[This is the first of a three part ZNet commentary series this month, about global economic crisis and relating to Greece, by Peter Bohmer and Robin Hahnel. Hahnel spoke at the Greek anti-authoritarian movement’s B-Festival in Athens last May and Bohmer will be speaking at the festival in Thessaloniki in September.]
Once upon a time most economists acknowledged that John Maynard Keynes had it right about what to do when unemployment was high. But in light of the fiscal austerity being practiced by governments all over the world, and the sermons of pundits preaching the urgent necessity of reducing budget deficits now, one would think Lord Keynes had never been born. An exacerbated Nobel Laureate Paul Krugman, put it this way: “Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand? Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse.” (New York Times, June 20, 2010)
The problem is that doing the reverse — cutting spending and increasing tax rates because a deep recession has reduced tax revenues — is exactly what Herbert Hoover did in 1930, turning the financial crash of 1929 into the Great Depression of 1929 – 1939.
Keynes became the most important economist of the twentieth century because he taught economists and politicians alike that their knee jerk reaction to cut spending when tax revenues fall due to recession is exactly backwards. And yet this is what Germany and England are doing. This is what the European Commission and European Central Bank are forcing Portugal, Ireland, Italy, Greece, and Spain to do. This is what governments of Eastern European countries are doing in an attempt to spruce up their resumes as they get ready to apply for admission into the Euro zone. This is what the IMF is forcing third world governments to do. And this is the road that deficit mania has now sent the United States and Japan down as well.
In Toronto, Canadian Prime Minister, Stephen Harper, host of the Alice in Wonderland, Mad Hatter Tea Party known as the G-20 meetings, prevailed upon his guests at this recently concluded gathering to sign a communiqué pledging to cut their budget deficits in half by 2013. New York Times reporter, David Leonhardt, summarized the outcome of the meetings as follows: “The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome.” But in the ways that matter the situation is not different, and therefore the outcome will not be different either.
This is economic madness! At best, global fiscal austerity will turn the Great Recession into a “lost decade” — like the 1980s was for Latin American and the 1990s was for Japan — but this time for most of the world. At worst, this madness risks sending the global economy spiraling back downward into a second Great Depression.
Instead of signing a mutual suicide pact to cut deficits that would do Jim Jones, the infamous cult leader in Guyana proud, the governments of the larger economies should have busied themselves at their G-20 meetings coordinating a global fiscal stimulus. They should have mutually pledged to run larger fiscal deficits until global unemployment is dramatically reduced. And instead of postponing global financial reform indefinitely, the G-8 should have worked overtime at their meetings to finalize measures to stop financial players from pushing interest rates on government bonds through the roof for smaller economies even when their economic “fundamentals” do not warrant such treatment. Moreover, the bitter medicine being spooned out by center left and right wing governments alike, draconian spending cuts and higher tax rates on lower and middle income households, will not only kill the patient – reducing production and increasing unemployment – they will not even cure the disease our leaders are fixated on – government debt. By aggravating the downward recessionary spiral fiscal austerity will only depress tax revenues further. Unless these austerity policies are reversed, working people will continue to suffer high unemployment, declines in take-home pay, cutbacks in social programs such as childcare and public education, declines in pensions, and reduced access to unemployment insurance.
Peter Bohmer is Professor of Political Economy at Evergreen State University in Olympia Washington. Robin Hahnel is Professor Emeritus at American University in Washington DC, and Visiting Professor of Economics at Portland State University in Portland Oregon.
