Two Deficits

The 1992 presidential election in the United States was dominated by the question of the two deficits: that of the federal government and that of the country as a whole, in foreign trade. The victory of Bill Clinton, who had campaigned above all on the ‘double deficit’, set off worldwide attempts at fiscal consolidation, aggressively promoted under American leadership by international organizations such as the OECD and the IMF. Initially the Clinton administration seems to have envisaged closing the public deficit by accelerated economic growth brought about by social reform, such as increased public investment in education. But once the Democrats lost their Congressional majority in the 1994 midterm elections, Clinton turned to a policy of austerity involving deep cuts in public spending and changes in social policy which, in the words of the president, were to put an end to ‘welfare as we know it’. From 1998 to 2000, the U.S. federal government for the first time in decades was running a budget surplus.

This is not to say, however, that the Clinton administration had somehow found a way of pacifying a democratic-capitalist political economy without recourse to additional, yet-to-be-produced economic resources. The Clinton strategy of social-conflict management drew heavily on the deregulation of the financial sector that had already started under Reagan and was now driven further than ever before. Rapidly rising income inequality, caused by continuing de-unionization and sharp cuts in social spending, as well as the reduction in aggregate demand caused by fiscal consolidation, were counterbalanced by unprecedented new opportunities for citizens and firms to indebt themselves. The felicitous term, ‘privatized Keynesianism’, was coined to describe what was, in effect, the replacement of public with private debt. Instead of the government borrowing money to fund equal access to decent housing, or the formation of marketable work skills, it was now individual citizens who, under a debt regime of extreme generosity, were allowed, and sometimes compelled, to take out loans at their own risk with which to pay for their education or their advancement to a less destitute urban neighbourhood. social policy that was simultaneously being scrapped, as well as for the wage increases that were no longer forthcoming at the lower end of a ‘flexibilized’ labour market. [..]

For a time, home ownership offered the middle class and even some of the poor an attractive opportunity to participate in the speculative craze that was making the rich so much richer in the 1990s and early 2000s – treacherous as that opportunity would later turn out to have been. As house prices escalated under rising demand from people who would, in normal circumstances, never have been able to buy a home, it became common practice to use the new financial instruments to extract part or all of one’s home equity to finance the – rapidly rising – costs of the next generation’s college education, or simply for personal consumption to offset stagnant or declining wages. Nor was it uncommon for home owners to use their new credit to buy a second or third dwelling, in the hope of cashing in on what was somehow expected to be an open-ended increase in the value of real estate. In this way, unlike the era of public debt when future resources were procured for present use by government borrowing, now such resources were made available by a myriad of individuals selling, in liberalized financial markets, commitments to pay a significant share of their expected future earnings to creditors, who in return provided them with the instant power to purchase whatever they liked.

Financial liberalization thus compensated for an era of fiscal consolidation and public austerity. Individual debt replaced public debt, and individual demand, constructed for high fees by a rapidly growing money-making industry, took the place of state-governed collective demand in supporting employment and profits in construction and other sectors (Figure 2.4). These dynamics accelerated after 2001, when the Federal Reserve switched to very low interest rates to prevent an economic slump and the return of high unemployment this implied. In addition to unprecedented profits in the financial sector, privatized Keynesianism sustained a booming economy that became the envy not least of European labour movements. In fact, Alan Greenspan’s policy of easy money supporting the rapidly growing indebtedness of American society was held up as a model by European trade-union leaders, who noted with great excitement that, unlike the European Central Bank, the Federal Reserve was bound by law not just to provide monetary stability but also high levels of employment. All of this, of course, ended in 2008 when the international credit pyramid on which the prosperity of the late 1990s and early 2000s had rested suddenly collapsed.

Ah but let's not talk about these uncomfortable things.. let's talk about Russia. Russia Russia Russia..!

There is an electoral "upset" in Italy? It's Russia..