For anti-capitalists, the impact of austerity measures was obvious. We were told austerity will lead to increased economic growth. Instead it creates unemployment, impoverishment of the poor and the working class thereby pushing the UK deeper into recession; at the same time it is destroying social services designed to protect the not only the most vulnerable, but also workers’ subsistence. Moreover, these measures are actually growth reducing, rather than growth enhancing. What is going on in the UK are also the conditions demanded by the European Union, European Central Bank (ECB) and International Monetary Fund (IMF) with respect to Greece (http://www.bbc.co.uk/...), Italy, Ireland, Portugal and Spain (general list of austerity measures being introduced in Europe: http://www.bbc.co.uk/...).
It may be a surprise to David Cameron and George Osborne (the Prime Minister and Chancellor of the Exchequer in the UK respectively), but it is no surprise to anti-capitalists. For that matter, the IMF and World Bank leaders know damn well these measures are not growth creating. That is why they called for stronger economies in the EU and the US to increase growth (while reducing public debt and deficits) and plead not move too quickly to introduce austerity measures. This is at the same time demanding their introduction at EU meetings; given their confusion, why are we not surprised that they clearly do not know how to deal with the upcoming crash (http://www.imf.org/...; http://www.imf.org/...; http://www.imf.org/...)?
The leaders of the EU agreed to recapitalise banks while levelling austerity measures against the working class and poor in Europe. It is quite evident all the hullabaloo about debt and deficits in the EU has more to do with fears of bank failures (and bank bailouts) than saving the Greek or Italian economy. While the banks had to take a loss of 50% on Greek debt (most of it from ridiculously high interests rates charged for loans that underlie the Greek debt), fears of total default by Greece are real. (http://www.guardian.co.uk/...; for information on the bailout see: http://ibnlive.in.com/...). However, this agreement will not prevent a recession. It attacks the incomes of the poor and working class, while failing to address investment and economic growth that are the causes of the forthcoming (revisited) recession.
I. The face of austerity in the UK: Unemployment, and rising poverty
A. Rising Unemployment
Since April, 110,000 public sector workers lost their jobs (http://www.bbc.co.uk/...). General unemployment rose by 114,000 from June-August, jobseekers rose by 17,500 (up to 1.6m people), and youth (ages 16-24) unemployment reached 991,000 (http://www.bbc.co.uk/...). These workers are not only losing their steady income, but now face the prospect of lower benefits due to government policy. Moreover, the only new jobs in the private sector are lower paid non-union work. Those lucky enough to find work may wind up working outside their specialisations. Finally, seniority they earned over years of public sector work will be lost, resulting in even lower wages.
The Office for National Statistics (ONS) said the unemployment rate increased to 8.1%. The unemployment total for 16-24 year olds hit a record high of 991,000 in this quarter, a jobless rate of 21.3%. The number of people out of work and claiming benefits rose 17,500 to 1.6 million in September. Other figures showed record cuts in the number of part-time workers, down by 175,000. a record reduction of 74,000 in the numbers of seniors in employment (http://www.bbc.co.uk/...).
Claiming that these figures are the result of the financial crisis, rather than placing the blame on their austerity measures, the government is offering job training for 50,000 workers. This is clearly insufficient, and won’t even make a dent in unemployment statistics. It is obvious that cutbacks in the public sector are not resulting in private sector investment and increased employment.
B. Poverty
The austerity measures have caused the fall in income and rising poverty-- the poor are getting poorer, and the middle class is joining them in their misery (http://www.bbc.co.uk/...; http://www.ifs.org.uk/publications/5710; http://www.ifs.org.uk/...).
According to the Institute for Fiscal Studies (IFS), this is the biggest fall in median household incomes since the 1970s, a £2000 drop in income for median households. Rising costs due to increased petrol prices, rising energy bills (http://www.bbc.co.uk/...; http://www.bbc.co.uk/...), and rising food prices are undercutting household income.
Rising unemployment has also taken a bite out of household income as have cuts to benefits for the poor and working class. Household income is falling for many reasons and a part derives from rising unemployment. But there are additional things driving this: cuts to benefits for the poor, working and middle class, the government’s increased VAT tax (leading to a direct rise in prices), increased food prices due to inflation and speculation in food on the future exchanges. Not to mention increasing rents and energy prices giving gas providers very high profits.
