A Tale of Two Austerity Hardliners

February 27, 2012

Conservative soul mates, Stephen Harper and British Prime Minister David Cameron, were in Davos, Switzerland a month ago lecturing Eurozone leaders on how to get their collective act together. As they have done since the G-20 meeting in Toronto, both were preaching fiscal austerity as the solution to Europe’s, and the world’s, economic woes. 

Both are proponents of “expansionary austerity,” the doctrine which holds that aggressive deficit reduction via spending cuts is an essential pre-requisite to restoring business and consumer confidence, and therewith, growth and job creation. 

The Cameron government began its austerity drive—the most draconian since WW2— in mid-2010. According to the National Institute of Economic and Social Research, Britain’s economic performance to date is actually worse now than it was during the Great Depression. 

Then, output had, by the fourth year of the crisis, regained its pre-1929 peak. It is nowhere close this time. GDP at the end of 2011 was still 3.8% below its pre-crisis level. The British economy actually contracted in the final quarter of 2011, and is predicted to dip into recession again in 2012. And its debt burden continues to rise.

Unemployment is currently at 8.4%, and the Institute for Fiscal Studies predicts that it will rise to over 9% in 2012. Median household incomes fell again in 2011, by 7%, the sharpest drop in 35 years.

Consumer confidence has plummeted since the Cameron austerity plan was announced. Business confidence has also been on the downslide.

And even though the program has been at full throttle for a year, the bulk of cuts to public services and social benefits are still to come. 

The Harper government began tightening the fiscal screws in early 2011, with severe cuts expected in its budget due in a few weeks. 

Despite government claims, the performance of the Canadian economy has been lacklustre. It has regained output lost during the recession thanks largely to strong demand for its commodity exports. However, GDP per capita has yet to recover its pre-recession peak.

The economy, which was expected to gather steam in 2011, was grinding to a standstill in the last months of 2011. And official unemployment has shot back up to 7.6%.

Consumer confidence is down sharply from a year ago (Nanos and RBC); and the Conference Board index of business confidence, on a roller coaster in recent months, is well below where it was a year ago.

A warning at Davos from the leaders of 11 international organizations—including the International Monetary Fund, the World Bank and the World Trade Organization—about the economic and social risks of austerity programs, has not caused Cameron and Harper to change their minds.

Nor has an exhaustive study by IMF economists of government austerity programs in 17 countries over the last 30 years, which concluded that weaker economies were the inescapable consequence of government austerity. 

Both Conservative leaders are plowing ahead despite the overwhelming evidence that expansionary austerity—an idea built on pure fantasy according to Nobel Laureate economist Paul Krugman—does not work.

Are they simply misguided? Not likely, though austerity does play well with the conservative base. I believe they are aware of the risks and are prepared to stick it out regardless whether it works, regardless of the social and economic damage it will cause. But to what end? 

Their actions make more sense if we recognize there is a deeper motive at work. Both Harper and Cameron are using the crisis to help advance their long-term goal which is to transform the relationship between the public and private economy—shrinking the former; shifting from collective public provision of services available to all, to private for-profit provision of services according to ability to pay. 

This means replacing, in substantial measure, current public protections against illness, retirement, unemployment, etc. from cash strapped middle-class families with “market solutions.” However, this vision of a stripped down social contract is neither stable nor sustainable in my view. 

In an environment where high unemployment and falling incomes are becoming the new normal; where the gap between the very rich and the rest continues to widen as exorbitant levels of CEO pay continue to escalate; where corporations and governments demand wage rollbacks from their workers; and where the middle class continues to shrink—it is a recipe for a long winter of social discontent. 

This article was originally published in the Hill Times. 

Bruce Campbell is the Executive Director of the Canadian Centre  for  Policy Alternatives.