Screw (Down) the Debt: Neoliberalism and the Politics of Austerity

Under the name of ‘austerity' many governments are currently looking to drastically reduce public expenditure and impose tax increases to cover a rapidly and dramatically increased state debt. Beyond their attack on those who most call upon state support what is so galling about these measures is that this debt was drawn in order to channel credit into the banking system as it took huge hits in the 2007-09 credit crunch, a falling apart of its credit structures - or deleveraging - that threatened the very solvency of financial corporation of all sizes. The reasoning and justification for austerity is that such a sharp contraction of crecit would have ceased up commerce, leading to massive job losses and reduction in consumption, in turn resulting in the destructive effects of severe global recession if not depression (though such commercial credit has not in fact been exactly forthcoming, the banks channeling the supporting funds into financial instruments generating high enough rates of return to ensure a profitability that will keep their shareholders and managers happy). The size, imponderability and systematic importance of national debt at these scales, necessary to maintain the credit ‘to keep the economy going', gives it weight and urgency - a momentum - that assures its political and economic priority, thinly cloaking the ‘ideological' cutback of the state in favour of contracting out of public services to the private sector to the great benefit of those company's profit margins and disadvantage of those who work for them.

But as slogans such as ‘We Won't Pay For Your Crisis!', ‘Pay, You Fuckers!', and ‘No Profit On Our Future' make clear, in addition to the attacks on public provision austerity is but another name for the transfer of debt from the international finance sector to national populations, with governments acting as the transmission mechanism not just for the old banking adage to ‘privatise the profits and socialize the losses' but also for the legality and putative legitimacy of such a transfer. As well as rightly blaming the finance sector as historical cause for the crisis, protests against austerity therefore also incisively highlight the disservice that, in their subordination to the mechanisms and power of international finance, governments now do to their own populations (who, through representational procedures, are putatively supposed to ‘own' these very governments). The post-war settlement of social security and state arbitration of the labour-capital relation prevalent in Western Europe for the last half-century or so is stripped further back as populations are now exploited to cover the costs of a financial sector that holds states to ransom with its own power to close down business by destroying its basic fiscal condition: credit.

In addition to the individual and sectorial politics of the current protests (respectively, massive personal debt burdens and the privatization - which is to say creditization - of what remains of public services such as education, health, care, etc.), the implementation or not of austerity then involves a systematic politics of debt. Systematic because, contrary to assertions that the credit crisis marks the end of neo-liberalism, austerity as the means of ‘recovery' from the financial credit-crisis turned public debt-crisis will instead inaugurate a further diversification of capital accumulation for the already wealthy, entrenching neo-liberalism mechanisms and conditions of one-sided capital accumulation. That is, austerity is not just the cutback of the state but the entrenchment of neo-liberalism (as the acceleration of capital accumulation on the basis of leveraged credit revenue). This future of neo-liberalism is what governments are now seeking to implement. And vectored through individual and sectorial interests this is what the current spate of protest struggle against, what they have in common - what is systematically political in the current conflicts.

The practical parameters of national debt financing

A broad outline of the basic mechanisms of debt and its funding at state level suffices to capture the systematic operation of austerity.

In economies with large private sectors the circulation and leveraging of credit central to the transfer of debt from the finance sector to general populations has two principal sources: the bond markets, where governments, agencies and corporations borrow at rates of interest determined by risk, and the extraction of revenue on the basis of private debt, which provides the basic revenue leveraged by financial institutions to generate escalating levels of profit.

State intervention to compensate for a deep contraction in credit and liquidity, and of large drops in asset prices of financial institutions (and so their net worth), has two main channels: (i) direct backing of banks and other financial institutions to cover losses and keep them solvent; (ii) boosting the economy to ensure its non-stagnation in the face of the contraction of credit and liquidity, loss of jobs, drops in tax-income, etc., This is a proto-Keynesian ‘supply side' stimulus favoured by the centre-left. Both routes lead to a rapid escalation of national debt which must be able to be paid down (even if in fact it never is) if the state is not to lose its credit-worthiness.

