on austerity taken in this chapter, and that of others such as Armingeon (2013), there is an important set of counterarguments that question whether, in fact, austerity accurately describes the present direction of welfare states or their long-term future. As much social policy literature over the last three decades has indicated (Friedmann et al, 1987; Keman et al, 1987; Huber and Stephens, 2001; Pierson, 2001; Taylor-Gooby, 2002; SeeleibKaiser, 2008), welfare states may evolve and transform but they have ultimately proved to be incredibly resilient. Thus, portents of doom (for example, O’Goffe’s tale1) tend to be decried for being blind to the fact that welfare states continue to thrive, despite the challenges. Crises of affordability are in reality the chronic problem of markets versus politics, and for the most part politics prevail because the existence of social rights benefits economic interests as well as people (Offe, 1984). Where actual retrenchment does occur, policy legacies tend to ensure that it is gradual, less well coordinated than neoliberal ideologues are able to achieve, and seldom proves to be critical. With this perspective in mind it is unsurprising that some analysts question the power and importance of austerity.

14

Austerity: more than the sum of its parts

Van Kersbergen et al (2014), for example, suggest that welfare states are being reformed rather than retrenched since spending cuts have been accompanied by evidence of expansion and positive social investment measures in some countries. A similar conclusion was reached by Starke et al (2013), who argued that in a number of small states, reforms since the crisis period have been piecemeal, and more in evidence in liberal economies than non-liberal. Studies such as these do provide a post-crisis, cross-national snapshot of the direction of spending reforms, but they still do not provide a definitive statement on the existence of austerity. We take issue with these conclusions in two ways. First, we argue that the available data, especially if we take into account future projections, does point to a prolonged period of deep cuts across the majority of states. Second, we argue that austerity goes beyond such cuts in reconfiguring and transforming welfare states and, in the process, undermining welfare state institutions and structures and the social relations they support. To consider these points in more detail we can examine the presentation of data on public spending, and its relationship to taxation and public debt. State expenditure Beginning with data on expenditure, if we look at overall state expenditure levels as a percentage of GDP (gross domestic product), the customary way of comparing expenditure across nations, the comparative evidence for austerity up until 2013 (the latest available year) is not especially compelling. Figure 1.1 compares spending in a number of economies in two snapshot periods, 2005–7 and 2013. Economies that spent exactly the same in the two periods lie exactly on the line of symmetry. In fact, most economies lie to the left of the line, meaning that expenditure as a percentage of GDP was higher in 2013 compared with the earlier period. Only Israel, Poland and Hungary appeared to be spending less. It is this type of data that is seized upon by those criticising ‘deficit deniers’2 to argue that more cuts in public expenditure and the welfare state are necessary. The problem with such a conclusion is most clearly illustrated by the example of Greece. Having lived through a period of unprecedented austerity, Greek citizens might well be surprised to learn that Greece had a higher level of public expenditure than Finland, Denmark and Sweden! The problem is that if governments froze or even cut spending in real terms, the spending cut will account for a larger share of shrinking GDP.

15

Social policy in times of austerity Figure 1.1: Public expenditure (percentage of GDP), 2005–7 and 2013 60

Slovenia Greece

Denmark

55

France

Belgium Italy

Austria

Netherlands

50

Iceland 2013

Finland

Spain

45

40

Sweden

Hungary

Portugal United Kingdom

Germany Norway Luxembourg Ireland Poland Czech Japan Republic Israel Canada United States Slovak Republic

Estonia

Australia Switzerland

35

30 30

35

40

45 2005-2007

50

55

60

Source: compiled from the IMF Fiscal Monitor dataset, downloaded from http://www.imf.org/external/ pubs/ft/fm/2014/01/fmindex.htm March, 2015

In order to overcome such problems, it is important to examine how the total level of public expenditure, in national currencies, changes year-on-year in real terms (after taking inflation into account). In fact, spending continued to increase during the early period of the crisis. This was to be expected given that most governments spent large amounts protecting their banking sectors and/or individuals began to make greater claims on state benefits as they transitioned out of paid work. As time has passed, however, we begin to see the evidence of austerity, especially if we delve deeper. In fact, governments protected certain parts of public expenditure while cutting others. In the UK, over 50% of the cuts introduced up until 2012 had fallen onto just two areas: benefits and local government. While social protection benefits are the most common indicator of ‘welfare stateness’ in comparative research, it is the expansion of care provision (and other ‘social’ services) that has arguably given meaning to the creation of the ‘welfare state’ in the post-war period. Local government’s primary function in the UK (over 60%) is to fund social care for children and adults (see Duffy, 2013), and the dismantling of these elements of provision is as significant (if not more so) in identifying austerity as is retrenchment of social protection.

16

Austerity: more than the sum of its parts

Cuts in benefits are also not well captured in departmental budgets, where demand is increasing. A snapshot of social expenditure trends over the 2007–14 period (Figure 1.2) illustrates that expenditure increased in all OECD economies between these dates. However, the

Source: OECD, 2014

17

0

5

10

15

20

25

30

35

2014 ( )

Peak level after 2007

2007

Figure 1.2: Social expenditure, 2007, post-2007 peak and 2014

Social policy in times of austerity

increase was much sharper in some economies than others: a rapid increase in Finland, for instance, but only marginal change in Sweden. More revealing is the change in expenditure from the post-crisis high as opposed to 2007 levels. In 2007, most economies were still growing and unemployment was relatively low. Over this period, Germany and Sweden have experienced modest falls in social spending since their post-crisis peak, but the biggest falls have been seen in Greece, the UK, Ireland and Estonia. Of these, Estonia and the UK are not members of the Eurozone, and the UK experienced a milder recession than the Eastern European economies. The demand for social spending has, of course, increased as a result of increasing unemployment and labour market insecurity over this period (the so-called automatic stabiliser effects of protection measures). Despite this, or because of it, a number of governments have sought to put in place measures that at least reduce expenditure within the parts of the total social expenditure budget over which they have most control: the less electorally explosive and more residual elements of benefit levels and social assistance qualifying criteria, as well as expenditure on social care services. Figure 1.3 illustrates the shifting expenditure trends between government departments across six economies. What this reveals is the imposition of cuts across departments in a diverse range of economies. Again, some degree of expenditure adjustment is to be expected, especially in departments such as economic affairs where one of the effects of the crisis was to boost expenditure in this area in the immediate post-crisis period. This notwithstanding, contrary to the assertions of austerity sceptics, the evidence appears to suggest year-on-year cuts in expenditure in a range of economies, even if the scale of the cuts vary. Housing has been a particular casualty in most countries – a symptom of the relationship between property-led financialisation and its fiscal impact – but the impact on spending on the environment is also noteworthy as a step back from the former expansion of what welfare states do.

18

Austerity: more than the sum of its parts

Total expenditure

Environment Public order

Education Health

Economic affairs -25

-20

-15

-10

-5

19

Defence

2009-10 0

5

10

15

20

25

2007-08

2008-09

Finland Source: Data from http://stats.oecd.org/

Social protection

2010-11

Housing

2011-12

Figure 1.3a: Changes in public expenditure by department, 2007–8 to 2011–12 (2008 prices)

Source: Data from http://stats.oecd.org/

20

-120

-100

-80

-60

-40

-20

0

20

40

2007-08

Public order Education

Defence Health

2008-09

Social protection

Economic affairs

2009-10

Greece

Total expenditure

Environment

2010-11

Housing

2011-12

Social policy in times of austerity

Figure 1.3b: Changes in public expenditure by department, 2007–8 to 2011–12 (2008 prices)

Austerity: more than the sum of its parts

Total expenditure

Environment Public order

Education Health

Economic affairs -250

-200

-150

-100

-50

21

Defence

2009-10 0

50

2007-08

2008-09

Ireland 100

Source: Data from http://stats.oecd.org/

Social protection

2010-11

Housing

2011-12

Figure 1.3c: Changes in public expenditure by department, 2007–8 to 2011–12 (2008 prices)

Social policy in times of austerity

Source: Data from http://stats.oecd.org/

22

Environment

Total expenditure Social protection

Public order

Education

Defence

Health

Economic affairs -6

-4

-2

0

2

4

6

8

10

2007-08

2008-09

2009-10

Sweden

2010-11

Housing

2011-12

Figure 1.3d: Changes in public expenditure by department, 2007–8 to 2011–12 (2008 prices)

Austerity: more than the sum of its parts

Source: Data from http://stats.oecd.org/

23

Total expenditure

Environment

Education Health

Social protection

Public order Defence

Economic affairs 40

30

20

10

0

10

20

30

40

50

2007-08

2008-09

2009-10

United Kingdom

2010-11

Housing

2011-12

Figure 1.3e: Changes in public expenditure by department, 2007–8 to 2011–12 (2008 prices)

Source: Data from http://stats.oecd.org/

24

40

30

20

10

0

10

20

30

40

50

60

2007-08

Public order Education

Defence Health

2008-09

Social protection

Economic affairs

2009-10

United States

Total expenditure

Environment

2010-11

Housing

2011-12

Social policy in times of austerity

Figure 1.3f: Changes in public expenditure by department, 2007–8 to 2011–12 (2008 prices)

Austerity: more than the sum of its parts

The impact on the overall shape of welfare systems will, in the most austere states, be huge. Taking the UK as an example of this group (see Farnsworth and Irving, 2012), in December 2014 the Conservativeled coalition released details of its plans to cut public expenditure to around 35% of GDP by 2018. On current levels, this would place the UK below the US and would take expenditure levels as a percentage of GDP back to the 1930s (Office for Budget Responsibility, 2014, p 7). The biggest cuts will again be targeted on social services, transport, local government and discretionary social security payments, whereas spending on the more politically and economically sensitive areas of health and education will be somewhat protected. This confirms the pattern of austerity’s impact on the shape of the welfare state – a reconfiguration of social policy that protects only the ‘deserving’ and politically important, alongside productive welfare measures. These cuts take place against the backcloth of increasing debt repayments, demographic pressures on pension costs and tax cuts for corporations and the most wealthy (see Taylor-Gooby, 2013). Nothing is certain but debt and taxes As already noted above, austerity can be considered a particular political response to a set of economic challenges. The nature and degree of these challenges do vary by country and, more particularly, the specific ways in which countries experienced the global economic crisis (see Farnsworth and Irving, 2011). Nevertheless, whatever their ideological traditions, governments are facing a fiscal crisis that is potentially more destabilising than previous episodes. Evidence for austerity, therefore, should not begin and end with current budgetary outcomes; we also have to consider the prospects and examine planned expenditure. Even welfare states that have so far avoided retrenchment face a choice in the future of spending cuts, tax increases or permanently high levels of debt accompanied by high interest rate charges. As Streeck (2014) has pointed out, the pressure to cut expenditure is compounded by the lack of discretion and flexibility that governments actually possess to undertake the necessary reforms. Living with permanently high levels of debt is also a difficult strategy to sustain given that this leaves very little room for manoeuvre when economies inevitably face other future economic downturns. Debt, especially when it is raised on international markets, can be risky and costly in terms of interest rate payments. In order to reduce debt, governments can, of course, choose to balance their budgets by raising taxation as well as cutting expenditure,

25

Social policy in times of austerity

and governments embarking on austerity may choose to impose cuts that impact on different groups, in a range of areas. As Figure 1.4

Source: Data from OECD, 2014

26

0

10

20

30

40

50

60

70

80

90

%

100

Revenue enhancements

Expenditure reductions

a ni to Es

Figure 1.4: Tackling fiscal imbalances: the ratio of tax increases to spending cuts since 2009

Austerity: more than the sum of its parts

illustrates, some governments have tended to place greater emphasis on spending cuts rather than tax increases – indeed, some have cut both expenditure and taxation in the name of austerity. Many governments have begun to reconfigure their welfare states, not simply imposing heavier cuts on certain services and benefits, but also privatising or outsourcing provision to other suppliers, withdrawing certain services, or changing qualifying rules. Austerity policies can seriously undermine welfare state capacity. How far this is the case depends on the particular mix of measures adopted and tax increases may offer an alternative solution. Relatively small increases in income tax rates in the US, for example, would rapidly wipe out the fiscal deficit and leave overall taxation rates that are lower than most other OECD economies (see Streeck and Mertens, 2013). However, such increases are made difficult by a real or perceived political calculation across industrialised economies, that voters in many of these countries are unwilling to support tax increases (Streeck and Mertens, 2013). Tax increases may also dampen consumption unless they are targeted on large corporations and the wealthy (see Piketty, 2014) – but even if a redistributive impulse could be harnessed, tax avoidance would cushion these particular constituents against substantial increases in liability. In the absence of tax rises, governments have to live with prevailing debt levels, or they have to maintain tax levels but cut expenditure in order to reduce debt. The austerity solution would suggest that spending cuts should take priority over tax increases, and that tax cuts should take priority over increases in welfare expenditure. The ghost of spending futures A combination of slow growth and high levels of demand have meant that fiscal imbalances have continued to plague welfare states six years after the initial international banking crisis. To put their economic houses in order, the IMF has recommended that up until 2030 many countries engage in a massive programme of fiscal rebalancing consisting of deep and sustained cuts in public expenditure coupled with some tax rises (although the former has been favoured above the latter) (Farnsworth and Irving, 2011, p 19). Not only does this illustrate the enormity of the adjustment required in some countries (Greece, Ireland, Japan, the UK, the US and Spain in particular) but it also indicates that larger cuts are required in those countries that historically tend to spend least amongst developed welfare states. If IMF advice is followed by governments in these countries, the gap will only widen between the more generous and less generous states.

27

Social policy in times of austerity

Moving away from IMF projections, Figure 1.5 plots actual planned government expenditures in a number of countries up until 2019. The x-axis plots the extent of planned austerity compared with pre-crisis expenditure levels (in this case, average expenditure between 2005 and 2007) and the y-axis plots the difference between planned expenditure in 2019 and the highest level of expenditure during the post-crisis

Spain France

Belgium

Netherlands Italy Denmark Iceland

2

Source: Compiled using IMF 2013 data

28

-6

Ireland

UK -5 Greece

Sweden

Poland

+ / - change from post-crisis high to 2019

Portugal-4

-3

-2

-1

0 -4

-2

Germany

1

2

3

4

0

Canada Australia USA

4

% change from 2005-07 to projected expenditure in 2019

6

Luxembourg Japan

Norway

8

Finland

10

Figure 1.5: Pre-crisis spending and planned austerity to 2019 (percentage of GDP)

Austerity: more than the sum of its parts

period. Together, these present a useful mechanism for indicating the degree of austerity yet to come. These data suggest that very few countries have planned expansion and most governments intend to impose deep spending cuts (as opposed to tax increases) in order to balance their budgets over the next five years. In the most ‘austere’ states, where large cuts have already been imposed, governments intend to impose further cuts that are in excess of 4% of GDP. This represents a massive adjustment in overall public expenditure levels regardless of shifting GDP. However, as noted earlier, although the forecast spending cuts alone represent an unprecedented challenge to the basis on which welfare states have been built, they are not the only way in which austerity is manifested and so-called ‘adjustments’ in the labour market and incomes are of equal importance as it unfolds. Working through austerity There are many lines of enquiry that pursue links between jobs and austerity but here will we focus on the significance of unemployment. Unemployment rates, like spending to GDP ratios, are a nebulous ‘measure’ of the success of austerity policies. At the regional level, the strategy of austerity adopted in the Eurozone has been defended even though unemployment rates in only two of the member countries (Germany and Austria) are less than 5%. In Greece and Spain rates of unemployment are well over 20% and six of the remaining member states are well above the average rate (11.4% according to Eurostat figures). In the UK in comparison, government claims that austerity is working are strengthened by reports that unemployment has fallen (below 6% in early 2014). In both scenarios the result is official demands for more austerity. This indicates that in its twenty-first century economic reformulation, austerity is indeed simply the reproduction of previous (failed) attempts by governments to cut their way to growth (see Blyth, 2013) an approach to economic management that has been disavowed by numerous influential economists (including Joseph Stiglitz, Paul Krugman, Martin Wolf, Anatole Kaletsky and Will Hutton). In its political reformulation, austerity simply provides a new means to revive the neoliberal model of precarious employment which began in the 1980s but faltered (in Europe) in the 1990s–2000s as it hit the hurdle of the European ‘social model’. Both unemployment and the rise of precarious employment are at the centre of the welfare state’s contemporary contradictions. Increasing insecurity in the labour market is one of the most significant ‘scarring’ effects of austerity: the long-term and cumulative

29

Social policy in times of austerity

‘diswelfare’ associated with the withdrawal of state support. One of the implications of the varieties of crises is that the scarring effects are also unevenly distributed across states and the subnational regions within them. Figure 1.6 gives an indication of the unemployment trends post-2008. Here we see that in some countries unemployment

Source: OECD data accessed via http://stats.oecd.org/

30

0

5

Average (2008)

Average (2012) 10

Hardest hit (2012)

Least hit (2012)

Hardest hit (2008) 15

20

25

30

%

Least hit (2008)

Figure 1.6: Unemployment averages in least and hardest hit countries, 2008 and 2012

Austerity: more than the sum of its parts

has fallen – in Germany and Chile unemployment was lower in 2012 than in 2008, while in others average unemployment has increased in excess of 100% (Denmark, Greece, Ireland and Spain). However, these averages mask growing regional disparities which, as the historical geography of recession shows, have a spatial impact on the solidarity upon which welfare states are founded. Unemployment in Turkey, for example, was less than 5% in the best performing regions in 2012, but higher than 10% in regions that were hardest hit by the crisis. In Spain, unemployment in the least hit area increased from 21% to 28% while in the worst hit area it increased from less than 8% to 20%. In France, unemployment in the least hit region declined slightly between 2008 and 2012; in the worst hit region it almost doubled to over 11% between 2008 and 2012. It is little wonder that, as the 2014 IAGS (Independent Annual Growth Survey) report suggests, regional convergence within the EU has ended and regions are increasingly ‘heterogenous in their fate’ (IAGS, 2014, p 71). The point of highlighting these regional disparities is to demonstrate that even were national unemployment to be taken as a general indicator of austerity’s impact (or not), its spatial divisions tell a different story. And, of course, unemployment brings many costs, not least in terms of falling revenues, higher benefit costs and a range of other related social costs (see Chapter Three). Rising unemployment as a consequence of the financial crisis (including public sector job losses) places greater pressure on social protection expenditure, and the experience of unemployment brings with it, in addition to income maintenance support, a whole range of social risks and consequent support needs that accumulate exponentially the longer the period of unemployment. These extend from simple and more immediate ‘passport’ benefits attached to unemployment benefit, to intermediate support for job searching and retraining to deeper longer-term effects on health, housing and life chances. In the EU28, the number of those unemployed for a year or more is close to 12 million. This level of unemployment undermines states’ capacities to generate current and future revenue through the loss of human capital, and unemployment therefore is clearly a serious and cumulative potential cost challenge to the aims of austerity. At present, this challenge is being circumvented in two key ways, both of which are unsustainable in the long term. Firstly, and as part of the ongoing individualisation of social risks, the non-productive elements of support are simply being removed within the wider framework of cuts and in their place a combination of informal and charitable provision (where it exists) is relied upon (see for example O’Hara, 2014). The productive elements (retraining

31

Social policy in times of austerity

and so on) are incorporated into the privatisation of employment services intended to achieve efficiency savings. Secondly, while austerity measures are framed as growth friendly and job creating, job creation in the aftermath of the crisis has tended to be found in employment that is most subject to the porosity of the boundary between being ‘in’ and ‘out’ of work, with a regional distribution that is deeply divisive. The post-crisis recessions have fostered an acceleration in employee flexibilisation (see for example IAGS, 2014, pp 30–34), and since 2011, Eurostat has included three new forms of ‘supplementary’ unemployment in data collection in an attempt to account for the diversity of employment circumstances (linked to household circumstances). One indicator of the mirage of ‘working’ austerity is the proportion of involuntary part-time workers in total employment which has risen in the majority of OECD countries since 2007, and particularly so in the austerity economies (Greece, Ireland, Italy, Spain and the UK, where is more than doubled between 2007 and 2013, and Portugal according to OECD data). While growth in this form of employment reduces unemployment rates, precarious employment is by definition that which is incapable of providing adequate income or security for workers, and this fate is no longer confined to marginalised groups in the labour market, but is extending to older and more highly educated workers (Schmitt and Jones, 2012). Governments have for some time provided increasing levels of direct and indirect support to employers through job subsidies and employee tax credits, and this perverse incentive to employers to pay and protect less, though part of the logic of austerity, cannot be sustained in the face of decreasing wages and falling revenues (see Farnsworth, 2012). The consequence of this that the burden of paying ‘living wages’ shifts from employers to the state (see Figure 1.7). In the long term, as Schäfer and Streeck (2013) have noted, the consequences of spiralling austerity for intergenerational inequalities, social mobility and the incidence of economic disadvantage are dire, and together, we would argue, represent the ‘inverse welfare law’ that an austerity economy produces. Sharing austerity An inverse welfare law would imply that the more public investment and social provision is needed the fewer the accessible resources there will be to meet the need. This is not to argue that the resources do not exist. One of the core ambiguities of austerity is that while the discourse that frames it is one of a shared burden, whether amongst peoples of individual nations or across regions, the reality is very different. As we

32

Austerity: more than the sum of its parts Figure 1.7: Total value of state contribution to working families as a percentage of take-home pay (two children, two adults, one in work earning 40% average wage)

Belgium Italy Greece

2010 -2012

2005 -2007

Spain

Netherlands Switzerland Portugal Iceland Slovak Republic Austria Hungary United States Czech Republic Canada Poland Norway France Sweden Germany Australia

0

20

40

60

80

100

120

140

Finland United Kingdom New Zealand Ireland Japan

Source: Data from Social Expenditure Database, accessed via http://stats.oecd.org/

discuss further below, austerity’s socially uneven impact is both cause and effect in its political-economic ‘lock’ on policy options. Growing inequality has been a feature of many developed economies since the 1980s, and while the economic crisis initially threatened to hit the wealthy quite hard, the top 1% have recovered more rapidly than lower income groups since 2010. Figure 1.8 illustrates that across a number of economies, the top 1% have seen higher increases in incomes whereas the bottom 90% have seen their incomes fall. The only exception to this, amongst wealthy economies for which there is

33

Social policy in times of austerity

complete data, is Norway. In the US, the meteoric capture of income gain by the top 1% relative to the bottom 90% is particularly stark, and follows rising inequalities over a much longer period. According to Tcherneva (2014), the top 1% captured just under half the total income gains through the 1980s–90s, 76% between 2001 and 2007 and 95% in the immediate post-crisis years of 2009–12. Figure 1.8: Wage increases/falls in the post-crisis period, 2008–10

30

10 Top 1% wage increase, 2008-2010

0

-30

United States United Kingdom

Sweden Norway New Zealand Japan Ireland France

-20

Denmark Canada

-10

Bottom 90% wage increase, 2008-2010 Australia

Increase / fall in annual incomes of top 1% and bottom 90% within population

20

-40 -50 Source: Compiled from incomes data extracted from http://stats.oecd.org

As top earners have increased their share of incomes, the bottom 90% have made up income shortfalls through liberalised credit markets and an increase in private debt or ‘privatised Keynesianism’ as Colin Crouch (2011) puts it. However, the fact that such debt is difficult to service where labour markets have become more flexible and precarious was one of the factors that helped to fuel the global economic crisis in the first place and in most industrial economies private debt in 2010 remained higher than it was in 2000. Although declining growth might be assumed to equalise or at least not drastically alter the distribution of incomes as profits were

34

Austerity: more than the sum of its parts

squeezed, the actual effect of the crisis was to further decrease labour shares. Moreover, research carried out by the International Institute for Labour Studies found that wage shares fell unevenly between workers. The wage share of low-skilled workers fell by 12 percentage points in the most developed economies while it increased by 7 percentage points for the most highly skilled workers (International Institute for Labour Studies, 2011, p 58). In many ways, the better off are insulated against the effects of public service decline, unemployment and falling wages. However, capital represents a heterogeneity of actors, and some of those in the 1% can see that its detachment is a systemic problem. Even within finance capital, which has the most to gain from austerity (ILO, 2015), the Chair of Pimco, the biggest global bond trading company, recently suggested that labour and capital need to be rebalanced through higher taxes on the rich and higher minimum wages for the poor.3 Clearly austerity is not ‘a problem shared’ and in the closing discussion we attempt to draw together the different strands examined above to consider what they imply for welfare states and the welfare state.

Austerity economies and the reconfiguration of the welfare state The dimensions of austerity that have been explored above support the argument that, as an economic tool, austerity is not fit for purpose: growth has not been restored and debt has not been reduced. For Blyth (2013), austerity is a dangerous idea precisely because it is selfdefeating: all previous manifestations have similarly failed to achieve growth and in this sense austerity is, as Blyth (2013, p 226) puts it, ‘ideologically immune to facts and basic empirical refutation’. As a political tool it has been of much greater use however. In this respect, austerity presents more of a challenge to welfare states than ‘old’ neoliberalism (which could at least be challenged on ideological grounds) because austerity is accepted as ‘simple’ economics, beyond politics and ideology. The propagation of such ideas is shaped as much by who gains from austerity as the ‘needs’ of the economy, and austerity represents a powerful counterforce to the threat of a more progressive social democratic welfare state (see Mirowski, 2014). While this has immediate implications for advanced economies, it also has long-term implications as a brake on more solidaristic developments in emerging economies, and ultimately all states, since the global pressures to develop policies to support social integration alongside those supporting production will be vastly reduced.

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Social policy in times of austerity

Since 2007 policy makers have been confronted by essentially the same problem that has troubled welfare states since they were established: how do governments create the conditions for capitalist accumulation and profitability while maintaining legitimacy (Streeck, 2014). The kinds of policy prescriptions that are put forward by austerity advocates repackage neoliberal responses to this problem despite the challenge to their efficacy that the financial crisis represents. Such is the power of political and economic elites following three decades of favour that alternative policy options are almost absent from mainstream political debate. In this environment, even international organisations, free from the constraints of national politics, appear unable to marshal a coherent response. The European Union and IMF have wrestled for solutions only to offer contradictory prescriptions, at times supporting deep spending cuts and at other times criticising austerity measures. Their criticism is not born of a concern with social justice or human needs however – since 2008, when the IMF has condemned spending cuts this has been primarily on the grounds that they are undermining global or national economic objectives. As we have already indicated, the current age of austerity is about much more than the expenditure cuts themselves. It represents an economic and political environment that is increasingly hostile to social welfare states, where austerity itself provides the logic for their demolition. Although the state has not (yet) shrunk, it is being reconfigured and this reconfiguration favours capital. To draw on the neo-Marxist analysis of the 1970s, governments are withdrawing support that primarily fulfilled a legitimation function at the same time that they have had to direct increasing resources to accumulation efforts. This began with the bailing out of banks, and has culminated in a steady shift away from social welfare towards corporate welfare (Farnsworth, 2012). Thus, although the move towards ‘active’ social policy and the social investment state can be welcomed on one level, such moves can also be recognised as attempts to utilise public effort in order to boost private profits. The short-term gains are obvious, but these are not sustainable in the long term since even were the solidaristic and integrative elements of welfare provision dismantled altogether, the ever less well paid and insecure could not support the revenue base required for productive measures. Measures characterised as ‘social investment’ are presented by van Kersbergen et al (2014) as evidence that the demise of the welfare state is not on the horizon. From our perspective, the question arising is what makes these ‘social’ investments in the context of the, arguably more significant, reconfiguration of the

36

Austerity: more than the sum of its parts

state–citizen contract and the discipline of the (global) labour market by which it is underpinned. Cuts are nevertheless resulting in deep institutional changes as economic priorities have come to play an even more dominant role in shaping welfare state efforts than imagined by past scholars of welfare state ‘crisis’. The pre-crisis period was certainly marked by a shift towards the creation of more competitive states and the higher priority afforded to economic concerns (see Cerny, 1990) as social policies were increasingly used as tools to underpin greater levels of economic growth (which would, in turn, help to generate jobs, higher incomes and additional resources to spend on welfare services). In the new age of austerity, the priorities have shifted towards economic stability and recovery resolved through deep and sustained public spending cuts. Public services can bear short-term (and ‘easier’) cuts to expenditure through staffing freezes, cutting pay, running down departmental (and local government) reserves, mothballing infrastructure projects and promoting efficiency savings. But in the medium term, cuts begin to undermine the capabilities of institutions to deliver good-quality services. This, in turn, undermines confidence in state services, which governments are able to harness as justification for further cuts. In the medium to long term, expenditure cuts become more constrained, and more debilitating and scarring, as the scope for ‘easy’ savings is exhausted and remaining reserves are run down. As the tolerance for austerity is challenged, the politics in the age of austerity is becoming more technocratic, more illiberal and more divisive. Blyth may be correct in arguing that there is an element of ‘voluntarism’ involved in austerity measures, but we would add that it is as important not to overemphasise political choice as it is not to underestimate it. Most obviously, for the citizens and governments of Greece and Italy, and even Portugal, Spain and Ireland, the element of choice in public expenditure evaporated once the ‘choice’ to ‘pay and stay’ – to default on debt or leave the Eurozone – had been taken. But in other less exposed cases too, economic interests are steering, if not determining, politics and policy choices within states. The new age of austerity is one in which markets overshadow politics and where democracy is swept aside where it threatens to assert social rights above certain economic fundamentals. It remains to be seen whether those hardest hit by austerity will fight back and reassert these rights.

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Social policy in times of austerity

Conclusions The above discussion has indicated that welfare states today exist within a world in which austerity, as a reformulated manifestation of neoliberalism, increasingly sets the terms of the debate. A focus on ‘cuts’ alone, while providing a picture of what welfare states do, does not adequately capture austerity’s capacity to transform what welfare states are, and will be in the future. This is not to suggest that all states are pursuing austerity with equal rigour and enthusiasm, or that austerity is permanent. Just as the economic crisis interrupted neoliberalism (albeit briefly), austerity may be abandoned in the face of its ongoing failure to deliver growth. The IMF has already begun to issue warnings of a low-growth future for advanced economies and the European Central Bank decision in early 2015 to introduce a trillion euro programme of quantitative easing indicates that this warning is being heard. Nevertheless, slow growth will ensure continued demands on social protection and depressed state revenues. Austerity is however undermining political legitimacy and encouraging electorates across Europe and beyond to look to more radical alternatives. The election of the left-wing party Syriza in Greece in early 2015 and the rise of anti-austerity Podemos in Spain have occurred at the same time as the French Front National and other far right parties are gaining ground in national and European politics. There are doubts on all sides around the sustainability of austerity in the long term, and whether the austere welfare state necessarily means small government more generally. Neoliberalism, with its emphasis on relaxing regulations on capital and flexibilising labour, was the primary cause of the global economic crisis, with the net result that the attempt to shrink the state resulted in an unprecedented expansion of ‘peacetime’ capitalist states. By 2010, in most industrial states, the public sector had never been bigger. At the same time that debt and fiscal imbalances have encouraged governments to pursue deep cuts in social welfare expenditure, they have also felt the pressure to protect capital, a pressure all the more forcefully applied given the gains that capital has consolidated since 2007. What the recent neoliberal past has illustrated is that paradoxically, and contrary to the rhetoric, sustained heavy state intervention is required in order to support it. Austerity also demands active government, but in a way that redistributes state effort and displays a disregard for the social purpose of social policies. We suggest that this disregard is more calculated than careless, and that targeting the socalled ‘discretionary’ elements of public spending is, in terms of the

38

Austerity: more than the sum of its parts

impact on social security (in its widest sense), more transformational for and damaging to the welfare state. Unpicking the social fabric in pursuit of an iron-age social contract may well be eventually selfdefeating, because markets are social after all. More significant will be the scars on solidarity and life chances that are left, and the challenge for social recovery that they represent. Notes 1

This refers to Rudolph Klein’s characterisation in Klein (1993).

2 A term used by UK Chancellor George Osborne in his Mais Lecture to the City, 24 February 2010.

Bill Gross speaking in June 2014 www.social-europe.eu/2014/06/real-businessleaders/ 3

References Armingeon, K. (2013) ‘Breaking with the past? Why the global financial crisis led to austerity policies but not to the modernization of the welfare state’, in C. Pierson, F.G. Castles and I.K. Naumann (eds), The welfare state reader, 3rd edition, Cambridge: Polity. Bermeo, N. and Pontusson, J. (eds) (2012) Coping with crisis, government reactions to the Great Recession, New York, NY: Russell Sage Foundation. Blyth, M. (2001) ‘The transformation of the Swedish Model: Economic ideas, distributional conflict, and institutional change’, World Politics, vol 54, pp 1–26. Blyth, M. (2013) Austerity, the history of a dangerous idea, Oxford: Oxford University Press. Bramall, R. (2013) The cultural politics of austerity: Past and present in austere times, Basingstoke: Palgrave Macmillan. Cerny, P. (1990) The changing architecture of politics: Structure, agency, and the future of the state, London: Sage. Clarke, J. and Newman, J. (2012) ‘The alchemy of austerity’, Critical Social Policy, vol 32, no 3, pp 299–319. Crouch, C. (2011) The strange non-death of neoliberalism, Cambridge, Polity. Duffy, S. (2013) A fair society?, Centre for Welfare Reform, www. centreforwelfarereform.org/uploads/attachment/354/a-fair-society.pdf Farnsworth, K. (2012) Social versus corporate welfare, London: Palgrave. Farnsworth, K. and Irving, Z. (eds) (2011) Social policy in challenging times: Economic crisis and welfare systems, Bristol: Policy Press.

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Farnsworth, K. and Irving, Z. (2012) ‘Varieties of crisis, varieties of austerity: Social policy in challenging times’, Journal of Poverty and Social Justice, vol 20, no 2, pp 135–49. Fontana, G. and Sawyer, M. (2011) ‘Fiscal austerity’, Challenge, vol 54, no 2, March, pp 42–60. Friedmann, R., Gilbert, N. and Sherer, M. (1987) Modern welfare states: A comparative view of trends and prospects, Brighton: Wheatsheaf. Gamble, A. (2009) The spectre at the feast, Capitalist crisis and the politics of recession, Basingstoke: Palgrave Macmillan. Huber, E. and Stephens, J.D. (2001) Development and crisis of the welfare state: Parties and policies in global markets, London: University of Chicago Press IAGS (2014) Independent annual growth survey, Third report, December 2014, www.iags-project.org/documents/iags_report2015.pdf ILO (International Labour Organization) (2015) Global wage report, 2014/15: Wages and income inequality, Geneva: ILO. IMF (International Monetary Fund) (2013) Fiscal monitor, 2013, Washington, DC: International Monetary Fund. International Institute for Labour Studies (2011) World of work report 2011: Making markets work for jobs, Geneva: ILO (International Labour Office). Keman, H., Paloheimo, H. and Whiteley, P. (1987) Coping with economic crisis: Alternative responses to economic recession in advanced industrial societies, London: Sage. Klein, R. (1993) ‘O’Goffe’s tale’, in C. Jones (ed), New perspectives on the welfare state in Europe, London: Routledge. Lindblom, C.E. (1977) Politics and markets, New York: Basic Books. Mirowski, P. (2014) Never let a serious crisis go to waste, London: Verso. NEF (2013) Framing the economy: The austerity story, London: New Economics Foundation. OECD (Organisation for Economic Co-operation and Development) (2012) Restoring public finances, 2012 update, Paris: OECD. OECD (2014) Social expenditure update: Social spending is falling in some countries, but in many others it remains at historically high levels Insights from the OECD Social Expenditure database (SOCX), November, Paris: OECD. Offe, C. (1984) Contradictions of the welfare state (J. Keane, ed), London: Hutchinson. Office for Budget Responsibility (2014) Economic and fiscal outlook, December 2014, CM8966, London, HMSO. O’Hara, M. (2014) Austerity bites, Bristol: Policy Press. Ormerod, P. (1994) The death of economics, London: Faber and Faber.

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Piketty, T. (2014) Capital in the twenty-first century, English language edition, Cambridge, MA: Belknap Press. Pierson, P. (1998) ‘Irresistible forces, immovable objects: Post-industrial welfare states confront permanent austerity’, Journal of European Public Policy, vol 5, no 4, pp 539–60. Pierson, P. (ed) (2001) The new politics of the welfare state, Oxford: Oxford University Press. Pierson, P. (2004) Politics in time, Princeton, NJ: Princeton University Press. Poulantzas, N. (1972) ‘The problem of the capitalist state’, in R. Blackburn (ed), Ideology and the social sciences, London, Fontana, pp 238–53. Schmitt, J. and Jones, J. (2012) Where have all the good jobs gone?, Washington, DC: Center for Economic and Policy Research, www. cepr.net/documents/publications/good-jobs-2012-07.pdf Seeleib-Kaiser, M. (ed) (2008) Welfare state transformations, comparative perspectives, Basingstoke, Palgrave Macmillan. Sissons, M. and French, P. (eds) (1964) Age of austerity 1945–1951, London: Hodder and Stoughton. Starke, P., Kaasch, A. and van Hooren, F. (2013) The welfare state as crisis manager: Explaining the diversity of policy responses to economic crisis, Basingstoke: Palgrave Macmillan. Schäfer, A. and Streeck, W. (eds) (2013) Politics in the age of austerity, Cambridge: Polity. Streeck, W. (2014) Buying time: The delayed crisis of democratic capitalism, London: Verso. Streeck, W. and Mertens, D. (2013) ‘Public finance and the decline of state capacity in democratic capitalism’, in A. Schäfer and W. Streeck (eds), Politics in the age of austerity, Cambridge: Polity. Taylor-Gooby, P. (2002) ‘The silver age of the welfare state: Perspectives on resilience’, Journal of Social Policy, vol 31, no 4, pp 597–622. Taylor-Gooby, P. (2013) The double crisis of the welfare state and what we can do about it, Basingstoke: Palgrave. Tcherneva, P.R. (2014) ‘Reorienting fiscal policy: A bottom-up approach’, Journal of Post Keynesian Economics, vol 37, no 1, pp 43–66. Van Kersbergen, K., Vis, B. and Hemerijck, A. (2014) ‘The great recession and welfare state reform: Is retrenchment really the only game left in town?’, Social Policy and Administration, vol 48, no 7, pp 883–904. Watson, M. (2014) Uneconomic economics and the crisis of the model world, Basingstoke: Palgrave.

