12 December 2002 Edition
Economic idiocy of cutbacks
BY ROISIN DE ROSA
Thatcherism is not so much a economic theory as a political recommendation - to use recessions to cut back on social expenditure and nurture business and their profits, what's called the neo-liberal agenda
Once again we are protesting the 'cutbacks' in outrage that amidst the swill of corruption, handouts, tax breaks and brown envelopes, it's the poorer people who must suffer the consequences. And it always is.
What is the theory behind it all? Why when a recession looms, is it always the poor that are made to pay?
The theory is Thatcherism, Reaganomics, call it what you will. It says, quite simply, that when the business cycle appears to hit a downturn, jobs start to disappear, overtime falls, people tend to be careful and spend less in the shops. Businessmen, anticipating all this, tend to delay investment decisions until better times, so they cut back, and off we go on a downward spiral of recession.
So bust replaces boom. We talk up approaching recession and fears, which become a self-fulfilling prophesy. Government revenues, which mostly come from taxes on wages and sale of goods, fall off. The government then begins its predictable cry: revenue is falling, debt is rising, we need to cut back on government expenditure so we can balance the books.
Just like you, when you find you've been spending too much, the only way out is to spend less, to live within your means, and cut back on the extras. So everyone is supposed to grasp the logic of that.
The only problem, of course, is that when you are dealing with the economy as a whole, you are not in the same ball game as when you are dealing with Mr and Mrs Consumerist, who responded like Pavlovian dogs to all the ads and bought wildly all the things the ads suggested and bank credit encouraged them to get, and then found they couldn't afford it.
Cutbacks might make good sense for individuals. But in the case of a government, it is quite different. They don't make any sense at all.
When a recession looms, and jobs begin to disappear, a government can intervene and by increasing, or at least maintaining expenditure and capital investment, government can cushion, if not reverse, the forces driving the supposed recession.
When a recession looms, this is the very time when government needs to maintain expenditure. Government expenditure maintains incomes, and this maintains demand, people see that there isn't a recession after all, things are booming. Investment decisions get made, people expect good times ahead, demand rises, which spurs business to take on more workers, tax revenues to increase, and growth to stay positive.
Ah, say the Thatcherites, but you're forgetting about prices. You can't increase demand through government expenditure, because the net effect of this will be to increase prices, leading to wage demands which businesses can't meet if profits rates are to be maintained. Spiralling inflation will price our goods way out of the marketplace in international trade. So in a country like ours, highly trade dependant, you can't afford the government to spend its way out of impending recessions.
You've said it. Businesses put prices up to increase their profits. But without a recession there is no reason to assume that profits will fall. Businesses will say they are putting prices up so they can meet increasing wage demands, but in our situation the increased wage demands haven't been allowed. Instead, workers are losing their jobs all over the place. No one could argue that inflexibility in the labour market is driving wages up.
So where is the argument that government should spend less? All spending less means is that government reinforces the recessionary pressures that initial falls in revenue suggest is looming. That makes no sense at all.
But to business, it makes very good sense. Businesses like to keep wages down. Recessions are a very handy tool to achieve this. The national wealth, instead of being redirected through government to spending to improve the quality of life for all of us (on health, housing, schools, facilities, community development, sports, roads, and just plain paying the welfare dependants a living wage) is instead diverted to cushion businesses which threaten to go away or go bust, and to keep their tax rates low to encourage them to stay and to invest.
Thatcherism is a ridiculous theory from an economic point of view, but then Thatcherism is not so much a economic theory as a political recommendation - to use recessions to cut back on social expenditure and nurture business and their profits, what's called the neo-liberal agenda.
In today's Ireland, Thatcherism carries a further sting in the tail. If government cuts back expenditure, this means it cuts back the school building programme, the hospital build, the road building and so. Now if you want your schools, hospitals, roads and new houses, the only way you are going to get them is through privatising their provision.
The government says, "Well, we can't afford to build that school we'd promised - but Company A will be very glad to do it, and the government will pay them over the long run, or may be they'll be able to directly charge you - the consumer - and cut us the government out of the picture altogether. And, as Minister of Education Noel Dempsey said only two days ago on television: In the long run, this option will be much cheaper for us.
How do you work that out, Minister Dempsey? How could it possibly be that a service provided by someone who makes a profit on providing it, is going to cost less than providing a service where there is no profit to be made?
Increasing privatisation is the sting in the tail of cutbacks. The government is happy to create the context for business to make profit by supplying essential needs and, of course, charging you for them. Too bad if you can't pay.
The cutbacks, far from an economic necessity, are a political decision, which happens to be gravely misguided and entirely against the broad interests of the broad mass of the people.
