Austerity and Ideology

Wolfgang Munchau has another interesting editorial on austerity, in yesterday’s Financial Times. He argues that the US may become the next paying member of the austerity club, thus making the perspective of another lost decade certain.

Munchau’s article could be the n-th plea against austerity, as one can by now read everywhere (except in Berlin or in Brussels; but this is another story). What caught my attention are two paragraphs in particular.

First, when Munchau argues that

In Europe, “perma-austerity” comes primarily in the form of social entitlements cuts. In most countries, the scope for tax increases is relatively small. There are a few genuine structural fiscal reforms that may well be worth undertaking – cuts in levels of regional government, plugging tax loopholes, or ending subsidies. But these are hard to do, and governments find it more expedient to cut welfare benefits, which is what European conservatives usually mean when they talk about “economic reforms”.

The remark is interesting, and it comes at the same time as a long post of Paul Krugman on the subject of ideology and macroeconomics. A few years ago, well before the crisis, Jean-Paul Fitoussi had already spoken about an hidden agenda:

The inertia of European governments in the past decades is due to a “hidden agenda”, namely the tentative to bring the European social system to a lower degree of protection, and hence to prove the ineluctability of structural reforms.

In a sentence, Fitoussi viewed economic policy, rather than based on “scientific” theories, as the instrument of a particular political view. The crisis has made things worse, and today Munchau and Krugman join Fitoussi in arguing that economic theory is bent to serve a political agenda.

The second interesting point is in Munchau’s conclusion:

There is a deeper reason why we are all in this mess. It has become more difficult for political systems to defend the collective interest – which I would define as the pursuit of policies to end the recession, then deal with the debt overhang vigorously afterwards. The collective action problem is a natural deficiency of a monetary union with decentralized decision making. But it can also occur at the level of sovereign nation states when society lacks broad consensus over economic policy. In their respective pathologies, the US and the eurozone have become remarkably similar.

Collective action is becoming increasingly difficult. I believe that there is more to this than a divided political system, or a flawed monetary union. The lack of solidarity, be it among people or among countries, is inevitable after three decades of increasing inequality; among its many pernicious effects income polarization disrupted the social fabric, and today makes it extremely difficult to “defend the collective interest”, in Munchau’s words.

The two issues are not disconnected. Periods of increasing inequality (the first decades of the twentieth century, and the three decades since 1980) are also periods of dominance of the Laissez-Faire doctrine. Likewise, the development of the welfare state is certainly linked to the Keynesian dominance and to the sharp decline of inequality that lasted until the late 1970s (A period of robust growth, by the way).

And here is the despairing conclusion: we emerged from the great recession of the thirties also thanks to the construction of the welfare state. Today’s crisis is marked by an unprecedented attack to the role of the government in the economy, mostly driven by an ideological agenda. Is it surprising that the best we can hope for is a decade of stagnant growth?