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two

Conventional wisdom on government austerity: UK politics since the 1920s Michael Hill

Introduction What do we mean by austerity? Taking a very wide view, Schui (2014), without explicitly defining austerity, writes that ‘The notion that individuals, states and societies benefit from limiting their consumption is almost as old as humanity’ (taken from a Kindle edition, location 20). This leads him on to an analysis of austerity that roots economic theories in philosophical, even psychological, frameworks. In terms of the approach to the ‘politics of austerity’ adopted in this chapter there are two different issues: (1) about austerity as applied to government, where there is a history as old as government itself concerned with government living within its means – as exemplified in disputes about extravagant monarchs (Magna Carta, Charles I), or (2) government requiring austerity of citizens, which after all would have been a non-issue until the emergence in the twentieth century when politics began to be about aspects of welfare and the securing of decent employment for all. It is in the second sense that Mark Blyth defines austerity as ‘a form of voluntary deflation in which the economy adjusts though reduction of wages, prices and public spending to restore competitiveness, which is (supposedly) best achieved by cutting the state’s budgets, debts and deficits’ (Blyth, 2013, p 2). However, even then there is a need to pause to ask: on whom is government imposing austerity? I am approaching these issues from the perspective of a political sociologist concerned to elucidate the ideas, with implications for the form austerity takes, in government approaches to the management of the economy. Hence, although I probably cannot hide my preferences between the competing ideas, because of their implications for citizens,

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Social policy in times of austerity

I do not intend to express judgements about their efficacy (or indeed necessity) for the management of the economy. While the overview of this subject goes back to the nineteenth century, the main focus is on three periods: the late 1920s and early 1930s, the immediate post-1945 period and the 1970s–80s. It will be suggested that in the first of those periods the dominant idea was still that the government could do little to manage the economy in ways that advanced welfare. Then in the second one austerity (in both senses) posed massive political problems about rebalancing public accounts and achieving post-war prosperity for a clearly welfare oriented government. The third period then is notable for the emergence of views about economic management which, while not involving simple reversions to austerity in the first sense, nevertheless challenged the idea that governments could engineer welfare through the management of the economy.

Before the 1920s – austerity as a government budgeting issue A look at the long-run pattern of government expenditure and debt shows the dramatic impact of wars (Clark and Dilnot, 2002, see also Piketty, 2014). This is accompanied, at least in the twentieth century, by a ‘ratchet effect’ which can perhaps be seen as ‘the role of wars in allowing scope for higher levels of non-military spending once war is over’ (Clark and Dilnot, 2002, p 3). Not surprisingly then, no simple Figure 2.1: Public wealth in Britain, 1700–2010

Source: Piketty, 2014. Reproduced with kind permission of the author.

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UK politics since the 1920s

association can be found between levels of public expenditure and heightened awareness of the need for government austerity through much of the twentieth century. Piketty (2014, figure 3.3, p 126) shows a combination of the dramatic rise of debt in war and very slow subsequent downward trends. He also notes that the trends in respect of public assets were much less dramatic (see Figure 2.1). It is interesting to note that data on the UK ‘national debt’ shows levels of government debt of twice GDP (gross domestic product) at the end of the Napoleonic Wars. Hills and Thomas (2010, p 281) observe that ‘This level was only surpassed at the end of World War II and is three times as high as the projected peak in the public sector debt ratio in the June 2010 Budget’ (italics original). What is also interesting about this nineteenth century data is that this debt to GDP ratio was only slowly reduced, so that even by the middle of the century it was still about equivalent to GDP and it was not reduced to half GDP (a figure often suggested as a target for government now) until the end of the century (Hills and Thomas, 2010, chart 8). This suggests a fairly remarkable acceptance by the rich of the case for lending to government. In this respect it is important to note that so long as government was trusted, an investment in government bonds represented a safe way of saving, relative to a still uncertain private market. The servicing of the debt represented one of the most salient elements in the public budget. In the 1850s 51% of central expenditure was on debt interest and the only other significant item was defence expenditure at 28% (Feinstein, 1972). Yet so long as those who had lent to government continued to get good terms on their investments and felt their money to be secure, government debt was not seen to be a problem. As Jenkins notes of Gladstone’s role as Chancellor: Nineteenth Century Chancellors, at least in peacetime, were subject to none of the short-term pressures by which, in the decline of the British economy, their post-1930 successors have been frequently buffeted. In the 1850s there was no danger of a weak budget leading to a run on sterling. (Jenkins, 1995, p 148) When he was Chancellor, Gladstone saw income tax as a distasteful necessity and was not unaware of the distributive effects of customs duties and other forms of indirect taxation, but his primary concern was to balance the government’s books in an era in which only war (in the Crimea) was a major charge on the public exchequer. Such austerity as was imposed on the public by the government took the

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Social policy in times of austerity

form of imposts upon the relatively well off, and even the need for these depended upon limits of these people’s willingness to lend to the government. Change began to come with two obviously related things – a widened electorate and the emergence of government expenditure for social ends. Perhaps the first UK election in which controversy over economic policy was salient was that of 1906, in which the Liberals (in alliance with an emergent Labour Party) defeated a Conservative one proposing inroads into free trade with imperial preference duties. The Liberals made much of predictions about the likely rise in the price of bread. For the next 30 years one of the most fundamental divisions between the parties was about import duties, the Conservatives increasingly seeing the imposition of some duties as needed to protect UK prosperity, while most of the Liberal and Labour politicians opposed this. However, it is in the activities of the Liberals once in power that we see the emergence of what may loosely be called the politics of welfare. It would not be relevant here to explore the early social measures of the Liberal government and their battles with the House of Lords over a budget which would help to fund these social measures, inasmuch as they were not insurance contribution funded, but it is interesting to note a famous speech which raised the political temperature with a redistributive message. This was Lloyd George’s Limehouse speech of 1909: ‘Is it not time something was done? It is rather a shame that a rich country like ours ... should allow those who have toiled all their days to end in penury and possible starvation’, and going on to claim: ‘We are placing the burdens on the broadest shoulders’ (quotes from Lloyd George’s Limehouse speech in Hattersley, 2010, pp 252 and 254). Bearing in mind how UK political life was developing at that time, and the strident populism of the orator in question, we should perhaps not make too much of that speech. Moreover, although the speech seemed to mark a watershed in UK politics, the First World War was soon to intervene and recast the issues about austerity in very different terms.

Austerity in the inter-war period While the critical events in respect of the politics of austerity in the inter-war period occurred at the beginning of the 1930s, the seeds for this were sown earlier. First, war expenditure pushed government debt levels right up again. Second, the post-war coalition was committed to restoring traditional economic management back to pre-war terms. Ironically the then Prime Minister, Lloyd George, was increasingly the

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UK politics since the 1920s

prisoner of the Conservative Party dominated, according to a remark by one of their number, Stanley Baldwin (quoted in Keynes, 1919, chapter 5), by ‘hard-faced men who look as if they had done very well out of the war’. The restoration of the Gold Standard to govern relationships between currencies was a particularly salient objective. This was done in 1925, at a parity with the dollar corresponding to that before the war. High levels of unemployment became endemic. Figures for this period are very unreliable, but official rates of over 10% were recorded almost continuously after 1921, and above 15% from 1930 to 1935 (see Table 2.1). Table 2.1: UK unemployment rates, 1925–35 Year

Rate (%)

1925

11.3

1926

12.5

1927

9.7

1928

10.8

1929

10.4

1930

16.0

1931

21.3

1932

22.1

1933

19.9

1934

16.7

1935

15.5

Source: Based on Price and Bain in Halsey (1988, table 4.7, p 174)

What seemed thus to have been set up was a significant dynamic between economic policy wedded to classical theory in which there was no role for the government as the manager of the economy, and an emergent politics of welfare. All men and many women joined the electorate after the First World War and by 1928 there was universal suffrage. What is more, in the period just after the Russian Revolution, the government was being advised of serious levels of unrest in the more depressed areas (see Gilbert, 1970). The response was a succession of measures of increasing complexity that tried to extend the coverage of benefit support for unemployed people but with levels of parsimony that kept the budget in check.

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Social policy in times of austerity

All came to a head when the economy slumped seriously at the beginning of the 1930s. A Labour government had been elected in 1929, with the largest group in Parliament but nevertheless dependent upon Liberal support to remain in power. The Labour leadership had supported the return to a fixed exchange rate for the pound (the Gold Standard) (see Gilbert, 1991, p 469) and was determined to be seen as politically respectable, and the trade unions had been weakened by the failure of the General Strike in 1926. When Labour first came to power, although the economy was still struggling to accommodate the impact of the return to the Gold Standard, the situation did not seem to be very serious. It is interesting to note that a view that government investments could do more to stimulate the economy had been put on the agenda by the Liberal Party: We can conquer unemployment (March 1929). This cautiously sought its justification in the direct benefits from investments (in road building and so on), but did not go the whole way towards the later Keynesian position that justified such activities in countercyclical terms. It was nevertheless rejected by both the Conservative Party and the Labour Party. While the latter needed Liberal support, its suspicion of Lloyd George reinforced its concern to seem orthodox in the eyes of the Treasury. However, Mowat (1955, p 359) said of the new Labour Chancellor Philip Snowden that ‘no Chancellor of the Exchequer was more economy-minded and less sympathetic to proposals of a socialist cast’. A backbench Conservative said of him: ‘To every outworn shibboleth of nineteenth century economics he clung with fanatic tenacity. Economy, Free Trade, Gold – these were the keynotes of his political philosophy; and deflation the path he trod with almost ghoulish enthusiasm’ (Boothby, 1947, p 90). As the slump worsened the continued commitment to the international role for the City of London produced substantial problems for the government as difficulties for the pound were generated as much by difficulties in other countries (particularly Germany) as by weaknesses in the UK. However, political debate became increasingly focused on the latter. The Chancellor appointed a committee headed by Sir George May of the Prudential Assurance Company, which reported at the end of July 1931 that substantial government economies, particularly in respect of payments to the unemployed, were needed. Modern commentaries on the May Committee suggest that the problems were exaggerated, making too much of ‘the annual provision for the sinking fund, which paid off the national debt’ (Clarke, 2004, p 156). However government dithering in the face of this report (note that it came just before they all went off on holiday) encouraged the

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UK politics since the 1920s

speculators against the pound. But the case for economy, and the protection of the Gold Standard, was not disputed (even by Keynes!). Within the wider Labour movement a debate developed about the respective contributions that might be made by expenditure cuts and further taxation. The trade unions, led by the increasingly influential Ernest Bevin, urged more of the latter. Snowden was intransigent, and of course in exploring the last stages of this debate we are driven into issues about personalities: the ailing but rigid Snowden and the vacillating Macdonald (see Marquand, 1977, for a reasonably sympathetic portrait). The eventual programme of cuts split the government and Macdonald, accompanied by Snowden and some of the other Labour leaders, formed a National Government in 1931 with the Conservatives and some Liberal members. The cuts were enacted but, significantly, in September 1931 the Gold Standard was abandoned. The majority of the Parliamentary Labour Party remained in opposition, and then in a general election in October 1931 their ranks were decimated by a landslide swing which gave the National Government a large majority. In retrospect there are various alternative lessons to be drawn from these events. Looking at this issue as a conflict between traditional economic management and democracy, it needs to be noted that there was substantial popular support for the National Government. There was a massive press campaign in favour of the cuts, with Labour only really represented by the fairly ineffectual Daily Herald. In retrospect, for much of the Labour Party what occurred was a ‘bankers’ ramp’ (see Williamson, 1984, for an account of the emergence of this view) in which the Labour leaders were talked into unnecessary (even symbolic) measures. Notwithstanding the role of the part of the Liberal Party led by the ageing Lloyd George in arguing in 1929 for a new approach to the management of the economy, that party was splintered at least three ways, with some of its leaders joining the National Government, leaving Lloyd George as an increasingly lonely political figure. Skidelsky makes much of the absence of a coherent approach to economic policy in the period before the 1931 crisis. He ends his account of Macdonald’s 1929–31 government with: Socialism was impossible and capitalism was doomed: there was nothing to do but govern without conviction a system it did not believe in but saw no prospect of changing. It struggled to defend the working class as long as it knew how, and when it could defend them no longer it resigned. (Skidelsky, 1970, p 434)

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But in Skidelsky’s book, writing before he engaged in his monumental biography of Keynes, the conservatism of the Treasury is emphasised as much as the incapacity of the Macdonald government to challenge it. In that respect Labour’s failure ‘to defend the working class’ may be contrasted with the wider indifference to this by the Establishment. But it is perhaps interesting to note with hindsight (over 40 years since Skidelsky’s hindsight), now that Keynes’ deficit spending remedies are again viewed with great suspicion, that the debate within the British Labour movement at that time focused rather more on tax-based spending than on increasing debt. This was what the Labour Left (at that time mainly represented by the Independent Labour Party) urged. Skidelsky (1967, p 182) comments: ‘In its desire to finance socialism out of taxation the I.L.P. position was the same as that of Snowden. The only difference was that he thought the moment was inopportune.’ To summarise, the first of the three comparative cases considered here suggests that austerity in the 1930s needs to be seen as a response of classical economic orthodoxy despite the fact that the Macdonald Labour government was the UK’s first fully democratically elected government. The case for government austerity was in the end allowed to dominate over a political concern not to impose austerity (particularly on the unemployed). What we saw was a reluctant acceptance of economic orthodoxy, which was not subsequently repudiated by the electorate. In the long run, however, the rejection by the electorate of the war hero Churchill in 1945, in favour of a Labour government, may be seen as in part a reaction to his political role in peacetime. It was he who took the UK back to the Gold Standard in the 1920s.

Austerity in the 1940s The period from 1945 to 1951 has been described as the ‘age of austerity’ (the title used for Sissons and French’s edited collection published in 1963 and more recently for Kynaston’s 2007 history of the period). As a child during that time I have no difficulty in accepting the case for that description of the era. But what seems equally clear is that what is being identified is the social effect of a long and devastating war, even for the European nations on the winning side. As far as public policy is concerned it may be acknowledged that, at least by the end of that period, the Labour government had begun to appear to some to be one that embraced austerity too readily. The Chancellor of the Exchequer between 1947 and 1950, Stafford Cripps, seemed to have become personally identified with austerity as a consequence of his

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own lifestyle and remarks he made while still Secretary of the Board of Trade suggesting that the ‘new look’ fashions made extravagant use of scarce resources of cloth. But it may be argued that behind this was a politics of austerity very different to that in the period before the war or in more recent times. What is crucial for the examination of the 1945–51 period is a recognition that the war generated a debt burden even greater than the First World War (well above 200% of GDP) and that the United States immediately revoked the generous terms for its loans to the UK at the end of the war. Nevertheless, the Labour government was committed to its pledges on social policy, and to the ideal of building a new, fairer social order (see Barnett, 1986, for a critique of this which nevertheless recognises its special character). It did not want to go back on its commitments in the way Lloyd George had in the aftermath of the First World War. It embarked therefore on a difficult course of action in which new policies were inaugurated, the national debt was brought down only slowly and the very high wartime rates of taxation were maintained. Perhaps it was the maintenance of rationing of many basic foods and commodities that was the hallmark of austerity during this period but, importantly, what this implied was a socialised austerity alongside high government expenditure. Since a feature of the economic problems of the inter-war period was unemployment, a comment is appropriate on this issue during the 1945–51 period. Implicit in the Labour commitment to a new social order was full employment. The Labour manifesto, interestingly, said ‘all parties pay lip service to the idea of jobs for all’. But of course it went on to question the strength of others’ commitments. But the manifesto did not specify a target level. The Beveridge Report (1942) had seen full employment as an essential underpinning for the government’s social policy programme. Interestingly, Beveridge had expressed this as an unemployment rate of no more than 8.5% (Beveridge, 1942, para 441). In practice, apart from a temporary setback associated with the fuel crisis and a very hard winter in 1946–47 when it rose to over 3%, it was below 2% throughout this period. The management of demobilisation of service personnel after the war was done with more care than after the First World War, but otherwise there is little evidence of explicit political action to maximise employment. While unemployment was very low over this period, so was the inflation rate. These two indicators need to be emphasised here as elements in the politics of austerity that have been particularly significant in more recent times (and are therefore key issues for the discussion in the next section). The 1940s is conventionally seen as the

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period when a Keynesian approach to the management of the economy was adopted. A contemporary participant in economic policy making summed up this development in the following way: Macro-economic policy was born in the years after the war and survived unchanged for at least two more decades. It is this, perhaps more than the development of the welfare state, that gives these years a special coherence and significance ... The very concept of managing the economy was new and little understood. While debate raged on abstract theories of planning, the practice of regulating economic activity through demand management was in the course of management and improvement. (Cairncross, 1985, p 19) Interestingly, he goes on to observe that the White Paper of 1944 which set out employment policy ‘had studiously avoided approval of unbalancing the Budget as a weapon of demand management’ (Cairncross, 1985, p 19). We have there a retrospective view that recognised a process of gradual change, even trial and error. What was then achieved may be seen as made easier by factors largely outside political control. The war provided a massive Keynesian stimulus to the economy, with its inflationary effects curbed by rationing and high taxation. The enormous reconstruction needs after the war continued the stimulant effects all over Europe and East Asia. As for curbs on inflation, Dell, in his survey of post-war chancellors, suggests Cripps’ success in keeping the inflation rate down rested upon success in persuading the trade unions not to try to exploit labour scarcities. Although much of this may have been a consequence of overall union commitment to the government, Dell (1996, p 103) notes that ‘In the 1948 Budget the TUC was sweetened by Cripps’s once-for-all capital levy.’ Consideration of this last element in the equation does thus suggest benefits to the economy flowing from coordinated policy making and equality of sacrifice. However, all this leaves out an element in the economic equation which was a source of stress for the 1945–51 Labour government: the issues necessarily following upon the maintenance of the exchange rate of the pound. There was no question in this period of a return to the Gold Standard, but instead rates of exchange were fixed in terms of a relationship to the dollar. In the face of the economic strength of the United States, including a severe adverse balance of trade, and low stocks of sterling, the rate fixed in 1945 proved hard to maintain.

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Cripps resisted devaluation for a long time but eventually gave way in September 1949. Dell, writing with the hindsight of a very different era, argues that Cripps should have resigned on devaluing and that his policies had been insufficiently deflationary. On the other hand, Kynaston quotes Cripps’ broadcast justifying the action: We have decided upon these steps because we are determined not to try and solve our problem at the cost of heavy unemployment, or by attacking the social services that have expanded over the last few years. (quoted in Kynaston, 2007, p 350) Of course Cripps was offering an after-the-event justification. The point here is that there was a conventional view that devaluation was some sort of political failure. The issue continued to bug Labour governments in the 1960s and 1970s to the extent that Wilson was reluctant to accept devaluation in 1967, and was ridiculed for a speech in which he quite reasonably pointed out, after having devalued, that its direct effect on ordinary people was not necessarily to find that the ‘pounds in their pockets’ had fallen in value. A reason for emphasising this here is that Blyth’s (2013) economic analysis of austerity lays heavy emphasis on the oppressive effect of inflexible exchange rates (whether in the form of the Gold Standard or the euro). Cripps’ difficulties over devaluation came at a time when his political influence was declining in the face of terminal illness. He was eventually replaced as Chancellor by a politician from a younger generation, Hugh Gaitskell. It was then that a conflict arose within the ranks of the government over social expenditure cuts, in the face of increased military expenditure associated with the Korean War. That conflict, though fuelled partly by political ambitions as the old order in the Labour leadership declined, has continued within the Labour Party. Nevertheless, an overall assessment of the 1945–51 period is that it saw a strenuous effort to minimise public austerity in the context of a new (post-Keynesian) ideological atmosphere that saw government austerity as less essential. That continued to be the case until the 1970s. Indeed, levels of public expenditure as a proportion of GDP continued to rise (Clark and Dilnot, 2002, figure 1.1). The Conservatives, in power between 1951 and 1964, did little to disturb the welfare state and then the Labour government led by Wilson from 1964 to 1970 made some successful efforts to consolidate it. Both parties, despite evidence of increasing difficulties in managing the economy (and some rumbles of dissent within the Conservative ranks) used broadly Keynesian

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policies to maintain a balance between inflation and unemployment. While rates of neither rose really significantly (by post-1970 standards), chancellors found economic management more difficult with a succession of crises in respect of the balance of payments. The resulting stop/go pattern of economic management came under criticism as a source of problems for the overall development of the economy. In respect of the management of the economy it is appropriate to mention here a neo-Keynesian equation: the Phillips curve. Phillips (1958) identified, using retrospective data, a level at which a trade-off might be made between unemployment and inflation. This suggested that economic management could be seen as a steering activity in which as either unemployment or inflation moved away from an equilibrium position, increases or reductions of public expenditure might bring things back into balance to that position. The trouble with economic propositions about equilibrium based upon retrospective data is that future events may disturb it. While it goes far beyond the themes of this chapter, any account of changing approaches to economic management has, ultimately, to be seen in the context of economic changes, which in the case of the UK involve a slow process of economic decline. Much has been written in these terms about the policy changes that occurred during the next period to be reviewed here. This chapter’s concern is with the ways in which they involved new stances on austerity.

New stances on austerity in the 1970s and 1980s Much attention has been given to the way in which Keynesian approaches to economic management were replaced by neoliberal ones at the end of the 1970s. Hall (1986, 1992) pioneered the use of the concept of an ideological ‘paradigm shift’ to analyse this process. It is not appropriate to elaborate the sources of this shift here, except to note how much changes to the relationship postulated in the Phillips curve played a part in the change. During the 1970s both unemployment levels and inflation levels moved sharply upwards, if not exactly in tandem then certainly in ways that suggested problems with measures that targeted one or other alone. Analysis of the causes of this would depart from the main theme of this chapter; however we may note briefly one episode of solidaristic government-imposed austerity as Edward Heath tried unsuccessfully to grapple with two postulated causes – trade union militancy and the oil price hike – by means of the three-day week and fuel use restrictions of 1973–74 (see Beckett, 2009, for a lively journalistic account of these events).

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In the UK, and of course elsewhere, the inflation rate accelerated dramatically in the 1970s, but the unemployment rate also rose, particularly after the middle of the decade (see Table 2.2). The impact of this on political thinking is perhaps best expressed by the statement made by the Labour Prime Minister, James Callaghan, in 1976: We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists. (quoted in Cassidy, 2009, p 79) The interesting thing about this intervention was that it was made at the time when the government was applying to the IMF (International Monetary Fund) for support. This was, as in 1931, because of a run on the pound, with the difference that a fixed exchange rate was no longer being defended. Nevertheless, the effect of the efforts to restrict the fall of the pound upon government currency reserves led to talk of impending bankruptcy. This notion, applied to many nations at this time, had, for a nation as fundamentally strong as the UK, a hint of hysteria to it. The undeniable slow long-run decline of the UK seems to be punctuated by episodes of panic. The role required of the IMF was a demonstration to speculators that it had long-term confidence in the UK. But, given the changing thinking about the governance of the Table 2.2: Annual unemployment rate averages and inflation rates in the 1970s Year

Unemployment Percentage rate increase in retail price index

1970

2.6

7.9

1971

3.5

9.0

1972

3.8

7.7

1973

2.7

10,6

1974

2.6

19.1

1975

4.2

24.9

1976

5.7

15.1

1977

6.2

12.1

1978

6.1

8.4

1979

5.7

17.2

Source: Official unemployment rate: Halsey (1988, p 174); retail price index percentage changes: Central Statistical Office, Annual Abstract of Statistics (various years)

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economy, that support came at the price of a demand for austerity. In practice the loan was quite quickly repaid, and retrospective evidence (Dell, 1991, chapter 25) suggests that there were errors in the data that led to an exaggeration of the UK’s plight. However, the concern here is with the implications for austerity of the more general paradigm shift: involving the alleged death of Keynesianism and the rise of neoliberalism. Notwithstanding the importance of the Callaghan speech quoted above, it was the arrival of the Thatcher government that was crucial for this. As Thompson puts it: The ideological rhetoric of the early Thatcher government was unequivocal: the enemy was inflation and inflation was a monetary phenomenon. Keynesian demand management could not be used to boost employment, and the UK economy had to be adjusted to the world as it was. (Thompson, 2014, p 44) There are thus four connected themes that need to be examined: • The development of new approaches to economic management, involving trying to minimise government interference with market forces, which bore some resemblance to the use of the Gold Standard in earlier times. • The development of ‘public choice’ theories which dismissed government concerns with public welfare as self-interested behaviour productive of inflation. • A related theme, not necessarily expressed in public choice terms, about government activity crowding out more ‘productive’ activity. • Denial of the importance of the fallout from new ways of managing the economy, including particularly a stance on unemployment which explicitly or implicitly blamed the victims for their predicament. The changes to the management of the economy that came in at the end of the 1970s are generally seen as involving a rejection of Keynesianism. At the outset a new label for economic policy – monetarism – came into use. The key theorist, Milton Friedman, revisited the American experience in the 1930s, accepting the Keynesian analysis of the policy mistakes of that era but arguing that these primarily involved insufficient attention to the availability of money (Friedman and Schwartz, 1965). So later, and particularly in the 1960s and 1970s, governments were

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accused of being too ready to print money, with the consequence that inflation was not controlled. The key policy measure advocated by Friedman involved control over the money supply. In practice it is actually very difficult to control the money supply in an era of high credit and when a great deal of money creation simply takes the form of entries in accounting records. Hence the term monetarism soon came to sound rather dated. However, the wider issue remained about identifiable influences on the money supply in the form of interest rates and government measures to invest or encourage investment. Thus what has been seen as a shift in economic control is a shift from fiscal measures to monetary policy. What has this got to do with austerity? A quote from a lecture by the Conservative Chancellor from 1983 to 1989, Nigel Lawson, provides the answer. He argues that the proper role of government economic policy is: precisely the opposite of that assigned to it by the conventional post-war wisdom. It is the conquest of inflation, and not the pursuit of growth and employment, which is or should be the objective of macroeconomic policy. And it is the creation of conditions conducive to growth and employment, and not the suppression of price rises, which is or should be the objective of microeconomic policy. (Lawson, 1984, quoted in Dell, 1996, pp 499–500) In other words, he stresses the need to stop worrying about unemployment and focus on inflation. Of course it may be argued that such a perspective does not preclude tax rises to compensate the victims of such an approach. In practice the neoliberal perspective involves low taxation as a precondition for growth. More on this theme can be found when we turn to the second aspect of the new ideological paradigm: public choice theory. Public choice theory portrays politics as a marketplace in which leaders compete for votes. In that marketplace, parties compete to win power by responding to the demands of pressure groups (see Tullock, 1976; Brittan, 1977; Auster and Silver, 1979). There is strong pressure upon governments to yield to those demands, and thus to enhance the role of the state as a giver of benefits (using that word in its general sense, to embrace jobs, contracts, services and tax concessions as well as direct cash benefits). This is not very effectively restrained by the fact that these benefits have to be paid for, because of the extent to which these costs can be hidden in the short run (by deficit financing)

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or spread in ways which lead benefits to be more readily perceived than the mechanisms to pay for them. Writers suggest the existence of a ‘government business cycle’ in which government expenditure, to satisfy demands and curb unemployment, is pushed up before general elections (Nordhaus, 1975; MacRae, 1977). The consequences of this are problems of inflation and adverse trade balances that will need to be dealt with in the post-election period. Hence, it is argued that political behaviour may contribute to the cyclical problems of the modern capitalist state. Another element in public choice theory reinforces this argument with assumptions about self-interest in respect of the behaviour of public officials. Here the emphasis is on the consequences of the fact that public bureaucracies tend to be monopoly providers of goods and services. This perspective then draws upon economic theory on monopoly, which stresses the absence of constraints upon costs when these can be passed on to consumers and the extent to which in the absence of market limitations a monopolist will tend to oversupply commodities. It is argued that bureaucrats will tend, like monopolists, to enlarge their enterprises and to use resources extravagantly (Buchanan and Tullock, 1962; Tullock, 1976; Niskanen, 1971). The interesting thing about public choice theory is that it portrays austerity as a vote loser. Indeed, public choice theorists go on to argue for the adoption of institutional devices – independent central banks or constitutional devices that prevent politicians increasing indebtedness (Buchanan and Tullock, 1962). Blyth’s critique sums up this perspective: policy making should be delegated away from democratically elected politicians to independent conservative bankers who will dish out the bad medicine because their jobs do not depend upon pleasing constituents – except, perhaps, their constituents in the financial sector who benefit from ultralow inflation – but that’s another story. (Blyth, 2013, p 157) There is now a considerable literature testing these public choice propositions. They find very mixed evidence for them, and there is an overriding point here about the reduction of political choice to simple predictable interests (see Hindmoor, 2006, for a general critique). Mosley (1984) shows the specific limitations of this approach for the explanation of UK elections. Some of the historical evidence reviewed

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here also suggests that traditional economic rectitude may be rewarded by the electorate (note the comment above on the 1931 election). However, what is significant here is not so much whether public choice propositions are correct but whether they are believed to be correct. Certainly political journalists take these propositions seriously and are quick to point to what they see as political efforts to ‘buy’ elections. The notion that ‘democracy is inflationary’ then finds powerful support from those interests that want to keep governments small and taxes low. This brings us to the third of the aspects of the new paradigm, to some extent having an influence beyond the ranks of the neoliberals. This is the ‘crowding out’ hypothesis particularly advanced in an influential book by Bacon and Eltis published in 1976, that the growth of public expenditure was taking so many resources from the more ‘productive’ private economy that it was inhibiting economic growth. At the end of the 1970s some politicians tried to indicate specific levels at which public expenditure as a percentage of GDP might be too high (see discussion in Heald, 1983, pp 12–18). Interestingly, though it was at 50% in 1975, it fell slightly later in the 1970s and rose again in the early years of the Thatcher government. There are various problems about this statistic. Obviously (like government debt as a percentage of GDP) it is a ratio that is very sensitive to changes in GDP – a high percentage may just reflect weakness in the economy and cannot in this respect be used as an indicator of the cause of that weakness. There are also problems about how public expenditure is defined (see Thain and Wright, 1990). Furthermore, a lot of public expenditure is on transfer payments (social benefits and so on), which cannot in themselves be argued to be diverting resources from productivity. Significantly, across the period we are discussing in this section, transfer payments grew substantially, some independently of public policy (as in the case of increasing numbers of pensioners) and some as a direct consequence of public policy (as in the case of unemployment benefits) (see Hill and Walker, 2014). On the other side there is an unsupportable assumption that private expenditure necessarily boosts the economy. Underlying much of the argument about ‘crowding out’ there is thus an ideological ‘public bad, private good’ assumption, often connected with equally problematical assumptions about economic growth (see Skidelsky and Skidelsky, 2012). Finally to the fourth element in the neoliberal paradigm. What can be said about Nigel Lawson, evidenced by the quotation above, is that he firmly pins his colours to the mast. He is quite clear: inflation matters

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more than unemployment. Other politicians have tried to disguise the fallout from such a perspective by arguing that unemployment is principally explained by the supply of labour not the demand for it. In some respects here we see a return to the idea embodied in the Phillips curve. That implies the possibility of restoring an equilibrium in which unemployment is brought down without causing inflation by forcing potential workers to reduce their costs to, or enhance their value to, employers. Such a perspective is implicit in the multitude of ‘schemes’ developed since the late 1970s to assist/coerce unemployed workers back into the labour force. In a sense, classical Keynesianism gives credence to this view, except that it sees government expenditure as the key to solving the problem. But perhaps the experience of the early 1970s suggests that in a country like the UK, in the context of industrial decline, a global economy and a multitude of new approaches to economic endeavour which use labour very sparingly, neither getting the market to work better nor public expenditure can solve this problem. This obviously raises a more fundamental critical point beyond this historical exposition of the politics of austerity.

Postscript: Thatcher’s heirs 1990–2015 It seems awkward to end the account of the politics of austerity in the UK in the 1980s, but I do not intend to trespass, in more than outline, into the territories of the contributors to this book who deal with modern times. I offer this short postscript premised upon a view that not much changed in the period between 1990 and the response to the 2008 crisis. I provocatively title this account of a period of Conservative rule under John Major, a period of Labour rule after 1997 and then the 2010–15 coalition ‘Thatcher’s heirs’. John Major’s success in securing the leadership of the Conservative Party after Margaret Thatcher came about because he was, perhaps misleadingly, seen as Thatcher’s heir. In fact his greater commitment to the European Union came close to splitting the Conservative Party. As far as the management of the economy is concerned he continued a process, started more or less behind Thatcher’s back by Nigel Lawson, of shadowing the major European currencies as moves began to be made towards the establishment of the single currency (the euro). This was given a firmer form as an ‘exchange rate mechanism’ in 1990 with disastrous consequences as the pound came to be overvalued, leading to withdrawal and thus a dramatic devaluation in 1992. Labour came to power in 1997 with a long-run commitment to join the Eurozone, but with what it portrayed as temporary reservations (dictated by

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the Chancellor, Gordon Brown). The fact that it did not happen contributes to an important feature of the present UK situation: that it has freedom to let the currency float denied to the Eurozone members. Aside from the position in respect of the Eurozone, on which a difference was detectable between Brown and the Prime Minister, Tony Blair, there was much about economic policy under Labour at this period that justifies my ‘Thatcher’s heirs’ section title. Significantly, as Thompson (2014, p 44) points out, ‘since 1979 unemployment has never once fallen below the level inherited by the Thatcher government’. Although there was a fractious relationship between Brown and Blair, which led to the recognition of two ‘tribes’ within the Labour Party, it is inappropriate (as some of the ‘Brownites’ like to suggest) to say that this was an ideological divide. There was a strong, shared commitment to keeping public expenditure under control and to avoiding increases in direct taxation. Moreover, two measures particularly attributed to Brown (who in many respects was the ‘prime minister’ for economic and much domestic policy) belong very much within the paradigm outlined in the last section. One of these was a decision, right at the beginning of the period, to give the Bank of England the responsibility for monitoring inflation (but not unemployment) and using its powers to change interest rates to keep it under control. The other was the dramatic extension of a device to confine public borrowing through the so-called Public Finance Initiative, which drew private investors into the funding of capital developments in the public sector. Overall, Brown was a Chancellor who gave a great deal of attention to the views of the City of London, something very pertinent to the financial crisis that came soon after he succeeded Blair as Prime Minister. In popular UK political rhetoric Brown is often blamed for the poor handling of the international crisis of 2008. The succeeding Conservative/Liberal Democrat coalition and then Conservative government that replaced Labour warmly embraced the case for public austerity, as did the leading Eurozone politicians, as a necessary response. As far as the current political debate is concerned, at least in England, there are good reasons for regarding the remarks in this postscript as still applicable.

Conclusions This chapter started with a discussion of what might be meant by austerity. As Schui’s (2014) analysis of the concept suggests, there is a case for some sympathy with the sentiment embodied in Mr Micawber’s famous aphorism equating balancing accounts as producing the result

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‘happiness’ and overspending the result ‘misery’ (Dickens, 1850, chapter 12). Dickens was well acquainted with that misery, having grown up under the shadow of the debtors’ prison and spent much of his prosperous middle age subsidising other family members. Although the proposition belongs of course to an era before mortgages were available to ordinary people and long before credit cards, it remains an important principle for the experience of individuals and households. However, it is not a principle to be applied indiscriminately to governments. Governments do not live under the shadow of the debtors’ prison and have a variety of options for avoiding ‘misery’. They can live with debt so long as their creditors do not want their money back. Indeed their creditors may be quite happy to place their surplus savings safely with the government. And in any case governments have another device for balancing the books unavailable to their citizens: taxation. Additionally, and perhaps more controversially, they have another way of reducing their debts: inflation. Of course there are limits to the autonomy of governments, particularly in respect of that last point. A great deal depends upon the power of those to whom they are in debt – the contrast here is particularly between people who have limited options for fighting back against the measures governments adopt to deal with debt and the wealthy, including in particular global capital and powerful foreign governments. Of course I am not in a position to try to argue that the threats perceived by governments were not real ones. From at least the end of the First World War UK governments were struggling with a changing economy and a changing role in the world, a process that was described above as one of slow decline. This manifested itself internally in terms of varying problems about managing unemployment or inflation (or both at the same time) and externally in terms of problems about the balance of payments and about the value of the pound relative to other currencies. In respect of these problems there were various occasions when governments or their critics portrayed the system as ‘in crisis’. In doing so they chose, in ways that varied from time to time, the indices they drew upon to define the crisis. They also varied in the extent to which they pronounced a need for austerity. Overlooking the period as a whole there was not – as might be expected were economics a science and public policy evolution a progressive process – an evolution towards better answers to public problems. On the contrary, the big switch in and out of the Keynesian consensus simply generated a controversy still unresolved today. These then are considerations we need to be bear in mind when we look at government policies that place austerity, particularly reducing

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public expenditure, high on the agenda as an approach to deal with government indebtedness. But this means that we cannot isolate the issues about austerity from concerns to avoid increasing taxation, increasing the proportion of GDP going into public expenditure and controlling the rate of inflation. The brief historical survey of the UK in the twentieth century suggests variation in the phases of the politics of austerity. It has been noted that there have been times when there was a general case for austerity, of the kind that Mr Micawber might find justified, particularly after the two world wars. A contrast was made between the inter-war period, when there was an orthodox view that governments should balance the books and that taxation levels should be contained, and the post-Second World War period, when the quest to achieve social progress and preserve relative equality was seen (with the help of the Keynesian challenge to the older orthodoxy) to override that view. What then was seen from the mid-1970s onward was a distinct shift (better described as ideological than simply a paradigm shift) to one that accepted a role for government in enforcing austerity with comparative indifference to the situations of the victims of that action. The trends in public debt, public expenditure and taxation across the period reviewed owe much more to the impact of war than anything else, and there was no dramatic reversal in this respect in the 1970s. However, what is striking about the 1970s relative to the other periods is the difficulties about the rate of inflation in peacetime. It is true to say that post-Keynesian policies dealt with that problem (though it took the Thatcher government a few years to do this) but it did so at the expense of worsening unemployment. What is most salient in contrasting the periods surveyed is the negative impact on unemployment of public policies in both the late 1920s to early 1930s period and since the late 1970s, in massive contrast to the period from 1940 to 1970. Is it appropriate simply to emphasise the special economic circumstances of the ‘thirty glorious years’ after 1945 or were the social policy commitments of that time relevant? It is important to ask this question with social welfare implications rather than economic efficiency considerations dominant. As indicated at the beginning of this chapter, issues about the justifiability of government austerity need to be separated from issues about the distributive impact of the policies that follow from that. The arguments in the 1970s about the inapplicability of Keynesian theories have not been effectively countered from within social democratic theory (see Gamble, 2013). Nevertheless that does not justify the indifference a lack of attention to the resultant problems of a retreat

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from regulation of the market, and the austerity that has followed, has posed for many people least able to cope with it. References Auster, R.D. and Silver, M. (1979) The state as a firm: Economic forces in political development, The Hague: Martinus Nijhoff. Bacon R. and Eltis W. (1976) Britain’s economic problems: Too few producers, London: Macmillan. Barnett, C. (1986) The audit of war, London: Macmillan. Beckett, A. (2009) When the lights went out: Britain in the seventies, London: Faber and Faber. Beveridge, W. (1942) Social insurance and Allied services (Beveridge report), Cmnd 6404, London: HMSO. Blyth, M. (2013) Austerity: The history of a dangerous idea, Oxford: Oxford University Press. Boothby R. (1947) I fight to live, London: Gollancz. Brittan, S. (1977) The economic consequences of democracy, London: Temple Smith. Buchanan, J.M. and Tullock, G. (1962) The calculus of consent, Ann Arbor, MI: University of Michigan Press. Cairncross, A. (1985) Years of recovery: British economic policy 1945–51, London: Methuen. Cassidy, J. (2009) How markets fail, London: Allen Lane. Clark T. and Dilnot, A. (2002) ‘Long-term trends in British taxation and spending’, Institute of Fiscal Studies, briefing note 25. Clarke, P. (2004) Hope and glory: Britain 1900–2000, 2nd edition, London: Penguin Books. Dell, E. (1991) A hard pounding: Politics and the economic crisis 1974–76, Oxford: Oxford University Press Dell, E. (1996) The chancellors, London: HarperCollins. Dickens, C. (1850) David Copperfield. Feinstein, C.H. (1972) National income, output and expenditure of the United Kingdom 1855–1965, Cambridge: Cambridge University Press. Friedman, M. and Schwartz A. (1965) The great contraction 1929–1933, Princeton, NJ: Princeton University Press. Gamble, A. (2013) ‘Austerity politics and the public household’, Renewal: A Journal of Labour Politics, vol 2, no 3, pp 14–20. Gilbert, B.B. (1970) British social policy 1914–1939, London: Batsford. Gilbert, M. (1991) Churchill: A life, London: Minerva Paperback. Hall, P.A. (1986) Governing the economy: The politics of state intervention in Britain and France, Cambridge: Polity Press.