Further contributions to impoverishment include spectacularly rising rents.
Shelter say that private rents are unaffordable in 55% of English boroughs, having already risen at one-and-a-half times the rate of incomes in the 10 years to 2007 (http://www.bbc.co.uk/...; http://news.bbc.co.uk/...).
Further confirmation can be found below in a piece telling people to increase their buying of properties to let:
In September, the average rent rose by 0.7% to reach £718 in September, surpassing the previous record high of £713 in August. This represents a 4.3% increase on September 2010’s average of £689. The research also shows the average yield rose from 5.2% in August to 5.3% in September. Rents hit record highs in six regions: London, the South-East, Yorkshire and Humber, the East of England, Wales and the East Midlands.
Rents increased the fastest in the South-East and the East Midlands, where they rose by 1.8% and 1.1% respectively compared to August, while the smallest increases were in the West Midlands and the North East, where rents rose by 0.2% and 0.3%. Over the past year, London’s rents have risen at a faster rate than any other region, increasing by 5.8% (http://www.mortgagestrategy.co.uk/...).
These rising rents cannot be explained solely by supply and demand arguments. Encouragement of home ownership rather than renting and failure to build social housing has increased home ownership (with previously easy credit but at high interest rates). This has cost people their homes due to rising unemployment and attacks on income. The contraction of the credit market has made it harder for those trying to get on the housing ladder. Meanwhile, tenancy laws favour the landlords rather than tenants in the UK (http://www.globalpropertyguide.com/...).
While the government’s policy of cutting housing benefits to clear out the poor from the centre of London has yet to take effect, this will only compound the problem as displaced people are shifted to the outer boroughs where rents theoretically can still be covered by housing benefits. However, given rising rents in London the question is will displaced people and current renters be able to obtain given the government’s targeted numbers for housing benefit?
The IFS projects government policies will increase the number of children living in poverty by 600,000 in the next four years-- from 1 in 5 to 1 in 4. Median household income is expected to continue to fall, increasing both absolute and relative poverty in the UK.
We are experiencing falling money wages brought about by attacks on benefits and pensions. Real wages (what wages can purchase) are also diminished due to rising food and energy prices, rising rents, increased VAT and inflationary policies (e.g., quantitative easing). The IFS, projects that absolute poverty (income below 60% of median household income) and relative poverty (compared to median household income in a specific year) are expected to increase:
The period between 2009–10 (the latest household income data available) and 2012–13 is likely to be dominated by a large decline in real incomes across the income distribution. Absolute poverty is forecast to rise by about 600,000 children and 800,000 working-age adults. Median income is expected to fall by around 7% in real terms, which would be the largest three-year fall for 35 years (http://www.ifs.org.uk/...).
Acknowledging that in the longer term, the planned introduction of Universal Credit (http://www.direct.gov.uk/...) by the government to replace the current benefit system will act to reduce both absolute and relative poverty, the IFS has maintained that the net direct effect of the coalition government’s tax and benefit changes will be to increase both absolute and relative poverty. This will occur because other changes introduced by the government (e.g., the switch from Retail Price Index (RPI) - to Consumer Price Index (CPI) -indexation of means-tested benefits; the main difference between the two is that the former includes housing costs, see http://www.moneyextra.com/..., but the RPI is significantly higher than the CPI and the switch will undermine not only benefits but pension calculations) actually will more than offset the impact on poverty of Universal Credit.
Absolute and relative child poverty are forecast to be 23% and 24% in 2020–21 respectively. These compare to the targets of 5% and 10%, set out in the Child Poverty Act (2010) and passed with cross-party support. This would be the highest rate of absolute child poverty since 2001–02 and the highest rate of relative child poverty since 1999–2000. Modelling of scenarios in which employment rises by more than expected or take-up of benefits increases (perhaps as a consequence of Universal Credit strengthening work incentives or being easier to understand for benefit claimants) suggests that such factors cannot be relied upon to make a large difference to poverty rates (http://www.ifs.org.uk/...).