There are in turn four basic inter-connected ways of decreasing national debt: directly increasing state income (by taxation and one-off privatizations of national industries), expanding the economy to indirectly increase revenues, cutting expenditure, and opening new channels of credit that circumvent state debt financing. Practical orthodox responses to the credit crisis and risk of global recession are for the most part constrained by these two-plus-four standard parameters. Schematically outlining what each involves will serve to demonstrate how the austerity implemented by governments - seeking in the form of credit-worthy bonds to placate the very markets they are securing through their new debt - strengthens not just the immediate continuation of proto-neo-liberal economic policy but also its systematic promulgation; how, that is, the recent crisis is not the end of neo-liberalism as is sometimes proposed but an opportunity for its further entrenchment.

Taking in turn the four basic ways of decreasing national debt:

(i) Taxation: Tax increases are taken to be ‘politically unacceptable' by parties contending for government in largely privatised economies though that that does not prevent them from being implemented by ‘stealth'. The economic argument is that increased taxation removes income and profits from the private sector, decreasing private consumption and private re-investments. Economies based on high consumption levels - notably the United States, Britain and others that have followed neo-liberal principles - cannot increase tax levels easily without causing further recessionary effects or compensating through state expenditure. Furthermore, increased taxation income does not necessarily mean increasing tax levels: tax policy in the US and the UK since the 1980s has consistently striven to reduce the tax rate for the wealthiest sectors of the population, proposing that lower taxes makes such high earners more likely to remain residents and pay taxes rather than leave their countries or find loopholes, thereby increasing overall revenue from this notoriously tax-shy sector. Further, given these incentives, the very wealthy are supposed to invest their earnings into the broader economy and stabilize production through their marked consumption, both of which serve to generating growth. The rapid growth of overall net income of the super-rich has however, and not entirely unpredictably, tended to be invested not in domestic production but in emerging economies and finance sector where the levels of return are much higher, generating yet further returns for the wealthy themselves.

(ii) Economic expansion: This route requires pump-priming the economy either by backing private sector creditors or through its direct financing. Without current surpluses both routes require increasing national debt levels or, if undertaken by central banks, increasing money supply (Quantitative Easing). But the ability to raise national debt to maintain open-enough credit and liquidity are limited by the conditions under which debt is raised in the first place through bond markets, where governments like private corporations regularly borrow money by selling interest-bearing bills. (The next few lines schematize the conditions bond markets impose on borrowing levels; readers familiar with this may skip to the last paragraph of this section.) As with other borrowing the basic parameter of these markets is that the risk of lending is offset by higher interest: high-risk borrowing needs higher interest rates on repayment to attract and secure lenders despite the various disinclinations against the chances of default, long-term risk, etc.. Such risks reduce the cost of the bonds and therefore the amount of money that can be raised from them. If the risks of lending are perceived to be too great funds cannot be raised on the bond markets and states cannot pay back their existing bonds or, in expectionally bad cases (when interest is about 12 percent of GDP), even the interest on them. Commercially, this is bankruptcy and insolvency; for states it is sovereign debt default. Since governments are usually considered to be the safest bet of all on bond markets because they can always raise revenue by increasing taxes, sovereign debt default is not only a problem for the states whose borrowing capability is at risk; it is also a fundamental risk for the bond markets themselves, and therefore for the entire state-commercial credit system.