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Hall, P.A. (1992) ‘The movement from Keynesianism to monetarism: Institutional analysis and British economic policy in the 1970s’, in S. Steinmo, K. Thelen and F. Longstreth (eds), Structuring politics: Historical institutionalism in comparative analysis, Cambridge: Cambridge University Press. Halsey, A.H. (ed) (1988) British social trends since 1900, Basingstoke: Macmillan. Hattersley R. (2010) David Lloyd George: The great outsider, London: Little, Brown. Heald, D. (1983) Public expenditure, Oxford: Martin Robertson. Hill, M. and Walker, A. (2014) ‘What were the lasting effects of Thatcher’s legacy for social security? Burying Beveridge?’, in S. Farrall and C. Hay (eds), The legacy of Thatcherism, Oxford: Oxford University Press. Hills, S. and Thomas, R. (2010) ‘The UK recession in context – what do three centuries of data tell us’, Bank of England Quarterly Bulletin, Quarter 4, London: Bank of England, pp 277–91. Hindmoor, A. (2006) Rational choice, Basingstoke: Palgrave Macmillan. Jenkins, R. (1995) Gladstone, Basingstoke: Macmillan. Keynes, J.M. (1919) The economic consequences of the peace, reprinted in The collected writings of John Maynard Keynes, Cambridge: Cambridge University Press for the Royal Economic Society, 1971. Kynaston, D. (2007) Austerity Britain 1945–51, London: Bloomsbury. Liberal Party (1929) We can conquer unemployment, London: Cassell. MacRae, C.D. (1977) ‘A political model of the business cycle’, Journal of Political Economy, vol 85, no 2, pp 239–64. Marquand, D. (1977) Ramsay Macdonald, London: Jonathan Cape. Mosley, P. (1984) The making of economic policy, Brighton: Wheatsheaf. Mowat, C.L. (1955) Britain between the wars 1918–1940, London: Methuen. Niskanen, W.A. (1971) Bureaucracy and representative government, New York, NY: Aldine-Atherton. Nordhaus, W. (1975) ‘The political business cycle’, Review of Economic Studies, vol 42, pp 169–90. Phillips, A.W. (1958) ‘The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861–1957’, Economica, vol 25, pp 283–99. Piketty, T. (2014) Capital in the twenty-first century, English language edition, Cambridge, MA: Belknap Press. Schui, F. (2014) Austerity: The great failure, Newhaven, CT: Yale University Press.

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Sissons, M. and French P. (eds) (1963) Age of austerity 1945–1951, London: Hodder and Stoughton. Skidelsky, R. (1967) Politicians and the slump: The Labour government of 1929–31, London: Macmillan (Pelican edition 1970). Skidelsky, R. and Skidelsky, E. (2012) How much is enough? Money and the good life, New York: Other Press. Thain, C. and Wright, M. (1990) ‘Coping with difficulty: The Treasury and public expenditure, 1976–89’, Policy and Politics, vol 18, no 1, pp 1–16. Thompson, H. (2014) ‘The Thatcherite economic legacy’, in S. Farrall and C. Hay (eds), The legacy of Thatcherism, Oxford: Oxford University Press. Tullock, G. (1976) The vote motive, London: Institute of Economic Affairs. Williamson, P. (1984) ‘A “bankers’ ramp”? Financiers and the British political crisis of August 1931’, English Historical Review, vol XCIX, no CCCXCIII), pp 770–806.

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three

The economics of austerity Stephen McBride

The financial crisis that initially developed in the United States in 2007–8, and rapidly became global, has proved deep and protracted. Though its impact has been felt everywhere, there is considerable variation in the way it has been experienced both between nations and between social classes (Farnsworth and Irving, 2011). The costs of the crisis are economic, as in declines in GDP (gross domestic product) and lost income for individuals, and social, as with forfeited opportunities for youth and, more generally, increasing health problems (all of which also carry an economic cost). A common response to this situation, especially since 2010, has been implementation of austerity policies aimed at cutting government expenditures. This seems to indicate a narrow focus on the fiscal costs of the crisis, represented by increasing public debt, rather than a broader economic focus in which growth to counter unemployment and lost incomes might feature more prominently. As this preliminary formulation hints, the issues of the costs of the crisis and of austerity considered as a response are likely to be complex. This is not just because of the variability of experience but also because of the difficulty of attributing costs directly to the crisis itself, or to the responses to the crisis – some of which, such as austerity policies, have arguably made the crisis worse and hence increased its costs. Certainly policy responses like austerity have a distributive impact, imposing harsh burdens on some sectors of society while easing burdens on others. Adding to this are the distinctions between direct costs, such as unemployment, underutilisation of capacity, lost output for the economy as a whole and the bills for government bailouts of threatened enterprises or general fiscal stimulus spending, and indirect costs, often manifested in the longer term, such as the health effects and associated resource allocations resulting from increased unemployment, poverty and inequality. Further, it can be argued that less tangible costs, such as the erosion of democratic governance and loss of national and popular sovereignty, are augmented by austerity.

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Social policy in times of austerity

An additional layer of complexity is provided by the role of austerity within the neoliberal paradigm that has dominated policy discourse and choices for several decades (McBride and Whiteside, 2011; Blyth, 2013). A new age of ‘permanent austerity’ may have been proclaimed (Watt, 2013) but austerity, relative or absolute, has long been a component of neoliberal social policy and before that was a conditioned response of capitalist elites faced with economic crises. It has been argued (Blyth, 2013; McBride, 2014) that the emergence of austerity as a default strategy to respond to economic crises is less the result of cost–benefit calculations about its immediate impact than it is about a long-term tendency aimed at protecting the power and advantages of capitalist elites. This is because of austerity’s apparent quality of enabling such elites to contain potential threats to their authority posed by the state, which finds any interventionist tendencies limited by the dull compulsion of fiscal constraints, and labour, which finds its already weak bargaining power further limited as high levels of unemployment become normalised, and as privatisation and individualisation triumph over solidarity as a social value (see McBride, 2014). As many countries experience what is widely predicted to be a longlasting new age of austerity it is thus worth reflecting that austerity policies have often been invoked as solutions to crises in the past, and even as guides to be followed in normal times. Since the distributional consequences of austerity are negative for the disadvantaged and disempowered it is clear that demand for such policies do not come from ‘below’ but are elite driven, even if elites have sometimes been able to manufacture consent for their decisions. ‘Fiscal consolidation’, or austerity, has been defined as getting state budgets back into balance within a reasonable period and reducing public debt as a percentage of GDP (OECD, 2012). The fact that austerity policies may not actually produce these results is less important than their impact in terms of diminished wages, insecurity, reduced living standards and expectations (Albo, 2013). Balanced budgets and reduced debt to GDP ratios could theoretically be achieved by tax increases, spending cuts, stimulating growth through currency devaluation or reducing the debt through inflationary policies. But in the ‘austerian’ world most of these are undesirable, indicating that resort to austerity is less a technical issue than an ideological preference aimed at constraining the state. Thus, contrary to the technical presentation of the case for austerity, it is highly ideological. Spending reductions, supplemented in some cases by selective tax increases (for example, consumption taxes, broadening tax coverage and closing certain tax loopholes) are the favoured instruments. They

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The economics of austerity

are generally presented in combination with ‘structural reforms’ to make the labour market more flexible and other measures to make the economy more competitive. For example, part of the Irish response to the crisis comprised a structural reform agenda articulated as ‘a strategy to remove remaining structural impediments to competitiveness and employment creation’ (IMF, 2010, p 8). This meant internal devaluation by way of reduced labour costs. The Minister for Enterprise and Trade went further in revealing the government’s thinking: Let us be clear: labour market reform is a prerequisite for Ireland’s long-term economic recovery. Unless steps are taken now to address labour market inflexibility, it is likely to inhibit job growth in Ireland and lead to a loss of competitiveness in coming years. (O’Keeffe, 2010) Ireland’s labour market regulations were already flexible – by 2008 Ireland ranked seventh among 29 OECD (Organisation for Economic Co-operation and Development) countries on flexible labour market regulations (OECD, 2009b, p 84). Internationally there has been pressure from various sources for states to adopt fiscal consolidation. One example is the OECD, an organisation that lacks coercive power but is an influential source of policy recommendations. At first onside with emergency fiscal stimulus, the organisation quickly concluded that budget deficits and debt would escalate, and consequently that stimulus spending should be ‘timely, targeted and temporary’ so that balanced and sustainable budgets could be achieved in the long term (OECD, 2009a). One aspect of the OECD’s argument was that states needed to have fiscal policy space to react to future crises (Sutherland et al, 2010). In any event, by 2009 its position was clear and consistent – the time for extraordinary measures had ended and the time for austerity had begun: ‘many countries will have to face up to severe macroeconomic imbalances during the recovery period and beyond’ (OECD, 2010, p 222). Similarly, structural reforms – public efficiency, privatisation of public services, reducing public subsidies, reforming disability and health compensation, eliminating early retirement schemes, reducing employment benefits and ending short work schemes – assumed a key place in the OECD’s discourse (OECD, 2012). The Troika, composed of the EU, ECB (European Central Bank) and IMF (International Monetary Fund), has coercive authority over countries that require its assistance. The European Union, urged on by Germany – widely seen as the author of the response to the crisis in

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Social policy in times of austerity

Europe and one of the staunchest players behind the austerity agenda (see Guerot and Dullien, 2012) – has imposed strict austerity measures on the countries hardest hit by the crisis, as conditions for receipt of financial assistance. In other jurisdictions, such as Germany and the UK, austerity has been a self-imposed policy. It is assumed that these tough fiscal consolidation measures will lower national deficits and debts and restore stability (Lapavitsas et al, 2012, pp 42–3). In the aftermath of the crisis the G20 emerged as an important forum for coordinating responses to the crisis. At its Toronto Summit in 2010 it adopted a statement calling for the advanced economies to halve their deficits by 2013 and to ‘stabilize or reduce’ their ratio of government debt to gross domestic product. While G20 declarations continuously point out the need to recognize national circumstances, fiscal consolidation remains the overarching goal. For example, at the Seoul summit the G20 warned that ‘failure to implement consolidation, where immediately necessary, would undermine confidence and growth’ (G20, 2010, p 2). The greatest burden of demands for austerity has fallen on the weaker countries of Europe. To some extent their fate was sealed by joining the EU, and the Eurozone in particular. European integration operates within a neoliberal understanding which means ‘flexibilization of the labour markets, monetarist monetary policy, financial market liberalization, free movement for capital across Europe’ (Becker and Jager, 2011, p 6). In such a context only the more efficient and powerful economies could consistently achieve net export balances (Bellofiore and Halevi, 2010, p 15). Germany, along with some other countries, benefited from the European Union as ‘the main area of profitable effective demand’ where surpluses were realised (Bellofiore and Halevi, 2010, p 17). The monetary union was restrictive and removed instruments that weaker states might have used to address this imbalance – notably, faced with a German productivity advantage of some 35%, the countries in deficit could neither devalue nor develop expansionary fiscal policies (Bellofiore and Halevi, 2010, p 20). The consequence for peripheral Europe has been an unhealthy growth and sustained imbalances. With inclusion in the Eurozone, this competitiveness gap between the core and the periphery led to the weakening of the productive sectors and deindustrialisation in the latter countries (Dyson, 2010; Becker and Jager, 2011, p 10; see also Mahnkopf, 2012; Offe, 2013). The following account of the economics and economic costs of the crisis and austerity focuses on the OECD countries, and within the OECD with somewhat more attention to the United States, Germany, Canada, the UK, Ireland and Greece than to the other member

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The economics of austerity

countries.1 There is not a systematic comparison of the six countries. Rather more detailed data is presented in the tables, and illustrative evidence from their experience is used in the text.

Direct costs The direct costs of the crisis and austerity measures are recorded in unemployment statistics, lost output, declines in GDP and GDP per capita and in costs to government shown in fiscal imbalances and debt. The following tables present a selection of this data, starting with unemployment in Table 3.1. Table 3.1: Unemployment rates Unemployment

Youth unemployment

Long-term unemployment

2007

peak

2012

2007

peak

2012

2007

peak

2012

CAN

6.0

8.3 (2009)

7.2

11.2

15.2 (2009)

14.3

7.4

13.5 (2011)

12.5

GER

8.7

8.7 (2007)

5.5

11.9

11.9 (2007)

8.2

56.6

56.6 (2007)

45.5

GK

8.3

24.3 (2012)

24.3

22.9

55.3 (2012)

55.3

50.0

59.3 (2012)

59.3

IRE

4.7

14.7 (2012)

14.7

9.0

30.4 (2012)

30.4

29.5

61.7 (2012)

61.7

UK

5.3

8.0 (2011)

7.9

14.3

21.1 (2011)

21.0

23.7

34.8 (2012)

34.8

US

4.6

9.6 (2010)

8.1

10.5

18.4 (2010)

16.2

10.0

31.3 (2011)

29.3

OECD 5.6 average

8.3 (2010)

8.0

11.9

16.7 (2010)

16.2

28.6

34.3 (2012)

34.3

Source: Short-term labour market statistics: Labour Force Statistics by sex and age: indicators. OECD Employment and Labour Market Statistics Database; OECD (2014a)

Clearly the unemployment effects were significant and, in some cases, continue at peak levels, whereas in others a hesitant recovery has begun. Particularly disturbing is the escalation in youth unemployment rates, giving rise to talk of a ‘lost generation’ in countries like Ireland and Greece. Emigration of young people in those countries has increased,2 with a consequent loss, in economic terms, of human capital resources. In contrast, the official German rate of unemployment actually declined. However, this masks other labour market problems. For

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Social policy in times of austerity

example, about 20% of the workforce is low paid and many workers are underemployed as a result of involuntary part-time work (EuroMemo Group, 2014). The increase in long-term unemployment that is also a feature of this crisis points to a growing economic impact both for individuals and for levels of demand in the economy as a whole. There are other dimensions, too, not captured by these tables. For example, as well as the costs of unemployment, Greece has experienced a loss of 100,000 small and medium enterprises helping to produce a situation where declining GDP, mass unemployment, rising levels of precarious work, along with closures of small businesses create extreme hopelessness in Greece. Arguably this had an impact in record high suicide rates, ‘increasing by 25% from 2009 to 2010 and by an additional 40% from 2010 to 2011’, as well as homelessness, insecurity and outmigration of the young and better educated (Markantonatou, 2013, p 74). Table 3.2 records GDP per capita between 2007 and 2012. It also shows the cumulative GDP per capita change over the five years following 2007. Several aspects of this table are worth emphasising. In this sample of countries GDP per capita in 2012 exceeded 2007 levels only in Germany. Several others, and the OECD average itself, are very close to 2007 levels but these countries experienced drops of 4–5% in the intervening period. Five years into the crisis, the UK remained 7–8% below 2007 levels with little indication of recovery, and the more peripheral countries – Greece and Ireland – had more severe drops, again with few signs of recovering from these lows. Expressed in cumulative constant dollar terms it is clear that incomes in all cases but Germany were severely affected, especially if the assumption is made Table 3.2: GDP per capita, 2007–12* 2012 as percentage of 2007

Low point

Cumulative difference from 2007 in US$**

Canada

99.9

95.6 (2009)

–3244

Germany

104.2

96.3 (2009)

+1941

Greece

79.2

79.2 (2012)

–13200

Ireland

88.9

87.4 (2010)

–20336

UK

92.8

92.8 (2012)

–9799

US

99.8

95.2 (2009)

–5283

OECD average

99.9

95.3 (2009)

–2801

Notes: *some figures for 2012 are OECD estimates; **constant prices, constant PPPs, base year 2005. Source: OECD Stat Extracts; http://stats.oecd.org/Index.aspx

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The economics of austerity

that some level of growth would have occurred but for the crisis. The extent of lost per capita income in Ireland and Greece is particularly adverse but also very substantial in the UK case. It should be apparent that this way of measuring costs is very conservative since by taking 2007 as the base year it assumes that without the crisis no growth would have occurred. Estimates of the costs that factor in growth and the length of time likely to achieve precrisis growth trends indicate far higher costs. In the US, for example, a study for the Federal Reserve Bank of Dallas (Luttrell et al, 2013) concluded that the total cost of the crisis for the US exceeds one year’s total national output. Their study assumed that, but for the crisis, economic growth would have occurred and that the output gap lay between what it actually became and what it would have been (rather than taking 2007 as a base as in Tables 3.1 and 3.2). By their estimate the output loss, assuming an eventual return to the pre-crisis growth path, is between US$6 trillion and US$14 trillion (or US$50,000 to US$120,000 per household).3 With respect to Greece, the size of the imposed contraction in public finances was startling at 11% of GDP between 2009 and 2014, with half to occur in the first year. Reductions were to be achieved through drastic cuts to public sector salaries and benefits, pension reductions in both public and private sectors, the operating budgets of government ministries and state transfers to municipalities and social service departments, and by reducing public investment (Karamessini, 2012, p 169; Papadopolous and Roumpakis, 2012). The assumption by the Irish state of private banking debts imposed a huge burden on the Irish population. Taft (2013) calculated that the cost, not counting further billions transferred to the banks from the national pension fund, was over €41 billion, or more than 25% of GDP, or €8981 per capita. Including the funds transferred from the pensions boosts the total to €64 billion or 40% of GDP (Healy, 2013, p 8). On the employment and public finance indicators summarised in Tables 3.1 and 3.3, Canada fares relatively well compared to the OECD average. On the GDP per capita indicators of Table 3.2 its performance is unremarkable. Critics have argued that Canada’s performance is much less impressive than its government has claimed. Jim Stanford (2013, pp 21–2) points out that Canada has a relatively fast rate of population growth and needs to create jobs quickly to accommodate population increase. Taking population changes into account the country’s record is mediocre, with employment creation, the employment rate and GDP lagging behind population growth. This type of analysis would suggest the need for further stimulus. However, the federal government

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Social policy in times of austerity

has followed the austerity path with similar costs and impacts to those experienced elsewhere (Sanger, 2013). Government fiscal deficits and debt to GDP ratios provide another window into the costs of the crisis. The discursive focus in justifying austerity measures has been on public sector debt. Often ignored is the extent to which private individuals and corporations have increased debt (notwithstanding the socialisation of significant portions of private sector debt by transferring liabilities from banks and other corporations to the public sector). Structural reforms also imposed costs on employees by removing rights and employment standards, making the workforce more flexible and, by these means, reducing its future capacity to recoup losses. Moreover (179) extensive privatisations of state owned enterprises removed a policy tool for the Greek state in formulating future economic development strategies, leaving it ever more reliant on foreign and internationally oriented Greek capital (Karamessini, 2012, p 173). Table 3.3 provides basic data on both public and private sector finances. Table 3.3: Public sector deficits and debt, and private sector debt (percentage of GDP) Public deficits

CAN

Gross public debt GDP

Private debt

2007

2013

change

2007

2012

change

2007

2011

change

1.5

–2.9

–4.4

65.0

85.2

20.2

213.4

239.2

25.8

GER

0.2

–0.2

–0.4

65.6

87.9

22.3

163.3

169.0

5.7

GK

–6.8

–4.1

+2.7

119.3

183.7

64.4

117.2

140.7

23.5

IRE

0.1

–7.5

–7.6

28.6

129.3

100.6

285.2

392.7

107.5

UK

–2.7

–7.1

–4.4

47.0

109.1

62.2

223.9

218.9

–5.0

US

–2.9

–5.4

–2.4

66.3

109.1

42.9

219.0

202.6

–16.4

OECD –1.3 average

–4.3

–3.0

74.3

111.9

37.5

200.2

218.4

18.3

Sources: OECD Stat extracts http://stats.oecd.org/Index.aspx; Economic Outlook 93 http://stats.oecd. org/Index.aspx?DataSetCode=EO93_FLASHFILE_EO93; Financial indicators and stats, private sector debt dataset http://stats.oecd.org/index.aspx?queryid=34814

In the ‘austerian’ neoliberal universe such accumulations of public debt represent a major problem, a burden on future generations and, given a reluctance to raise taxes, justify curbs on public expenditures now to raise the surpluses to repay the debt. Critics have pointed out that under some conditions economic growth, and drawing into use underutilised resources, including unemployed labour, can diminish the

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The economics of austerity

ratio of debt to GDP as well increasing tax revenues that can be used to repay the debt (Dube, 2013; Wolf, 2013; Chang, 2014). Robert Skidelsky (2013) has argued that states rarely ‘repay’ their debts and that the crucial factor is therefore carrying costs which will vary not only on the amount of debt but on the applicable interest rates. States that have central banks with full autonomy over monetary policy (that is, states outside the Eurozone) retain the capacity to hold down interest rates, thus lessening the carrying costs of the debt. And, in reference to the burden on future generations, there is not net transfer between generations because the debt repayments simply transfer assets from debtors to creditors who occupy the same time (that is, both belong to future generations). Such transfers, of course, have distributional consequences, as do proposals to repay debt now through expenditure cuts. Be that as it may, the EU remained rigidly aligned with neoliberal balanced budget and price stability priorities. Thus wages would bear the brunt of adjustment (see www.euromemo.eu).

Indirect socioeconomic costs The effects of some of the outcomes of the crisis – greater inequality, higher unemployment and insecurity, and higher poverty – are exacerbated by austerity measures such as cuts in social and healthcare spending. Inequality and poverty increased in the decades before the crisis struck and can be counted among the legacies of neoliberalism. Between 2007 and 2010 market incomes in the OECD area declined, primarily due to unemployment and lower wages. The increase in market income inequality was as great in these three years as in the previous 12 years (OECD, 2013a). At least in this early post-crisis period, however, lower taxes, social transfers and the impact of initial post-crisis stimulus measures largely offset the trend to income inequality represented by market income. The OECD report notes that after 2010, if slow growth persisted and austerity measures were implemented then the impact of the tax and benefit systems in ameliorating inequality (and poverty) would decline. Given events since 2010, including the turn away from stimulus policies and towards those of austerity, it is likely that both inequality and poverty have increased. Even in the 2007–10 period certain groups, particularly children and youth, were likely to experience increased poverty. Inequality has been linked with a number of social ills and pathologies which will worsen to the extent that austerity removes the cushion between increasingly unequal market incomes and take-home income after tax and benefits. There is some data to suggest that inequality has

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Social policy in times of austerity

worsened since the crisis struck, but the true impact of the austerity measures themselves may not be apparent until more recent information becomes available. Table 3.4 shows changes in the Gini coefficient between 2007 and 2011. Table 3.4: Gini coefficient change in market income inequality* in 2007–11 (by percentage) Canada

+0.5%

United States

+2.0%

UK

+2.1%

Ireland

+5.5%

Germany

+1.2%

Greece

+5.0%

OECD average

+1.5

Notes: *market income refers to gross earnings and capital income; (+) denotes percentage increase in inequality. Data from Germany is from 2008, 2011 UK and Ireland data is provisional. Source: OECD (2014b)

Once redistribution through the tax system is taken into account the increases are more moderate, with Canada recording a very small decrease in inequality, and Ireland and Greece no change (Table 3.5). Another take on the issue, again indicating a growth in inequality, comes from comparing the disposable incomes of the top 10% and bottom 10% of income distribution (Table 3.6). With some exceptions, the top income earners have experienced declines, but smaller losses than those at the bottom. Table 3.5: Gini coefficient percentage change in disposable income inequality, 2007–11 Canada

–0.1%

United States

+1.5%

UK

+0.2%

Ireland

+0.0

Germany

+1.0

Greece

+0.0

OECD average

+0.1

Notes: (+) denotes percentage increase in inequality, (-) denotes decrease in inequality. Source: OECD (2014b)

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The economics of austerity Table 3.6: Annual percentage change in household disposable income, 2007–11 (by income group) Bottom 10%

Top 10%

Canada

+1.6%

+0.9%

US

–3.2%

–1.0%

UK

–4.5%

–2.0%

Ireland

–13%

–2.0%

Greece

–12.5%

–9.0%

Germany

+2.0

–1.5%

OECD average

–2%

–0.5%

Note: 2011 data for Ireland and UK are provisional. Sources: OECD (2013b, 2014b)

Wilkinson and Pickett (2010) show that inequality is correlated with increased incidence of mental health problems, drug use and addiction, lower life expectancy, higher levels of obesity, low educational achievement and aspirations, more violence and less social mobility. All these factors impose human and social costs on the individuals and communities experiencing them. All also carry economic costs, though these may be hard to quantify. These include the increased costs of healthcare, law enforcement, forgone production from foreshortened lives and unused or underutilised talents. In addition, inequality is associated with diminished trust and lower levels of social capital with intangible but real costs for society. For example, one study of the precariously employed in Canada shows diminished levels of community involvement (Lewchuk et al, 2013), an effect that is likely to be more general. Turning to the impact of poverty, the OECD (2013a) showed that, defined in relative terms, poverty seemed little affected by the crisis. However, the study noted that such measures are difficult to interpret during recessions. Using an absolute measure of poverty there was a much greater increase than using a relative poverty measure. The health impacts are again difficult to measure, especially as some may operate as a long-term impact of poverty experienced today. In the US, Seefeldt et al (2012) found that long-term unemployment (see Table 3.1 earlier) had increased to record levels with consequences for the individual, the level of aggregate demand and for poverty incidence. The same study found that the number of people living in poverty in the US, already high, had increased by 27% between 2007 and 2010. Greater growth in poverty was observable among Hispanics, African-Americans, children, female-headed households and young adults between the

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Social policy in times of austerity

ages of 18 and 34. But for federal initiatives, including the stimulus package and various other measures that assisted low-income people, the situation would have been worse. Looking ahead, Seefeldt et al express concern that expenditure cuts, at federal, state and municipal levels, will remove this partial buffer. The World Health Organization has already noted increased numbers of suicides and alcohol related deaths due to poverty (WHO, 2011). In addition, but manifest in the longer term, childhood poverty has demonstrably negative impacts on health as an adult, though of course the effects are not yet observable. For the working poor, occupational health and safety standards are likely to be lower than for other income levels and thus they are more likely to suffer injuries or other workrelated problems (Ebner, 2010). Unemployment, underemployment and precarious employment and the associated sense of insecurity even of those who remain in work all exert their own toll. With regard to precarious workers, for example, Lewchuk et al (2011) demonstrated that insecurity generated by precarious employment, and where social support was limited, were associated with poorer health indicators.

Austerity and the reconstitution of neoliberalism Policies of austerity have been widely implemented and threats to the stability of the neoliberal order have been manageable in the sense that incumbent governments may have fallen, but the austerity policy package has not been displaced in any significant jurisdiction. This is because clear alternatives have either not emerged or have failed to attract an organised social base capable of contending for power. Still there are signs that political and economic elites would wish to see neoliberalism and austerity more entrenched and less capable of being altered were a popularly supported alternative to emerge. Part of this finds expression in measures to render austerity policies automatic rather than discretionary. Locking in austerity in quasi-constitutional ways renders the policy normal under specified conditions and also allows governments to avoid blame for implementation since they are merely following the ‘rules’. To the extent these efforts are successful, the austerity measures would become the neoliberal counterpoint to the pro-stimulus automatic stabilisers of the Keynesian era (programmes such as unemployment insurance which served to sustain aggregate demand when job losses occurred and did so automatically without the need for any political intervention or decision). Today, such programmes continue as part of the legacy of the Keynesian era though their effectiveness has

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been diluted in many countries by harder criteria for qualification, lower replacement rates and limits on the length of time they may be collected. Nevertheless, their operation presents a contrast with today’s austerity policies that need to be enacted and defended against public protest. They remain highly discretionary and therefore political, even if no effective politics yet exists to challenge them. Openness to political challenge may not remain the case for much longer. Part of the project of reconstituting neoliberalism is to convert these programmes and policies into automatic responses to specified indicators. Thus, the European Union, under the influence of German ‘ordo-liberalism’ (Blyth, 2013, pp 136–41) and big European capital, intends to limit the ability of governments to engage in expansionary policies. This will be done through treaty and will impose various thresholds that will cause austerity to be introduced once crossed. The economic effect would be to limit any attempt at fiscal stimulus. If successful, the measure would replace political and discretionary decisions with technocratic rules with which politics and the state may not interfere. This can be observed in the Maastricht Treaty, the Stability and Growth Pact, the rules governing the European Central Bank and the proposed new fiscal treaty. Previous attempts to place limits on fiscal policy discretion through the Stability and Growth Pact fell short of imposing enforceable sanctions for excess deficits: ‘the essence of the pact is not a mechanism of “quasi-automatic sanctions” but the institutionalization of a political pledge to aim for low deficits. The procedures cannot be enforced by legal means’ (Heipertz and Verdun, 2004, p 770). In 2012, a new fiscal compact in the EU was designed to strengthen the earlier pact by providing that: ‘the budgetary position of the general government of a Contracting Party shall be balanced or in surplus’ subject to temporary deviations with a correction mechanism, ‘triggered automatically’, for ‘significant observed deviations’. The Compact goes on to state that: [these] rules … shall take effect in the national law of the Contracting Parties … through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to through national budgetary processes. The Contracting Parties shall put in place at national level the correction mechanism. (Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, 2012, Article 3.2)

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The intended effect of these measures is to deny the Eurozone countries and other signatories4 the use of policy instruments – currency devaluation and running significant budget deficits – that have traditionally been important ingredients of stimulus policies. At prescribed thresholds the rules should take over from discretion. Corrective action is intended to be automatic. Critics have noted continued scope for wriggle room with the implication that, as with the Growth and Stability Pact, the stated intentions may not be realised (see, for example, Burret and Schnellenbach, 2014). Nonetheless, the intention seems very clear. Outside the European Union similar initiatives can be seen elsewhere in balanced budget laws, strengthened provisions for central bank independence and in the contents of various international agreements which condition state activity (see Grinspun and Kreklewich, 1994; McBride, 2010). Sometimes there is an attempt to ‘constitutionalise’ such rules, as is envisaged with the EU’s Fiscal Pact, making them more difficult to change. For example, in the 1980s and 1990s Canada was in seemingly endless constitutional negotiations largely centred on issues of nationality, language and regionalism. Notwithstanding those priorities, a series of efforts were made to insert neoliberal economic rules into negotiations and texts driven by other agendas. Thus it was proposed that the Bank of Canada’s mandate be confined to the prevention of inflation rather than the broader one that included promoting employment (McBride, 1993). In the event, these particular efforts to constitutionalise neoliberal preferences failed. Other examples had more success. This included legislation in various provinces to impose balanced budgets, thus removing a key Keynesian instrument to counter recessions. The fact that this was ordinary legislation in parliamentary systems rather than being part of the constitution and could be easily rescinded by a subsequent government or, for that matter, ignored by an incumbent one meant that this type of legislation was primarily of symbolic value (McBride and Whiteside, 2011). However, as the European Union has demonstrated, measures like this can be constitutionalised in other ways, as by treaties which bind their signatories, even if they are parliamentary type systems under which no parliament can bind its successors. The Fiscal Compact, signed by 25 out of the 27 EU members,5 ‘establishes a pervasive legal regime to tighten the budgetary policies of the Contracting Parties, with the goal of ensuring fiscal discipline in the member states as a pre-condition for financial stability in the entire Euro-zone’ (Fabbrini, 2013, p 8). It strictly defines the annual structural deficit permitted in member states and stipulates that

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they incorporate this commitment in either constitutional or quasiconstitutional laws binding on budget decisions, and empowers the European Court of Justice to impose substantial financial penalties for noncompliance (Fabbrini, 2013). All this could be depicted as a purely political issue, perhaps reducing the scope for democracy. In fact, though, there are intended economic effects (costs, in the analysis presented in this chapter). It can be argued that forgoing alternatives to austerity will impose costs on future generations that may be higher than the costs associated with higher public debt. The remoteness of political decision making from the populations affected by these measures is unlikely to be effectively challenged at least in the short term. Notes 1

The rationale is as follows: the US was the source of the crisis; Germany was the most trenchant advocate of austerity as a response; Canada was one of the least affected by the crisis but has nevertheless chosen the austerity route; similarly the UK is not part of the Eurozone and could have used policy instruments denied to members of the zone, though in fact it did not do so to any great extent; and Ireland and Greece had austerity imposed upon them, though with the compliance of their ruling elites. www.bbc.co.uk/news/uk-northern-ireland-22689189; www.bbc.co.uk/news/ business-22702003

2

3

The broad range of the estimate is due to uncertainty over how long it will take to return to trend. If return to pre-crisis trend is not achieved the costs will be higher. 4

At the time of writing all EU members except the UK and Czech Republic had signed.

5

The exceptions are the UK and the Czech Republic.

Acknowledgements Stephen McBride is grateful for research funding from SSHRC (Standard Grant number: 410-2010-0837) and the Canada Research Chairs programme, and for research assistance provided by Berkay Ayhan, Scott Leon and Sorin Mitrea.

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References Albo, G. (2013) ‘The crisis and economic alternatives’, in L. Panitch, G. Albo, and V. Chibber (eds), Socialist Register 2013: The Question of Strategy, London: Merlin. Becker, J. and Jager, J. (2011) From an economic crisis to a crisis of European integration, Paper presented at IIPPE Conference on Neoliberalism and Crisis of Economic Science, Istanbul, Turkey. Bellofiore, R. and Halevi, J. (2010) ‘“Could be raining”: The European crisis after the Great Recession’, Journal of International Political Economy, vol 39, no 4, pp 5–30. Blyth, M. (2013) Austerity: The history of a dangerous idea, Oxford: Oxford University Press. Burret, H.T. and Schnellenbach, J. (2014) Implementation of the fiscal compact in the Euro Area member states: Expertise on behalf of the German Council of Economic Experts, Freiberg im Breisgau: Walter Eucken Institute. Chang, H.-J. (2014) ‘Why did Britain’s political class buy into the Tories’ economic fairytale?’, The Guardian, 19 October. Dube, A. (2013) ‘A note on debt, growth and causality: Preliminary’, https://dl.dropboxusercontent.com/u/15038936/RR%20 Timepath/Dube_Growth_Debt_Causation.pdf Dyson, K. (2010) ‘Norman’s lament: The Greek and Euro Area crisis in historical perspective’, New Political Economy, vol 15, no 4, pp 597–608. Ebner, Y. (2010) The impact of the economic crisis on health inequalities, Brussels: Assembly of European Regions Background Paper. EuroMemo Group (2014) The deepening divisions in Europe and the need for a radical alternative to EU Policies, London. Fabbrini, F. (2013) The fiscal compact, the ‘Golden Rule’, and the paradox of European Federalism, Tilburg Law School Legal Studies Research Paper Series No 013/2013. Farnsworth, K. and Irving, Z. (2011) ‘Varieties of crisis’, in K. Farnsworth and Z. Irving (eds), Social policy in challenging times: Economic crisis and welfare systems, Bristol: Policy Press. Grinspun, R. and Kreklewich, R. (1994) ‘Consolidating Neoliberal Reforms: “FreeTrade” as a Conditioning Framework’, Studies in Political Economy, vol 43, pp 33–61. G-20 (2010) Seoul Summit document, 11–12 November, www.g20. utoronto.ca/2010/g20seoul-doc.html Guerot, U. and Dullien, S. (2012) ‘The long shadow of ordoliberalism’, Social Europe Journal, 30 July.

