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The liberal case against austerity has recently gained momentum with the exposure of Harvard economists Carmen Reinhart and Kenneth Rogoff’s calculation errors in their influential pro-austerity paper, “Growth in a Time of Debt.” Among many others, Paul Krugman has been lambasting the economists’ omission-based analysis that warns against exceeding an alleged 90 percent debt-to-GDP ratio. Krugman complains that economic justifications for austerity, no matter how dubious, have found receptive audiences among the powerful for decidedly non-economic factors; because it is so “strange” to cut spending – and thereby demand and ultimately production and employment – during a recession, Krugman can only speculate that austerity boosters are primarily driven by “underlying political and psychological reasons.”
Accordingly, Krugman rejects the notion that austerity generates growth via increasing investor confidence (the claim of the so-called Alesina-Ardagna paper), and he invokes the PIGS’ economic decline following severe spending cuts and tax increases to show that austerity indeed does not “work.”
Yet what is critical here is Krugman and other liberals’ understanding of precisely what “work” in fact means. Liberals are of course correct that European austerity, as well as the US version, has not generated an immediate economic expansion. But to get a clearer idea of the actual purpose of austerity, it is far more useful to listen not to liberal economists but to the politicians who actually decide to implement it. Greek European Commissioner Maria Damanaki recently noted, “‘The strategy of the European Commission over the past year and a half or two has been to reduce the labour costs in all European countries in order to improve the competitiveness of European companies over the rivals from Eastern Europe and Asia.'”
Similarly, in her recent keynote speech at the World Economic Forum, Angela Merkel was admirably frank in asserting that high unemployment is, according to the Guardian, the “price Europe had to pay to become more competitive.” Merkel’s statement that austerity is intended to “ensure the prosperity of our people” is an oxymoron only to those liberal economists who do not see capitalism as a class-based system. For, Krugman’s contention that recessions are merely “technical malfunctions” ignores what both politicians and capitalists have long asserted: recessions are “correctives” that reduce the cost of the one commodity that is more adjustable and often more expensive than any other: labor.
Austerity, via slashing social spending and expanding a surplus labor pool that is ever more desperate, achieves its aim via making labor cheap enough so that it can again be profitably exploited by capitalists. That is, our recession will come to an end, and the standard of living will be ever-lower, once business can again make a profit off of an ample number of workers, which of course is wage labor’s raison d’etre in capitalism in the first place. While the consequences of further impoverishing millions of people in order to more effectively profit off of them might engender political instability, this is not part of the economic equation. After all, political instability is what police states are for.
Austerity is neither psychological nor mysterious, unless you are a liberal economist who thinks that – notwithstanding some two centuries of wage labor exploitation – capitalism could “work” for everyone. While Krugman accuses austerity’s proponents of wearing ideological blinders, it is he and other liberals who are guilty of the charge, as they fervently mystify what is, to any dispassionate observer, plain as day. How else to explain the Nobel Prize winning economist’s failure to recognize austerity as embodying that most basic capitalist concept: an investment.
Joshua Sperber lives in Brooklyn and can be reached at firstname.lastname@example.org