The New Age of Austerity

Thurman Arnold, assistant attorney general in the Roosevelt administration from 1938 to 1943.

The double-whammy of recession and sovereign debt crisis has made austerity the buzzword of politics in European Union nations in recent years. Now the A-word has become increasingly a part of political rhetoric in the United States. In his recent book Age of Austerity, journalist Thomas Byrne Edsall argues that America has already entered a new age of austerity that will remake its politics in the second decade of the twenty-first century. In his view the intensified polarization of Democrats and Republicans constitutes the first shots in a struggle over diminished national resources. Gone for good, he argues, are the days when the two parties could engage in a tacit compromise to fund their respective social-program expansion and low-tax agendas from the proceeds of economic growth.

In the United Kingdom, the Conservative/Liberal Democrat coalition government preaches the virtues of austerity as the castor-oil cure for the Blair-Brown Labour governments’ sin of living off public credit in the early years of this century. It promised to get the nation back onto the track of economic growth by putting the public finances right and eliminating the deficit in a single five-year Parliament (by 2015). But austerity has mainly worked in Britain to increase inequality, enhance social instability, and retard economic growth. A weak recovery led to new recession in 2012 and another weak recovery threatens a triple-dip recession in 2013.

The effect of all this for the UK public finances was predictable to any student of Economics 101 -- anemic growth means higher public borrowing and throws into disarray plans to balance the budget, now put back to 2018. The likelihood is that the revised schedule will itself fall by the wayside, but there is no sign of the U-turn to stimulus that would be the usual response from political leaders worried about the electoral consequences of economic pain without gain. Ironically, Obama’s re-election appears to have stiffened the resolve of the coalition government to carry on cutting. It was proof, Chancellor of the Exchequer George Osborne remarked, that incumbent governments can win re-election in hard times.

The austerity debate is also shaping up to dominate American politics in Obama’s second term and far beyond. The U.S. faces a series of short, medium and long term public debt challenges -- respectively the fiscal cliff of 2013, the need to reduce its trillion-dollar deficits of Fiscal Years 2009-2012 to manageable proportions by the early 2020s, and the need to avert the debt Everest created by entitlement spending growth and insufficient tax revenues that threatens fiscal unsustainability in the 2030s.

But austerity is not a global phenomenon, just a Western one. In late 2012 a new OECD report estimated that the world economy would grow by about 3 percent a year during the next fifty years. Most of that growth will be in Asia and so-called developing nations. Growth in Europe and the U.S. will be far less robust and punctuated by frequent periods of decline. In line with this, the Western share of global income will also diminish, with the big gainers -- no surprises here -- being China and India.

Without the salve of economic growth to heal their domestic economies, Western leaders will likely face a crisis of political legitimacy. In Europe, with the exception of Germany, this appears to be the new cycle of politics. Governments are rejected at the ballot box because they cannot fix the economy, but new leaders meet the same fate for the same reason. Obama’s re-election may seem to buck that trend in the U.S., but the reality of divided party control of government that was also the outcome of 2012 limits his political options for dealing with the economy.

Parties of the right are more comfortable with the politics of austerity because it legitimizes retrenchment of public spending and social programs. Yet austerity does not necessarily mean that parties of the center-left are doomed to become part of a new brutish consensus to safeguard their political relevance. There is an alternative to the relentless pain of fiscal consolidation. There are different austerity strategies. The challenge facing progressive parties is to redefine the terms on which the rich, the middle classes, and the poor coexist amid economic limits.

American history in the 1930s may offer a lesson of the possibilities of a progressive approach to the new scarcity. When the Roosevelt Recession of 1937-38 extinguished the promising signs of economic recovery from the Great Depression, some New Dealers grew fearful that the long era of American economic growth was now consigned to history and a new age of stagnation had set in. They saw a future of recurrent recessions interrupted by weak recoveries in a mature economy that lacked the growth dynamics of the nineteenth and early twentieth centuries. In response, they set about planning regulatory and fiscal policies to meet this reality and ensure a more equitable distribution of wealth and resources in an age of limits.

Few of these plans made it from blueprint to public policy. The political constraints of conservative revival in the midterm elections of 1938 meant that most of the late New Deal’s redistributive initiatives were stymied. Moreover, stagnationist economic fears proved misguided. The U.S. economy soon bounced back onto an expansionary track of unprecedented prosperity, one that would last into the 1970s. However, it took World War II to revive and consolidate growth.

Could an exogenous shock of this kind happen again? In an exchange back in 2010 liberal economist Paul Krugman and conservative economist Martin Feldstein found agreement in the belief that only a major crisis of this kind could speedily revitalize the nation’s economy and terminate the paralysis of the political class. However, they were also in agreement that the likelihood of such a cataclysm was slim and that the human costs of the kind of warfare now likely to be fought far outweighed any economic benefits.

Another possibility is that a new wave of technological change of the kind that fuelled the so-called new economy of the 1990s could revitalize growth. But there is nothing to suggest that this particular cavalry is going to ride over the hill any time soon. And even if it did, the benefits may well be felt more in China and India than the West.

Perhaps the time has come, therefore, to revisit stagnationist theory of the 1930s and look at how New Deal planners like Thurman Arnold and Leon Henderson conceived fiscal, regulatory and anti-monopoly initiatives that sought a more equal, efficient, and ethical redistribution of diminished resources.

If the age of growth is over in America and Europe, progressive parties should adjust to this reality. They need to find ways of ensuring that the lesser rewards produced by sputtering economies do not flow disproportionately to the wealthy minority. Otherwise they will be co-opted into the destruction of the welfare state that their twentieth century predecessors started to build but never wholly finished.