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Healy, T. (2013) Private bank debts and public finances: Some options for Ireland, Dublin: Nevin Economic Research Institute, NERI WP 2013.1. Heipertz, M. and Verdun, A. (2004) ‘The dog that would never bite? What we can learn from the origins of the Stability and Growth Pact’, Journal of European Public Policy, vol 11, no 5, pp 765–80. International Monetary Fund (IMF) (2010) Ireland: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, 3 December, www.imf.org/external/ np/loi/2010/irl/120310.pdf Karamessini, M. (2012) ‘Sovereign debt crisis: An opportunity to complete the neoliberal project and dismantle the Greek employment model’, in S. Lehndorf (ed), A triumph of failed ideas: European models of capitalism in the crisis, Brussels: ETIU. Lapavitsas, C., Kaltenbrunner, A., Labrinidis, G., Lindo, D., Meadway, J., Michell, J., Painceira, J.P., Pires, E., Powell, J., Stenfors, A., Teles, N. and Vatikiosis, L. (2012) Crisis in the Eurozone, London: Verso. Lewchuk, W. (with M. Clarke and A. de Wolff) (2011) Working without commitments: Precarious employment and health, Montreal: McGill Queen’s University Press. Lewchuk, W., Lafleche, M., Dyson, D., Goldring, L., Meisner, A., Procyk, S., Rosen, D., Shields, J., Viducis, P. and Vrankulj, S. (2013) It’s more than poverty: Employment precarity and household well-being, Toronto: United Way of Toronto. Luttrell, D., Atkinson, T. and Rosenblum, H. (2013) ‘Assessing the costs and consequences of the 2007–09 financial crisis and its aftermath’, Federal Reserve Bank of Dallas Economic Letter, Houston Texas, vol 8, no 7, September 2013. Mahnkopf, B. (2012) ‘The euro crisis: German politics of blame and austerity – A neoliberal nightmare’, International Critical Thought, vol 2, no 4, pp 472–85. Markantonatou, M. (2013) ‘Fiscal discipline through internal devaluation and discourses of rent-seeking: The case of the crisis in Greece’, Studies in Political Economy, vol 91, pp 59–83. McBride, S. (1993) ‘Renewed federalism as an instrument of competitiveness: Liberal political economy and the Canadian Constitution’, International Journal of Canadian Studies, no 7/8, pp 187–205. McBride, S. (2010) ‘The New Constitutionalism: International and private rule in the new global order’, in G. Teeple and S. McBride (eds), Relations of global power: Neoliberal order and disorder, Toronto: University of Toronto Press, pp 19–40.

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McBride, S. (2014) ‘In austerity we trust: Elite responses to times of crisis’, in D. Baines and S. McBride (eds), Orchestrating austerity: Impacts and resistance, Halifax: Fernwood. McBride, S. and Whiteside, H. (2011) Private affluence, public austerity: Economic crisis and democratic malaise in Canada, Halifax: Fernwood. OECD (Organisation for Economic Co-operation and Development) (2009a) Government at a glance 2009. Country note: Ireland, www.oecd. org/gov/44212694.pdf OECD (2009b) OECD Economic surveys: Ireland 2009, Paris: OECD, DOI: http://dx.doi.org/10.1787/eco_surveys-irl-2009-en OECD (2010) OECD Economic outlook Vol 1, Paris: OECD. OECD (2012) Fiscal consolidation: How much, how fast, and by what means?, Paris: OECD. OECD (2013a) Crisis squeezes income and puts pressure on inequality and income, Paris: OECD. OECD (2013b) ‘Crisis squeezes income and puts pressure on inequality and poverty: new results from the OECD’, OECD Income Distribution Database, www.oecd.org/els/soc/OECD2013-Inequality-andPoverty-8p.pdf OECD (2014a) OECD Factbook: Economic, environmental and social statistics, OECD Publishing, http://dx.doi.org/10.1787/factbook2014-en OECD (2014b) Rising inequality: Youth and poor fall further behind, OECD Income and Distribution Database, June. Offe, C. (2013) ‘Europe entrapped: Does the EU have the political capacity to overcome its current crisis?’, European Law Journal, vol 19, no 5, pp 595–611. O’Keeffe, B. (2010) Speech by the Minister of Enterprise, Trade and Innovation, 14 December, www.djei.ie/press/2010/20101214.htm Papadopolous, T. and Roumpakis, A. (2012) ‘The Greek welfare state in the age of austerity: anti-social policy and politico-economic crisis’, in M. Kilkey, G. Ramia and K. Farnsworth (eds), Social policy review 24, Bristol: Policy Press. Sanger, T. (2013) ‘Canada’s Conservative class war: Using austerity to squeeze labour at the expense of economic growth’, in C. Fanelli and B. Evans (eds), Great recession proof? Shattering the myth of Canadian exceptionalism, Ottawa: Red Quill Books. Seefeldt, K., Abner, G., Bolinger, J.A. Xu, L. and Graham, J. D. (2012) ‘At risk: America’s poor during and after the Great Recession’, Indiana University Purdue University Indianapolis Top of Form School of Public and Environmental Affairs Working Paper.

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Skidelsky, R. (2013) ‘Post-crash economics: Some common fallacies about austerity’, The Guardian, 21 November. Stanford, J. (2013) ‘The myth of Canadian exceptionalism’, in C. Fanelli and B. Evans (eds) Great recession proof? Shattering the myth of Canadian exceptionalism, Ottawa: Red Quill Books. Sutherland, D., Hoeller, P., Égert, B. and Röhn, O. (2010) Countercyclical economic policy, Economics Department Working Papers, Paris: OECD. Taft, M. (2013) ‘Column: How much has Ireland paid for the EU banking crisis?’, The Journal, www.thejournal.ie/readme/bankingcrisis-bill-ireland-755464-Jan2013/ Watt, N. (2013) ‘David Cameron: We need to do more with less … permanently’, The Guardian, 11 November. Wilkinson, R. and Pickett, K. (2010) The spirit level: Why equality is better for everyone, London: Penguin. Wolf, M. (2013) ‘Austerity loses an article of faith’, Financial Times, 23 April.

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Neoliberalism, finance-dominated accumulation and enduring austerity: a cultural political economy perspective Bob Jessop

In line with interest in varieties of capitalism, one might expect to find varieties of austerity. This is confirmed by the historical record – austerity has different origins, dynamics and effects in different periods – and by comparisons in the same periods. Another source of variation is how (and how far) pursuit of austerity rearticulates the economic and political in terms of policy, politics and polity. This chapter explores these issues through cultural political economy (CPE). This heterodox theoretical approach takes the cultural turn seriously but not one-sidedly in the critique of political economy. It can be said to combine interest in the economic, political and social imaginaries that shape capital accumulation and state projects with a critical analysis of the changing articulation of the economic and political in capitalist social formations. After brief comments in these terms on austerity policies in the ‘golden age’ of Atlantic Fordism, the analysis concentrates on post-Fordist accumulation regimes. To illustrate the variegation of austerity policies, politics and political transformation in this context, the US and UK serve as exemplars of neoliberal finance-dominated accumulation. Attention then turns to economic and fisco-financial crises in Continental Europe as organised in the shadow of a German-led neo-mercantilist bloc. European efforts to address contagion effects from the North Atlantic Financial Crisis (NAFC) as well as the Eurozone’s sui generis crisis dynamics involve other forms of austerity policies and politics. This is illustrated from Germany and Greece. The conclusion considers the limits to neoliberal austerity and the catastrophic equilibrium of forces that is blocking efforts to overcome them.

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Cultural political economy CPE posits that, since the world is ungraspable in all its complexity, individual and collective agents must resort to simplified understandings in order to be able to ‘go on’.1 What actors construe as significant in this enforced selection is not cognitively hardwired or otherwise preprogrammed. It depends on sense-making systems that give ‘meaning’ to some aspects of the world and to their own and others’ place within that world. While any construal may be as good as any other for internal meaning-making purposes, matters change when we ask which of many alternatives gets translated into effective social practices. To paraphrase Orwell, while all construals are equal, some are more equal than others. That is, some are more powerful than others in structuring personal, organisational and inter-organisational interaction, institutional and inter-institutional dynamics, and the wider social order. This holds for all kinds of social construal but here the focus is on economic and political imaginaries. One implication of CPE is that austerity must be interpreted and explained in terms of prevailing economic and fisco-financial imaginaries, accounts of the conditions for political stability and the wider social repercussions of economic and political policy. Imaginaries reflect different (and contestable) entry-points and standpoints and can vary in their spatio-temporal horizons of action. When they have historical depth, they may be integrated into the politics of memory (for examples relating to austerity, see Bramall, 2013). But CPE also studies the structural constraints and opportunities, including specific governmental techniques and technologies, that condition and mediate agents’ attempts to formulate, implement and evaluate austerity. This approach has similarities to Mark Blyth’s (2013) analysis of austerity thinking. He describes this as a template designed to reduce complexity and clarify pathways to action. In brief, austerity policy, which is based on the new fiscal conservatism, aims to cut and balance the state’s budget in order to stabilise public finances, restore competitiveness through wage cuts and incentivise investment by lowering taxes. Blyth claims that the resulting austerity policies have been ‘an unmitigated failure’ in Europe. They identified the wrong target (public sector balance sheets) and adopted the wrong policy (simultaneous contraction of Eurozone economies). Indeed, the greater the austerity imposed in individual economies since 2008, he reports, the worse their performance, especially in the periphery. To explain why austerity policies persist when they are pro-cyclical and encounter resistance, Blyth suggests that they are a form of ideological politics

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that is only maintained via a retreat from democratic government to technocratic and authoritarian exceptional states. While CPE shares Blyth’s interest in the simplifying role of ideas in guiding policy, it also seeks to explain why some ideas rather than others are selected to guide policy and why some are then retained and institutionalised in policy paradigms. This depends not only on discursive resonance, rhetorical appeal, ideological politics and so on, but also on structural mediations, calculative devices and governmental technologies, and the strategies and tactics of key agents. The CPE approach also draws on more elaborate accounts of the state and state power in exploring their recomposition in response to the challenges of crisis management.

The tax state and fisco-financial crises Public finances are one of the best starting points for an investigation of society, especially though not exclusively of its political life … This is true both of the causal significance of fiscal policy (insofar as fiscal events are an important element in the causation of all change) and of its symptomatic significance (insofar as everything that happens has its fiscal reflection). (Schumpeter, 1954, p 7) Taxation is the lifeblood of the capitalist type of state.2 As a tax state (Steuerstaat), its income derives primarily from its monopoly over taxation in an essentially private economic order rather than from its profitable management of state owned or state controlled property (Schumpeter, 1954; Goldscheid, 1976; Krätke, 1987, pp 25–6). Its taxing capacity is underpinned in turn by its monopoly of coercion. The legitimacy of these twin monopolies is typically grounded in constitutional accountability based on ‘no taxation without representation’, which purportedly ensures that the level, incidence and purposes of taxation correspond to the conceptions of justice and good government held by its citizens and other key forces (Krätke, 1987; Théret, 1992). Alongside its external and internal sovereignty and political legitimacy, the tax state must be able to adapt public finances in both their revenue and expenditure dimensions to the imperatives of accumulation as well as the legitimacy needs of the prevailing political regime (O’Connor, 1973; Théret, 1992; Streeck, 2013). In addition to economic crises (such as a recession or capital strike), fisco-financial crisis may originate in crises affecting the state. These could include crises over the right to taxation (with or without representation) and/or tax resistance or avoidance; crises of

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institutional integration and coordination within the state apparatus; crises affecting the state’s capacities for effective intervention (such that, for example, intervention undermines the tax base); legitimacy crises as the social basis of the state mobilised behind a particular tax regime fails to consolidate or breaks up; administrative demoralisation or disorientation as political esprit de corps is undermined by a failed state project; or a hegemonic crisis around the nature and purposes of government for the wider society (see Habermas, 1975; Poulantzas, 1979). Conversely, as Schumpeter implies, a fisco-financial crisis could trigger or intensify existing crises in and/or of the state. This in turn could lead to demands to redesign political representation, reform the internal structures and operations of the state, alter the amount and modalities of state intervention, recompose the social bases of the state, redefine state strategies, and alter the balance between consent and coercion to address hegemonic and/or wider organic crisis (see Gramsci, 1971). Where the tax state uses future taxing powers as security against current and new loans, the views of creditors and credit rating agencies also matter. A strike by productive capital and/or bondholders is a standing (and discursively reinforced) threat and reinforces capital’s power over the state. Indebted states, notably those with heavy external debts, may seek to negotiate their cancellation or rescheduling. Unilateral action, even where possible, would further undermine their credibility. This problem is compounded when the state wants to attract inward investment and spur local enterprise. Yet tax holidays, subsidies and so on could threaten both the immediate tax base and the state’s legitimacy in the eyes of those obliged to pay taxes. The pioneering Goldscheid/Schumpeter debate concerned how best to deal with Austro-Hungarian debt incurred in the First World War (Hickel, 1976). While war continued to be a major cause of expanded debt, the limits of austerity under the Gold Standard before and during the Great Depression added a further cause in the form of contracyclical deficit finance to stimulate demand and create employment. Attention turned to peacetime debt in response to crises in and/ or of post-war Atlantic Fordist regimes following a ‘golden age’ of apparently permanent prosperity. This had been based on temporary austerity measures to facilitate post-war reconstruction, a peacetime dividend that enabled the diversion of state expenditure from warfare to welfare, the rising productivity of profit-producing capital and a tripartite consensus in favour of wage led growth. As this virtuous Fordist growth dynamic began to reach its limits in the late 1960s and

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1970s, stagflationary tendencies triggered the inherent possibility in any tax state of a fisco-financial crisis. Writing from a radical left position, O’Connor (1973) explained the rising debt to national income ratio as a particular expression of the basic contradiction in capitalism between a growing socialisation of the forces of production and continued private appropriation of surplus in the form of profit. This took the form of a growing gap between state expenditure and revenues. Moreover, as inflationary tax increases and/or deficit financing at high interest rates reinforced stagflation, the state faced a double bind. It could cut spending on public services or raise taxes on households – undermining its legitimacy; and/or it could reduce its services to capital, including public capital investment, or seek to lower the deficit by raising taxes on profits – risking economic crisis or inflation and refuelling the fiscal crisis. Quite different conclusions were drawn by liberal economists from the combination of stagflation and the growth in peacetime debt. They demanded a drastic rollback of the state to reduce inherently unproductive public sector employment (see for example Bacon and Eltis, 1976) and/or to reverse the financial ‘crowding out’ of private sector investment by public sector borrowing and taxes (see Green, 1993, on the ‘debt state’). These arguments, contestable as they are theoretically and empirically (Tomlinson, 2000), were used to justify monetarist shock therapy to break stagflation and, later, the more general neoliberal politics of austerity intended to raise the rate and volume of profits. Relevant measures included privatisation of state assets to reduce public debt, privatisation of public services to lower future public spending, cuts in welfare entitlements and attacks on public sector unions to reduce wages. Paradoxically, they have created conditions for a financial crisis due to unsustainable private debt fuelled by privatised Keynesianism and financial innovation (Crouch, 2009; Rasmus, 2010). Moreover, as many critics note, these measures are compounding fiscal deficits and crisis with democratic deficits and crisis. Such fisco-financial crises are linked to the double life that money leads in a capitalist society as an economic and political phenomenon. First, as the most general and abstract expression of the capital relationship, money circulates anonymously and anarchically within the economy. All economic agents are required to earn money in order to spend money; this subordinates them to the logic of accumulation. Conversely, second, money is issued as legal tender, backed by a central bank that is part of the state apparatus (even if formally independent); and, as such, it enables the state to raise revenue for its own purposes

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through taxation, loans or the printing press. So the state has an interest in the monetisation of economic relations as well as in the specific forms of money. Where money in circulation escapes state surveillance and control, the state can encounter real economic and political difficulties. The massive expansion of capitalist credit creation by private banks is one major threat to state control in this regard. Another is the internationalisation of the circuits of capital (see below). Thus, compared with periods when national economic and monetary space, national capital and the national state were decisive in shaping the relationship between the social power of money and the political power of the state, in the current period of growing globalisation and supranational regionalism, more weight must be given to international currency regimes, internationally transferable property rights, and the international political order. In addition, the taken for grantedness of national space as the site for taxation is weakened by a proliferation of state sponsored exceptions and exemptions and by the growing ability of corporations and high net worth households to avoid or evade tax (Cameron, 2008). This undermines three key conditions of a tax state: the monopolies of taxation and coercion and, hence, the general and compulsory nature of taxation. A cause and effect of this is that privileged economic agents are permitted (or simply exploit) the opportunity to negotiate the rate, amount and beneficiary of the taxes that they choose to pay. These issues are illuminated through the variegated capitalism approach. This highlights the patterned diversity – or variegation – of economic and political regimes at scales up to and including the world market. Variegation is reflected in the complementarities, tensions, rivalries and antagonisms among different types or varieties of capitalism and results from structural coupling, coevolution and efforts at strategic coordination or rebalancing of various economic regimes to steer differential accumulation. This rules out a ‘flat world’ of separate but equal national varieties or, again, a mosaic of rival economies with variable geometry and growth potentials. Instead we find a fractally organised, changing variegated capitalism. Indeed, the global economy displays many kinds of complex, non-trivial asymmetries. For example, some territorial states (for example, the US, China, Germany), some places (for example, networked global cities), some scales (for example, the EU) and some spaces of flows (for example, over the counter trade in interest rate contracts) matter more than others. These asymmetries may combine to create distinct bilateral or multilateral economic spaces with their own dynamics. Two cases are the pathological co-dependence of the US and Chinese economies

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and the dysfunctional interaction of a neo-mercantilist German space and the remaining Eurozone, especially Southern Europe.

Neoliberalisms Neoliberalism has different aspects and can be interpreted from many perspectives. This chapter distinguishes four types, each of which is associated with, inter alia, a more or less distinctive approach to austerity. Most radical was the attempt at neoliberal system transformation in post-Soviet successor states. Even here there were different cases and outcomes (for example, Russia and Poland). A second type is neoliberal regime shifts. Breaking with the post-war Atlantic Fordist settlements, based on a capital–labour institutionalised compromise, a committed and newly empowered elite alliance introduced the six key planks in the neoliberal policy agenda, namely liberalisation, deregulation, privatisation, market proxies in the public sector, internationalisation and cuts in direct taxation. These policies largely succeeded in modifying the balance of forces in favour of capital. This is reflected in stagnant real wages, cuts in welfare, increasing personal debt to invest in housing, pensions, education and health or, indeed, maintain a previous standard of living, and growing concentration of income and assets at the top of their respective populations. Thatcherism and Reaganism are well-known cases but similar shifts occurred in Australia, Canada, New Zealand, Ireland and Iceland under centre-left as well as rightwing governments. Other examples occurred in Latin America in the 1970s–90s in response to inflationary and debt crises. The third type comprises economic restructuring and regime shifts that were mainly imposed from outside by transnational economic institutions and organisations backed by leading capitalist powers and partners among domestic political and economic elites. It adopts neoliberal policies in line with the ‘Washington Consensus’ as a condition for financial and other aid to crisis-ridden economies in parts of Africa, Asia, Eastern and Central Europe, and Latin America. While policies in types two and three often overlap in the (semi-)periphery of the global economy, they involve analytically distinct roots, lessons learnt and likely forms of resistance. Fourth, neoliberalism can involve a more pragmatic, partial and potentially reversible set of neoliberal policy adjustments. Not all of the six defining neoliberal economic policies listed under type two have been adopted in such cases. They involve more modest and piecemeal changes deemed necessary by governing elites and their social base(s) to maintain existing economic and social models in the face of specific

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crisis tendencies and the challenges created by globalisation. Nordic social democracies and Rhenish capitalism exemplify such policy adjustments with ordoliberalism more prevalent than Chicagoan neoliberalism. These adjustments can nonetheless cumulate over time and, combined with the growing internationalisation and – more recently – the contagion effects of the NAFC, they become harder to reverse. This creates the paradox that an ordoliberal Germany, which has made regular neoliberal policy adjustments to secure its neo-mercantilist export-led growth model, is backing the austerity demands of transnational financial capital that effectively imposes a technocratic neoliberal regime shift on Greece and Spain. Efforts to roll neoliberalism forward continued up to the NAFC ‘blowback’ in 2007–8. These included flanking and supporting mechanisms and policies to maintain neoliberal momentum despite growing signs of failure and/or mounting resistance. Moreover, notwithstanding a brief period when the global financial crisis was construed as a crisis of rather than in neoliberalism, massive state intervention has since created conditions for a return to neoliberal ‘business as usual’ where neoliberal regime shifts occurred. Elsewhere in Europe it has prompted ordoliberal policy adjustments alongside efforts to maintain free trade, extend it to services, facilitate nonspeculative capital flows and find market solutions to climate change and other global challenges. Despite this ‘blowback’, the neoliberal project still dominates world society thanks to the path-dependent effects of policies, strategies and structural shifts that were implemented during its highpoint. This is linked to crisis management in support of finance-dominated accumulation and accumulation via dispossession. These pathdependent effects are political and ideological as well as economic. This derives from the global weight of the US economy (including its pathological co-dependence with China) and the US state’s role in shifting the contradictions of neoliberalism elsewhere and/or into the future. Thus neoliberal policies have shaped the forms, timing and dynamics of economic crises even in countries where they were not willingly embraced, were coercively imposed or unwittingly cumulated.

Finance-dominated accumulation Money, credit and debt have existed for three millennia but they acquire new forms and functions when capitalist credit money becomes essential to accumulation. Of special significance here are

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the tensions between money as money and as capital and, for public finance, between private credit and state fiat money. These tensions are reflected in the role of credit–debt relations in generating and/ or mediating crisis tendencies in capitalist formations. An adequate account in these terms of the distinctive features of fisco-financial crises and their implications for the politics of austerity requires attention to: (1) the functions of money; (2) the hierarchy of money forms; and (3) the tension between ‘national currency’ and world money. With the increasing internationalisation of the circuits of capital, the second and third issues matter even more. One form of credit money is interest-bearing capital (which differs from traditional usury capital) and this, in turn, can generate increasingly fantastic forms of fictitious capital and, indeed, unsustainable fictitious profits (Marx, 1967; Carneiro et al, 2012; Jessop, 2013). Interestbearing capital can facilitate the accumulation of profit-producing capital and also function as property, when it is simply one revenuegenerating asset among others. The neoliberal form of world market integration greatly benefits interest-bearing capital because it controls the most liquid, abstract, and generalised economic resource and because it has also become the most integrated fraction of capital. This is the basis for financialisation. Many definitions of financialisation focus on the role of finance in the circuits of capital and its contribution to differential accumulation. Four relevant definitions are: • the transformation of future streams of (profit, dividend or interest) income into a tradable asset like a stock or a bond; • a ‘pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production’ (Krippner, 2005, p 174); • an increasing tendency to the autonomisation of the circuits of finance capital as property (or fictitious capital) from finance capital as functioning capital within the circuits of the ‘real economy’ (Meacci, 1998, pp 191–5); and • the systemic power and importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, nationally and internationally (Epstein, 2005, p 3). Financialisation can lead to finance-dominated accumulation. This is an extreme form of marketisation of economic relations in which fictitious money, fictitious credit, fictitious capital and fictitious profits play an

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increasing role in shaping economic performance and crisis tendencies. It emerges to the extent that the circuits of interest-bearing capital become increasingly autonomous from those of profit-producing capital. Of course, financial capital as property cannot become fully and permanently detached from the need to valorise profit-producing capital. On the contrary, because continued expansion depends heavily on the pseudo-validation of highly leveraged speculative and Ponzi debt, this regime has its own inherent crisis-generating mechanism. Elsner (2012) explains this as follows: financial capital in a financedominated regime has a target rate of return that is several times greater than the historic norm for profit-producing capital and, worse still, in seeking to achieve it, massively levers fictitious credit and capital. In aggregate, the eventual validation of this capital would demand a total volume of surplus value that far exceeds the productive and exploitative capacity of existing profit-producing capital. This explains the emergence of financial crises that develop relatively independently, at least initially, from crisis tendencies rooted in capitalist production. Indeed, the greater and longer the seeming independence of financial capital and the greater the resulting parasitism of finance as property, the greater and longer the crises created as the organic unity of the circuits of capital is reimposed through crisis. Attempts to overcome the contradiction identified by Elsner depend on three strategies that are individually and collectively unsustainable. The first strategy is to create and manage bubbles, the main redistribution mechanism in finance-dominated accumulation, and then bail out (or get bailed out) at the right moment (Elsner, 2012, pp 146–7; also Hudson, 2012). This requires the complicity of central banks and government in finance-dominated economies. A second strategy is to invoke a system-threatening ‘financial emergency’ that justifies efforts to reduce individual and social wages, impose internal devaluation and financial repression and privatise public services and assets to pay off the public debt incurred in massive bailouts (see Mirowski, 2013). States have key roles here and this strategy has reinvigorated neoliberalism and supported the politics of austerity (see below). A third approach, which also includes privatisation, involves state-sponsored primitive accumulation (for example, land-grabbing, capitalising nature and its services, and enclosing the intellectual commons). Albeit in different ways, all three strategies are implicated in the politics of austerity, as its cause and/or one of its mechanisms.

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A cultural political economy of austerity While austerity policies differ across ‘varieties of capitalism’ (reflecting their specific economic profiles and imaginaries), they are also shaped by interdependencies that result from interstate relations (including forms of regional and global governance), foreign trade (and other features of world market integration), and the prevailing logic of the world market. This highlights the need to examine austerity in terms of the relations between the economic and political fields, including their basic forms and institutional architecture, and their mediation through the changing balance of forces. The policy–politics–polity triplet suggests that austerity can be studied in three ways. First, there are conjunctural austerity policies that are introduced in the first instance as temporary measures in response to short-term or immediate problems. As the conjuncture becomes favourable again, these policies are suspended or reversed. Second, there is the enduring politics of austerity (often called ‘permanent austerity’ in the relevant literature) that is promoted in response to a ‘chronic’ crisis, real or manufactured, in the fisco-financial domain and/or in the economy more generally. This enduring politics of austerity, as noted above, is intended to bring about a more lasting reorganisation of the balance of forces in favour of capital rather than to make policy adjustments to safeguard existing economic and political arrangements. Third, there is the austerity polity. This results from a continuing fundamental institutional reorganisation of the relations between the economic and political in capitalist formations. It can be a possibly unintended cumulative result of the enduring politics of austerity, especially where this aggravates the underlying causes of fisco-financial crisis. It can also result from a deliberate strategy to subordinate the polity more directly and durably to the ‘imperatives’ of the world market as these are construed in neoliberal discourse with its one-sided emphasis on the logic of exchange value. And, given the political, ideological, hegemonic and organic crises that have developed in the context of the financial, economic and fisco-financial crises, they can also be an authoritarian response to growing popular unrest (including rightwing extremism) about the technocratic and plutocratic nature of crisis responses. Whereas conjunctural policies are found in the pattern of neoliberal policy adjustment and associated with targeted cuts in specific areas, an enduring politics of austerity is characteristic of neoliberal regime shifts and assumes the form of general fisco-financial restraint, putting downward pressure on most areas of expenditure, especially

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discretionary ones (Pierson, 2001; Ferrera, 2008; Seymour, 2014). This pattern can occur in normal forms of politics, in states of economic emergency or even in lasting states of exception. It can be triggered by an obvious crisis, one that is deliberately exaggerated or one ‘manufactured’ for political purposes. Indeed, in neoliberal regimes, whatever the state of the economy, it seems that it is always the right time to reduce public expenditure (except for corporate welfare) through an appropriately crafted (and crafty) politics of austerity. This involves far more than quantitative cuts in spending because it is also intended to have qualitative, transformative effects. It is pursued as a means to consolidate and extend the power of capital, especially interest-bearing capital, and to subsume ever wider areas of social life under the logic of differential accumulation. It becomes a major vector of the colonisation, commodification and, eventually, financialisation of everyday life – processes subject to friction, resistance and crisis tendencies. Seymour (2014) explains this well. He argues that austerity involves something much broader and more complex than spending cuts – thanks to its role in restructuring, recalibrating and reorienting state expenditure. Indeed, for him, austerity is the dominant political articulation of the global economic crisis in Europe and North America. This strategy has seven aspects: (1) rebalance the economy from wage-led to finance-led growth; (2) redistribute income from wage earners to capital; (3) promote ‘precarity’ in all areas of life as a disciplinary mechanism and means to reinforce the financialisation of everyday life; (4) recompose social classes, with increasing inequality in income and wealth and greater stratification within classes; (5) facilitate the penetration of the state by corporations; (6) accelerate the turn from a Keynesian welfare state based on shared citizenship rights to a workfare regime that relies on coercion, casual sadism and, especially in the US, penality; and (7) promote the values of hierarchy and competitiveness (Seymour, 2014, pp 2-4). In many respects, these aspects were already inscribed in the politics of neoliberal regime shifts (see above) but, for Seymour, they have been much reinforced following the 2007–9 financial and economic crisis (see also Fumagalli and Lucarelli, 2011). This can be explained in part by the fact that the painful measures already taken to consolidate budgets in the 1990s and early 2000s were wiped out by the impact of the NAFC and the Eurozone crisis as governments took on more debt to bail out banks and/or engineer stimulus packages (Rasmus, 2010; Hudson, 2012). This ramping up of the politics of austerity occurred in part because the response of financial capital to this crisis intensified the state’s

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fisco-financial crisis. Measures were taken to rescue interest-bearing capital from the effects of its Ponzi dynamic and from the inherently unsustainable drive for financial profits (see above; also Demirović and Sablowski, 2013). This created a debt–default–deflation dynamic that has worsened public finances as well as the private sector (Rasmus, 2010). In addition, as Seymour, among others, notes, the politics of permanent austerity is not just a response to economic crisis but also to political and ideological crises and, indeed, an organic crisis of the capitalist social order (Seymour, 2014, p 4; compare Gramsci, 1971; Bruff, 2013). This is used to justify a state of economic emergency that is presented initially as a ‘temporary’ response to immediate or chronic problems but then acquires more permanent form through cumulative and mutually reinforcing institutional change, routinisation of exceptional measures and habituation. The politics of austerity can be interpreted as a long-term strategic offensive to reorganise the institutional matrix and balance of forces in favour of capital. It aims to rearticulate relations between (1) the social power of money as capital and of capital as property and (2) the political power of the state. Inter alia, this involves a politics aimed at disorganising subaltern classes and reorganising the capitalist power bloc around interest-bearing capital (in neoliberal regimes) and export based profit-producing capital (in economies where neoliberal policy adjustments prevailed). In the Eurozone, for example, the central goal of authoritarian crisis constitutionalism is to deepen EU integration on neoliberal terms and govern through competitive austerity. Its aims include socialising bank losses, exploiting the sovereign debt crisis to restructure welfare states and labour markets (including further measures to weaken trade union bargaining power) and to impose shock therapy in the periphery. In both finance-dominated and exportoriented regimes, the overall approach can switch between offensive and defensive tactics (an example of the latter is the ‘Third Way’, with its flanking and supporting mechanisms to maintain the overall momentum of neoliberal transformation). The successful pursuit of this strategy, which cannot be taken for granted, leads to an austerity state embedded in a political system (polity) that institutionalises a ‘permanent’ politics of austerity. Critics from the political right as well as left have noted this trend and described it in various ways. For example, Albo and Fanelli (2014) refer to a bipartisan or pluripartisan ‘disciplinary democracy’ as the political form of ‘permanent austerity’ (compare Rasmus, 2010; Stützle, 2013). Likewise, Bruff (2013) refers to neoliberal authoritarian constitutionalism; Solty (2013) identifies an authoritarian crisis of

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constitutionalism oriented to the economic governance of competitive austerity; and Oberndorfer (2015) describes the development of authoritarian competitive statism. From a social democratic perspective, Streeck (2014) refers to a move from the welfare state to the consolidation state; and a (former) Fabian Socialist, Crouch (2004), describes the transition to post-democracy. On the libertarian right, there is condemnation of the strong and repressive state that emerges from allegedly unconstitutional intervention to shore up finance capital and to police dissent (see for example Stockman, 2013). Most of these commentators note that the scope for material concessions to subaltern groups has shrunk and, faced with growing resentment and sometimes open resistance, capitalist states are also becoming less open and democratic and increasingly coercive. It also creates different kinds of state and representational crisis that weaken the state even as its powers seem to expand (Poulantzas, 1979; Bruff, 2013).

Debt–default–deflation dynamics in the US and UK Neoliberal regimes in the US and UK also created the economic and political space where conditions favouring a severe financial crisis were strongly nurtured (albeit not with this result in mind) and where it surfaced, initially in the US (by virtue of the influence of financedominated accumulation and financialisation within that economy and the latter’s dominance in the world economy), and then in the UK (Rasmus, 2010, 2012; Davies, 2014; Jessop, 2014). They also initiated many of the techniques of neoliberal austerity that have since been refined there and elsewhere. The features of the crisis in both cases are typical of finance-dominated accumulation but the financial sector is less important to the US than the UK and the former also has the ‘exorbitant privilege’ of the dollar as world money and a labour force that suffered stagnant real incomes for 20 years. In the US, the crisis passed through several stages: credit crunch, liquidity crisis, financial insolvencies, a generalised financial crisis, a recession that risked becoming an epic recession or great depression and, most recently, a manufactured ‘public debt’ crisis reflected in a surreal fiscal cliff debate. The initial response to the NAFC was the bailout of ‘too big to fail’ (TBTF) banks mainly as a covert strategy to recapitalise the banking system and socialise losses. This massively increased public debt and reinforced government dependence on bondholder confidence and ‘Mr Market’ more generally. Although there was also a federal stimulus package, it could not compensate for falling demand due to wage cuts plus austerity measures introduced at

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state and local level (where governments must balance their budgets). A scissors effect occurred as public expenditure and debt rose and GDP (gross domestic product) fell, so that debt increased as a proportion of GDP. This fuelled the neoliberal hysteria around the long-term costs of Medicaid, Medicare and Social Security and the more general ‘fiscal cliff’ debate. Yet of the projected US$7 trillion deficit, some US$4 trillion was due to consolidation of tax cuts introduced by the George W. Bush Administration and US$1 trillion to an increased defence budget (Solty, 2013). The fiscal cliff debate rested on cumulative and wide-ranging efforts over decades to naturalise the need for entitlement reductions to lower public spending and the skilful exploitation of the economic fear and political panic in November 2008 to push this agenda forward in a bicameral, bipartisan manner. The accompanying proposals for deficit reduction never seriously examined cuts in defence spending, ending unfunded wars, halting subsidies to a broad spectrum of corporate interests (often with large reserves, often held offshore) or restoring tax rates on the rich to Reagan era levels, despite stagnant wages and increased wealth inequalities to match those of the Roaring Twenties (Piketty, 2014). Despite the stage-managed ‘fiscal cliff’ hysteria, dealing and plotting continued behind the scenes to secure further cuts in entitlement programmes and implement yet more corporate tax breaks. The latter will benefit the rich substantially more than the ‘harm’ caused by individual tax hikes and this reflects the policy choices favoured by interest-bearing capital and transnational profit-producing capital. Little attention was paid to other policy options that might regenerate the economy, enhance competitiveness, improve conditions for the ‘squeezed middle’ and renew the war on poverty. Despite earlier doom-laden forecasts, the US economy is slowly recovering (although commentators doubt its robustness) and, significantly, the federal budget deficit is falling. This suggests that the deficit hysteria was staged to pressure Congress in an election period to lock in bigger cuts before quantitative easing produced a (weak and still fragile) recovery, and that Obama collaborated for his own political ends (and continues to do so, despite his occasional populist declarations that wealth inequalities are now excessive). In essence, authoritarian neoliberalism and financialisation are continuing. They are producing rising profits, a weak economy and welfare cuts in the ‘exceptional nation’ but also causing more economic problems for most other economic spaces in the world market than those spaces can cause for it. This holds both for China, with which it is pathologically codependent (reflected in the notion of ‘Chimerica’, on which see Fabre,

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2009), and the European Union, its biggest trading and investment partner (Hamilton and Quinlan, 2013). The UK also experienced a neoliberal regime shift, continued after the Thatcher years under successive Conservative, New Labour and Conservative–Liberal Democrat regimes. The UK is even more dominated by international financial capital and is also more spatially polarised than the US thanks to the economic dominance of the City of London, the concentration of power in London and a long entrenched pattern of uneven development that favours London and the rest of the South East. Thus the NAFC had a greater and more lasting impact in the UK and this has been exacerbated by the more rigid politics of austerity pursued under Osborne’s neoliberal Chancellorship, with its pro-cyclical commitment to balanced budgets (a prospect moving into an ever more distant future as the debt–deflation spiral continues), its Ricardian approach to workfare and its preferential tax treatment of corporations and the wealthy that is not reflected in renewed investment in profit-producing capital in the UK economy (see Seymour, 2014). Without the exorbitant privilege of the dollar and the recent if commercially fragile trend to energy independence enjoyed by the US, the UK has been lagging behind with its recovery based on new asset bubbles fuelled by quantitative easing and vulnerable to secular stagnation in the Eurozone. These developments help to situate the continuing attempts led by the US and UK to pursue ‘trade agreements’ as a stimulus to crisisridden economies, such as the Transpacific Partnership (TPP) and Transatlantic Trade and Investment Pact (TTIP). If implemented, these treaties will limit state sovereignty to challenge transnational capital. One effect of these regional treaties could be to enforce a neoliberal project of ‘total privatisation’ of state owned non-financial assets. Some US$9 trillion of government land and buildings has been identified in OECD (Organisation for Economic Co-operation and Development) countries, equivalent to some 18% of their gross general government debt (The Economist, 2014). According to neoliberal budgetary and new public management principles, these should be monetised through public–private partnerships, contracting out and leasing opportunities or even fully privatised.