What is the government response to these projections? “The stats are not taking into account that people are being forced back to work due to cuts in benefits” say Iain Duncan Smith, secretary of works and pensions in this shameful display of Benthamite logic (Bentham’s prescription of lesser eligibility maintained that conditions for the non-working poor must be worse than those of the working).
We are forced to conclude that either government ministers are delusional, sociopathic or they are simply lying (or any combination of the three). Put simply, there are no jobs for these so-called slackers; moreover, increased unemployment of public sector workers means they need to compete with those recently unemployed for low-wage, low skilled jobs that are simply not materialising irrespective of how much government ministers are waving their magic wands.
This is a government blinded by its own ideology that poverty exists because the poor are lazy, drunk, immoral and dissolute, rather than because capitalist economies cannot sustain full-employment due to the need for the system to be profitable. Competition means reducing wage costs to maximise profitability. Even during the 19th century, when wages were incredibly low and labour was deskilled to drive wages down, full employment did not exist. Profits were extremely high; yet full employment was not and has never been consistent with the needs of the system.
Rising numbers of people are using food-banks to help cope with fallen income due to benefit cuts and cuts in work hours for those already on low wages (http://www.bbc.co.uk/...). This is especially the case for young people:
The Trussell Trust said the numbers of people using its food banks had increased from 41,000 last year to almost 61,500 in the past 12 months. In some areas such as Exeter, Cardigan and the Isle of White, the number of young people was as high as 70 to 80% (http://www.bbc.co.uk/...).
C. Increased exploitation of workers:
Employed workers are being forced to take wage cuts to keep their jobs in the face of rising unemployment. Benefits like paid holidays are been attacked. People are being asked to work extra hours for the same wages. All these things are increased exploitation of workers. (e.g., http://www.bbc.co.uk/...). Public sector workers have been asked to take a wage cut to cover NHS debt caused by cuts to NHS funding by the government by working during paid holidays and doing extra unpaid hours. Funding problems for the NHS by this government are being compounded by attempts to introduce privatisation of certain parts of the NHS by making contracting open to competition; this will leave the NHS open to EU competition laws which will destroy the system.
As the UK falls ever deeper into crisis, it is evident that the neoliberal economic ideas underlying government economic and social policy are responsible for the problem. These attacks on wages and the social welfare state are doing exactly what they were meant to do: lower wages to increase profits. The government fantasises that this will lead to investment and economic growth; however, wage squeezes do not enable growth, they merely impoverish.
For anyone not blinded by greed, or trapped in the delusional ideology of neoliberal economics, it is obvious what the impact of these austerity measures will be. If you cut money to the state sector and prohibit local councils from increasing council tax (this prohibition has been renewed this year), services and jobs will be cut. When they pegged benefits and pensions to the CPI rather than the RPI, benefits were to be cut (that was the aim of the policy after all). Cutting child-tax credits only affects those paying taxes, the working and middle class; but cutbacks to child benefit, education spending, and provision of local services such as availability of child-care provision affect the poor, working and middle classes. Perhaps it was not obvious to those voting for these measures, but making people poorer actually impoverishes them. In fact, the rapidity and the depth of the impact of these measures are far worse than initial projections.
II. Wages and Unemployment:
Lowering wages will not create employment. It only increases impoverishment. Employment depends on known techniques of production, profitability criteria, and the demand for the goods and services produced in the country.
A. Wages
Contrary to the dominant mainstream economic theory, wages are not determined by the interaction between the supply and demand Moreover, altering the level of wages will not alter the level of employment; there is no evidence for this proposition at all.
Wages are determined by essentially two things:
1) the historically and socially determined subsistence floor that enables the reproduction and subsistence of the working class. This is not a biological level of subsistence which is simply the floor of historical and social subsistence; rather it is a level that society recognises that working people have the right to have as members of society. It differs between countries and over time in the same country reflecting changes in custom and commodities that society deems all members are allowed to have. And 2) the level of class struggle. This is the power struggle between capital (owners of capital) and workers. It is here that the level of unemployment becomes relevant. High levels of unemployment weaken the power of the working class as capitalists (owners) can play desperate workers against each other. The strength of the unions and other organisations representing the working class are also important. If there are high levels of unemployment, weak trade unions and other representatives of the working class, wages can be pushed down to the social subsistence level. If employment is high, workers can demand a portion of rising profits in periods of economic growth.