Two often inter-linked routes to the risk of sovereign debt default are chronic debt overhang, when long-term state borrowing is too large for confidence in its repayment to be maintained, and a rapid escalation in borrowing, when state income is not high enough to cover the increased borrowing costs. In either case borrowing becomes difficult to impossible, and not only is it then impossible to secure commercial credit systems or boost economic activity but the very circulation of credit in the bond markets themselves becomes fragile. In order to ‘re-assure' these markets of their continued viability over the duration of the period of the bond, and to support the continued operation of that market itself, governments must ensure that the debt to GDP ratio is reduced to risk levels acceptable to the bond markets. Governments pressing for austerity measures therefore insist that the high levels of national debt (more accurately, national debt to GDP ratios, which depends on the earnings from production of the particular national economy) require urgent attention because of the risk of default anxiety in the bond markets. This is exactly what has taken place in the large-scale bail-out of the finance sector - dramatically so with Greece and Ireland recently, where the flight from those states' bonds was mitigated by exceptional intervention from the European Central Bank in conjunction with IMF intervention to provide loans to those economies with the added condition that they not raise capital from the bonds markets.

Even if sovereign debt default is not such a great risk for countries such as the UK that have strong enough production and consumption sectors to secure high levels of borrowing, increased debt burdens can nonetheless be politically mobilized to justify austerity measures. For example, the repayment of debt interest alone, never mind the borrowed capital, for the UK in 2010 is £30 billion (though this is only 2 percent of GDP) and is predicted to climb to £60 billion by 2015 (3.3 percent GDP) which, as current costs to be paid by future income, is revenue that does not go to direct re-investment into productive capital, social expenditure or wages, and is taken to be a straightforward loss of productive capacity. The slight of hand in this argument is that this interest repayment is what maintains current production and investment, and does so at relatively low levels interest levels in terms of GDP.

Given these operational conditions for where and how national credit is raised, it's worth highlighting that while the recent rapid increases in national debt and interest repayment levels have been made in order to keep the highly transnationalized financial sector solvent - for example, by sustaining credit and liquidity in the economy, re-assuring stock markets and their shareholders of their continued viability as going concerns and, as in the case of Ireland, insuring of bank deposits to prevent a bank run - this life-support of transnational finance at a time of its crises not only requires states to raise capital at higher cost to themselves but those very bonds are themselves subject to much speculative trading and leveraging by the finance sector, which therefore profits well from the increased cost of borrowing generated by the efforts to stabilize that system.

(iii) Cutbacks: The reduction of government expenditure is the most overt attack on public services, usually with the most destructive effects on the poorest. Cutbacks to public services such as the reduction or closure of public facilities, either directly through outsourcing or indirectly as providers of the next nearest alternative (the shopping centre rather than the park, the bookstore rather than the library), pushing social or non-work time and spaces into the hands of private ownership and their ‘facility charges', caps on housing subsidy, unemployment payments, disability benefits, and so on, all serve to put what were once public responsibilities and interests into the private sector whose ownership extends not just to the material facility, service or entitlement (the park, the building, the benefit) but also to the right to access it, the requirement to generate a profit. As such, not only do cutbacks in public services corrode the practical and material conditions of what and how a public is constituted, making it ever more distant and idealized, it also redistributes and deepens the dependence between the poorest and the private sector. (What is politically astute and disturbing about the logic put forward for privatizing tuition costs - why should the hard-working poor subsidize those who will privilege in status and earnings from a Higher Education? - is not only the defense it presents against the very exclusion of poorer people from HE but that it makes the case for the destruction of public funding into an argument by and for the poor precisely when it will be only those with a large enough capital base - definitionally, not the poor - who will be able to take advantage of such provision in the revised funding structures.)

(iv) Extending Private Debt: The consumption boom of the decade to 2008 was premised on the massive increases in private debt mortgages and, to a lesser but still significant extent, the escalating individual and aggregate debts of private consumption organized through low-interest loans, credit cards, and so on. The rapid growth of financialization of that period - capital accumulation through ownership titles rather than production or services - depended not only on an increase of indebtedness with interest-bearing repayment but also on the acceleration of accumulation by the fabrication of new financial instruments leveraging that initial income (what is called securitization: high levels of speculative investment backed with the ‘real money' earned from interest repayment). Interest bearing loans - debt - generated a supposedly reliable revenue stream without depredation of the capital (other than inflation, which was at exceptionally low levels during the period). That is, debt interest became a constitutive feature of economic growth, accumulation itself being organized increasingly through financialization.