The Eurozone crisis and the fiscal compact European economic space exemplifies the fractal nature of variegated capitalism. It is organised in the shadow of the German export-led growth regime that, despite significant and cumulative neoliberal

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policy adjustments in the labour market, has remained firmly inside the ‘coordinated market economy’ camp. Its entrenched export dependence has shaped the German state’s post-war domestic and foreign economic policy and its general strategy for European integration for decades (Streeck, 2009; Bellofiore et al, 2010; Cesaratto and Stirati, 2010). Its power in this regard is reinforced by the extension of the German economy to include elements of other Rhenish economies in Northern Europe. The prime strategic goal is to maintain Germany’s export competitiveness and the regional and international stability on which its exports depend. Moreover, although there is much hype about the links between the US and China, the North Atlantic region still comprises the largest, most advanced and most tightly integrated economic space in the global economy (Hamilton and Quinlan, 2013). This underpins the strong US interest in the forms and effects of crisis management in the Eurozone (AmCham, 2012). The development of Economic and Monetary Union (EMU) occurred in the shadow of German neo-mercantilism and was expected to enhance the competitiveness of French and German industrial capital, especially when reinforced by direct wage restraint, a reduced social wage and lowered domestic consumption. Reflecting the banking tenets of das Modell Deutschland, EMU operated on two key principles: first, the European Central Bank (ECB) may not act as lender of last resort to insolvent banks or indebted states; and, second, sovereign debts may only be discharged by their respective member states (Varoufakis, 2013). Before 2008, the Eurozone appeared to be operating smoothly thanks to global capital and trade flows and the short-term boost to growth produced by EMU, with low interest rates fuelling import and housing demand in Southern Europe. Yet structural incompatibilities and institutional design flaws were already evident before 2009, intensified in 2010–11 and became acute in 2012. Future structural problems originated in the incompatible accumulation regimes, patterns of insertion into European and world markets, modes of regulation and governance capacities of states in the Eurozone. Other grounds for scepticism also existed. Monetary union was not accompanied by fiscal union and, additionally, there were no credible institutional arrangements to enforce long-term fiscal discipline, compensate for uneven development and economic performance or coordinate crisis management in a situation where conventional national crisis responses such as devaluation were ruled out. In short, the design of EMU ‘removed internal shock absorbers while ... magnifying both the probability and magnitude of a future crisis’ (Sotiropoulos, 2013).

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The contagion effects of the NAFC led to the virtual insolvency of many of Europe’s big banks and required urgent measures to recapitalise them and nationalise toxic assets. As in the US, this led to further concentration in banking. It also threatened a domino effect of sequential bankruptcy of vulnerable member states and their respective banking systems, starting with Greece and Ireland and with the systemically important cases of Spain, Italy and France looming on the near horizon. Without the right to exit the Eurozone and regain competitiveness through devaluation (among other measures), the intensification of the Eurozone crisis exposed the peripheral economies to domestic debt–default–deflation dynamics as well as to austerity measures mistakenly adopted by other member states and European institutions in the belief that they would limit or resolve the wider crisis. Crisis management responses premised on deep cuts in spending and regressive taxation actually proved pro-cyclical, provoking a mutually reinforcing downward spiral of actual or feared private and sovereign debt–default–deflation dynamics in the periphery. This is now spreading to the core of the Eurozone, as evidenced in a triple dip recession to which more austerity seems still to be the answer. Even France, which led the initial resistance to German demands for austerity, has accepted the need for ‘a new era of budgetary discipline’ (Lagarde, 2010). A series of failed crisis measures led to the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (or Fiscal Compact). This was signed by all but two member states in March 2012. If and when fully implemented, it will impose binding limits (0.5% of GDP) on the structural deficits in the annual budgets of individual member states. By extending surveillance and disciplinary neoliberalism, it constitutionalises and entrenches the power of capital, limiting states’ political autonomy and transforming budget making into a more technocratic process subject to legal sanctions as well as market pressures. This will prevent active fiscal policy along Keynesian lines and exacerbate the underlying macroeconomic weaknesses in the Eurozone. For example, to gain authority to operate as a de facto lender of last resort to banks, central banks and sovereign states, the ECB had to commit to using its coercive powers in conjunction with the European Commission and the International Monetary Fund (IMF) to impose the greatest austerity upon the weakest member states (Varoufakis, 2013). To achieve the Pact’s aims, however, investment must rise well above savings in deficit and surplus countries alike. This is unlikely because of the economic and political divisions in the Eurozone.

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A Greek tragedy Greece is a small and peripheral economy with a weak and clientelistic state. It has provided an interesting laboratory for neoliberal austerity policies to see what the authorities could push through (this chapter was written before the incumbency of the Syriza alliance but vicious pressures pour encourager les autres have since been reinforced). It is one example of the technocratic politics of austerity in Southern member states, whether through EU and ECB inspired coups d’état (Greece and Italy), de facto or formally agreed governments of national unity (Spain, Portugal) or a coordinated war of financial manoeuvre against a radical anti-austerity regime. The first two kinds of government run states of economic emergency that authorise big spending cuts and neoliberal structural reforms. The failure of measures imposed on the Greek people up to the end of 2014 prompted second thoughts among research staff at the IMF and OECD on the validity and effectiveness of austerity policies. However, despite hopes (and fears) that Greece might exit the Eurozone, permanently or temporarily (to permit restructuring), the risks and costs of breakup led the German government, European Commission, ECB and IMF (with US backing) to introduce exceptional measures to preserve this flawed system. Austerity in Greece has been regarded by outside forces as a price worth paying to achieve this, especially as the excluded alternatives (Marshall Plan type capital transfers, a debt moratorium to finance contra-cyclical investment, a state role as employer of last resort and so on) would have set bad precedents for the larger, more systemically important Southern European economies. The Syriza government then came under pressure to abjure these alternatives too (see below). In Greece as elsewhere, the ‘There is No Alternative’ (TINA) mantra restricts the feasible set of economic, political and social policies. This proved unappealing in Southern Europe (outside the current set of state managers) and is contested by post-Keynesian economists, diverse think tanks and several major political parties (at least when in opposition), growing popular unrest, including right-wing populism and xenophobia, and popular reaction against the ECB’s attempt to renege on deposit insurance in Cyprus, all indicating possible limits of austerity politics and policies. Indeed, the appeal of Syriza in Greece, die Linke in Germany, and Spain’s Podemos in contesting the TINA cliché and proposing radical alternative strategies to these ineffective policies and politics has been an enduring threat to neoliberal rule (see Munchau, 2014). This threat requires careful modulation of conditionalities to keep the electorates of ‘donor’ states on side and to

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temper popular unrest that could destabilise authoritarian ‘regimes of economic emergency’ in indebted states.

Conclusions This chapter has advanced an analysis of austerity policies and politics and identified a trend towards an austerity polity that is a neoliberal variant of authoritarian statism. It contrasted the conjunctural austerity policies that developed in the Atlantic Fordist period with the politics of austerity that was promoted in the financialised (and increasingly finance dominated) neoliberal accumulation regimes that developed in response to the crisis in/of Atlantic Fordism. Whereas the shortlived period of apparently permanent prosperity (Lutz, 1989) of the Fordist period was based on the dynamic of profit-producing capital and wage-led growth, neoliberal regimes are dominated by different forms of financial capital and involve largely debt-fuelled expansion (Jessop, 2002; Stockhammer, 2013).3 By mid-July 2015, after Syriza had tried to pursue an alternative anti-austerity mandate at home and renegotiate the terms of its second bail-out, it held a surprise referendum to strengthen its bargaining hand. Germany and its northern allies forced Syriza to capitulate when Greek banks were starved of liquidity. They required the reversal of Syriza’s reforms, dictated a legislative programme to entrench neoliberal austerity, and assumed control of Greek fisco-financial and economic policies in exchange, possibly, for a third bailout. Yet, divisions inside Syriza and tensions among Eurozone member states and within the EU more generally, plus doubts raised again by institutions like the IMF mean that Greece might yet leave the Eurozone. If it does not, it must accept a permanent state of austerity; if Grexit does occurs, then a politics and policies of austerity will continue but oriented to growing rather than further shrinking the economy. The illusory permanent prosperity that occurred under the latter regimes (sometimes termed the Great Moderation) was actually based on unsustainable private debt facilitated by financial innovation, liberalisation, deregulation and decriminalisation and the expansion of ever more fantastic forms of fictitious credit, fictitious capital and fictitious profits. When the financial bubble burst, it wiped out any gains from the preceding period of neoliberal austerity and, thanks to the decision to bail out and recapitalise interest-bearing capital, has further distorted the growth dynamic of neoliberal finance-dominated accumulation. In an increasingly integrated world economy, this also affects the dynamic of other varieties of capitalism because of the weight

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of the US and other finance-dominated regimes and the contagion effects of their crises. The destabilising consequences of budget cutting in North America, Europe and elsewhere are worrying even the high priests of neoliberalism in the International Monetary Fund, the World Bank, the World Economic Forum and so on. In a joint report with the International Labour Organization (ILO), the IMF warned that, in a context of high and long-lasting unemployment around the world, premature fiscal retrenchment could harm growth and lead to even larger deficits and debts (IMF/ILO, 2010, p 10). Furthermore, abrupt shifts in fiscal policy stances, in many countries at the same time, could destabilise recovery and weaken future growth. Thus ‘a credible and gradual return to fiscal stability over several years is likely to be a more successful strategy, not only for recovery and growth, but also for deficit and debt reduction … Social dialogue is essential to avoiding an explosion of social unrest’ (IMF/ILO, 2010, p 8). The IMF has twice repeated this warning for Greece, arguing that austerity is not working and that its debt is unsustainable and should be written down (IMF, 2015). Likewise, in its 2014 Report on World Risks, the World Economic Forum identifies growing inequalities in wealth and income as the biggest single potential source of global instability. These are two of many similar examples of an impotent recognition of the limits to the politics of austerity. This could well lead to some softening of austerity measures in the next few years as the Eurozone remains mired in recession and Japan enters a third recession. Even the German government seems willing to relax strict budgetary rules where public investment is intended to facilitate structural reform (Schui, 2014). But the uneven development of the world economy, the conflicting interests of different economic and political spaces in a variegated world market, and the crisis of US hegemony (compared with the Atlantic Fordist era) has blocked any serious movement by the G8, G20 or wider groupings to resolve the crisis, let alone to address the far more fundamental challenges of climate change and growing inequalities of wealth and income. Notes 1

This section draws on the extended account of CPE in Sum and Jessop (2013).

2

Not all states in capitalist societies conform to the capitalist type of state.

3

On these capital fractions, see Demirović and Sablowski, 2013; and below.

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Acknowledgement Research for this chapter was aided by an Economic and Social Research Council professorial fellowship (RES-051-27-0303). References Albo, G. and Fanelli, C. (2014) Austerity against democracy. An authoritarian phase of neoliberalism? www.socialistproject.ca/documents/ AusterityAgainstDemocracy.pdf AmCham EU (2012) Putting growth back into Europe: AmCham EU’s strategic recommendations, Brussels: AmChamEU. Bacon, R. and Eltis, W. (1976) Britain’s economic problem: Too few producers, London: Macmillan. Bellofiore, R., Garibaldo, F. and Halevi, J. (2010) ‘The Great Recession and the contradictions of European neomercantilism’, Socialist Register 2011, pp 120–46. Blyth, M. (2013) Austerity: The history of a dangerous idea, Oxford: Oxford University Press. Bramall, R. (2013) The cultural politics of austerity: Past and present in austere times, Basingstoke: PalgraveMacmillan. Bruff, I. (2013) ‘The rise of authoritarian neoliberalism’, Rethinking Marxism, vol 26, no 1, pp 113–29. Cameron, A. (2008) ‘Crisis? What crisis? Displacing the spatial imaginary of the fiscal state’, Geoforum, vol 39, pp 1145–54. Carneiro, R. de Medeiros, Chiliatto-Leite, M., Santos Mello, G. and Rossi, P. (2012) ‘The fourth dimension: Derivatives in a capitalism with financial dominance’, Paper for International Initiative on Political Economy Conference, Paris, 6 July. Cesaratto, S. and Stirati, A. (2010) ‘Germany and the European and global crises’, Journal of International Political Economy, vol 39, no 4, pp 56–86. Crouch, C. (2004) Post-democracy, Cambridge: Polity. Crouch, C. (2009) ‘Privatised Keynesianism: An unacknowledged policy regime’, British Journal of Political Science and International Relations, vol 11, no 3, pp 382–99. Demirović, A. and Sablowski, T. (2013) The finance-dominated regime of accumulation and the crisis in Europe, Berlin: Rosa Luxemburg Stiftung. Elsner, W. (2012) ‘Financial capitalism – at odds with democracy: The trap of an “impossible” profit rate’, Real-World Economics Review, vol 62, pp 132–59. Epstein, G.A. (2005) ‘Introduction’, in G.A. Epstein (ed), Financialization and the world economy, Cheltenham: Edward Elgar, pp 3–14.

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Fabre, G. (2009) ‘The twilight of Chimerica?’, Economic and Political Weekly, vol 44, no 26–27, pp 299–307. Ferrera, M. (2008) ‘The European welfare state: Golden achievements, silver prospects’, West European Politics, vol 31, no 1–2, pp 82–107. Fumagalli, A. and Lucarelli, S. (2011) ‘Instability and uncertainty in cognitive capitalism’, in C. Gnos and L.-P. Rochon (eds), Credit, money and macroeconomic policy, Cheltenham: Edward Elgar, pp 313–34. Goldscheid, R. (1976) ‘Finanzwissenschaft und Soziologie’, in R. Hickel (ed), Rudolf Goldscheid/Joseph Schumpeter, Die Finanzkrise des Steuerstaates, Frankfurt: Suhrkamp, pp 317–28. Gramsci, A. (1971) Selections from the prison notebooks, London: Lawrence & Wishart. Green, C. (1993) ‘From “tax state” to “debt state”’, Journal of Evolutionary Economics, vol 3, no 1, pp 23–42. Habermas, J. (1975) Legitimation crisis, Cambridge: Polity. Hamilton, D.S. and Quinlan, J.P. (2013) The transatlantic economy 2013, Brussels: AmCham EU. Hickel, R. (1976) Rudolf Goldscheid/Joseph Schumpeter, Die Finanzkrise des Steuerstaates, Frankfurt: Suhrkamp. Hudson, M. (2012) The bubble and beyond: Fictitious capital, debt deflation and the global crisis, Dresden: Islet. IMF (2015) Greece. An update of IMF staff’s preliminary public debt sustainability analysis, IMF Country Report no. 15/186. IMF/ILO (2010) The challenges of growth, employment and social cohesion, www.osloconference2010.org/discussionpaper.pdf Jessop, B. (2002) The future of the capitalist state, Cambridge: Polity. Jessop, B. (2013) ‘Credit money, fiat money and currency pyramids’, in J. Pixley and G.C. Harcourt (eds), Financial crises and the nature of capitalist money, Basingstoke: PalgraveMacmillan, pp 248–72. Jessop, B. (2014) ‘Variegated capitalism, Modell Deutschland, and the Eurozone crisis’, Journal of Contemporary European Studies, vol 22, pp 248–60. Krätke, M. (1987) Kritik der Staatsfinanzen, Hamburg: VSA. Krippner, G.R. (2005) ‘The financialization of the American economy’, Socio-Economic Review, vol 3, pp 173–208. Lagarde, C. (2010) ‘Fiscal rules face obstacles, warns Lagarde’, Financial Times, 14 September. Lutz, B. (1989) Der kurze Traum immerwährender Prosperität, Frankfurt: Campus. Marx, K. (1967) Capital, Vol 3, London: Lawrence & Wishart.

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Meacci, F. (1998) ‘Fictitious capital and crises’, in R. Bellofiore (ed), Marxian economics: Essays on volume III of Capital, Vol 1, Basingstoke: Macmillan, pp 189–204. Mirowski, P. (2013) Never let a serious crisis go to waste, London: Verso. Munchau, W. (2014) ‘Radical left is right about Europe’s debt’, Financial Times, 27 November. Oberndorfer, L. (2015) ‘From new constitutionalism to authoritarian constitutionalism’, in J. Jäger and E. Springler (eds), Asymmetric crisis in Europe and possible futures, London: Routledge, pp 184–205. O’Connor, J. (1973) The fiscal crisis of the state, New York: St Martin’s. Pierson, P. (2001) Coping with permanent austerity, in P. Pierson (ed), The new politics of the welfare state, Oxford: Oxford University Press. Piketty, T. (2014) Capital in the twenty-first century, Cambridge, MA: Harvard University Press. Poulantzas, N. (1979) ‘The political crisis and the crisis of the state’, in J.W. Freiburg (ed), Critical sociology, New York: Halsted Press, pp 373–93. Rasmus, J. (2010) Epic recession: Prelude to global depression, London: Pluto. Rasmus, J. (2012) Obama’s economic recovery: Recovery for the few, London: Pluto. Schui, F. (2014) European austerity was a failure but what comes next may be even worse, http://theconversation.com/european-austeritywas-a-failure-but-what-comes-next-may-be-even-worse-28690 Schumpeter, J.A. (1954) ‘Crisis of the tax state’, International Economic Papers, vol 4, pp 5–38. Seymour, R. (2014) Against austerity: How we can fix the crisis they made, London: Pluto. Solty, I. (2013) ‘Is the global crisis ending the marriage between capitalism and liberal democracy?’, in M. Lakitsch (ed), Political power reconsidered, Berlin: LIT, pp 161–204. Sotiropoulos, D. (2013) ‘Addressing the rationality of “irrational”: European responses to the crisis’, http://oro.open.ac.uk/39299/ Stockhammer, E. (2013) ‘Rising inequality as a cause of the present crisis’, Cambridge Journal of Economics, doi:10.1093/cje/bet052 Stockman, D. (2013) The great deformation: The corruption of capitalism in America, New York: PublicAffairs. Streeck, W. (2009) Re-forming capitalism. Institutional change in the German political economy, Oxford: Oxford University Press. Streeck, W. (2013) Borrowed time, London: Verso. Stützle, I. (2013) Austerität als politisches Projekt, Münster: Westfälisches Dampfboot.

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Alternatives to austerity Dexter Whitfield and John Spoehr

Introduction This chapter examines the policies and strategies that could comprise an alternative to current austerity policies being pursued in a number of nation states. It outlines the need for a more coherent and robust approach to public investment-led growth to achieve a sustainable recovery that incorporates preventative reforms essential to minimise the occurrence and impact of future financial crises. At the core of this, it is argued, is the need for increased industrial and infrastructure investment, the reform of financial markets, the reconstruction of public services, a redistribution of national income and more stringent controls on the corporate sector. The discussion of these elements of economic management suggests that these policies, rather than austerity, could underpin more effective and more equitable social policies in future. Most G20 governments responded to the financial crisis with fiscal stimulus initiatives. For example, between 2008 and 2010, 15 governments planned to increase infrastructure investment, mainly in transportation networks (IMF, 2009). The expectation was that such investment would increase economic output and maximise job creation with the package of policies estimated to increase gross domestic product (GDP) by 0.4% to 1.2% in 2009 (Whitfield, 2010). For example, the American Recovery and Reinvestment Act 2009 (ARRA) launched a US$782 billion programme with 19% allocated to infrastructure, 35% for unemployment insurance, 24% for tax cuts and 22% for state and local government education and healthcare. However, the programme failed to generate a strong recovery because it relied too heavily on tax cuts as a means of bolstering private spending; household wealth declined dramatically during the recession which in turn weakened the willingness of households to increase spending. In addition to this, credit markets were locked up, especially for smaller businesses (Pollin, 2012). This strategic response to the financial crisis was strongly contested by the German government and European Central Bank, which lobbied

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instead for fiscal consolidation. By the time of the G20 Toronto meeting in 2010 they had the support of the UK and Canada, leaving the US isolated (Blyth, 2013). The G20 agreed a new ‘fiscal consolidation’ strategy for advanced economies (G20, 2010). The resulting austerity measures ranged from deep public spending cuts, privatisation of state assets, the bailout of failed banks and industrial companies, income and sales tax increases, reductions in and/or more restricted access to welfare benefits, to public sector wage cuts and increased pension contributions. As also discussed in Chapters One and Three, even countries that had initially resisted austerity up until 2010 later embarked on programmes of deep cuts. Australia, for example, imposed its own form of austerity following the election of a new Liberal government in 2014. It had earlier avoided recession through an A$59.6 billion economic stimulus programme between 2008 and 2011, two-thirds allocated to job generation and infrastructure investment (Australian Government, 2009; Barratt, 2011; Leigh, 2012). After five years of austerity it is important to assess its effect on economic output, public debt, public expenditure and employment and the need for an alternative strategy.

The effectiveness of austerity policies If the objective of austerity is to restore growth and reduce public debt it appears to be failing. Official statistics for 2013–14 demonstrate that austerity policies failed to stop the rise in public debt in euro area bailout countries – up 25% and 35% in Ireland and Spain respectively between 2011 and 2013. The failure to restore economies is clear from some of the other key indicators: the investment rate of nonfinancial corporations in Europe has plummeted; in the Eurozone, bank lending to households and non-financial corporations fell sharply from 23% to 19.7% between 2008 and 2013; GDP and business startup rates declined; mass unemployment soared in Europe – youth unemployment reached 59.2% in Greece and 56.5% in Spain; deep public spending cuts led to reduced services, extensive job losses and wage cuts; house prices fell sharply in many countries between 2009 and 2013, particularly in Ireland (53%) and Spain (40%); tax increases and welfare state benefit cuts increased poverty and inequalities and further reduced demand in the economy (see Whitfield, 2014a, for further discussion). Economic output is forecast by Ball (2014) to decline by an average of 8.4% between 2007 and 2015 in 23 developed countries as a consequence of the financial crisis. The loss of potential output has

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ranged from less than 1% in Switzerland and 2% in Australia to over 30% in Greece, Ireland and Hungary. The potential loss of output in Germany, France, the UK and the US is forecast to be 3.4%, 8.6%, 12.4% and 5.3% respectively. The loss of output is arguably a consequence of the combined effect of the financial crisis, austerity policies and adherence to neoliberal ideology in the public policymaking process. Nevertheless austerity continues. A further 10.6% real-terms cut (or £37.6 billion) in UK public spending is planned between 2015–16 and 2018–19, which will impose further severe constraints on public service budgets (see also Chapter One). This is in addition to the £8.7 billion cut that has already been agreed for 2015–16 (Institute for Fiscal Studies, 2014). The Conservative-led coalition forecast a small overall surplus in 2018–19 with only a small decrease in public sector net debt from 76.3% of GDP to 74.2%. The main opposition Labour Party is also committed to a balanced or small budget surplus in the next parliament, although target dates are fluid. UK local authority spending will be cut by about 40% between 2010 and 2015–16 (SIGOMA, 2013). The planned additional cuts, coming on top of four years of cuts, will be harder to implement and will have significant consequences for services and jobs. Meanwhile, the International Monetary Fund (IMF) has called for growth- and job-friendly fiscal policies, including addressing tax evasion and more efficient public spending; structural reforms to raise productivity, competitiveness and employment; and increasing infrastructure investment (IMF, 2014b). It called for bolder policies to address the demand and supply side of economies to inject a ‘new momentum’ because the ‘world economy risks getting stuck with a mediocre level of growth – low growth for a long time’ (IMF, 2014b, p 2). After five years of austerity policies governments have limited options. Global growth rates for 2014 have been revised downwards by the IMF, which has warned of a ‘new mediocre’ era. Advanced economies face the risk of secular stagnation (a persistent shortfall of investment relative to saving, even with near-zero interest rates) and low potential growth despite continued very low interest rates and increased risk appetite in financial markets. The euro area risks protracted low inflation or outright deflation (IMF, 2014a). Countries in the Eurozone could continue current policies in anticipation that ‘recovery’ and economic growth will accelerate, but since austerity policies have not achieved many of their original objectives this strategy has limited credibility.

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A second option would see the adoption of deeper public expenditure cuts, rationalisation of the role of the state by more extensive privatisation in a debt reduction strategy, together with individual and corporate tax cuts. However, this is a high risk strategy that is unlikely to increase overall demand in the economy, would have significant social and economic impacts, including increasing inequalities, and almost certainly intensify political opposition to austerity policies. The third option is a Keynesian investment strategy significantly larger than the 2009–11 short-term stimulus policies. This kind of strategy would seek to increase industrial and infrastructure investment, accelerate financial market reform, reconstruct public services, redistribute national income together with more stringent controls on the corporate sector to reduce tax evasion and encourage the release of corporate cash hoards for sustainable investment. Employing proposals put forward by a range of policy actors, the rest of this chapter discusses the key policies this alternative strategy should address.

Industrial investment, innovation and public spending This section outlines a number of examples of policy proposals linked to industrial investment and representing alternative economic strategies to simple austerity. Public investment in industry can boost innovation, increase employment and produce wider fiscal benefits. For example, the European Trade Union Confederation’s New Path for Europe plan for investment, sustainable growth and quality jobs proposed to invest an additional 2% of European Union GDP per year over a 10-year period (European Trade Union Confederation, 2013). In the short term, the investment policies were forecast to increase employment by 1.7 million in 2015 and by nearly 6.0 million in 2019. It forecast that output in the EU-27 countries would increase to nearly 5% per annum after five years. Over a 10-year period the proposals set out in the plan would increase Europe’s GDP by €312 billion and create between 7.2 and 8.8 million full-time jobs. Tax revenue would be increased by €83 billion, social security contributions by €45 billion and a €16 billion saving in unemployment benefit would be made. Measures included in the plan would also save €300 billion in fossil fuel imports by cutting carbon dioxide emissions and decoupling Europe’s energy supply from fuel imports (European Trade Union Confederation, 2013). Clean energy economy initiatives are significant in the development of alternatives to austerity. Government investment and regulatory frameworks in clean energy stimulates economic growth with environmental benefits. It creates more jobs, dollar for dollar, than

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equivalent spending on road construction, fossil fuel energy projects or tax cuts (United Nations Environment Programme Sustainable Energy Alliance, 2009). Policies that lend themselves to this alternative approach to restoring economies already exist in Europe. In 2013, the French government launched a reindustrialisation strategy to invest €3.7 billion in new technologies in 34 sectors including robotics, renewable energy, medical biotechnologies and electrical transport. Each sector or project has a state appointed ‘industrial officer’ or project leader, mainly chief executives from major French companies. The strategy aims to create 475,000 jobs over 10 years (Invest in France Agency, 2013; Reuters, 2013). A year earlier it had established a new Bank of Public Investment with €20 billion capital to provide financial support for small and medium-sized enterprises (Financial Times, 2012). These policies are a step forward, but they appear insufficient to improve France’s fragile economy and have not prevented further public expenditure cuts and liberalisation measures. The Marshall Plan for Europe by the Confederation of German Trade Unions also planned to increase ‘investments in sustainable power generation, in reducing energy consumption, in sustainable industries and services, in training and education, in research and development, in modern transport infrastructures, low-emission cities and municipalities’ (Confederation of German Trade Unions, 2012, p 4). This 10-year plan would seek to eliminate the need for fuel imports in the long term and achieve large reductions in CO2 emissions in Europe. It also proposed direct public sector investment, investment grants for companies and incentives for consumer spending. Similarly, the European Economists for an Alternative Economic Policy set out a new industrial policy to develop new environmentally sustainable, knowledge intensive, high skill and high wage economic activities (EuroMemo Group, 2014). Freiburg and Hamburg (Germany), Aarhus and Copenhagen (Denmark), Vienna (Austria) and Gothenburg (Sweden) are examples of existing European green cities. Hamburg planned to re-municipalise electricity, gas and district heating distribution grids when concessions are up for renewal by 2016. Since 2007, 44 new local public utilities have been set up in Germany with more than 100 energy distribution network concessions now publicly operated (Hall, 2012). Despite these important examples of a return to public ownership of key infrastructure assets, Germany continues to support austerity policies in the European Union.

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Another example is a UK plan to reduce emissions by 80% in electricity, buildings and transport over 20 years to create a million new climate change jobs. A National Climate Service could employ teams of construction workers to refit homes and buildings, engineers to design and build wind farms and to plan, build and operate public transport systems (Campaign Against Climate Change, 2014). The net effect would be a gain of 1.5 million jobs in the economy after 20 years of the programme, with an annual cost of £19 billion after taking account of higher tax and social insurance revenue from the new jobs, lower unemployment benefit costs, energy payments and public transport fares (Campaign Against Climate Change, 2014). Plan B, an alternative strategy for the UK economy, also called for a new round of quantitative easing to invest in Green New Deal projects (Reed, 2012). Policy proposals here also account for required labour market reforms which would include a living wage, reduced pay differentials, enhanced industrial democracy and comprehensive affordable highquality childcare (Reed, 2012). The role of the public sector The role of government in economic development and innovation is regarded as legitimate and essential because there ‘is nothing in the DNA of the public sector that makes it less innovative than the private sector’ (Mazzucato, 2013, p 197). The state has played a central role in funding, supporting and development of information technology, hardware and software (for example, Apple), the Internet, biotechnology, green technology, pharmaceuticals, aeronautical and space industries. Furthermore, public investment has a significant positive effect on private sector productivity, growth in average living standards and increases both output and jobs (Bivens, 2012). For example, analysis of government purchase multipliers for a large number of OECD (Organisation for Economic Co-operation and Development) countries concluded that a $1 billion increase in US government spending is estimated to create approximately 44,000 jobs (Auerbach and Gorodnichenko, 2011). In a period of low growth a debt-financed public investment spending shock of 1% of GDP increases the level of output by about 0.9% in the same year, and by 2.9% after four years. Increased output is also conditional on countries having a high degree of public investment efficiency (IMF, 2014c). As Bivens (2014) suggests, infrastructure spending has a significantly greater impact on economic output (GDP) than other forms of public expenditure, such as spending on public

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services, and 9–16 times greater than tax incentives for business (see Table 5.1). Both output and employment multipliers vary between countries, economic conditions and types of infrastructure, but nevertheless the economic impact of infrastructure investment is significantly greater than individual or corporate tax cuts. Table 5.1: US comparison of estimated macroeconomic multipliers Fiscal policy changes

Congressional Budget Office, averages

Council of Economic Advisers or Moody’s Analytics Economy*

Infrastructure spending

1.8

1.6*

State and local fiscal support

1.3

1.1

Income support payments

1.5

1.5

One-time payments to retirees

0.7

0.4

Tax cuts to individuals

1.1

0.8

Cut in corporate tax rate

0.4

0.3*

Business tax incentives

0.2

0.1

Note: Macroeconomic multipliers estimate economic activity and employment growth generated by increases in investment and changes in public expenditure, taxation or welfare state benefits, taking account of prevailing economic conditions. The Congressional Budget Office produces independent analyses of budgetary and economic issues to support the US Congressional budget process. The Council of Economic Advisers is an agency within the Executive Office of the President which provides economic advice on the formulation of both domestic and international economic policy. Moody’s Analytics is a leading independent provider of data, analysis, modelling and forecasts on national and regional economies, financial markets and credit risk. * Moody’s Analytics Economy multipliers. Source: Bivens (2014)

While the state has a central role, in terms of financing these Europewide plans for industrial and infrastructure investment rely on different methods of funding investment. The New Path for Europe initiative would be financed though the European Investment Bank, or a new body, via increased share capital and the issue of long-term bonds to take advantage of ‘the large volumes of saving both within and outside the EU seeking secure investment opportunities’ (European Trade Union Confederation, 2013). The Marshall Plan for Europe proposed a new ‘European Future Fund’ which would issue ‘New Deal bonds’ to attract the €27,000 billion cash assets in Western Europe. Interest payments on the bonds would be funded from the planned Financial Transactions Tax (Confederation of German Trade Unions, 2012). Plan B for the UK proposed a new British Investment Bank to invest in low carbon, high unemployment sectors such as housing, transport

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and renewable energy (Compass, 2011). Although the UK government has since launched a Green Investment Bank, this has been described as ‘a feeble and anaemic version of what Plan B suggested’ (Reed, 2012). The European Economists for an Alternative Economic Policy for Europe proposed that governments should be released from a highly restrictive fiscal policy with higher levels of public spending financed by reversing tax cuts. Government deficits in this case would be financed through Eurobonds (EuroMemo Group, 2014).

Reform of financial markets The reform of financial markets and institutions has been slow, and important questions remain about the effectiveness of the reforms that have been implemented and the risks associated with market responses to the new regulations. Reforms have included increasing bank capital reserves, restricting their activities in trading stock and bonds, EU mechanisms to finance future bank bailouts and increasing the regulation of the shadow banking system. The new Financial Transaction Tax being implemented by some EU countries is intended to have the dual effect of reducing speculation and raising public revenue. New global banking regulations (Basel III or Third Basel Accord) are being phased in between 2013 and 2019 which require banks to be more resilient to financial shocks, improve risk management, governance and transparency. Banks are required to increase capital reserves to 3–7% of risk-weighted assets. The regulations are also intended to significantly reduce off-balance sheet financing, one of the causes of the financial crisis (Lehmann et al, 2011). The new ‘Volcker’ rules to restrict banks’ trading of stocks, bonds and other securities on behalf of clients took effect in April 2014. They limit banks’ ability to trade their own cash, restrict investment in high-risk hedge and private equity funds and impose compliance obligations. However, questions remain about the effectiveness of these regulations, such as how banks define assets, measure the risk of losses, determine what is off-balance sheet gross or net and the potential for gaming capital requirements and how the regulators interpret and enforce the regulations (Brunsden, 2013; Wall Street Journal, 2013). The European Stability Mechanism (ESM) was established by Eurozone member states in 2012 to fund future financial crises and bailouts, replacing the temporary European Financial Stability Facility, and can lend up to €500 billion. The ESM raises funds by issuing short-term securities and long-term debt. It provided €41.3 billion

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in 2012–13 to the Spanish government to recapitalise the banking sector and €4.5 billion to Cyprus to recapitalise and restructure the two largest banks (European Stability Mechanism, 2014). Eurozone finance ministers also agreed to establish a 17-member single currency banking union in December 2013. A Single Resolution Mechanism will provide a centralised system for winding down failing banks. An industry levy will create a €55 billion fund by 2026 with a network of national resolution funds in the transitional period (Financial Times, 2013). Stricter regulation of financial institutions together with new EU mechanisms, such as the ESM and banking union, are important steps in reducing the threat of financial crises and increasing the ability of the EU and member states to respond to them. However, they have yet to be fully tested and are not inclusive of all financial institutions. A radical restructuring of financial institutions centres on addressing the problems created by the rapid growth of the shadow banking system. This part of the system consists of non-bank financial institutions, such as hedge funds, money market funds, special purpose vehicles and structured investment vehicles operating outside the regular banking system. The growth of payday loan companies charging exorbitant interest rates is a further manifestation of the shadow banking system. Assets in the shadow banking system more than tripled from US$26.1 trillion in 2002 to US$71.2 trillion by 2012, which represents 24% of total global financial assets. Non-banks are supplanting the role of traditional banks in corporate lending and investment as the latter face increased regulation and deleveraging (Financial Stability Board, 2013a). Although shadow banking can complement traditional banking by expanding access to credit, it increases risks of market failure and global financial stability. Because shadow banks are less regulated, they are more able to engage in highly leveraged, high-risk financial activities. The complexity of the shadow banking system and its lack of transparency make it more likely to contribute to asset price bubbles. The system has been described as a source of systemic risk both directly and through its interconnections with the regular banking system. Shadow banking can also create opportunities for arbitrage that might undermine stricter bank regulation and lead to a build-up of additional leverage and risks in the financial system as a whole. (Bank of International Settlements, 2014, p 149)

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The International Monetary Fund’s Global Financial Stability Report 2014 (October) recommended a four-part approach of increasing the monitoring and regulation of shadow banks, such as capital requirements; addressing the underlying causes that stimulate the growth of shadow banking; access to central bank facilities such as extending their lender-of-last-resort function; and changes to bankruptcy regimes and privileges because insolvency law may not adequately deal with systemic failures of shadow banks (IMF, 2014d). In addition to banking reform, the reform of credit rating agencies has been very slow despite widespread criticism of their ‘issuer pays’ business model, with financial institutions and banks paying the charges for ratings, not investors. The Financial Stability Board (Bank of International Settlements), responsible for international coordination of national financial authorities and implementation of effective regulatory policies, established a roadmap for reducing reliance on agency ratings (Financial Stability Board, 2013b; G20, 2013). However, proposals to establish a European public sector ratings agency to break the oligopoly by supporting new entrants to increase competition and other proposals remain under discussion. Credit rating agencies validated the conversion of US subprime mortgages into triple A rated securities that ultimately plummeted in value, a key cause of the financial crisis. Finally, several free trade agreements are currently being negotiated – Transatlantic Trade and Investment Partnership (TTIP), Trade In Services Agreement (TISA), Canada–European Comprehensive Economic and Trade Agreement (CETA) and the Trans-Pacific Partnership (TPP) – that involve countries seeking agreement to align regulations, cut tariffs, deregulate, liberalise trade in services and increase privatisation of public services. The proposed TTIP Investor–State Dispute Settlement provisions could potentially enable US investors in privatised services to sue governments if they sought to bring them back into public ownership or provision (Corporate Europe Observatory, 2015). Disagreements over draft clauses on financial market liberalisation in the TTIP negotiations could mean that ‘everything that has been achieved in recent years in the area of financial market regulation could be endangered by the inclusion of financial services in the agreement’ (World Economy, Ecology and Development, 2013, p 2).