Elimination of minimum wages laws, cutbacks to benefits for the poor, new taxes, rising prices for necessary goods, all lower the level of wages. However, they do not increase employment even in the most rudimentary neoclassical model. All it does is impoverish people. To say the obvious, increasing wages does not lead to unemployment, irrespective of the lies of neoclassical economic theory (see Card and Krueger (1994) http://davidcard.berkeley.edu/..., for a further exploration using the methodology employed by Card and Krueger see, http://www.uvm.edu/...; for a recent study on 24 states in the US which corrected for criticisms against the original piece, see, http://www.irle.berkeley.edu/...). Unsurprisingly, mainstream economists are resisting hearing that their argument neither holds internally (in terms of logical consistency) or in the real world.
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B. Employment and Unemployment
The level of employment is dependent upon two things:
First, the technical conditions of production. Different commodities require different combinations of raw materials, fixed capital and different types of labour to produce them. For example, in the shirt-making field, shirts in one factory are cut from cloth by unskilled labour with scissors while another factory uses more skilled labour and lasers. These techniques can co-exist; sweatshops can exist in the garment centre, while skilled labour might be used for a higher level product. What is chosen depends on costs in terms of rental of buildings, cost of machinery and its replacement, costs of inputs, and labour costs so as to maximise net profits assuming sale of goods at a profit.
The second relates to the demand for the different types of output (composition of output) and the quantity of output demanded. This demand (or expected demand) then will condition the amount of different commodities produced and hence the employment of different types of labour, circulating capital and machinery (fixed capital) used in production.
In order for capitalists to switch techniques of production commensurate with a change in wages or the rate of profits, it requires not only more or less workers; it requires changing the amount or type of machinery in use in production and whether to change or increase investment. Concentrating on the labour market alone is leaving out a massive amount of information as any business person can tell you; even in neoclassical theory
B. What are austerity measures hoping to achieve?
So, if the attacks on wages are not going to increase employment, what is it they are designed to do? Increase profits to the capitalists (owners) in hopes that capitalists will engage in productive investments. They believe it will stimulate growth, but we know that is not happening:
Real GDP is expected to grow by a fairly robust 6.4 percent in emerging and developing economies but by only 1.6 percent in advanced economies in 2011 (http://www.imf.org/...).
What this argument ignores, is the impact of working class demand for goods (which then has a backward and forward linkage to intermediate product production and final goods distribution, which then affects positively the need for labour in those sectors).
When workers demand final products, they are not only demanding those goods; that demand increases the demand for goods used to produce those goods ... in the case of clothing, it is not just shirts and jeans, but cotton and other materials used to produce those jeans, means of production used in their production and labour at different levels; additionally, once they are produced, transport, retail, are needed to distribute the goods. What is meant by backward linkages (both constant, fixed, and variable capital, aka inputs, means of production and labour needed to produce things at all levels used to produce final commodities) and forward linkages [labour and other things needed to bring them to sale (transport things like trucks, petrol, labour, rail, then retail sale including labour, etc)] are these things, the economy is not a one-off; production and reproduction of goods used up in production and the working is constantly ongoing.
These things reverberate throughout the economy; the capitalist economy literally is an interconnecting system based upon not only the reproduction of the working class (which would be the case in any economy), but one which exists solely to ensure the production and reproduction of the surplus product which is where profits come from and which is essential for the system to work.