If neo-liberalism is often taken to be a free-market ideology it practically amounts to just this escalation of private debt as primary source for the rapidly escalating leveraging of the finance sector. In the US, which has most shaped its economy to this model, with global consequences, this escalation took off markedly with Reaganism in the 1980s, was consolidated through the transfer of debt from the state to the private sector in the 1990s - compensating for the Clinton administration's reversing of government debt into surpluses by shrinking public expenditure through shutting down Federal public services and shrinking its consumption - and peaking in the 2000s with the speculative transformation of private debt into speculative credit through house-price inflation, fuelled by chronically low interest rates set by Greenspan's Federal Reserve coupled to low inflation rates thanks to the cheap prices of imported consumer goods enabled by very low Chinese labour costs.

Incurred upon housing and consumption, such debts and interest revenues presumed earnings to facilitate a minimal enough repayment of interest and charges to ensure non-default. However, the trick of financialization can be played out at the literally domestic level and the revenue from which private debt repayments are made do not have to take place through labour or other production. The house-price boom to 2008 allowed those with mortgages to take out loans against the added value of the property without any productive expenditure, generating a form of income predicated on the future disposal of the house at a higher price than it was brought for. But such income is of course only an increase in debt and an increase in interest earnings by the lender, allowing the creditor to increase its revenue stream and increase the revenue available for further leveraging. This base revenue is what became systematically insecure in 2007-08 when the volume of mortgage defaults reached a level high enough to not only cause the downfall of several lenders but to make the highly leveraged basic debt-incurred income susceptible to doubt as to its viability, resulting in a rapid deleveraging across the finance sector. Given the degree and complexity of leveraging typifying finance since the mid-1990s, doubts on the security of most financial products could not be contained or ‘sterilized' resulting in the withdrawal of confidence in commercial lending, and so a rapid credit contraction threatening international insolvency.

The credit crisis and the need for new sources for securitization

What remains a cause for concern for speculative neo-liberalism after the unraveling of financial leveraging is how to maintain securitizable income when earnings-based debt - mortgages, credit cards, domestic consumption, etc - can no longer be ensured and presents too great a risk of default. It is here that governments' withdrawal of state support for non-labour activities such as education, health, retirement and so on - that is, austerity - takes its role in diversifying the revenue stream for financial securitization. As much as bond markets may be re-assured that national debt and its interest can again be financed by governments, so austerity measures that require schoolchildren or students and their parents, the elderly and their children, the unwell and their relatives, the unemployed and those who rely upon them - in short, non-earning non-labour - to finance (the term is exactly right) their provision through loans and incurring debt, providing a more or less direct source of primary revenue for leveraging.

That source of securitization is by now familiar: it is a lesson (not) learnt from the extension of the lending practices of credit-card companies and loan-sharks, as well as for lenders of ‘sub-prime' mortgages. The point here is that such basic income generation for financialization now takes place not just on revenue predicated on earnings through labour or other credit generation at smaller or larger scales, but also on the basis of those who have no earnings yet or any more, of those who will earn (schoolchildren and students) or have earned (retirees, the unemployed), of non-labour. As such, austerity measures implemented by governments seek to support financial leveraging not only by restoring confidence to the bond markets but also by securing and officialising new non-earning revenue for it.

In this respect the politics of the current protest against austerity are not just a politics of who pays for a historical and systematic near-insolvency of the finance sector, but a politics of the continuation of the system of financialization of not just present but also future and past earnings. To be clear: not just the future and past earnings of those who can earn (the mortgage you can take out once you have an income that enables you to have one) but on coming-to-have or having-had the ability of earning at all (schooling at all levels, retirement) and even of not-being-able-to-earn. The credit crunch and subsequent efforts to salvage the economy through pumping liquidity into the system and imposing austerity measures configure non-earning as a new primary revenue for finance to leverage and extract speculative earnings. Austerity is another turn of the screw of debt-based revenue for financial leveraging.