Reconstruction of public services In terms of the problematic financial deregulation addressed above, the UK has been a global leader in the implementation of neoliberal policies

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for more than three decades. In the framework of austerity policies, the public sector has been pathologised as being largely culpable for the financial crisis. ‘Transformative’ change does not have to include public expenditure cuts, services and/or wage reductions. Successive governments have developed a four-part strategy to financialise, personalise, marketise and privatise public services and the welfare state. Privatisation was never limited to the sale of state owned corporations and outsourcing support services. Assets that could not be sold outright for political and economic reasons have been subjected to ‘transformation’ to commodify, reconfigure and marketise services (Whitfield, 2012a, 2012b). The private finance of public infrastructure has, in fact, created new primary and secondary markets (Whitfield, 2012c). The mutation of privatisation has created new pathways, such as the transfer of services to arm’s length trading companies, trusts and social enterprises, wider use of private and social finance and the commercialisation of public services (Whitfield, 2012b). Public provision is being fractured into a plethora of individual or chains/ networks of increasingly private or quasi-public organisations, particularly in health, education and housing, all competing against each other. Commissioning (the separation of purchaser and provider functions), competition and markets are embedding a contract culture and business values, with profound consequences for the public and voluntary sectors (National Coalition for Independent Action, 2014). A slow but constant flow of outsourcing contracts return to in-house provision, because of either termination or completion of the contract. Similarly, a degree of re-municipalisation occurs when public–private partnerships (PPP) are terminated for poor performance (Whitfield, 2014b). There is also evidence of re-municipalisation elsewhere in energy and local government (Germany), water services (France and Germany) and local government in Finland (Hall, 2012). However, there is no evidence that the flow of contracts back to in-house provision is greater than the number of new outsourced contracts, so claims of a ‘wave’ of re-municipalisation or a return to public ownership are premature. A case has been made that the single model of public ownership, characterised by large bureaucracy and centralised planning, afforded neoliberalism a useful target, and an alternative economic agenda should include diversified forms of public ownership (Cumbers and McMaster, 2012). In theory, public ownership could range from full or partial public ownership, regional public ownership to social enterprises, cooperatives, mutuals and community ownership. In practice, models

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of public ownership cannot be discussed in abstract. The pervasive political economy has a crucial impact. Furthermore, the models are discussed almost exclusively with reference to the public sector despite the legacy of the demutualisation of mutually owned building societies, the corporate acquisition of employee owned bus companies and local authority white-collar management buyouts (Whitfield, 2012a). The financial crisis has re-emphasised the need to strengthen the core functions of the state – democratic governance and civil society; national and international responsibilities; human needs and development; economic and fiscal management; and the regulation of markets, firms and organisations. Reconfiguring public ownership requires new levers and organised support to increase democratic accountability and scrutiny, participation and transparency, innovation and improvement. Greater integration of functions and services and the alignment of services to meet social need can be direct outcomes of participative and accountable governance (Whitfield, 2012a). In addition to securing investment resources, reconfiguration would have to embrace five key reforms in order to radically improve the sustainability, equity and quality of public services and the welfare state: • Firstly, the abolition of commissioning would enable the reintegration of client and service provider and, together with inhouse service innovation and improvement plans, could stem the flow of outsourcing contracts and PPPs. • Secondly, a new public service management could advance democratisation and participation, public planning, innovation and improvement strategies and flatter accountable organisational structures. Democratic innovation could widen service user and staff involvement in the policy making process and strengthen scrutiny and review by drawing on evidence from community organisations and trade unions (Whitfield, 2012a). • Thirdly, adherence to public sector principles such as democratic accountability, participation and transparency; social justice; collective responsibility through universal provision; evidence-based policy making; good quality integrated, responsive and flexible services; and quality employment could limit policy drift and implementation failure. • Fourthly, job satisfaction has a significant impact on service quality and, ultimately, on organisational effectiveness in a service organisation (Snipes et al, 2005). The adoption of smart and inclusive workplace practices in Australia has been demonstrated to improve organisational performance by up to a third (Boedker et al, 2011).

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• Finally, rigorous economic, social, health, equality and environmental impact assessment of public policies and projects could significantly strengthen the evidence base for democratic decision making. Reducing class, race and gender inequality should be a high priority in public and industrial investment decision making.

Resources for public investment Alternative economic strategies require governments to secure resources and the ability to fund, plan, provide and regulate for the medium and long term, taking account of generational interests, innovation and transformation of the economy, redistribution, and the need to legislate and enforce regulations, protect rights, advance a social justice agenda and protect the environment. Fundamental to all these goals is a progressive tax system. Tax systems have, in fact, become less progressive since the early 1980s, with steep cuts in top marginal tax rates and increased reliance on regressive indirect taxes, such as value added tax (VAT) or sales taxes on goods and services (IMF, 2013a). The introduction of a new Financial Transaction Tax continues to be controversial. However, 10 European countries – Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia and Spain – intend to launch a Financial Transaction Tax on 1 January 2016 after other EU countries opposed the move. The tax requires a 0.1% levy on stock and bond transactions and 0.01% levy on derivative transactions between financial institutions if at least one party is located in the European Union. It is expected to raise €30–€35 billion annually taking into account a reduction in trading volumes after its introduction (European Commission, 2013a). The UK, US and the financial institutions, where the banking crisis originated, strongly oppose the tax. Many countries have increased VAT as part of their austerity policies. The VAT gap (non-collection of taxes) has increased significantly in many EU countries since 2008 as a result of the economic crisis. The gap is related to non-compliance under national tax rules and was €193 billion, or 1.5% of GDP for the 26 member states in 2011 or 18% of the theoretical VAT (European Commission, 2013b). A reduction in the VAT gap could clearly provide nation states with significant additional resources.

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The decline of corporate tax rates Corporate income tax rates and the average effective rate of taxation have been significantly reduced in most European countries in the last decade. The average EU-27 corporate tax rate fell from 35.3% in 1995 to 23.2% by 2013, a 12.2% difference (Eurostat, 2013). The effective average tax rate, the percentage tax rate companies actually pay, had fallen to 20.9% in 2012 (see Figure 5.1). UK corporation tax cuts by the Coalition government represented an annual £5 billion loss of income in 2014, projected to rise to nearly £8 billion in 2016–17 when the corporation tax rate is reduced to 20% (Financial Times, 2014a). Figure 5.1: Corporate income tax rates and average effective taxation indicators, EU-27 (1995–2012) % 36 34 32 30 28 26 24

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EU-27 average top statutory CIT xxxxxx

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Source: Taxation Trends in the European Union, Eurostat, 2013

Beyond Europe, the tax rate for US firms operating in Ireland was just 2.2% in 2011 (Stewart, 2014). Corporate tax rates in Canada (inclusive of the provincial tax rate) declined from 40.5% to 26.1% between 2010 and 2013. The US rate (excluding state taxes) remained at 35% in this period. However, the US effective average tax rate is significantly lower at 12.6% of worldwide income (Government Accountability Office, 2013). Nearly 55% of all large US-controlled corporations reported no federal tax liability in at least one year between 1998 and 2005 (Government Accountability Office, 2008). This race to the

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bottom has not been productive. The reversal of corporate tax cuts, combined with the closure of regulatory loopholes to increase the effective average tax rate, would provide significant public resources in industrialised economies Tax evasion Tax evasion in Europe and North America is estimated to amount to €1600 billion annually in lost revenue. US income tax evasion was estimated at US$500 billion per annum in 2008 (Celuba and Feige, 2011). Canada’s ‘underground’ economy was estimated to be C$35 billion in 2009, equivalent to 2.3% of GDP (Canada Revenue Agency, 2012). The Tax Justice Network (2011) estimated lost tax revenue from the underground economy to be significantly higher at US$79.6 billion per annum, with a further C$81 billion lost through tax evasion. In Europe, lost tax revenue is estimated at €864 billion per annum from the shadow economy, nearly 20% of total economic activity, with a further loss of €150 billion per annum through tax avoidance (Murphy, 2012). Despite these levels of revenue loss, some governments have cut tax collection budgets and staffing levels. For example, the Canadian Revenue Agency cut C$250 million from its budget up to 2015–16 (National Post, 2013). The OECD Action Plan aims to reform international tax rules to ensure that multinationals are taxed ‘where economic activities take place and value is created’ (G20, 2013). However, the plan has been described as ‘a path strewn with obstacles, and leading ultimately in the wrong direction’ because it tries ‘to tax transnational corporations (TNCs) as if they were loose collections of separate entities operating independently in each country’ (Tax Justice Network, 2013a, p 6). An alternative unitary approach to taxing multinational firms would require a combined and country-by-country report to each tax authority, apportioning profits to different jurisdictions, and a procedure to resolve disagreements and conflicts (Tax Justice Network, 2013b). Debt reduction The average public debt ratio in advanced economies is expected to stabilise in 2013–14 at slightly below 110% of GDP, 35 percentage points above its 2007 level. Faster growth is an important route to reduce debt.

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a country with a debt ratio of 100 percent of GDP could reduce its debt by 30 percent of GDP in 10 years with one additional percentage point of potential growth. This could eventually give rise to a virtuous circle in which lower debt levels would raise potential growth, further facilitating debt reduction. (IMF, 2013b, p 33) A rapid debt reduction strategy or relying on high inflation to erode the real value of the debt would have high economic and social costs. It is important to reduce public debt, ‘although it will inevitably be a slow process’ (IMF, 2013a, p 4). Debt restructuring is an alternative option that is already evidenced in some countries. The 2012 Greek debt restructuring led to a €100 billion transfer from private creditors to the government, corresponding to 50% of GDP in 2012. ‘[T]he Greek debt restructuring approach can be useful in specific cases, but it falls far short of providing a template that could be a permanent fixture of the European financial architecture’ (Zettelmeyer et al, 2013, p 41). Depositors and bondholders had 47.5% of their deposits converted into shares in the €23 billion bailout to recapitalise banks in Cyprus. Iceland allowed three previously privatised banks to go bankrupt and set up three new banks to take over their assets, devalued the currency, imposed capital controls and secured a US$10 billion IMF loan. The previous government had introduced a moratorium on foreclosures, rescheduled payments, restructured debt and wrote down mortgages to 110% of household assets for the most indebted households (IMF, 2013c). The European Fiscal Pact requires member states to impose a binding limit on their structural deficits, with strict rules governing any breaches, subject to sanctions imposed by the Eurozone authorities. Radice (2014, p 318) argues that the structural deficit ‘is meaningless as a policy target, since it is impossible to measure objectively; while politically, it reinforces the depoliticisation of economic policy, under which technical experts replace elected governments in managing the national economy’. A systematic and coordinated approach is required to increase resources for public investment, reverse the decline the corporate tax rates, reduce tax evasion and extend the timetable for the reduction of public debt.

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Redistribution of national income Austerity policies have led to a further decline in the labour share of national income (the labour share includes wages, salaries and fringe benefits while the capital share covers corporate profits, small business, partnership and rental income and net interest) with a greater share of labour income going to those with highest incomes, thus increasing inequality (Onaran and Galanis, 2012). The median labour share of national income fell from 66.1% to 61.7% between 1990 and 2009 in 26 out of 30 developed countries (OECD, 2012). Australia had the highest reduction in labour share of GDP between 1970 and 2007, followed by the UK and Sweden, with a narrowing of the gap in Japan and Denmark. The International Labour Organization (ILO) has calculated that financialisation (the increased role of financial markets, the aggressive short-termism of financial institutions and rising indebtedness of households) contributed 46% of the fall in labour share, 25% by welfare state retrenchment and union density, 19% by globalisation and 10% for technology in 71 countries (ILO, 2013). Analysts concluded that ‘the relationship between financial globalisation and the wage share is consistently negative across the majority of high-income countries’ (International Institute for Labour Studies, 2011, p 61). The gap between productivity and pay is a key factor in this trend. Productivity in the US increased 245.3% between 1948 and 2010 compared to a 113% increase in hourly wage rates (Mishel, 2012). A similar divergence was revealed in 36 developed economies between 1999 and 2011, where average labour productivity increased more than twice as much as average wages (ILO, 2013). It also reflects the weakening bargaining power of labour (International Institute for Labour Studies, 2011). Figure 5.2 illustrates how capital captured the bulk of the benefits of increased productivity between 1999 and 2013. The privatisation of network industries (telecommunications, electricity, gas, airlines, railways, roads and postal services) in 18 OCED countries between 1970 and 2001 accounted for an average 20% of the decline in the labour share, but over half in Britain and France (Azmat et al, 2012). Bassanini and Manfredi (2012, p 8) concluded that the ‘massive privatisation of network industries since the early 1990’s can explain about 33% of the decline of the labour share in these industries’. Since many countries privatised state-owned corporations in other sectors of the economy, the impact of privatisation is probably ‘at least as important as that of globalisation’ (Bassanini and Manfredi, 2012, p 8).

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Social policy in times of austerity Figure 5.2: Trends in growth in average wages and labour productivity in G20 developed economies (1999 = 100) Labour productivity index (base year = 1999)

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95 Source: ILO, 2015 Note: Labour productivity is defined as GDP per employed person and uses GDP in constant 2005 PPPS for all countries. G20 advanced economies include: Australia, Canada, France, Germany, Italy, Japan, the Republic of Korea, the United Kingdom and the United States. Both indices are based on a weighted average of all the countries in the group that takes into account labour productivity and the size of paid employment.

The fall in labour share of national income led to a decline in workers’ purchasing power, but financial deregulation provided a short-term solution for capital. Consumption booms in the US and to a lesser extent in the UK, Australia and the bailout countries (Greece, Ireland, Portugal and Spain), were underpinned by soaring household debt rather than rising wages. New financial instruments and deterioration of creditworthiness standards, triggered by the securitisation of mortgage debt, made increasing amounts of credit available to low-income households. As the ILO observes, ‘Household debt thus became a substitute for higher wages as a source of demand and consumption’ (ILO, 2013, p 58). In contrast, Onaran and Stockhammer (2014) conclude that wage-led growth is an essential ingredient of economic recovery. They believe the state should encourage nominal wage growth in line with productivity growth and inflation trends, since the trend in ‘productivity growth is about 2% and inflation is about 2%, thus nominal wages should be growing by 4%’ (Onaran and Stockhammer, 2014, p 3). Austerity policies, particularly wage cuts and mass unemployment, have widened inequality within the labour share of national wealth. In 2009 a quarter of US workers and a fifth of workers in the UK,

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Canada, Ireland and Germany were in low-wage jobs (earning less than two-thirds of the national median hourly wage) compared to 11.1% and 8.0% in France and Italy respectively (Schmitt, 2012). The gap between chief executive pay and typical worker wages is growing rapidly again after shrinking during the recession. The ratio of annual pay received by chief executives of the largest 350 US firms relative to annual wages of production/nonsupervisory workers in those firms’ industries was roughly 20:1 in 1965. By 2012, it was 273:1 (Economic Policy Institute, 2013). These policies, coupled with labour market ‘reform’, are increasing the public subsidy of low-paid employment, primarily in the private sector. The US Earned Income Tax Credit (EITC) is estimated to have lifted 10.1 million families out of poverty in 2012 – claimants received an average US$2270 per annum in tax credits and refunds (Harris, 2014). The UK’s Working Tax Credit is a means-tested benefit for working families. In-work poverty accounted for the majority of people in poverty in the UK in 2011/12 (MacInnes et al, 2013). These programmes clearly lift many families out of poverty, but they also subsidise private and public sector employers’ low-wage policies. It is not possible to identify the specific proportion of these programmes related to low wages, but with annual costs of US$67 billion and £21 billion in the US and UK respectively in 2012–13, the corporate subsidies are substantial (Harris, 2014; HM Revenue & Customs, 2014). The labour share of national income could be increased through a combination of policies. Minimum and living wage rates could be increased with stronger enforcement. Thirteen US states have raised their minimum wage since January 2014, and all but one experienced job growth in the first five months and at a higher rate (0.99%) than the 37 states that did not (0.68%) (Garver, 2014). A reduction of the gender pay gap and a cap on excessive salaries in banks and businesses could also be effective measures, as would more stringent contract compliance with good quality employment conditions. Increased trade union membership and representation, extended collective bargaining and workplace participation have an important role in increasing the labour share of national income. Finally, resisting pension privatisation and closure or erosion of defined benefit schemes are similarly important.

More stringent controls on the corporate sector Corporate wage strategies are supported by a corporate welfare system of public subsidies and grants, corporation tax cuts, regulatory

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concessions and state market-making policies that increase outsourcing and privatisation (Whitfield, 2012a, 2014b). For example, in the UK alone, capital grants to business, low-wage subsidies, training and research grants, trade marketing and advice, tax subsidies such as capital allowances and various types of credits total over £100 billion per annum (excluding financial market and bank support, tax avoidance and evasion) (Farnsworth, 2014). However, the same corporations fund trade bodies, think tanks and right-wing organisations such as the American Legislative Exchange Council to try to undermine and dismantle the welfare state and privatise public services (Pilkington and Goldenberg, 2013; Corporate Europe Observatory, 2014). Corporate cash hoarding Non-financial companies have been hoarding cash since the beginning of the financial crisis. The total deposits of non-financial companies in the euro area increased to €1763 billion in July 2013, a 23.5% rise since January 2008. In the UK they increased 455% to £419 billion between the end of 2008 to July 2013 (Burke, 2013). The cash hoard of the thousand largest US companies rose to $1482 billion by July 2013, an 81% increase since 2006. In Canada, ‘liquid cash assets in the non-financial corporate sector continue to swell, and now total almost [C]$600 billion’ (Stanford, 2013, p 1). Corporate cash hoarding is significantly higher in East Asia, where it represents 44% of GDP in Japan (US$2.1 trillion) and 34% of GDP in South Korea (US$440 billion) (The Economist, 2014). By mid-2014 there was little sign that cash-rich companies would increase capital investment, primarily due to uncertainty over the outlook for global demand (Financial Times, 2014b). However, South Korea’s US$39 billion stimulus package in autumn 2014 includes a proposal for a 10% surcharge on corporate tax rates if companies do not spend a proportion of their income on dividends, investment and wages (The Economist, 2014). The euro area investment ratio, which indicates the proportion of profits directed to investment, fell from 53.2% in 2008 to 47.1% in 2012, with an even bigger decline in the UK from 53% in 2008 down to 42.9% in 2012 (Burke, 2013). Reductions in corporate tax rates in the same period were meant to encourage increased business investment, but had precisely the opposite result. A radical reduction in corporate welfare benefits, such as public subsidies, grants, guarantees and tax concessions, combined with increased corporate income tax rates, could provide significant new funds for public investment, improve

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democratic accountability and reduce the power of corporate interests promoting the neoliberal policy agenda.

The need for international cooperation Increased international cooperation is required to extend financial market reforms, tackle tax avoidance and evasion and address wide discrepancies in corporate tax rates. Several free trade agreements are currently being negotiated and add urgency to strengthening cooperation. The TTIP, TPP and the CETA are currently being negotiated. Draft clauses on investor privileges, market competition, standards and rights, and compensation have led to criticism that the agreements represent a power shift towards corporations (Corporate Europe Observatory, 2013). Civil society and trade union opposition is mounting to the TISA currently being negotiated by 22 developed and developing countries, including Australia, the US and the EU, following the statement in the World Trade Organization’s Doha talks. The TISA text reproduces the General Agreement for Trade in Services Article 1:3, which excludes services in the ‘exercise of governmental authority’. This is narrowly defined as ‘any service which is supplied neither on a commercial basis nor in competition with one or more service suppliers’ (Sinclair and Mertins-Kirkwood, 2014, p 4). This would provide minimal protection for public services and could lock in future privatisation by making it legally irreversible. European trade unions have called for social partners to strengthen social dialogue, collective bargaining and worker participation, particularly in relation to the economic governance process at national and EU level. They also advocate education, training and labour market reform together with the strengthening of EU social standards to tackle precarious employment and promote decent, quality jobs (European Trade Union Confederation, 2013). The prevailing inequality debate is focused on the distribution of income and wealth and whether the gap is likely to increase (Piketty, 2014). Addressing the cause of inequality, in particular the ownership and control of the means of production, should be addressed to achieve sustainable reductions, if not elimination, of persistent inequalities. As IMF research concludes, ‘there is surprisingly little evidence for the growth-destroying effects of fiscal redistribution at a macroeconomic level’ (Ostry et al, 2014).

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Conclusion The fragility of the economic recovery, the renewed threat of housing asset bubbles and the continuing damage due to the loss of economic output reinforce the case for an alternative economic strategy. As the evidence presented above indicates, austerity policies have resulted in a destabilised and weaker economy; the dispossession of wages, pensions, homes and services; the depoliticisation of communities as management of the economy is increasingly ceded to business interests and technocrats; disinvestment in the public infrastructure and economic development; and the attempts to disempower trade unions, community and civil society organisations. The core strategies that have been outlined in this chapter are necessary for three reasons. Firstly, to ensure a sustainable recovery that incorporates preventative reforms essential to minimise the occurrence and impact of future financial crises. Secondly, to tackle widening inequalities and increasing poverty; and thirdly, to develop more sustainable models of economic development. Alliances of civil society, trade unions and political organisations will be needed to ensure these policies are progressed, implemented and rigorously scrutinised. Alternative strategies have a key role in helping to build alliances that are rooted in social and economic needs, are democratically accountable and proactive. They should provide a springboard for the preparation of more detailed visions, plans and strategies for sectors of the economy, services, regions and localities. References Auerbach, A. and Gorodnichenko, Y. (2011) Fiscal multipliers in recession and expansion, National Bureau of Economic Research Working Paper 17447, Cambridge, MA, www.nber.org/papers/w17447 Australian Government (2009) Treasury briefing paper for the Senate Inquiry into the Economic Stimulus Package, The Treasury, June, Canberra. Azmat, G., Manning, A. and van Reenen, J. (2012) ‘Privatization and the decline of labour’s share: International evidence from network industries’, Economica, vol 79, pp 470–92. Ball, L. (2014) Long-term damage from the Great Recession in OECD countries, Working Paper 20185, National Bureau of Economic Research, www.nber.org/papers/w20185 Bank of International Settlements (2014) 84th Annual Report: 1st April 2013–31 March 2014, Basel, www.bis.org/publ/arpdf/ar2014e.pdf

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Barrett, C. (2011) Australia and the Great Recession, June, www. wilsoncenter.org/sites/default/files/Australia%20and%20the%20 Great%20Recession.pdf Bassanini, A. and Manfredi, T. (2012) Capital’s grabbing hand? A crosscountry/cross-industry analysis of the decline of the labour share, OECD Social, Employment and Migration Working Papers, No 133, Paris: OECD Publishing, http://dx.doi.org/10.1787/5k95zqsf4bxt-en Bivens, J. (2012) Public investment: The next ‘new thing’ for powering economic growth, Briefing Paper No 338, Economic Policy Institute, April, Washington, DC, www.epi.org/publication/bp338-publicinvestments/ Bivens, J. (2014) The short- and long-term impact of infrastructure investments on employment and economic activity in the US economy, Economic Policy Institute, July, Washington, DC, http://s1.epi.org/files/2014/impactof-infrastructure-investments.pdf Blyth, M. (2013) Austerity: The history of a dangerous idea, Oxford: Oxford University Press. Boedker, C., Vidgen, R., Meagher, K., Cogin, J., Mouritsen, J. and Runnalls, J.M. (2011) ‘Leadership, culture and management practices of high performing workplaces in Australia: The High Performing Workplace Index’, Department of Education, Employment and Workplace Relations and Society for Knowledge Economics, Sydney, www.ske.org.au/download/Boedker_Vidgen_Meagher_Cogin_ Mouritsen_and_Runnalls_2011_High_Performing_Workplaces_ Index_October_6_2011.pdf Brunsden, J. (2013) ‘Banks’ off-balance-sheet risks come under Basel scrutiny’, Bloomberg, 30 September, www.bloomberg.com/ news/2013-09-29/banks-face-basel-debt-limit-capturing-offbalance-sheet-risks.html Burke, M. (2013) ‘The cash hoard of Western companies’, Socialist Economic Bulletin, 21 October, http://socialisteconomicbulletin. blogspot.co.uk/2013/10/the-cash-hoard-of-western-companies.html Campaign Against Climate Change (2014) One million climate jobs: Tackling the environmental and economic crises, www.campaigncc.org/ sites/data/files/sites/data/files/Docs/one%20million%20climate%20 jobs%202014.pdf Canada Revenue Agency (2012) Statistics Canada study on the underground economy in Canada, 1992–2009, www.cra-arc.gc.ca/ nwsrm/fctshts/2012/m09/fs120927-eng.html Celuba, R. and Feige, E.L. (2011) America’s underground economy: Measuring the size, growth and determinants of Income tax evasion in the US, http://www.ssc.wisc.edu/econ/archive/wp2011-1.pdf

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Compass (2011) Plan B: A good economy for a good society, ed H. Reed and N. Lawson, October, London, www.compassonline.org.uk/wpcontent/uploads/2013/05/Compass_Plan_B_web1.pdf Confederation of German Trade Unions (2012) A Marshall Plan for Europe: Proposal by the DGB for an economic stimulus, investment and development programme for Europe, December, Berlin, www.fesdc.org/ pdf/A-Marshall-Plan-for-Europe_EN.pdf Corporate Europe Observatory (2013) A transatlantic corporate bill of rights – investor privileges in EU–US trade deal threaten public interest, October, Brussels, http://corporateeurope.org/sites/default/files/ attachments/transatlantic-corporate-bill-of-rights-oct13.pdf Corporate Europe Observatory (2014) ‘The fire power of the financial lobby: A survey of the size of the financial lobby at the EU level’, April, http://corporateeurope.org/sites/default/files/attachments/ financial_lobby_report.pdf Corporate Europe Observatory (2015) ‘TTIP: Regulations handcuffed’, 28 January, http://corporateeurope.org/internationaltrade/2015/01/ttip-regulations-handcuffed Cumbers, A. and McMaster, R. (2012) ‘Rethinking public ownership and participation’, On the Horizon, vol 20, no 3, pp. 172–81. Economic Policy Institute (2013) The 13 most important charts of 2013, Washington, DC, www.epi.org/publication/top-charts-2013/ EuroMemo Group (2014) The deepening divisions in Europe and the need for a radical alternative to EU policies, EuroMemorandum 2014, www.euromemo.eu/euromemorandum/euromemorandum_2014/ index.html European Commission (2013a) Taxation of the financial sector, Brussels, http://ec.europa.eu/taxation_customs/taxation/other_taxes/ financial_sector/ European Commission (2013b) Fight against fraud: new study confirms billions lost in VAT Gap, 19 September, Brussels, MEMO/13/800, http://europa.eu/rapid/press-release_IP-13-844_en.htm European Stability Mechanism (2014) Annual report 2013, www.esm. europa.eu European Trade Union Confederation (2013) A new plan for Europe: ETUC plan for investment, sustainable growth and quality jobs, 7 November, Brussels, www.etuc.org/img/pdf/en-a-new-path-foreurope.pdf Eurostat (2013) Taxation trends in the European Union, 2013 edition, http://ec.europa.eu/taxation_customs/resources/documents/ taxation/gen_info/economic_analysis/tax_structures/2013/report. pdf

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Farnsworth, K. (2014) Corporate welfare under the spotlight: British public policies for private businesses, Oxford: Oxfam. Financial Stability Board (2013a) Global shadow banking monitoring report 2013, 14 November, Basel, www.financialstabilityboard.org/ publications/r_131114.pdf Financial Stability Board (2013b) Credit rating agencies reducing reliance and strengthening oversight: Progress report to the St Petersburg G20 Summit, 29 August, www.financialstabilityboard.org/publications/r_130829d.pdf Financial Times (2012) ‘France launches public investment bank’, 17 October, www.ft.com/intl/cms/s/0/a3aadcae-1866-11e2-80e900144feabdc0.html?siteedition=intl#axzz2o7ZDZmCC Financial Times (2013) ‘EU sets out framework for banking union’, 11 December, www.ft.com/intl/cms/s/0/f65fa1ee-61e6-11e3-aa0200144feabdc0.html?siteedition=intl#axzz2n9Dxvkox Financial Times (2014a) ‘Corporation tax cuts cost UK over £5bn a year’, 9 July, www.ft.com/intl/cms/s/0/c0afbfc4-02af-11e4-a68d00144feab7de.html#axzz36zbfn16k Financial Times (2014b) ‘Global capital expenditure by companies still stalling’, 30 June, www.ft.com/intl/cms/s/0/113201e4-0028-11e4a3f2-00144feab7de.html?siteedition=intl#axzz36zbfn16k Garver, B. (2014) ‘No job loss in most states that raised minimum wage’, The Fiscal Times, 7 July, www.thefiscaltimes.com/ Articles/2014/07/07/No-Job-Loss-Most-States-Raised-MinimumWage G20 (2010) ‘The G20 Toronto Summit Declaration’, 26–27 June, www.treasury.gov/resource-center/international/Documents/ The%20G-20%20Toronto%20Summit%20Declaration.pdf G20 (2013) G20 leaders’ declaration, 6 September, St Petersburg, Russia, www.g20.utoronto.ca/2013/2013-0906-declaration.html Government Accountability Office (2008) Tax administration: Comparison of the reported tax liabilities of foreign- and U.S.-controlled corporations, 1998–2005, GAO-08-957, July, Washington, DC, www. gao.gov/assets/280/278562.pdf Government Accountability Office (2013) Corporate income tax: Effective tax rates can differ significantly from the statutory rate, GAO-13-520, May, Washington, DC, www.gao.gov/assets/660/654957.pdf Hall, D. (2012) Re-municipalising municipal services in Europe, Update, November, Public Services International Research Unit, www.psiru. org/publications Harris, B. (2014) Variation in EITC take-up, county by county, Brookings Institution, 30 January, Washington, DC, www.brookings.edu/blogs/ up-front/posts/2014/01/30-variation-eitc-takeup-county-harris

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HM Revenue & Customs (2014) ‘Child and Working Tax Credits statistics: Finalised annual awards: 2012 to 2013’, May, London, www.gov.uk/government/statistics/child-and-working-tax-creditsstatistics-finalised-annual-awards-2012-to-2013 Institute for Fiscal Studies (2014) ‘How do the parties’ fiscal targets compare?’, 19 September, London, www.ifs.org.uk/publications/7373 International Institute for Labour Studies (2011) World of work report 2011: Making markets work for jobs, Geneva, www.ilo.org/wcmsp5/ groups/public/@dgreports/@dcomm/@publ/documents/ publication/wcms_166021.pdf International Labour Organization (2013) Global wage report 2012/13: Wages and equitable growth, Geneva, www.ilo.org/wcmsp5/groups/ public/---dgreports/---dcomm/---publ/documents/publication/ wcms_194843.pdf International Labour Organization (2015) Global wage report 2014/15: Wages and income inequality, Geneva, www.ilo.org/wcmsp5/groups/ public/---dgreports/---dcomm/---publ/documents/publication/ wcms_324678.pdf International Monetary Fund (2009) The state of public finances: Outlook and medium-term policies after the 2008 crisis, March, Washington, DC, www.imf.org/external/np/pp/eng/2009/030609.pdf/a International Monetary Fund (2013a) Fiscal monitor: Taxing times, October, Washington, DC, www.imf.org/external/pubs/ft/ fm/2013/02/pdf/fm1302.pdf International Monetary Fund (2013b) Fiscal monitor: Fiscal adjustment in an uncertain world, April, Washington, DC, www.imf.org/external/ pubs/ft/fm/2013/01/pdf/fm1301.pdf International Monetary Fund (2013c) Iceland: 2013 Article lV Consultation and third post-program monitoring discussions, August, Washington, DC, www.imf.org/external/pubs/ft/scr/2013/cr13256. pdf International Monetary Fund (2014a) ‘Global growth disappoints, pace of recovery uneven and country-specific’, 7 October, Washington, DC, www.imf.org/external/pubs/ft/survey/so/2014/ NEW100714A.htm International Monetary Fund (2014b) ‘New momentum can help global economy beat mediocre growth’, 2 October, Washington, DC, www.imf.org/external/pubs/ft/survey/so/2014/NEW100214A.htm International Monetary Fund (2014c) ‘World economic outlook: Legacies, clouds and uncertainties’, Chapter 3, October, Washington, DC, www.imf.org/external/pubs/ft/weo/2014/02/pdf/c3.pdf

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International Monetary Fund (2014d) ‘Shadow banking around the globe: How large, and how risky?’, Chapter 2, Global Financial Stability Report, October, Washington, DC, www.imf.org/external/ pubs/ft/gfsr/2014/02/pdf/c2.pdf Invest in France Agency (2013) 34 sector-based initiatives for a French industrial Renaissance, www.invest-in-france.org/Medias/ Publications/2222/34-sector-based-initiatives-for-a-frenchindustrial-renaissance-2013.pdf Lehmann, A., Levi, M. and Tabak, P. (2011) Basel lll and regional financial integration in emerging Europe, European Bank for Reconstruction and Development, Working Paper 132, www.ebrd.com/downloads/ research/economics/workingpapers/wp0132.pdf Leigh, A. (2012) ‘How much did the 2009 Australian fiscal stimulus boost demand? Evidence from household-reported spending effects’, The BE Journal of Macroeconomics, vol 12, no 1 (Contributions), Article 4. MacInnes, T., Aldridge, H., Bushe, S., Kenway, P. and Tinson, A. (2013) Monitoring poverty and social exclusion 2013, Joseph Rowntree Foundation and New Policy Institute, www.jrf.org.uk/sites/files/ jrf/MPSE2013.pdf Mazzucato, M. (2013) The entrepreneurial state: Dubunking public v private, London: Anthem Press. Mishel, L. (2012) The wedges between productivity and median compensation growth, Issue Brief 330, 26 April, Economic Policy Institute, Washington, DC, www.epi.org/files/2012/ib330-productivity-vs-co mpensation.2012-04-26-16:45:37.pdf Murphy, R. (2012) Closing the European tax gap, A report for Group of the Progressive Alliance of Socialists & Democrats in the European Parliament, http://europeansforfinancialreform.org/en/system/ files/3842_en_richard_murphy_eu_tax_gap_en_120229.pdf National Coalition for Independent Action (2014) Inquiry into the future of voluntary services, 16 major reports, www.independentaction.net/ category/inquiry-voluntary-services/ National Post (2013) Opposition parties decry Canada Revenue Agency cuts after Conservatives vow to get tough on tax evasion, 26 March, http:// news.nationalpost.com/2013/03/26/opposition-parties-decrycanada-revenue-agency-cuts-after-conservatives-vow-to-get-toughon-tax-evasion/ Onaran, O. and Galanis, G. (2012) ‘Is aggregate demand wage-led or profit-led? National and global effects’, Conditions of Work and Employment Series No 40, International Labour Organization, Geneva www.ilo.org/wcmsp5/groups/public/---ed_protect/--protrav/---travail/documents/publication/wcms_192121.pdf

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Onaran, O. and Stockhammer, E. (2014) ‘Why recovery needs wage growth’, Social Europe Journal, 21 May, www.social-europe. eu/2014/05/recovery-needs-wage-growth/ Organisation for Economic Co-operation and Development (2012) Employment outlook 2012, Paris, www.oecd.org/els/emp/EMO%20 2012%20Eng_Chapter%203.pdf Ostry, J., Berg, A. and Tsangarides, C. (2014) Redistribution, inequality and growth, Staff Discussion Note, International Monetary Fund, Washington, DC, www.imf.org/external/pubs/ft/sdn/2014/ sdn1402.pdf Piketty, T. (2014) Capital in the twenty-first century, Cambridge, MA: Harvard University Press. Pilkington, E. and Goldenberg, S. (2013) ‘ALEC facing funding crisis from donor exodus in wake of Trayvon Martin row’, The Guardian, 3 December, www.theguardian.com/world/2013/dec/03/alecfunding-crisis-big-donors-trayvon-martin Pollin, R. (2012) ‘US government deficits and debt amid the great recession: What the evidence shows’, Cambridge Journal of Economics, vol 36, pp 161–87. Radice, H. (2014) ‘Enforcing austerity in Europe: The structural deficit as a policy target’, Journal of Contemporary European Studies, vol 22, no 3, pp 318–28. Reed, H. (2012) Plan B + 1, Compass and Friedrich Ebert Stiftung, London, www.compassonline.org.uk/wp-content/uploads/2013/05/ PlanB1.pdf Reuters (2013) ‘Hollande turns to robots, driverless cars to revive French industry’, 12 September, www.reuters.com/article/2013/09/12/usfrance-industry-idUSBRE98B0HW20130912 Schmitt, J. (2012) Low-wage lessons, Center for Economic and Policy Research, January, Washington, DC, www.cepr.net/documents/ publications/low-wage-2012-01.pdf SIGOMA (Special Interest Group of Municipal Authorities) (2013) ‘SIGOMA response to the Provisional Local Government Financial Settlement, 2014 to 2015’, 18 December, www.sigoma.gov.uk Sinclair, S. and Mertins-Kirkwood, H. (2014) TISA versus public services: The Trade in Services Agreement and the corporate agenda, Public Services International, Geneva, www.world-psi.org/sites/default/ files/documents/research/en_tisaresearchpaper_final_web.pdf Snipes, R., Oswald, S., LaTour, M. and Amenakis, A. (2005) ‘The effects of specific job satisfaction facets on customer perceptions of service quality: an employee-level analysis’, Journal of Business Research, vol 58, pp 1330–39.

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Stanford, J. (2013) Good time to rethink corporate tax cuts, 14 November, The Progressive Economic Forum, www.progressive-economics. ca/2013/11/14/good-time-to-rethink-corporate-tax-cuts/ Stewart, J. (2014) PwC/World Bank report ‘Paying taxes 2014’: An assessment, IIIS Discussion Paper No. 442, School of Business, Trinity College, Dublin, www.tcd.ie/iiis/documents/discussion/ pdfs/iiisdp442.pdf Tax Justice Network (2011) The cost of tax abuse: A briefing paper on the cost of tax evasion worldwide, November, www.tackletaxhavens. com/Cost_of_Tax_Abuse_TJN_Research_23rd_Nov_2011.pdf Tax Justice Network (2013a) Press release: Response to OECD Action Plan on corporate tax avoidance, 19 July, http://taxjustice.blogspot. ch/2013/07/oecd-launches-its-action-plan-on.html Tax Justice Network (2013b) Beyond BEPS: TJN briefing on the OECD’s ‘BEPS’ project on corporate tax avoidance, 17 July, www.taxjustice.net/ cms/upload/pdf/TJN_Briefing_BEPS_final.pdf The Economist (2014) ‘A $2.5 trillion problem and a tempting target’, 27 September, www.economist.com/news/leaders/21620203japanese-and-south-korean-firms-are-worlds-biggest-cash-hoardershurts-their United Nations Environment Programme Sustainable Energy Alliance (2009) Why clean energy public investment makes economic sense – The evidence base, www.unep.org/pdf/dtie/WhyCleanEnergyPublicInvestment. pdf Wall Street Journal (2013) Volcker Rule challenges Wall Street, 10 December, http://online.wsj.com/news/articles/SB10001424052 702303560204579249732841592834?mod=WSJEUROPE_hps_ LEFTTopWhatNews Whitfield, D. (2010) Global auction of public assets: Public sector alternatives to the infrastructure market and public private partnerships, Nottingham: Spokesman Books. Whitfield, D (2012a) In place of austerity: Reconstruction of the state, economy and public services, Spokesman Books, Nottingham. Whitfield, D. (2012b) The mutation of privatisation: A critical assessment of new community and individual rights, European Services Strategy Unit Research Report No 5, July, www.european-services-strategy.org. uk/publications/essu-research-reports/the-mutation-of-privatisationa-critical-asses/mutation-of-privatisation.pdf

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Whitfield, D. (2012c) PPP wealth machine: UK and global trends in trading project ownership, European Services Strategy Unit Research Report No 6, www.european-services-strategy.org.uk/publications/essuresearch-reports/essu-research-report-no-6-ppp-wealth-machine-u/ ppp-wealth-machine-final-full.pdf Whitfield, D. (2014a) Unmasking austerity: Opposition and alternatives in Europe and North America, Nottingham: Spokesman Books. Whitfield, D. (2014b) PPP database: Strategic partnerships 2012–2013, European Services Strategy Unit, www.european-services-strategy. org.uk/ppp-database/ppp-partnership-database/ppp-strategicpartnerships-database-2012-2013.pdf World Economy, Ecology and Development (2013) Financial services in the planned EU–US trade agreement TTIP, November, Berlin, www2. weed-online.org/uploads/factsheet_financial_services_ttip.pdf Zettelmeyer, J., Triebesch, C. and Gulati, M. (2013) The Greek debt restructuring: An autopsy, Working Paper 13-8, Peterson Institute for International Economics, August, Washington, DC, www.iie.com/ publications/wp/wp13-8.pdf

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Crisis, convulsion and the welfare state Frances Fox Piven and Lorraine C. Minnite

Publics are recurrently told by their leaders that they must tighten their belts, settle for less, forget their personal needs, their private dreams, for the greater good. The reasons given for this call for austerity are various. War made necessary by foreign aggressors, pestilence visited upon us by higher powers, or maybe merely crop failure. We the people must sacrifice for the greater good. But the call for sacrifice, for austerity, often obscures a strategy for extraction by those who have more from those who have less. Not so long ago, there was reason to believe that at least in the wealthier nations of the world, poverty and the extreme inequality to which it is related were becoming problems of the past (Marshall, 1950). An important reason for this confidence was the steady expansion of government policies that regulated market actors, largely to limit externalities, and also to offset market-generated income inequalities through redistribution in the form of taxation and subsidies. Recent developments, most dating from before the financial meltdown that began in 2007, but escalating since, have badly shaken that confidence.