In order for that to work, surplus product (or the value of that product) over and above the needs of reproducing the current level needs to be not only produced. What is essential is that this surplus is realised at the sale of the goods; such that the prices contain a rate of profit that makes it worthwhile for them to continually produce the goods. If it doesn't, it is not in their interest to continue to do so. Moreover, what may earn them a profit is not necessarily what we need and want and their continual need for profits (and the economic growth to sustain constantly rising profits) is what is driving the system, not the needs and wants of the majority
So while exploitation (http://www.dailykos.com/...) and the production of a surplus product (that is a product over and above the replacement of capital used up in production and that needed for ensuring the reproduction of the working class) are ongoing (or those goods will not be produced), that does not mean that the capitalists can actually realise that surplus product. Moreover, depending on the level of class struggle it is uncertain whether they can keep the whole of the surplus product. Essentially, weakening trade unions, decreasing employment levels and wages is an attempt by capitalists (owners) to keep the all the profits rather than share a portion as wages.
The fact that we are in a realisation crisis means that the capitalists are unable to realise profits contained in these goods as they cannot sell them at a price which earns a profit. This means that they are not going to increase investment, production and employment. That is why quantitative easing (which increases the money available for banks) will not enable economic growth; all that it is essentially is shovelling money at the wealthy and banks and it will either be hoarded by banks or used for further speculative investment on markets rather than enable productive investment.
III. Role of the State:
Invariably, posts on daily kos argue the state in a capitalist economy is a neutral force. In reality, the state constantly intervenes in the economy to sustain the system; either in the form of regulations, privatisation of public resources and services, or strike breaking.
Normally, it does not openly intervene in the labour market but it has allowed the creation of minimum wages (by being forced to do so), and allowed certain limited types of trade union organisation (again by force); and allowed the introduction of a social welfare state with some social protections despite oppositions of free-marketeers of the time.
Since the 1980s, intervention in labour markets by the government has undercut wages and increased support of businesses and the so-called free market. This is not only the case with the state, but the role of extra-governmental organisations as well (IMF, World Bank, ECB). One of the main aims of Neoliberalism has been to insist that the state eliminate protections for the workers and the poor (through the elimination of subsidies, privatisation of national resources and industries, and destroying the powers of trade unions fighting for higher wages and benefits).
The current attack to destroy the public sector and the social welfare state is an attempt to attack the trade unions in the public sector. This has led to lower wages and higher unemployment. This is an attempt to destroy the level of social subsistence to drive it down closer to biological level; it has affected the poor, the elderly and the disabled disproportionately. Its purpose is to complete the creation of a low wage economy in the UK.
This is justified by ideological economic arguments that low wages leads to higher employment and the idea that the capitalist class enables economic growth. Historically both of these arguments are not valid; following each recession, we are seeing jobless recoveries even though wages are lower than they were previously. Instead we are seeing increasing wealth and income inequality which, contrary to the arguments of the mainstream, are not trickling down to the poor and working class. In fact, they are impoverishing the middle class as well.
The arguments of the Austrian economics (or Hayekian) part of the mainstream maintain that the only way to create economic growth is to impoverish the poor; this will lead to increasing profits which are theoretically going to be invested to enable growth and future jobs (many examples of this type of thinking can be found here: http://freedomkeys.com/..., for an examination of both perspectives, see http://www.researchonmoneyandfinance.org/...).
Irrespective of the historical inaccuracy of these arguments, both in periods of economic growth and following the latest crash, we are seeing constant attacks on wages to keep profit rates higher and further concentration by the mainstream media on financial markets and their booms and busts rather than productive investment (this is deliberate).
So, why all the concentration on growth?
In the absence of growth, the only way to increase profit rates is to attack wages. With rapid economic growth and with a strong working class, part of the increase surplus can be given to the working class to raise wages like in the post-war period thus having an enhancing effect on growth and accumulation. However, we do not have that anymore in the advanced capitalist world (both capitalists and governments worked very hard to destroy that). With growth (and a weak working class), it is possible that increased surplus can be seized completely, so that profit rates will be even higher than they would be in the absence of growth.
Part of the reason for the attacks on trade unions was literally because the capitalists wanted that surplus that was being given to workers; weakening unions by destruction of the industrial and manufacturing sectors and off-shoring these sectors enabled them to reduce wages and appropriate the surplus that workers had won through wage bargaining contracts.
Why is it not only the mass of profits but the profits/capital advanced (rate of profits) that drives the system towards the need for continual growth? Profit margins or the net profit rate are relevant as it tells them exactly which sectors are the ones that are the most profitable for investment relative to the capital advanced for production.