As noted, the process is not new in itself, nor is its commonality: it replays the debt-transfer mechanisms of the late 1990s and 2000s based at that time on the boom in house prices and the income debt-driven stream of householders drawing loans on their mortgages and/or those of working age drawing on their pension schemes, as well as the finance sector's increasing need to expand credit whose earnings it could rapidly leverage for speculative gain. What is perhaps new and certainly exacerbated in the move to securitize non-earnings is that the income stream is entirely prospective and retrospective, taking place on what which is without-earning never mind profit-making. What itself earns nothing turns then into a speculative undertaking whose worth is that of purely future earnings. There is no chance of not being indebted and paying interest on it, even if nothing is (yet or still) being earned to pay that debt back and its interest. Austerity is not then only a matter of individual and sectorial indebtedness and privatization but of systemic conditions of capital accumulation its politics (which is also why the United States, which already arrived at this point about a decade ago, cannot take this route out of the crisis).

The political opportunity of austerity

In short, (i) austerity measures will implement the indebting of non-earning; (ii) austerity is an opportunity for neo-liberalism to deepen and re-secure - refinance - its credit base by securing debt into non-earning sectors, from not-yet or no-longer labour (childhood, study, retirement, non-economic sectors). This in order for non-earning activities to repay the credit that will have enabled them to take place at all. What is at issue is not the control or ruling in or out what happens outside of earning (it is not a matter of content) but that whatever kind of non-earning it is, it is a source of revenue for financialization through the interest-bearing loan it will require if it is to be undertaken (including unemployment). The financialization of that whose worth is not capitalization, of a future distinct from earning, is then predicated on the securitization of non-earning, ex-labour. Furthermore, what ex-labour could earn will not be for productivity or its own reproduction (to use only the basic Marxist categories) but as a continued income stream backing speculative capital. This is the primary task of austerity, the organization of a future as inherently revenue generating not through earning but, prior to that, as interest bearing. It screws down debt as condition for the further entrenchment of neo-liberalism at the moment of its deleveraging crisis.

As much as the protests against austerity condemn the finance sector for the losses it has already inflicted on the populations and no less government servility to their credit-making power, they also refuse the further implementation of this logic and extraction of future and past earning. To say ‘Screw Debt' whether in the form of tuition fees, increasing the retirement age, fixing housing benefit by average local rent, and to demand instead that the international finance sector takes a hit on future earnings so as to pay back the total costs of government intervention (that anyway seeks to ensure solvency of that sector's key institutions) and the costs of supporting the economy through the consequent recessionary period, all of this is to reject the turn of the screw of financialization and securitization as a ‘solution' to the credit crisis in the guise of public austerity.

The fight against austerity is in other words a direct and for once blatant opportunity to defeat the premise, logic and operation of neo-liberalism in its core mechanism of accumulation, and to do so as its screw looks to turn again. This is what is dangerous in the immediate struggles against Higher Education tuition fees, the preservation of a retirement age, for free education at primary and secondary levels, a public health service, struggles that will dominate the headlines in the coming period. Dangerous because the current beneficiaries of financial wealth generation, who by virtue of such accumulation are necessarily the more powerful, have of course done very well from leveraging securitized assets and will strive through state power to not only hold on to accumulation on this basis but also to entrench it further though austerity; to do otherwise would literally be at great cost to it.

These struggles then constitute a politics of neoliberalism in the exact sense: the implementation or not of austerity is a matter of whether the credit crisis and consequent public debt is an opportunity for financialization to deepen its hold on both earnings and non-earnings, or whether it is an opportunity to defeat the extraction of past, present and future earnings from populations as interest-bearing debt. It is a matter of whether the assumptions and material-technical practices of neo-liberalism are secured and entrenched in the coming period, or whether they will be halted before they are necessitated by government cutbacks on the material-technical-social conditions of public provision. Combatting the further indebting of not just labour and earnings but now also of non-labour and non-earning, of simply having a future at all - austerity or not - is the current politics of neo-liberalism.