The bifurcated welfare state In a large number of the rich countries that were earlier the pioneers in creating the welfare state, social spending is under attack. In Europe, the financial crisis, originating in manipulation and chicanery in the US housing market and spreading to Europe through the international financial markets, has now morphed into a banker and business led push for austerity, meaning cutbacks in welfare state spending and in wages (Blyth, 2013; Irwin, 2013; Streeck, 2014). This is not only happening in beleaguered Greece and Spain, but in the United States and the United Kingdom, and less dramatically in the other settler countries spawned by the British Empire (Huber and Stephens, 2005). Moreover, the emergence of campaigns for austerity elsewhere in Europe suggests

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the trend could spread to other rich nations that were once heralded as welfare state leaders, with consequences of increased poverty and inequality (see Figure 6.1). Figure 6.1: European countries with poverty rate increase between 2008 and 2012 (based on poverty line fixed in 2008)

Cyprus Denmark Estonia France Germany Greece Hungary Iceland Ireland

2008

Italy

2013

Latvia Lithuania Luxembourg Netherlands Portugal Slovenia Spain United Kingdom 0

5 10 15 20 25 30 35 40 45 50

Source: Eurostat Statistical Database (2015)

Neoliberalism, an effort to unfetter capitalism from the constraints imposed by the inroads of democratic politics, has been advancing for more than three decades (Harvey, 2005).1 It is not hard to assess what it has wrought. Public policies in the lead neoliberal nations have been transformed. Business regulations, including regulations intended to improve workplace safety, reduce environmental hazards, and protect consumers, have been rolled back. Taxes on the rich have

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been slashed. Income support programmes designed to reduce poverty among at-risk groups and to increase working class security have been reduced in the interest of what is called labour market flexibilisation.2 Policies to protect national economies from destabilising international incursions have been peeled away by trade pacts that open borders and by the globalisation of production. Government functions, some of them centuries old, have been privatised, turning much of the public sector into a commercial bazaar where businesses compete for lucrative contracts to run prisons or welfare or water services. As the process continues and expands, competition within and across national borders intensifies and this becomes a justification for lowering wages on the one hand, and slashing taxes on the better-off on the other. Then there is the looming spectre of public and private debt as hard-pressed citizens and governments try to make up for declining household income and shrinking public revenues by borrowing, thus lassoing themselves and their governments ever more tightly to the growing financial sector. The process of indebting workers and citizens also extends over time, as creditors claim not only a growing share of current income but of past income accumulated in the form of pensions or home mortgages, and also future income obligated to repay current debts through the garnishment of wages still to be earned. This is not to say that the welfare state has been abandoned.3 Indeed, in many rich countries broad, aggregate measures of social spending continue to rise (see Figure 6.2). But these policies are being refashioned to mesh with the credo of labour market flexibilisation, which means, as wages decline, income supports must also be reduced and the conditions for receiving these supports made more arduous. The most striking examples may be in the United States, where cash and in-kind assistance to the non-working poor have been slashed while subsidies to the working poor were significantly expanded. In other words, the welfare state is being transformed in ways that reduce what Esping-Anderson (1985) calls its ‘decommodifying’ effects, and instead, governments now craft policies to mesh more closely with market incentives and disincentives. Flexibilisation requires the weakening of regulations that protect workers from the effects of heightened labour market competition. The US is the acknowledged leader in these trends. There, poverty and inequality have been growing for nearly half a century, with the consequence that the world’s largest and richest economy now lags behind most European nations, as well as Mexico, Turkey, Japan, Australia and Canada, in its rate of relative poverty, and (despite a drop

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Social policy in times of austerity Figure 6.2: Total public social protection expenditure (including health) as a percentage of GDP, 1990 to latest year available

Source: International Labour Organization (2014a). Adapted from Table B.12, pp. 303-7

Figure 6.3: Child poverty rates, 2009 (percentage of children living in households with equivalent income lower than 50% of national median) Norway Netherlands Denmark Sweden Germany France UK Canada Portugal Japan Italy Greece Spain USA 0

5

10

15

Source: UNICEF Innocenti Research Centre, 2012. Adapted from Fig. 1b, p.3

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20

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in 2013) in its rate of child poverty (see Figure 6.3) (Fremstad, 2008, 2013; Parrott et al, 2013; DeNavas and Proctor, 2014 ).4 Wages have stagnated, and lower-wage workers have fallen further and further behind, while profits have soared, as have the incomes and wealth accumulated by the now infamous ‘1%’ at the expense of the ‘99%’. These developments demand an explanation that goes beyond simply naming it all ‘neoliberalism’. The US is presumed to be a leader among rich and democratic nations. Wealth means that resources exist to reduce poverty, and democracy means or should mean that the poor will have at least a measure of influence over the distribution of those resources. This sort of match between growing resources and growing needs was, after all, the core idea of the ‘logic of industrialism’ explanations of the origins and expansion of the welfare state, and of the family of theories that were inspired by that logic (discussed in more detail below). At least for the moment, the future of the welfare state in rich countries is cloudy. However, an altogether different scenario is suggested by policy innovations occurring in the global South. In many middle-income countries, including Mexico, Bolivia, Brazil and Turkey, for example, decades-long popular mobilisations among the lower classes have been answered with new and expansive social policy initiatives (see Yörük, 2013).5 The centrepiece of these policies, known as Conditional Cash Transfers (CCTs), tends to take a different form than welfare state policies in the West, and different also from the precursor poor relief systems. And already they appear to have had measurable and positive impacts on poverty and inequality (Haggard and Kaufman, 2008; Hanlon et al, 2010; Lustig et al, 2013; Yörük, 2013; but see also Petras and Veltmeyer, 2005; Stampini and Tornarolli, 2012; Lo Vuolo, 2013).

The theoretical problem These developments – rollbacks in welfare state programmes in the West, and policy innovation in the developing middle-income countries – are not well explained by existing theories of welfare state expansion or retrenchment. Of course, there is no shortage of such theories. The most familiar emphasise the role of an evolving and growing industrial economy that generates new needs or imperatives and new capacities that in turn lead to policy initiatives to deal with poverty. Thus ‘logic of industrialism’ theories posit that the advance of industry together with urbanisation was the motor for the invention of a variety of social security policies (Kerr et al, 1964; Cutright, 1965,

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1967; Wilensky and Lebeaux, 1965; Wilensky, 1975).6 A variant of the theory emphasises not industrialisation as such, but capitalist industrialisation and the imperatives of accumulation and legitimation generated by capitalism (Offe, 1972; O’Conner, 1973; Gough, 1979). Other theories focus on the political process through which policies to deal with poverty are initiated and sustained, and accordingly emphasise the role of parties and interest groups, unions and reform organisations (Stephens, 1979; Korpi, 1983; Shalev, 1983; Esping-Andersen and Korpi, 1984; Esping-Andersen, 1985; Korpi and Palme, 1988) and the political institutions that in turn help to shape them.7 And more recently the focus has shifted to ‘varieties of capitalism’ theories, which emphasise the different policy implications of the politics generated by corporatist and liberal market regimes (Hall and Soskice, 2001; Huber and Stephens, 2014). Meshing with the idea that capitalisms vary, and that those variations impact on the welfare state, some contributors to the current literature also propose that business interests are not necessarily opposed to the welfare state but may actually promote particular welfare state policies (Swenson, 2002, 2004).8 Finally, a relatively new interest in feminist political economy that focuses on gender and reproduction, and reflects the dramatic movement of women into the labour force in the rich countries, has produced studies that fastens on work and family implications of welfare state policies (Esping-Andersen, 1996, 1999; Morgan, 2013). We direct attention to two major weaknesses in welfare state theorising: (1) a neglect of the role of the politics of the poor and (2) the assumption that welfare state policies are primarily shaped by the politics of the nation state. By ‘the politics of the poor’ we mean the often disorderly and disruptive politics of poor and working class people for whom conformity to norms of routinised political participation is ineffective. However, we do not ignore the important role traditional institutions of electoral-representative democracy play in translating demands from below; rather, we argue that institutional frameworks are critical to an understanding of when and under what conditions protest is likely to lead to ameliorating social welfare reforms. For example, when protest movements threaten to disrupt party coalitions, politicians dependent upon coalitional arrangements will be more likely to concede the movements’ demands. Disruption, a key element of the politics of the poor, is most effective when it exploits the interdependencies that that are embedded in hierarchies of power (Piven and Cloward, 2005). Combining these propositions about the politics of the poor and the shifting structure of policy authority, we

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hypothesise that protest by the poor is more likely to have an impact on national policies in countries where nation states have retained or acquired a degree of autonomy from the supranational authorities associated with neoliberalism. Recent developments in Europe suggest that the locus of social and economic policy making there has shifted away from the national state and its associated electoral-representative institutions. Yet these institutions constitute the framework for much welfare state theorising. While a straightforward analogy between the new federal system of European governance and the federal United States may be too crude, the similarly regressive bias of both systems in the development of social policy should provoke investigation. To better account for both retrenchment in many advanced capitalist countries and innovation in welfare state policies in emerging economies, particularly those in Latin America, the next two sections take up what we have identified as weaknesses in welfare state theorising – the neglect of the politics of the poor, and the significance of state structures in mediating the impact of that politics on policy.

The politics of the poor meets European integration In contrast to dominant theories, which focus on the workings of what might be called normal political processes, the work of Piven and Cloward (for example, 1979, 1992, 1993, 2005) concentrates on the role of contestation from below in initiating and sustaining welfare state policies. This work draws in turn on the British social historians of the past century who focused on the role of popular protests in the centuries-long emergence of industrial capitalism and the welfare state. A similar line of argument, drawing a connection between protest from below and policy from above, is also evident in the work of John Walton and his colleagues, to which we will turn in short order .9 A focus on the politics of the poor may be especially useful for understanding the emergence of new forms of social protection in the global South, a region experiencing an extraordinary level of popular protest over the past several decades. But it falls short in explaining how austerity policies and welfare state retrenchment in the developed countries of the West are being sustained in the face of significant disruption and protest from below, particularly in Europe. Indeed, France and England have witnessed large-scale riots by the immigrant poor, as well as recurrent protests against austerity policies. In Greece, where austerity policies have been severe, turmoil reigns, and huge street protests have also erupted in Spain. Nor has the United States

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been immune to protests from below. The Occupy movement and strikes by fast food workers are the most recent insurgencies in the US against income inequality, low wages and debt. These protests, however, have so far not halted, much less reversed, campaigns for austerity. We think that what is missing is a theoretical grappling with big changes in the structure of political institutions that have accompanied globalisation and the rise of financial capitalism. The pattern is perhaps most evident in Europe where the authority of national political institutions over financial and currency policies has been usurped by the rise of the European Monetary Union and the Stability Pact by which it is governed, as well as by the European Central Bank (and the allied Bundesbank), the European Courts, the European Commission and, not insignificantly the International Monetary Fund (IMF). Thus, supranational European institutions insulated from popular protest or electoral influence dictate national budgets.10 Meanwhile the development of the political or electoral representative side of the European Union has lagged far behind. Participation in elections for the European Parliament is low, parties are weak, and so is the parliament itself. Jessop calls this kind of institutional restructuring the ‘hollowing out of the state’ (Jessop, 2002; see also Brenner, 1998; Axtmann, 2004). We ordinarily understand the idea of the nation state as the institutions with ultimate authority over a territory, its people and its resources. And we associate the existence of a state with a complex of arrangements through which societal demands are mediated upward while the decisions of political elites are transmitted and enforced downward. All of our big theories about welfare state development in fact presume the existence of the national state. The evidence of Europe suggests that hugely important changes in state structures have occurred in the form of the construction of the authoritative institutions of the European Union. This gradual but ultimately massive restructuring shifts authority upward beyond the reach of the nation state, and therefore beyond the electoral-representative institutional arrangements through which societal demands are transmitted to governmental authorities. Some analysts treat the emergence of Eurozone institutions as largely happenstance, too many actors in too much of a hurry and, in addition, leaders who took the wrong lesson from the Second World War, the lesson of a deep suspicion of the pre-war democratic institutions that had given way to fascism. Other analysts attribute the construction of the European Community to the effort to avoid a recurrence of the devastation of world wars. For example, in that regard, Perry Anderson argues that, ‘the edifice was entirely unprecedented, the architects never

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at one, the process extended far beyond the span of any government. How could it be otherwise than a minefield of mis-reckonings?’ (Anderson, 2011, p 88; see also Anderson, 2012). Jan-Werner Muller thinks otherwise, arguing that, ‘a deep distrust of popular sovereignty underlay not just the beginnings of European integration, but the political reconstruction of Western Europe in general’ (Müller 2012, p 40; see also, Müller, 2011). These disputes about the initiating motives notwithstanding, it is clear that motives having to do with facilitating trade and economic growth gained precedence over time. In any case, this article is not the place to attempt the formidable task of an analysis of the forces that drove the construction of the institutions of the European community. Rather, we want to direct attention to the significance of the new structures of political authority for social policy. The role of the courts in this emerging system of governance is underappreciated, too, and also important (Müller, 2012; Papadopoulos and Roumpakis, 2013). Muller thinks this was not simply a copy of the US Supreme Court, that rather what is significant about the European-level judiciary is the idea of centralised judicial review. But whether copied or independently invented, the American experience shows that a system of centralised non-elected courts can temper and often thwart popular influence through electoral institutions, just as Thomas Jefferson feared. Similarly, the fondly remembered ‘father’ of the European Community, Jean Monnet, envisaged a federal system, inspired by but not copied from the US. But over time the economic interests that shaped the developing EU system created something that was very different from Monnet’s vision. Indeed, Anderson and others (for example, see Streeck, 2014) invoke Hayek’s vision, especially of a ‘catallaxy’ – an ultraliberal state organised like a market. Supiot (2012, pp 31–2) writes: Between the chaste veil of what is conventionally known as the EU’s ‘democratic deficit’ lies a denial of democracy … True legislative power is held by unelected bodies, on the executive side – the Commission and the Council – as much as the judicial: the EU Court of Justice in Luxembourg. The European Parliament elected without debate at the European level, is confined to a walk-on part … [T]he process through which European Community law has developed [is] completely opaque; a confusion compounded by the corporate lobbying fostered by the Committee of

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Permanent Representatives … For its part, since 2007 the Court of Justice has striven to prohibit trade unions or collective bargaining from hindering ‘the spontaneous order of the markets’. Most to our point here is Supiot’s conclusion that these developments have stripped national governments, still subject to the rules and rituals of electoral-representative democracy, of the basic instruments of economic policy through which they might respond to their electoral constituencies. Writing in 2011, Harvey pointed to ‘various glimmers of hope and light around the world’, and named the Indignados movements in Spain and Greece. He also had in mind the young people who, in the summer of 2011, were rioting in the big cities of England and other European cities, smashing windows in Athens and setting bonfires in Paris. When Ken Livingston, former mayor of London, suggested the riots might be linked to spending cuts, the response from the British establishment was thunderous denunciation, of Livingston for his remarks, and of the rioters for what the Daily Mail called their ‘nihilistic and feral’ behaviour (Daily Mail, 2011). All this reminded Harvey of how the Paris communards in 1871 had been depicted. It was, Naomi Klein writes, ‘as if the massive bank bailouts never happened, followed by the defiant record bonuses … firing public sector workers, scapegoating teachers, closing libraries, upping tuitions, rolling back union contracts ... privatisations of public assets and decreasing pensions’ (Klein, 2011). Still, Prime Minister David Cameron responded not with measures to relieve the hardships of the protestors, but with evictions from public housing, jail terms for the rioters and huge cuts in funding for social/ community programmes (Gilbert, 2011). The problem was not that European rioters were nihilistic or delinquent or pathological, meaning that this was not politics, however familiar those sorts of discrediting labels may be. The problem was that the responsiveness of governing elites depends on their vulnerability to the discontented. This in turn depends partly on the disruptive force threatened by the protests, on the seriousness of the threats they pose. And it also depends on the exposure of governing authorities, as well as on the perceived costs of conciliation.11 Similarly, Piven (2006) makes the argument that responses to US protest movements have varied with variations in the exposure of the reigning regimes, largely as a result of the impact of protest on electoral alignments over the course of US history. The argument we propose here is that the supranational system of governance now in place in Europe blunted

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responses to recent protests from below because it is insulated from the electoral reverberations of those protests.

Leveraging disruption in Latin America We will use the experience of Latin America to illustrate our argument that the policy impact of protests by the poor is mediated by the insulation or exposure of authoritative state decision makers to the troubles the poor generate. It is widely agreed that clientelism, along with industrial policies that favoured organised workers in the formal sector, had been the dominant modes of political incorporation in Latin America (Eckstein, 1977; Eckstein and Wickham-Crowley, 2003; Shefner, 2008). In the 1980s, the policies that made these modes of incorporation possible were upended by new neoliberal policies foisted on indebted national governments by the IMF, the World Bank, and the United States. By the end of the decade, spreading and recurrent protests were erupting, so large and so persistent that they eventually toppled governments. There is also wide agreement that Latin America was the site of the greatest number of what came to be known as ‘austerity protests’ (Shefner et al, 2006). Or, as Roberts (2008, p 328) says: Perhaps nowhere have the challenges been more surprising … than in Latin America … [where] massive civic revolts contributed to the overthrow of a series of pro-market rulers in Ecuador, Argentina, and Bolivia and a diverse array of populist or Left-leaning leaders were elected president in eight Latin American countries that accounted for nearly two thirds of the regional population. As the protests continued, more Latin American governments introduced new income support programmes, beginning with Mexico’s Ninos en Solidaridad in 1989 and Chile’s Subsidio Unico in 1990 (Teichman, 2008). Brazil’s Bolsa Familia reached about 52 million people in 2010, when Mexico’s Opportunidades programme reached 24 million (Stampini and Tornarolli, 2012). In Ecuador, Brazil and Mexico, the new programmes, known as Conditional Cash Transfer or CCTs, served all or nearly all of the officially poor (100% in Ecuador, 84% in Brazil and 72% in Mexico; see Johannsen et al, 2009, p 6). They exist in every Latin American country except Cuba and Venezuela, and in 2010 served nearly 130 million people (Fiszbein and Schady, 2009; Franzoni and Voorend, 2011; Stampini and Tornarolli, 2012).

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By any standard, these are significant policy developments. How, then, did they happen, and what was their relationship to the worldwide rise of neoliberalism? Portes sees the train of events that led to tumult and change in Latin America and elsewhere beginning, in the 1970s, with intensified global competition and the industrial downsizing and restructuring that followed. ‘The bankruptcy of many domestic firms unable to withstand foreign competition shrank the protected industrial working class’, says Portes (1997, p 236), ‘while the labor victories of earlier times came under relentless pressure as so many barriers to external “competitiveness”.’ But troubles in Latin America were not the consequence of changes in global markets alone. Political stability in much of Latin America had also been secured by social policies which undergirded a kind of social pact that spanned the middle classes and the urban poor. Cardoso and Faletto (1979, p 143) argue that ‘[t]his alliance could be maintained only by creating and expanding employment opportunities for the masses’, and also by pacifying the urban poor with land titles and basic services (see also Walton and Seddon, 1994). By the early 1980s, the United States together with the World Bank and the IMF were bringing pressure on Latin American governments to reverse import substitution and industrial development policies that attempted to support the social wage and promote economic development, and replace them with policies that promoted government austerity, privatisation and the liberalisation of trade and capital movements. Meanwhile, argues Arrighi (2007, p 195), ‘the massive redirection of capital flows to the United States turned the flood of capital that Southern countries had experienced in the 1970s into the sudden drought of the 1980s’, beginning with the Mexican default of 1982. This, then, was the beginning of the era known as ‘structural adjustment’ and the collapse of the social compact that had previously secured political stability in Latin America. Not only did the new policy regime reverse the industrial policies that had worked to incorporate the Latin American working classes, but the austerity regimes imposed on national governments also struck a shattering blow to the clientelist arrangements that had more or less worked to keep masses of people in the informal and agricultural sectors quiescent. A survey conducted by Nelson some 35 years ago of cities in Africa, Latin America and Asia showed that patron–client relations were the most widespread form of political incorporation, and that clientelism was more prevalent than special interest groups or ethnic associations of political parties (Nelson, 1979). Clientelism in turn was thought to produce political passivity. In exchange for small

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favours, the poor remained quiescent. ‘Political participation’, says Walton, ‘took the form of deference and patronage.’ He goes on to cite Hobsbawm’s observation that ‘it is remarkable how few riots – even food riots – there have been in the great Latin American cities during a period when the mass of their impoverished and economically marginal inhabitants multiplies, and inflation as often as not was uncontrolled’ (Hobsbawm, 1967, p 56, cited in Walton, 1998, p 461). Some of the most important work on the austerity protests that followed across Latin America has been done by John Walton and his colleagues (see for example Walton, 1989, 1998; Walton and Ragin, 1990; Walton and Seddon, 1994). Walton and Seddon (1994) date the beginning of the wave of insurgencies to the late 1970s, when something very much like a food riot occurred in Peru. The seriousness of the insurgencies that were to follow became evident, however, with the rioting in the streets of Caracas that occurred in February of 1986, in response to transportation rate hikes. Crowds assembled, overturned buses, barricaded streets, threw stones and looted stores. The army and police moved in, 300 died, and thousands were injured or jailed. But food was airlifted into Caracas, price controls on basic goods established along with a 32% wage increase, and the original austerity plan was delayed (Walton and Seddon, 1994, pp 126–8). By 1989, shoppers in Argentina were walking out of stores without paying for food, crowds were assaulting shops and businesses associated with foreigners were attacked (Serulnikov, 1994). In Chile, land invasions in Santiago began in 1983, and over the next four years protest spread throughout the ‘poblaciones’ or poor neighbourhoods and shantytowns on the outskirts of the city that had been organised by left-wing political parties before the 1973 coup (Schneider, 1991). Laid off workers in Sao Paulo destroyed a factory assembly line. And as the protests widened, crowds demanded a restoration of food and transportation subsidies, employment and wages (Walton and Seddon, 1994, pp 119–20). According to Walton and Seddon (1994, p 49), the protestors in the escalating insurgencies cried, “Out with the IMF!” A supranational authority was very much present in Latin America, as in the Eurozone today. After all, it was the infamous structural adjustment policies that the IMF was imposing on indebted governments that were forcing the crippling of the main strategies of popular political incorporation. But in Latin America, the nation state and its electoral representative apparatus was still relatively intact. What ensued as the protests spread and escalated were three-way contests pitting the IMF and its structural adjustment policies against national governments who in turn were

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besieged by increasingly unruly protestors and the electoral upsets they threatened. In 2000, for example, the IMF approved a US$2 billion credit to the Argentine government on condition that the government accept fiscal ‘reforms’ and labour market deregulation, including changes that weakened the trade unions. This was in the wake of a wave of strikes against earlier structural adjustment reforms in 1999 (Woodroffe and Ellis-Jones, 2000; see also Vilas, 2006). The new reforms passed the Senate as thousands of demonstrators assembled and violent clashes resulted in injuries and arrests. A month later IMF-prescribed cuts in social security produced more violent protests in the Salta region by crowds demanding unemployment and severance benefits who set fire to public buildings, while rural communities blocked roads, with more injuries and arrests. The pattern was repeated month after month until the Argentine courts ruled that the IMF was directly responsible for the country’s debts accumulated under the military dictatorships of 1976–83 (Woodroffe and Ellis-Jones, 2000; Hanlon, 2006). In Bolivia, a 1998 plan to privatise all remaining public enterprises, including the water industry, had been worked out under the guidance of the World Bank, and was accompanied by US loans. One consequence was that water prices in Cochabamba, Bolivia’s third largest city, rose between 40% and 60% (Democracy Center, no date), and in some cases as much as 300%, with the average water bill equalling about a quarter of average wages (Finnegan, 2002; Olivera and Lewis, 2004, p 10). The protestors, including factory workers, farmers and students, shut down the city for four days and the national government promised to reverse the rate increase. But the privatisation contract, signed in a secret deal between Bolivian officials and a newly formed subsidiary of the Bechtel Corporation, a huge US-based multinational engineering firm, forced the government to stall. The protests continued, month after month, with new government promises, more protests, injuries and now deaths as well. Finally, in April, the national government revoked the concession to the multinational corporation that had bought the water contract (Nickson and Vargas, 2002; Olivera and Lewis, 2004; Schultz, 2009). In Brazil in 1998, the IMF agreed to a US$41.5 billion emergency bailout plan, including an US$18 billion loan on the condition that national authorities press ahead with privatisation and liberalisation measures (Goering, 1998; Weisbrot, 1999). An April 2000 tribunal convened in Rio de Janeiro by Jubilee 2000 declared the IMF policies disastrous. Later that year an unofficial referendum organised by the National Council of Bishops and Jubilee 2000, asking whether Brazil

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should discontinue the IMF-backed policies, reported that more than 90% of the 5.5 million people who voted supported ending those policies, as demonstrations drew millions of participants in all the main cities (Bassegio, 2000; Woodroffe and Ellis-Jones, 2000; Buxton, 2004, p 56). A similar series of contests over the conditions attached to IMF grants and loans was played out in Ecuador, where the protestors called for the resignation of Jamil Mahuad, the elected President, as the economy faltered, US Treasury Secretary Larry Summers pledged support for Mahuad, and indigenous protestors marched on the major cities. In January of 2000, protestors occupied the Congress building, the President fled, and the military took temporary power until a new President, Gustavo Noboa, took office and vowed to continue the IMF reforms. The teachers went on strike, and then a general strike organised by a coalition of unions unfolded, while protests in Quito by the indigenous continued (Collins, 2000; Lucero, 2001). Roughly similar scenarios involving conflicts between insurgent popular groups, the IMF, and elected authorities played out in other Latin American countries. The results with which we are familiar are the routing of one presidential regime after another, for example in Ecuador, Chile, Brazil and Argentina, as they attempted to implement IMF and US backed policies in the face of popular insurgency and the electoral opposition the insurgency propelled. Between January 2005 and May 2009, 14 of 19 presidential elections in Latin America resulted in the victory of candidates associated with left-leaning parties or movements (Murillo et al, 2010). There were other less celebrated consequences. The boldness of Argentina in its decade long standoff with international creditors is one (Brown, 2014; Stevenson, 2014). The efforts of national governments to block price hikes or raise wages is another. The IMF was chastened, and its reports began to worry over its own policies as they questioned the assumption that inequality promoted growth (Ostry et al, 2014). When told at a 2014 press conference by a journalist from Ghana that many people there had ‘a phobia for the IMF’ in reaction to past experiences with structural adjustment programmes, IMF chief Christine Lagarde responded: ‘Structural adjustment? That was before my time, I have no idea what it is. We don’t do that anymore’ (Agence France-Presse, 2014). Another important consequence was the spread of CCTs across the South American continent, now with the approval of the IMF and the World Bank. To be sure, the insurgents did not succeed everywhere. The protest politics of the poor did not succeed in Colombia, where the US maintained a strong presence, and it did not succeed in

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Honduras, where a coup backed by the US toppled a more populist president. Nevertheless, the scale of the protests and their persistence were remarkable, and so was the impact they made on social policy. In 2012, the United Nations issued a report that poverty rates in Latin America had dropped to their lowest levels in two decades, from 48.4% to 31.4%, while the rate of extreme poverty had fallen from 22.6% to 12.3% (United Nations, 2012; see also UN News Centre, 2011; Geier, 2014). One reason was an increase in wages. Another was the boost in public spending, and particularly social programme spending, in most of the countries in the region. Gini coefficients also declined, from 58 in 1996 to 52 in 2011, and this in Latin America, one of the most unequal areas of the world. A World Bank study reported similar statistics on the decline of overall inequality as measured by the Gini coefficient, and went on to say that almost half of the decline was due to a more equal distribution of non-labour income. ‘Taken as a whole, government transfers’ equalising effect stemmed primarily from the expansion in their coverage (especially among the poor)’ (Lustig et al, 2013). The key government programmes in accomplishing this remarkable feat were the CCTs: Jefes Y Jefas de Hogar Desocupados in Chile, Bolsa Familia in Brazil and Progresa Opportunidades in Mexico. Our point is not of course that these programmes constituted technical policy breakthroughs. Indeed, the programmes tend to be simplicity itself: distribute cash to mothers, on condition that they send their children to school and take them for medical checkups. Moreover, other improvements in social welfare policy also mattered. Our point rather is that these remarkable achievements were the accomplishment of the politics of the poor, a politics that unfolded in an institutional context that, however imperfectly, still allowed for a measure of democratic accountability through electoral-representative institutions.

Conclusion Welfare state theorising has always been nourished by attempts to analyse contemporary events. In that spirit, we intend our discussion of the very different consequences of disruptive protests in Europe and Latin America to be suggestive of new theoretical approaches that might improve our ability to analyse changes in social policy in a neoliberal world. To better understand the drivers of welfare state restructuring, we argue for an approach that pays attention to the role of movements and disruption from below and the institutional and interdependent context within which this ‘politics of the poor’

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unfolds. Such an approach explains seemingly disparate developments in social protection in Europe and Latin America: retrenchment in the former and expansion in the latter. Key to an understanding of when protest compels an ameliorating governmental response is the degree to which the institutional context exposes or immunises elites against disruption. To be sure, protest is necessary, but to produce the desired policy response it must achieve strategic leverage by exploiting the vulnerabilities of elites. In capitalist democracies, elite vulnerability is filtered through electoral-representative arrangements, which is why movements that threaten the stability of electoral and governing coalitions have sometimes succeeded in winning state concessions against the predations of capitalists. In the contemporary European case, the erection of supranational governing institutions in the building of the European Union in part explains why austerity has been implemented apace, despite impressive protests against these policies. The move to European integration was also a move to better insulate elites, leaving an institutional context that is now less responsive to the demands of popular democratic politics (electoral or protest) than the nation state was in the past. The Latin American case demands a longer view. We argued that the varied popular uprisings there of the last 30 years have led to dramatic changes and a ‘left turn’ in the governance of many Latin American countries. Protests against the IMF’s austerity programmes of the 1980s helped to bring to power left-wing populist parties that contributed to the adoption of new forms of welfare provision. Elites in a democratising Latin America, where the welfare state and the nation state remain tethered together, have been more vulnerable to a politics that demands its elected officials address poverty and need. In conclusion, we think our theoretical approach has something to say about why the Occupy movement, which successfully reintroduced the language of inequality to American politics, has nevertheless had little effect in changing the politics of the welfare state in the United States. Occupy was a weak form of a politics of the poor. In the face of considerable state repression, it has so far been unable to achieve the relatively high levels of disruption or unruliness that are required to overcome barriers to policy reform embedded in the institutional arrangements of state authority. These institutional features have long conditioned the effectiveness of protest in the US (Piven and Cloward, 1993). They include federalism and the fragmentation of state power; weak political parties and a two-party system that drives politics to the centre; and a Supreme Court with the capacity to wreak havoc

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on democratic politics through the power of judicial review. US constitutional arrangements favour decentralisation in the domestic policy sphere; at the same time, national institutions were designed to withstand the pressures of popular politics, with their dividing of legislative, executive and judicial power, and the undemocratic features of those institutions (for example, lifetime tenure for unelected federal judges) resulting in the creation of multiple veto points that favour elite manipulation. The US is perhaps the worst case of welfare state development in a rich country. Nevertheless, movements in the US have sometimes succeeded in forcing major reforms in policy. Indeed, movements have been the major forces in propelling reform. Such successes depended on their ability to create disruptions that penetrated the systemic obstructions of the American political system. Maybe, just maybe, our analyses can contribute to movement success by helping to identify the institutional lacunae that are opportunities for movement power, in the US and elsewhere. Notes Harvey emphasises that the main achievements of neoliberalism have been redistributive rather than generative, with redistribution accomplished through the commodification and privatisation of land and other common and collective rights into private property rights, as well as the appropriation of assets and the uses of credit to extort wealth. 1

By labour market flexibilisation we refer to changes that increase the subcontracting and contracting out of employment, and overall, reduce the security of employment, hours worked and wages. For a discussion of these trends, see, Van Eyck (2003). 2

3

Paul Pierson has for some time argued for the institutional stability of the European welfare state as a result of ‘path dependence’ (Pierson, 1994, 1996). In a recent exposition of his views, Pierson maintains this argument (Pierson, 2011). While acknowledging cutbacks, he nevertheless emphasises the ‘striking level of stability in benefits’. However, his data does not include recent austerity-induced reductions in both coverage and generosity across many social welfare programmes. 4

The evidence is available both in the data on absolute and relative poverty. For an account that draws on recent data from the Organisation for Economic Co-operation and Development (OECD) Statistical Extracts see Edsall (2013a, 2013b). The poorest tenth of Americans have income well below the OECD average. Therborn (2012) also discusses the ramifications of poverty and inequality on individual and social wellbeing. On 4 September 2014, the United States Federal Reserve Bank reported that

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Crisis, convulsion and the welfare state for the top 10% of American families, average income rose by 10% between 2010 and 2013, while it remained flat or falling for the remainder of the population (Bricker et al, 2014). For a study which concludes that the increase in US inequality is more permanent than transitory, see DeBacker et al (2013). 5

Yörük argues that in Turkey, at least, developments ‘provide support for Piven and Cloward’s thesis that relief for the poor is driven by social unrest, rather than social need.’. 6

Subsequent cross-national research produced evidence to dispute the causal connection between urbanisation and industrialisation, and the timing of the adoption of national social insurance programmes (Collier and Messick, 1975; Flora and Alber, 1981). 7

This includes state-centric approaches, which emphasise the initiative of bureaucratic actors (Heclo, 1974; Weir and Skocpol, 1985). Building on the state-centred approach, Weir et al (1988) identify institutional limits, shifting political coalitions and ‘policy feedbacks’ as the key variables in an ‘institutional–political process’ explanation of the welfare state. More recent studies of comparative political economy add a range of ‘process’ and institutional explanations for welfare state spending, further blurring the distinctions between power resources and other political process models, and statecentric and other institutional approaches (Hicks and Misra, 1993; Hicks, 1999; Huber and Stephens, 2001; Swank, 2002; Häusermann et al, 2013).

8

We note that because business support for welfare state programmes is typically a reflection of the need for workforce stability, a need precipitated by labour unrest, it is often hard to disentangle business and working class interests.

9

The examples offered notwithstanding, the literature connecting protests from below to poverty policies is modest. Perhaps this is at least partly owing to the fact that protestors do not usually proclaim poverty as such to be their grievance (Bebbington et al, 2010).

10

Decentralisation of decision making to the subnational or local level may also constrict responses to politics from below, not only because local resources are limited, but because local policies of surveillance and discretion can effectively gut the programmes and yet be nearly invisible to broader publics and, indeed, even to those who are the victims of these policies. 11 For these reasons also, responses to rioters in Britain and France were different, as Didier Chabonet (2014) has shown.

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Stephens, J.D. (1979) The transition from capitalism to socialism, London: Macmillan. Stevenson, A. (2014) ‘As talks falter, bond default by Argentina likely’, New York Times, 30 July, p B1. Streeck, W. (2014) Buying time: The delayed crisis of democratic capitalism, translated from German by P. Camiller, New York: Verso. Supiot, A. (2012) ‘Under Eastern eyes’, New Left Review, vol 73, pp 29–36. Swank, D. (2002) Global capital, political institutions, and policy change in developed welfare states, Cambridge: Cambridge University Press. Swenson, P. (2002) Capitalism against markets: The making of labor markets and welfare states in the United States and Sweden, New York: Oxford University Press. Swenson, P. (2004) ‘Varieties of capitalist interests: Power, institutions, and the regulatory welfare state in the United States and Sweden’, Studies in American Political Development, vol 18, no 1, pp 1–29. Teichman, J. (2008) ‘Redistributive conflict and social policy in Latin America’, World Development, vol 36, no 3, pp 446–60. Therborn, G. (2012) ‘The killing fields of inequality’, International Journal of Health Services, vol 42, no 4, pp 579–90. UN News Centre (2011) ‘Latin American poverty levels fall to lowest in two decades’, UN report finds, www.un.org/apps/news/story. asp?NewsID=40575&Cr=&Cr1#.VClTGUsVxFw UNICEF Innocenti Research Centre (2012) ‘Measuring child poverty: New league tables of child poverty in the world’s rich countries’, Innocenti Report Card 10, Florence: UNICEF Innocenti Research Centre, www.unicef-irc.org/publications/pdf/rc10_eng.pdf United Nations, Economic Commission for Latin America and the Caribbean (2012) ‘Social panorama of Latin America 2012’, Briefing paper, www.cepal.org/publicaciones/xml/4/48454/ SocialPanorama2012DocI.pdf Van Eyck, K. (2003) ‘Flexibilizing employment: An overview’, SEED Working Paper No. 41, InFocus Programme on Boosting Employment through Small Enterprise Development, Job Creation and Enterprise Department, International Labour Office, www.ilo. org/wcmsp5/groups/public/@ed_emp/@emp_ent/@ifp_seed/ documents/publication/wcms_117689.pdf Vilas, C.M. (2006) ‘Neoliberal meltdown and social protest: Argentina 2001–2002’, Critical Sociology, vol 32, no 1, pp 163–86. Walton, J.K. (1989) ‘Debt, protest, and the state in Latin America’, in S. Eckstein (ed), Power and popular protest: Latin American social movements, Berkeley: University of California Press, pp,. 299–328.