Introduction of machinery in sectors producing necessary wage goods, substitution of synthetic raw materials as opposed to scare natural resources, cheapening the costs of machinery decrease costs for capitalists. These things also enable a higher quantity of surplus product relative to costs of production. In the advanced capitalist world, rates of profit are necessarily lower than in the capitalist periphery and in the advanced capitalist world. Part of the short-term speculative investment rather than productive capital is due to that lower rate of profits in the advanced capitalist world and has led to increased investment there despite the instability of the financial sector.
That is part of what is going on in the advanced capitalist world. Barring reopening old factories based upon older more labour intensive techniques of production, the investment required and the return on investment is lower; reopening of these old derelict factories is expensive and it is not necessarily going to be useful in the long term.
An additional point is the high rates of productivity in the advanced capitalist world are also based upon the techniques in use which require a far lower use of human labour to obtain the required output; increasing output without sufficient expected effective demand for the product at home and abroad is simply nonsensical from the point of view of the profit-maximising capitalist. This is yet another place where the needs of the system depart substantially from the needs of the majority in the advanced capitalist world wracked by high levels of unemployment and constant pressure for lowering wages and abandoning labour protections.
So, is it just an inaccurate economic argument, or are they doing this deliberately?
I think they are doing this deliberately. The economic arguments are being used to justify the action; that is the purpose for which they were created. This is a deliberate suppression and impoverishment of the majority in the advanced capitalist world. It is a combination of things one thing is sheer greed on the part of the wealthy, the rest is due to the fact that in the advanced capitalist world they are clearly demonstrating both a falling rate of profits and profitability (and they do not have complete access to China and the level of demand in the emerging economies is still not sufficient to sustain profitability as the majority have low incomes, they need the advanced capitalist world.
However, attempts to decrease wages to increase profitability and rate of profits (which they are doing in earnest with the austerity measures) are affecting the demand for goods and services they are producing there; this is what is causing both the realisation crisis (they are not able to sell goods and services at the levels needed to ensure profitability) and the lack of investment (why the banks are hoarding money and why stock market investment is of the short-term speculative variety rather than investment in productive industries).
The Importance of a fightback
I think we need to fight this on all possible levels. Some of it can be fought legally. In the UK, we need to overturn the substitution of the CPI for the RPI in calculation of state worker pensions and benefit calculations. Six unions have launched a legal challenge of breach of contract as the government presented it as a fait accompli without any contract negotiations (http://localgovernmentlawyer.co.uk/...). There have been demonstrations, strikes (public sector workers are set to strike again on November 30th), and teach-ins. But the unions need to address the austerity measures in full and they need to unite with anti-austerity groups. In Greece, they have been building the fight for several years: general strikes, full scale protests, and constant pressure. One of the Greek Left’s problems is that the left and the unions need to unite to run in the next elections on an anti-austerity programme as it is unclear whether the replacement of the whole system has the support of the population. In Spain, Los Indignados (http://en.wikipedia.org/...; http://www.eesc.europa.eu/...) have catalysed opposition against austerity measures and the movement has spread beyond Spain to other countries in Europe (http://wlcentral.org/...).
I support fights on all levels, but we really need to have a discussion about what we are fighting for: are we fighting for small reforms, significant reforms or serious transformation? In the absence of that clarity, we waste time while the attacks on the poor and working class accelerate.
Upcoming Diaries
Nov 6: Robin Upton, host of Unwelcome Guests, will be a very welcome guest at our site! He will also be discussing education.
Nov 13: Erica Goldman's speech, Here I Stand. Also about education.
Nov 20: Geminijen: Cooperatives Changing Relationship to Unions, Part III
Nov 27: TBA by Justina
Dec 4: T'Pau Miliary Democracy as a tool to reclaim power.
Dec 11: Don Mikulecky
Dec 18: T'Pau: Nullification and States Rights as a way to reclaim our power.
Dec 25: Blue Dragon will discuss teaching from radical texts in the college setting. (She is using Shock Doctrine in her class.)
Jan 1 T'Pau: The Power Behind Resolutions and an exciting announcement.