Thatcherism is not so much a economic theory as a political recommendation - to use recessions to cut back on social expenditure and nurture business and their profits, what's called the neo-liberal agenda
Once again we are protesting the 'cutbacks' in outrage that amidst the swill of corruption, handouts, tax breaks and brown envelopes, it's the poorer people who must suffer the consequences. And it always is.
What is the theory behind it all? Why when a recession looms, is it always the poor that are made to pay?
The theory is Thatcherism, Reaganomics, call it what you will. It says, quite simply, that when the business cycle appears to hit a downturn, jobs start to disappear, overtime falls, people tend to be careful and spend less in the shops. Businessmen, anticipating all this, tend to delay investment decisions until better times, so they cut back, and off we go on a downward spiral of recession.
So bust replaces boom. We talk up approaching recession and fears, which become a self-fulfilling prophesy. Government revenues, which mostly come from taxes on wages and sale of goods, fall off. The government then begins its predictable cry: revenue is falling, debt is rising, we need to cut back on government expenditure so we can balance the books.
Just like you, when you find you've been spending too much, the only way out is to spend less, to live within your means, and cut back on the extras. So everyone is supposed to grasp the logic of that.
The only problem, of course, is that when you are dealing with the economy as a whole, you are not in the same ball game as when you are dealing with Mr and Mrs Consumerist, who responded like Pavlovian dogs to all the ads and bought wildly all the things the ads suggested and bank credit encouraged them to get, and then found they couldn't afford it.
Cutbacks might make good sense for individuals. But in the case of a government, it is quite different. They don't make any sense at all.
When a recession looms, and jobs begin to disappear, a government can intervene and by increasing, or at least maintaining expenditure and capital investment, government can cushion, if not reverse, the forces driving the supposed recession.
When a recession looms, this is the very time when government needs to maintain expenditure. Government expenditure maintains incomes, and this maintains demand, people see that there isn't a recession after all, things are booming. Investment decisions get made, people expect good times ahead, demand rises, which spurs business to take on more workers, tax revenues to increase, and growth to stay positive.
Ah, say the Thatcherites, but you're forgetting about prices. You can't increase demand through government expenditure, because the net effect of this will be to increase prices, leading to wage demands which businesses can't meet if profits rates are to be maintained. Spiralling inflation will price our goods way out of the marketplace in international trade. So in a country like ours, highly trade dependant, you can't afford the government to spend its way out of impending recessions.
You've said it. Businesses put prices up to increase their profits. But without a recession there is no reason to assume that profits will fall. Businesses will say they are putting prices up so they can meet increasing wage demands, but in our situation the increased wage demands haven't been allowed. Instead, workers are losing their jobs all over the place. No one could argue that inflexibility in the labour market is driving wages up.
So where is the argument that government should spend less? All spending less means is that government reinforces the recessionary pressures that initial falls in revenue suggest is looming. That makes no sense at all.
But to business, it makes very good sense. Businesses like to keep wages down. Recessions are a very handy tool to achieve this. The national wealth, instead of being redirected through government to spending to improve the quality of life for all of us (on health, housing, schools, facilities, community development, sports, roads, and just plain paying the welfare dependants a living wage) is instead diverted to cushion businesses which threaten to go away or go bust, and to keep their tax rates low to encourage them to stay and to invest.
Thatcherism is a ridiculous theory from an economic point of view, but then Thatcherism is not so much a economic theory as a political recommendation - to use recessions to cut back on social expenditure and nurture business and their profits, what's called the neo-liberal agenda.
In today's Ireland, Thatcherism carries a further sting in the tail. If government cuts back expenditure, this means it cuts back the school building programme, the hospital build, the road building and so. Now if you want your schools, hospitals, roads and new houses, the only way you are going to get them is through privatising their provision.
The government says, "Well, we can't afford to build that school we'd promised - but Company A will be very glad to do it, and the government will pay them over the long run, or may be they'll be able to directly charge you - the consumer - and cut us the government out of the picture altogether. And, as Minister of Education Noel Dempsey said only two days ago on television: In the long run, this option will be much cheaper for us.
How do you work that out, Minister Dempsey? How could it possibly be that a service provided by someone who makes a profit on providing it, is going to cost less than providing a service where there is no profit to be made?
Increasing privatisation is the sting in the tail of cutbacks. The government is happy to create the context for business to make profit by supplying essential needs and, of course, charging you for them. Too bad if you can't pay.
The cutbacks, far from an economic necessity, are a political decision, which happens to be gravely misguided and entirely against the broad interests of the broad mass of the people.