Pro-austerity organization finds austerity increases inequality

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In the June issue of the International Monetary Fund (IMF) publication Finance and Development, Jonathan D. Ostry, Deputy Head of the IMF Research Department, and two co-authors examine two main tenets of the neoliberal doctrine, and find them wanting.

Does it make sense to pay down debt? When the evidence is assessed it turns out this fiscal consolidation -- code language for austerity -- increases inequality.

According to its proponents (those named in the article are Jean-Claude Trichet the former Governor of the European Central Bank, and Alberto Alesina a Harvard economist lionized by the Fraser Institute) austerity is supposed to promote growth. The IMF team shows the inequality increases that result from austerity feed back into slower growth.

Pro-austerity measures, such as cuts to public services, hurt more than reduced debt payments help. This would not be news, except that it is the very pro-austerity IMF that is saying austerity has undesirable consequences.

When Paul Martin and Jean Chrétien brought in their 1995 austerity budget it increased inequality, homelessness, health-care wait times, and resulted in post-secondary tuition hikes.

Canadians are still dealing with the consequences of a Liberal austerity budget from over two decades ago. It turned out that austerity in 1995, was necessary so that in the 2000 budget, $100 billion of tax cuts could be provided to benefit corporations and higher income Canadians.

Not coincidently the then official opposition Reform Party was advocating just the kind of tax cuts brought in by the Liberals, who defeated Reform handily in the next election, after stealing its major policy plank.

The IMF researchers also asked if free capital mobility was beneficial to the economy? What they conclude is that short term movements of hot money do significant damage around the world.

In an era marked by corporate globalization, regulating financial flows is a smart policy option.

A "Tobin tax" on foreign exchange transactions would reduce incentives to speculate on currency movements. Though the IMF researchers do not discuss financial transactions taxes, the implication of the their findings is that something needs to be done by governments acting together to shut down the international currency casino.

The IMF researchers stop short of condemning foreign direct investment flows, encouraged by international trade deals.

The reality is that much so-called foreign investment amounts to transfers of ownership from national enterprises to foreign multinational corporations.

Corporate globalization consists of sending domestic manufacturing jobs offshore, leading to lower costs for corporations. Poorer nations gain income producing employment, while richer nations see downwards pressure on wages, as jobs are transferred abroad.

The point about austerity is that it is designed to shrink the state, and reduce the role of government. This is achieved directly through privatization, and spending cuts; and indirectly, through tax cuts that produce deficits, and create pressures to abandon government programmes.

The policy is called neoliberal because it resembles "laissez-faire" the foundation of 19th century British economic liberalism, where governments were to reduce their control over the economy. But the non-democratic governments in question were practicing "mercantilism", using state power to amass gold, hardly a feature of contemporary states.

If liberalism was the antidote to mercantilism, today the counterpoint to neoliberalism is democracy.

The idea that what happens to others matters to each of us was expressed by the liberal Adam Smith as "fellow feeling" or sympathy for the plight of others. For Smith this was was made us human.

In a democratic society, citizen empathy or the ability to imagine how others would struggle without education, health care, or a social safety net explains why these programs were promoted, funded, and put into place.

Corporate globalization undermines democracy from outside, imposing unwelcome restrictions on government power through practices such as tax evasion, capital flight, and bargaining down environmental standards in resource extraction.

Governments that accept and succumb to neoliberal corporate globalization are in effect accepting that citizens should ignore what democratic governments can do to improve the quality of life for all in order to satisfy conditions laid down in international trade deals, or IMF loan packages, the instruments of neoliberal policy.

The 1980s neoliberal agenda was established as the "Washington consensus" by the U.S. Treasury and State Departments, the U.S. central bank or the "Fed", and the international development banks headquartered in Washington, the Latin American Development Bank, and the World Bank, as well as the IMF.

The communiqué of the recent G7 Summit in Japan revealed no breaks with neoliberal financial orthodoxy, but the refutation of austerity and financial openness by IMF research sends signals that cannot be ignored by democratic governments. 


Duncan Cameron is former president of and writes a weekly column on politics and current affairs.

Photo: flickr/Michael K Donnelly

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