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Walton, J.K. (1998) ‘Urban conflict and social movements in poor countries: Theory and evidence of collective action’, International Journal of Urban and Regional Research, vol 22, no 3, pp 460–81. Walton, J.K. and Ragin, C. (1990) ‘Global and national sources of political protest: Third World responses to the debt crisis’, American Sociological Review, vol 55, no 6, pp 876–90. Walton, J.K. and Seddon, D. (1994) Free markets and food riots: the politics of global adjustment, Cambridge, MA: Blackwell Publishers. Weir, M. and Skocpol, T. (1985) ‘State structures and the possibilities for Keynesian “responses” to the Great Depression in Sweden, Britain and the United States’, in P. Evans, D. Rueschemeyer and T. Skocpol (eds), Bringing the state back in, New York: Cambridge University Press, pp 107–63. Weir, M., Orloff, A.S. and Skocpol, T. (1988) ‘Introduction: Understanding American social politics’, in M. Weir, A.S. Orloff and T. Skocpol (eds), The politics of social policy in the United States, Princeton, NJ: Princeton University Press, pp 3–27. Weisbrot, M. (1999) Globalization: A primer, Center for Economic and Policy Research, www.cepr.net/documents/publications/ globalization_primer_1999_10.pdf Wilensky, H. (1975) The welfare state and equality, Berkeley: University of California Press. Wilensky, H. and Lebeaux, C.N. (1965) Industrial society and social welfare: The impact of industrialization on the supply and organization of social welfare services in the United States, New York: Free Press. Woodroffe, J. and Ellis-Jones, M. (2000) ‘States of unrest: Resistance to IMF policies in poor countries’, World Development Movement Report, www.nadir.org/nadir/initiativ/agp/free/imf/unrest.htm Yörük, E. (2013) ‘Welfare provision as political containment: The politics of social assistance and the Kurdish conflict in Turkey’, Politics and Society, vol 40, no 4, pp 517–47.

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A new politics of welfare Kevin Farnsworth and Zoë Irving

Prior to 2008, the idea of austerity in popular discourse was captured in its cultural–political association with post-war lives – frugality and the ‘make do and mend’ approach to consumption, that contrasts sharply with the waste and disposability that characterise advanced economies in the twenty-first century. With more specific reference to social policy, the work of Paul Pierson (1998; 2001, pp 411–13) on ‘coping with permanent austerity’ provided a new perspective on the nature of the fiscal stress that afflicted advanced economies from the 1970s. In this he argued that in addition to the brake applied by institutions to radical change, such was the strength of political mobilisation in support of the welfare state that its continuing presence was basically secure. What the chapters in this book have shown is that this basic security is now threatened in ways hitherto not foreseen. Since 2008, austerity has taken on far greater significance as the logic driving fiscal decisions, but also as an ideological tool with which the state can be whittled away. Despite its significance for public policies and welfare states however, as pointed out in the introduction to this volume, austerity in the ‘new age’ is not in reality so easy to define or measure. The ambiguities deriving from its role as both economic and political strategy are its strengths. In economic terms, it is difficult to mount a credible intellectual challenge to an idea that is so modest – captured in Mr Micawber’s happiness–misery adage in Michael Hill’s chapter – and yet so fantastical – the notion of ‘expansionary fiscal contraction’ professed by modern day proponents. In political terms, it is also difficult to challenge policies that are pre-packaged as essential medicine that is ‘harmful if swallowed’. As Bob Jessop notes, the politics of austerity is ‘crafty’ and electorates have mainly voted for harm. The difference between this age and the past lies in this successful framing of austerity as the only way forward, its transposition from an underlying condition of governmental constraint to an active governmental strategy, and the various ways in which sources of opposition have been blocked.

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The chapters in this volume have addressed questions emerging from four broad themes that we consider essential to a better understanding of austerity in the post-2008 context. Firstly the temporal dimensions, that is, the way in which austerity in the current age is linked to the past and what it implies for the future; secondly, the true costs of austerity beyond revenue/expenditure calculations; thirdly, a more abstract concern with the operation of austerity within a global transformation of capitalism; and lastly the possibilities for alternatives. Each of the contributors tackles these themes in different ways, but all are clear that the current age is not just a temporary malfunction in the progress of the welfare state, and that despite its analytical amorphism, austerity is proving a prevailing and transformative force. Of course, in the end a book like this, taking as its subject relatively new transformations within the economic and political spheres, raises many more questions than it is able to answer. One purpose of the book is to reflect on what has happened, but also to consider future possibilities. Here one question in particular arises. Comparing the current austerity economies to the preceding underlying condition of austerity, are we only now living in times of permanent crisis and austerity? Although the full-blown international banking crisis occurred in 2007, it spurred a number of further crises and these are still not over. It may yet be more sensible to talk of an age of crisis (that privileges austerity) rather than an age of austerity, and this renders the future for the welfare state even less clear. Welfare states have weathered the ‘global’ crisis in different ways, but it is clear that for some economies, new economic and political crises linked to 2007 are still to emerge. It is important to remember, for example, that Greece and other economies within the Eurozone were barely affected by the initial banking crisis, and it is international governance (or more accurately world regional governance in the form of the European Union, European Central Bank and the IMF) that has shaped national responses to the Great Recession within the Eurozone. Michael Hill’s chapter points to the importance of history in emphasising that in some key ways we have been here before. What is also apparent in his chapter is that while policy follows distinct paths at different times, these paths are not cut in certainty of the outcomes. This is important because, whilst governments today face similar or much lower levels of debt than they have previously, they do so with much larger (welfare) states. Moreover, governments in the past have operated within the confines of austerity whilst expanding social policy measures to protect citizens. The current age of austerity is a ‘new’ age in this respect. As Hill reminds us, whilst crises certainly have the

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potential to lead to major paradigmatic transformations of the welfare state, we cannot yet know what the outcome of the current age will eventually be. Indeed, taking the long view, it may be that the current age of austerity is simply an extension of the ‘old’ age of austerity that was interrupted by the relatively short ‘golden age’ of the welfare state. This is certainly a view that is reinforced in Chapter Four, where Bob Jessop suggests that the welfare state and period of ‘plenty’ were built on unstable economic and political foundations. If it is accurate, the picture that emerges from the ‘hiatus’ view of the welfare state is not a positive or optimistic one for those who believe in comprehensive provision funded by systems of progressive taxation. Reverting to a pre-welfare state is worrying enough, but in attempting to count the costs of the crisis it is apparent that the condition of society expected to thrive in this ‘new age’ would be politically fractured and economically weak. As Chapters One and Two both demonstrate, under the banner of austerity the socialised costs of the crisis and the social costs of retrenchment are compounded by the economic costs of unemployment, lack of creation of decent jobs, insolvencies and accelerated regional decline. The evidence suggests this future is well within the realms of imagination. Governments have imposed deep cuts on expenditure and services, and, as Chapter One illustrates, there is a lot more austerity to come. Government economic strategies are based on economic recovery plans that, in the context of low growth projections and ongoing crises within a number of states, look wildly optimistic. Meanwhile, governments look to make cuts in areas of discretionary expenditure while prioritising non-discretionary expenditure, including the costs associated with servicing debt and the costs of fulfilling obligations to continue to pay an increasingly large number of private companies that are under contract with the state. After cutting benefit levels and tightening the rules of entitlement; after using up available reserves and selling off assets and forcing the various parts of the national and local state to do similarly; and after cutting pay, raiding public sector pensions and shedding employees, the opportunities to impose the remaining cuts without comprehensively transforming and hollowing out the state are running out. This is especially the case where governments have ruled out tax increases. Another factor that is seldom acknowledged is captured by the idea of a reconfiguration of the welfare state. Chapter One also pointed out that austerity is taking the capacity out of welfare states and changing the direction, role and function of social policies in a way that is difficult to reverse. In Chapter Two, Stephen McBride also raises the important issue of a shift towards constituted austerity – where current

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governments (or governmental bodies such as the EU) set rules that bind future governments to balanced budgets. Thus, austerity is shifted from ‘politics’ to ‘law’ at huge cost to democracy. On the third theme, the question simply put is to what extent is austerity leading to a permanent reconfiguration of the welfare state? Chapters One and Four both indicate that the direction of economic change coupled with wider structural changes within capitalism mean that it is difficult for governments to resist measures that signify permanent changes to the shape of welfare states. The major changes to social policies since the 1980s have been to increase the extent to which they help to support national economic strategies, and the economic crises since 2007 have only deepened this imperative. There is little doubt that neoliberalism has transformed social and economic life, expanding markets against politics and deepening the divide between the winners and losers. Bob Jessop’s chapter, in common with ours, raises fundamental questions over the sustainability of welfare states both prior to, and following, the financial crisis and Great Recession. If the foundations of the welfare state were unstable to begin with, the ‘solutions’ to the current crises, which include austerity, risk destabilising welfare states and capitalist economies even further. Cutting public sector jobs and expenditure undermines both consumption and social security (in its broader sense), which in turn undermines the whole system of personal debt and credit upon which contemporary capitalism is based. An alternative to this system requires fundamental challenges to the distribution of wealth and power with which, despite mounting evidence of widening inequalities and their insidious effects, governments appear largely unwilling to engage. Even if governments were willing to embark on a more redistributive project, their exercise of more authoritarian political power belies a significant weakening in the economic power of the state. Nor is the problem simply that austerity undermines the basic operation of contemporary (or postFordist) capitalism as it has operated since the 1970s. Austerity is itself based on the fanciful assumption that there will not be another major economic slowdown or crisis between now and the moment debt has been pared back to sustainable levels (whatever that level is deemed to be) and economies have been rebalanced. On present projections this is likely to take at least 20 years. What hope is there that economies will not face another economic crisis by then? The future does indeed appear bleak. However, as Chapters Five and Six demonstrate, there are alternatives. New policy options may arise as governments and international governmental organisations accept

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that austerity cannot deliver the growth that is sought. The European Central Bank’s announcement in early 2015 of plans to revive the Eurozone through quantitative easing signals a change in direction, no matter how slight. The fact that austerity cannot achieve the economic goals on which its political support depends is, in fact, its core weakness. The problem has been that as Skocpol (IPPR, 2012) has suggested, the 2008 crisis was an ‘opportunity for the well-prepared’ and although the evolving crises since 2008 have presented fundamental opportunities for change as well as more specific policy windows, supporters of alternatives to austerity were clearly not prepared at all. This lack of preparedness is allowing the ‘problems’ and their causes and solutions to be framed in ways that cement and rebrand neoliberalism and its core values of minimal welfarism and the small state. In Chapter Five, Dexter Whitfield and John Spoehr highlight the unsustainability of austerity on its own terms, which are as compelling as the moral critique made elsewhere in the book. Whitfield and Spoehr go furthest in documenting alternatives, many of which have a basis in measures already on the policy agendas of governments and international organisations. The key factors in determining whether these alternatives are pursued by and/or imposed on decision makers by citizens are, as Chapter Six maintains, political agitation and political struggle. For Frances Fox Piven and Lorraine Minnite, the struggles of those most affected by the crisis and austerity are critical to the future of social policy. This leads to the question of how far the crisis and period of austerity is transforming national politics. Europe has witnessed a rise of the political right and a general delegitimisation of mainstream politics and political parties. Generally speaking, the Right has been more successful in capitalising on the crisis than the Left. This is important since theories of welfare state development suggest that a coordinated Left is important to the establishment of progressive social policies. One of the additional costs of austerity, however, is the political demobilisation of support for the welfare state. Fewer stakeholders in the public sector as jobs are lost, fewer potential beneficiaries as social protection entitlements are whittled away and services privatised or abandoned, and lower expectations of support in older age, all contribute to the manufacture of a wider public understanding of the welfare state as a residual burden rather than a collective good. In concluding this volume, hope does not lie in simply wishing the crisis away, but nor does it lie in assuming that welfare states will remain resilient in the face of current pressures, just as they have in the past. Hope relies upon facing up to fact that welfare states may not survive

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the current political and economic onslaught intact, and that salvaging their core principles is imperative. There are indications of a break, not just from austerity, but from the neoliberal orthodoxy that conceived it: the election of a radical anti-austerity party in Greece is one; the incoherence of austerity discourse amongst international organisations is another. Alongside its failure to deliver on its economic promise, politics can determine whether austerity may yet reach its limits. References IPPR (2012) ‘Juncture interview: Theda Skocpol’, Juncture, vol 19, no 1, pp 34–40. Pierson, P. (1998) ‘Irresistible forces, immovable objects: Post-industrial welfare states confront permanent austerity’, Journal of European Public Policy, vol 5, no 4, pp 539–60. Pierson, P. (2001) ‘Coping with permanent austerity: Welfare state restructuring in affluent democracies’, in P. Pierson (ed), The new politics of the welfare state, Oxford: Oxford University Press.

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Index

Note: Page numbers for figures and tables appear in italics.

‘99%’ 3, 147 1945–51 period of austerity 50–4 2008 global financial crisis see financial crisis, global, 2008

A Aarhus 117 accountability, democratic 124 accumulation 91, 103 finance-dominated 94, 100, 106 via dispossession 94 ‘age of austerity’ 50 Age of Austerity 1945–1951 (Sissons and French) 13 agitation, political 175 ahistoricism 3 Albo, G. 99 alcohol and poverty 78 America 98, 107, 127, 153–8, 159 see also Canada; United States (US) American Recovery and Reinvestment Act 2009 (ARRA) 113 Anderson, Perry 150–1 Argentina 155, 156, 157 Armingeon, K. 14 Arrighi, G. 154 Asia 132 see also Japan Atlantic Fordist regimes 90–1 austerity polity 97 Australia 114, 115, 124, 129 Austria 117 Austro-Hungarian debt 90 authoritarian competitive statism 100 authoritarian crisis of constitutionalism 99–100

B Bacon, R. 59, 91 bailout countries 114 balanced budgets 68, 80, 102

balance of payments 54, 62 Baldwin, Stanley 47 Ball, L. 114 ‘bankers’ ramp’ 49 banking debts 73 banking union, single currency 121 Bank of England 61 Bank of International Settlements 121 bankruptcy 104 banks 10, 11, 61, 73, 100, 104, 119, 120, 121 see also central banks; World Bank Barnett, C. 51 Bassanini, A. 129 Bechtel Corporation 156 Becker, J. 70 Beckett, A. 54 Bellofiore, R. 70 benefits 47, 57–8, 131 cuts 16, 17, 114 Bermeo, N. 11 Beveridge Report 51 Bevin, Ernest 49 Bivens, J. 118 Blair, Tony 61 Blyth, Mark 3, 11, 12, 29, 35, 79, 88–9 on inflexible exchange rates 53 on policy making 58 and voluntarism 37, 43 Bolivia 156 Bolsa Familia 153, 158 bonds 119, 120 Boothby, R. 48 borrowing, public 61, 91 Bramall, R. 12, 88 Brazil 153, 155, 156–7, 158 Britain 44–64, 129 see also UK (United Kingdom) Brown, Gordon 9–10, 61 Bruff, I. 99

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Social policy in times of austerity budgets 68, 80, 81, 102 deficits 69 laws 80 bureaucracies, public 58 business regulations 144

C Cairncross, A. 52 Callaghan, James 55 Cameron, David 152 Canada 73–4, 80, 114, 126, 127, 132 income 76, 77, 131 capital 38, 95, 96, 97, 98–9, 101, 102, 106 capitalism 97, 106–7, 148 capitalist elites 68 Cardoso, F.H. 154 cash hoarding 132–3 Cassidy, J. 55 CCTs (Conditional Cash Transfers) 147, 153–4, 157, 158 central banks 61, 75, 80 ECB 38, 69, 103, 104, 113–14, 175 Cerny, P. 37 CETA (Canada–European Comprehensive Economic and Trade Agreement) 122, 133 Chicagoan neoliberalism 94 child poverty 78, 146 Chile 31, 153, 155, 157, 158 China 92, 101–2 Churchill, Winston 50 Clarke, J. 12 Clarke, P. 48 Clark, T. 44 class 98 clean energy 116–17 clientelism 153, 154–5 Cloward, R.A. 149 Colombia 157 commissioning 123, 124 competitive austerity 99, 100 competitiveness 69 Confederation of German Trade Unions 117 conjunctural austerity policies 97 Conservative Party 46, 53, 60 consolidation state 100 constituted austerity 173–4 constitutionalism 99–100 consumer production 13 consumption 130, 174 contract culture 123 contracyclical deficit finance 90 cooperation, international 133

Copenhagen 117 corporate sector 131–3 tax rates 126–7 costs 67, 71–8, 81 courts, European 81, 151–2 credit markets 34 credit money 95 credit rating agencies 122 Cripps, Stafford 50–1, 52 crisis management 94 ‘criticality’ 3 Crouch, Colin 10, 34, 100 ‘crowding out’ hypothesis 59 cultural political economy (CPE) 87–107 currency devaluation 53, 60, 68 customs duties 45 cuts effect on welfare state 37, 38, 173 benefits 16, 17, 114 expenditure 15, 18, 25–6, 29, 49, 53, 68, 78, 116 Cyprus 105, 128

D Daily Herald 49 Daily Mail 152 debt 11, 38, 67, 69, 74–5, 96, 114, 145, 172, 174 Austro-Hungarian 90 banks 73 EU 103 growth in peacetime 91 household 130 and IMF 107 private 34, 106 reduction 25–7, 68, 127–8 repayments 25 restructuring 128 UK 45, 46, 51 US 100, 101 decision making, democratic 125 deficits, structural 128 deflation 115 Dell, E. 52, 53, 57 Demirovic, A. 99 democratic accountability 124, 133 democratic innovation 124 Denmark 31, 117, 129 deregulation 93 devaluation of the pound 53, 60, 68 die Linke 105 Dilnot, A. 44 direct costs 71–5 direct taxation 61, 93

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Index ‘disciplinary democracy’ 99 disposable income 76, 77 ‘diswelfare’ 30 dollar, exchange rate 52 Duffy, S. 16 Dullien, S. 70

E Earned Income Tax Credit (EITC)/ US 131 East Asia 132 see also Japan Economic and Monetary Union (EMU) 70, 103 economic output 114–15 economic restructuring 93 Ecuador 153, 157 education spending 25 elites 68 vulnerability 159 Elsner, W. 96 Eltis, W. 59, 91 emigration 71, 72 employee flexibilisation 32 employers 32, 60 employment 32, 51, 69, 91, 118, 133 enduring politics of austerity 97–8 energy 116–18 entitlement reductions 101 environment, impact of spending 18 Epstein, G.A. 95 Esping-Anderson, G. 145 Estonia 18 Europe 127, 144, 175 see also European Union (EU) European Central Bank (ECB) 38, 69, 103, 104, 113–14, 175 European Commission 104, 105 European Court of Justice 81 European Economists for an Alternative Economic Policy for Europe 117, 120 European Fiscal Pact 128 see also Fiscal Compact European Investment Bank 119 European Stability Mechanism (ESM) 120–1 European Trade Union Confederation 116 European Union (EU) 36, 69–70, 75, 79–80, 102, 132 bailout countries 114 Financial Transaction Tax 120, 125 integration 99 investment 116

supranational governing institutions 150–3, 159 taxation 126 TISA 133 unemployment 31 Eurozone 29, 60–1, 70, 93, 99, 105, 107, 115, 172 bank lending 114 crisis 11, 98, 102–4 ESM 120–1 Greece exit 106 institutions 150 quantitative easing 175 exchange rate mechanism 60 exchange rates 52, 53 expansionary policies 79 expenditure 15–27, 28–9, 98 1997 Labour Government 61 and ‘crowding out’ hypothesis 59 cuts 49, 78, 116, 174 infrastructure 118–19 and Keynesianism 60 pushed up before general elections 58 and revenues 91, 101 war 46, 53, 63 export balances 70 export based profit-producing capital 99

F

Fabbrini, F. 80 Fabre, G. 101–2 Faletto, E. 154 Fanelli, C. 99 Federal Reserve Bank of Dallas 73 fictitious capital 95 fictitious credit 96 finance-dominated accumulation 94–6, 100, 106 financial capital 95, 96, 98–9 financial crises, explanation for 96 financial crisis, global, 2008 1, 9, 10–11, 67, 98–9, 100–1, 172 costs of 73 and fiscal consolidation 113–14 and Skocpol 175 financialisation 95, 129 financial markets, reform 120–2 Financial Stability Board 122 Financial Transaction Tax 119, 120, 125 Finland 18, 19 First World War 90 fiscal cliff debate 100, 101 Fiscal Compact 79–81, 104 fiscal consolidation 68, 69, 70

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Social policy in times of austerity fiscal stimulus 69, 79, 113 fiscal union 103 fisco-financial crisis 89–91, 95, 97, 99 flexibilisation, labour market 69, 145 Fordist period 106 fossil fuel imports 116 France 31, 104, 115, 117, 129, 131, 149, 152 free trade agreements 122, 133 Freiburg 117 French Front National 38 French, P. 13 Friedman, Milton 56, 57 full employment 51 Fumagalli, A. 98 functioning capital 95

G G20 70, 113, 114 Gaitskell, Hugh 53 Gamble, A. 11, 63 GDP (gross domestic product) 67 and debt 45, 59, 68, 74 Europe 114, 116 per capita 72–3 and public expenditure 15–16, 25, 29, 53, 63 generations, future, debt burden 75, 81 George, Lloyd 46, 46–7, 48, 49 Germany 18, 70, 93, 94, 105, 106, 107 economic output 102–3, 115 energy policies 117, 119 and fiscal consolidation 113–14 income 131 unemployment 31, 71–2 Gilbert, B.B. 47 Gilbert, M. 48 Gini coefficient 76, 158 Gladstone, William 45 global financial crisis, 2008 see financial crisis, global, 2008 global South 147, 149 Gold Standard 47, 48, 49, 50, 52, 90 Gothenburg 117 governments debt 25–7, 38 France 117 G20 113 local 16, 25 planned expenditures 28 Syriza 105 UK 44–64, 115 US 118 withdrawing support from welfare state 36, 37

Gramsci, A. 90, 99 Great Depression 90 Greece 72, 76, 105, 107, 172 consumption boom 130 debt restructuring 128 economic output 115 employment 32 expenditure 15, 20 GDP per capita 73 politics 38, 176 privatisation 74 protests 149, 152 social spending 18 unemployment 29, 71, 114 Green, C. 91 Green Investment Bank 120 Grinspun, R. 80 growth 38, 57, 59, 67, 68, 127, 128 and IMF 107, 115 Guerot, U. 70

H Halevi, J. 70 Hall, P.A. 54 Hamburg 117 hardship 12, 13 Harvey, D. 152 Hattersley, R. 46 Heald, D. 59 health 25, 77, 78 Healy, T. 73 Heath, Edward 54 Heipertz, M. 79 Hill, M. 59 Hills, S. 45 Hindmoor, A. 58 Hobsbawm, E. 155 homelessness 72 Honduras 158 household debt 130 housing 18 prices 114 Hudson, M. 96 Hungary 15, 115

I IAGS (Independent Annual Growth Survey) 31 Iceland 128 ILO (International Labour Organization) 107, 129, 130 IMF (International Monetary Fund) 36, 55–6, 69, 104, 105, 106, 133 on debt reduction 128 and fiscal rebalancing 27

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Index Global Financial Stability Report 2014 122 on growth 38, 107 growth- and job-friendly fiscal policies 115 and Latin America 154, 155–7, 159 import duties 46 income 33–5, 67, 75, 76, 77, 107, 129–31, 133 income maintenance support 31 income support programmes 145, 153 income tax 27, 45 see also taxation indebtedness 63 Indignados movements 152 indirect socioeconomic costs 67, 75–8 indirect taxation 45 individualisation 68 industrial investment 116–18 industrialism, logic of 147–8 inequality 107, 114, 125, 145, 147, 158, 174 income 33–4, 75–6, 77, 130–1, 133 intergenerational 32 inflation 54, 57, 58, 59–60, 62, 63, 115 and Cripps 52 and debt 68 high performance 55 low 51 monitoring by Bank of England 61 infrastructure spending 118–19 in-house provision, public services 123 innovation 116, 124 insecurity 29–30, 72, 78 interest-bearing capital 95, 96, 98, 99, 101, 106 interest rates 57, 61, 75, 91, 103, 115, 121 intergenerational inequalities 32 international cooperation 133 International Institute for Labour Studies 35 internationalisation of the circuits of capital 92, 93 inter-war period 46–50, 63 inverse welfare law 32 investment ratio 132 Ireland 18, 32, 69, 76, 114 consumption boom 130 economic output 115 expenditure 21 GDP per capita 72, 73 income 131 unemployment 31, 71

Israel 15 Italy 32, 131

J Jager, J. 70 Japan 107, 129, 132 Jefes Y Jefas de Hogar Desocupados 158 Jenkins, R. 45 Jessop, Bob 150, 171 jobs 29, 32, 69, 91, 118, 133, 174 job satisfaction 124 Johannsen et al 153

K Karamessini, M. 73, 74 Keynesian policies 52, 53–4, 56, 60 Keynes, J.M. 47 Klein, Naomi 152 Korean War 53 Korea, South 132 Krätke, M. 89 Kreklewich, R. 80 Krippner, G.R. 95 Kynaston, D. 53

L Labour government 48–9, 51–4, 60–1 labour market flexibility 69, 145 insecurity 29–30 Labour Party 49–50, 115 labour share 129 Lagarde, Christine 157 Lapavitsas et al 70 Latin America 153–8, 159 Lawson, Nigel 57, 59–60 Lehman Brothers 10 Lewchuk et al 78 Lewis, T. 156 liberalisation 93 Liberal Party 46, 48, 49 Livingston, Ken 152 living wage 32, 131 local authorities/governments, cuts 16, 25, 115 logic of industrialism 147–8 Lucarelli, S. 98

M Macdonald, Ramsay 49 Mahuad, Jamil 157 Major, John 60 Manfredi, T. 129 market income 75, 76 Marquand, D. 49

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Social policy in times of austerity Marshall Plan for Europe (Confederation of German Trade Unions) 117, 119 May Committee 48–9 Mazzucato, M. 118 McBride, S. 80 Meacci, F. 95 Mertens, M. 27 Mertins-Kirkwood, H. 133 Mexico 153, 158 middle-income countries 147 military expenditure 53 see also wars, impact of minimum wage rate 131 Mirowski, P. 35, 96 mobility 32 monetarism 56, 57 monetary policy 75 monetary union 70, 103 money 91–2, 95, 99 Monnet, Jean 151 monopoly 58 Mosley, P. 58 Mowat, C.L. 48 Muller, Jan-Werner 151 multinationals 127 Munchau, W. 105

O Oberndorfer, L. 100 Occupy movement 3, 150, 159 O’Connor, J. 91 OECD 105 OECD Action Plan 127 Office for Budget Responsibility (UK) 25 O’Hara, M. 31 oil price 54 O’Keeffe, B. 69 Olivera, O. 156 Onaran, O. 130 Opportunidades 153 ordoliberalism 79, 94 outmigration 71, 72 outsourcing contracts 123, 124 ownership, public 123–4

P

N NAFC (North Atlantic Financial Crisis) 94, 98, 100, 102, 104 National Government 49 national income 129–31 national politics, effect of austerity 175 nation state 148, 149, 150, 155, 159 Nelson, J. 154 neoliberal authoritarian constitutionalism 99 neoliberalism 1–2, 3–4, 13, 38, 56, 68, 78–81, 144–5, 174 and Crouch 10 four types 93–4 neoliberal regime shifts 93, 100, 102 neoliberal system transformation 93 neo-mercantilism 103 net export balances 70 network industries 129 New Economics Foundation (NEF) 13 Newman, J. 12 New Path for Europe (European Trade Union Confederation) 116, 119 Ninos en Solidaridad 153 Noboa, Gustavo 157 North America 127 see also Canada; United States (US) Norway 34

part-time workers 32 pay 33–5, 75, 129, 130–1 payday loan companies 121 pensions 25, 131 permanent austerity 97, 99 Peru 155 Phillips curve 54, 60 Pierson, Paul 13, 171 Piketty, T. 27, 45 Pimco 35 Piven, F.F. 149, 152 Plan B 118, 119–20 Podemos 38, 105 Poland 15 political agitation 175 political parties, radical 38 political struggle 175 politics of the poor 148–59 Pontusson, J. 11 Ponzi debt 96, 99 the poor, protests by 148, 149–58, 159 Portes, A. 154 Portugal 32, 130 post-democracy 100 post-Second World War period 50–4, 63 post-war austerity 12–13 poverty 75, 77–8, 114, 131, 144, 145, 146, 147, 148, 158 power distribution 174 precarious employment 29, 32, 78, 133 primitive accumulation 96 private sector debt 34, 74, 106, 145

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Index investment 91 productivity 118 privatisation 68, 74, 91, 93, 96, 102, 116, 123, 145 Latin America 156 of network industries 129 ‘privatised Keynesianism’ 34 productivity 118, 129, 130 profit-producing capital 95, 96, 99, 101, 102 Progresa Opportunidades 158 property 95, 96, 99 protests 149–50, 152, 153–8, 159 public borrowing 61, 91 public bureaucracies 58 public choice theory 56, 57–9 public debt 67, 68, 74, 91, 96, 100, 114, 145 public debt ratio 127–8 public expenditure 15–27, 53, 59, 61, 63, 98 cuts 116 discretionary 38–9 infrastructure 118–19 Latin America 158 post-war 13 UK 115 US 101 public finance 95 Public Finance Initiative 61 public investment 118 public ownership 123–4 public–private partnerships (PPPs) 123, 124 public sector 38, 91, 118–20, 174 public service management 124 public services 37, 122–8

Q quantitative easing 38, 175

R Radice, H. 128 Rasmus, J. 99 rationing 51, 52 Reaganism 93 recessions 11 regime shifts 93 re-municipalisation 123 Report on World Risks (World Economic Forum) 107 resources, public investment 125 revenues and state expenditure 91 rights 37

riots 149–50, 152, 153–8, 159 Roberts, K.M. 153

S Sablowski, T. 99 Schäfer, A. 32 Schui, F. 43, 61 Schumpeter, J.A. 89, 90 Seddon, D. 154, 155 Seefeldt et al 77–8 Seoul summit 70 Seymour, R. 98, 99, 102 shadow banking system 121–2 shadow economy 127 Sinclair, S. 133 single currency banking union 121 Single Resolution Mechanism 121 Sissons, M. 13 Skidelsky, E. 59 Skidelsky, R. 49–50, 59, 75 Skocpol, T. 175 Snowden, Philip 48, 49 social care, UK 16 social expenditure 17–18, 53 social investment 36–7 social mobility 32 social policy initiatives 147 social programme spending 158 social protection 16, 31, 38, 146, 149 social rights 37 social risks 31–2 social security 25, 39, 116, 174 social services 25 social support 78 social welfare states 36 see also welfare states socioeconomic costs 75–8 solidarity 68 Solty, I. 99–100 South America 153–8, 159 South Korea 132 Spain 29, 31, 32, 38, 105, 114, 121 consumption boom 130 protests 149, 152 spending 13, 38–9, 69, 113, 115, 118–19, 158 cuts 15, 26, 27, 29, 68, 91 see also expenditure Stability and Growth Pact 79 stagflation 91 Stanford, J. 73, 132 Starke et al 15 the state expenditure 15–27, 91, 98 see also public expenditure

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Social policy in times of austerity intervention 38 support for unemployed 32 state owned non-financial assets 102 state-sponsored primitive accumulation 96 stimulus policies 80 stimulus spending 69 Stockhammer, G. 130 Stockman, D. 100 The strange non-death of neoliberalism (Crouch) 10 Streeck, W. 25, 27, 32, 100, 151 structural adjustment policies 155–6, 157 structural deficits 128 structural reforms 69, 74 struggle, political 175 subprime mortgage market, US 10–11 subsidies 32 Subsidio Unico 153 suicide 72, 78 Summers, Larry 157 Supiot, A. 151–2 supranational governing institutions 159 Sweden 18, 22, 117, 129 Switzerland 115 Syriza 38, 105, 106

T Taft, M. 73 take-home income 75 see also income taxation 25, 27, 49, 89, 90, 92 corporate 126–7, 132 cuts 93, 113 Europe 116 evasion 127 and Gladstone 45 increase 26, 75, 91, 114 increases 68 low 57 progressive 125 on the rich 144–5 UK 50, 52, 61, 63, 102 tax credits 32 Tax Justice Network 127 Taylor-Gooby, P. 25 TBTF (‘too big to fail’) banks 100 Tcherneva, P.R. 34 Thain, C. 59 Thatcher government 56, 93 Thatcher, Margaret 60 ‘Third Way’ 99 Thomas, R. 45

Thompson, H. 56, 61 three-day week 54 TINA (‘There is No Alternative’) 105 TISA (Trade In Services Agreement) 122, 133 Toronto Summit 70, 114 TPP (Trans-Pacific Partnership) 102, 122, 133 trade agreements 102 trade balances 58 trade unions 49, 52, 54, 131, 133 transfer payments 59 transnational capital 102 transnational profit-producing capital 101 transport 25 Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (Fiscal Compact) 79–81, 104 Troika 69 TTIP (Transatlantic Trade and Investment Partnership) 102, 122, 133 Turkey 31

U UK (United Kingdom) 44–64 corporations, support for 126, 132 cuts, effect of 25 economic output 115 emissions reduction 118 employment 32 expenditure 23 and Financial Transaction Tax 125 and fiscal consolidation 114 GDP per capita 72, 73 income 130–1 labour share 129 neoliberal regime 100, 102 Plan B 119–20 public sector reform 122–3 riots 149, 152 social spending 18 spending cuts 16 unemployment 29 underemployment 78 unemployment 29–32, 58, 67, 68, 71–2, 78 Eurozone 114 UK 47, 51, 54, 55, 56, 57, 60, 62, 63 US 77 unemployment benefit 116 United Nations 158 United States (US)

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Index cash hoarding 132 and co-dependence with China 92 corporate tax rates 126 costs of financial crisis 73 dollar, strength of 52 economic output 115 expenditure 24, 118 and Financial Transaction Tax 125 income 34, 130–1 income tax rates 27 jobs 118 and Latin America 154, 157–8 loans to the UK 51 and neoliberalism 94, 100–2 poverty 77–8, 145, 147 productivity 129 protests 149–50, 152 public spending 119 subprime mortgage market 10–11 tax evasion 127 welfare 159–60

workfare 102 Working Tax Credit (UK) 131 World Bank 154, 157, 158 World Health Organization (WHO) 78 Wright, M. 59

Y Yörük, E. 147 youth unemployment 71, 114

Z Zettelmeyer et al 128

V van Kersbergen et al 15, 36 variegated capitalism 92 VAT (value added tax) 125 Verdun, A. 79 Vienna 117 Volcker rules 43, 120 ‘voluntarism’ 37 vulnerability, elite 159

W wages 33–5, 75, 129, 130–1, 147, 158 Walker, A. 59 Walton, John 149, 154, 155 wars, impact of 44, 45, 46, 51, 53, 63, 90 Washington Consensus 9, 93 water prices 156 Watson, M. 11 wealth 33, 44, 45, 107, 113, 133, 147, 174 welfare states 7, 9, 10, 14, 38, 53, 143–60, 172, 173, 174, 175–6 cuts,effect of 25, 37, 114 hostility to 36 and post-war austerity 13 pressure to do more for less 11 reconfiguring 27 and Van Kersbergen et al 15 Whitfield, D. 114 Williamson, P. 49 Wilson, Harold 53 workers 32, 35, 60, 74, 78

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“A timely, thought-provoking collection of critical scholarship which helps to better understand the ideology, politics and economics of austerity in contemporary welfare states and presents the reader with alternatives to the standard policy prescriptions of today.” Professor Peter Starke, University of Southern Denmark The 2008 global economic crisis was unprecedented in living memory and its impact on economic and social life immense. Large-scale social policy interventions played a crucial role in helping to mediate the crisis, and yet the welfare state continues to come under attack. A new age of austerity, based more on politics than economics, is threatening to undermine the very foundations of the welfare state. However, as this important book illustrates, there is still room for optimism – resistance to the logic of austerity exists within organisations and governments, and among peoples, thereby demonstrating how essential social policies remain to human progress. The second of a three-book series covering the post-2008 global economic crisis and the period of austerity, this volume draws together edited chapters from leading scholars engaged in the debate and will be equally suitable for academics and other researchers studying international and comparative social policy, as well as upper level undergraduate and postgraduate students.

Kevin Farnsworth and Zoë Irving are both senior lecturers in international social policy at the University of York, UK. Kevin has published widely on issues relating to the political economy of social policies and welfare states. Zoë has previously published on social policy development in small island states. Together they are co-editors of Social Policy in Challenging Times (Policy Press, 2011) and the Journal of International and Comparative Social Policy.

SOCIAL POLICY / SOCIal studies

ISBN 978-1-4473-1912-2

www.policypress.co.uk PolicyPress

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SOCIAL POLICY IN TIMES OF AUSTERITY • Edited by Kevin Farnsworth and Zoë Irving

“This is sure to be an influential book on the contemporary literature on the politics of austerity. Featuring insightful contributions by some of the foremost theorists in social policy, the book offers a remarkably powerful analysis of governments’ recent overhauls of social policies.” Dr Lavinia Mitton, University of Kent, UK