Who benefits from austerity – and who pays?

Published by Anonymous (not verified) on Tue, 16/07/2019 - 7:30pm in

This is an important question. If austerity –
involving cuts in social security – is imposed on an economy in recession, the
result will be rising unemployment, poverty, inequality and socio-economic
hardship. If it goes on long enough, social unrest and political change is also
very likely to follow.

Oxfam argue that over the past thirty years, wealth and income inequality have both risen to “levels never before seen … [and] are getting worse”. They conclude that extreme wealth and income inequality are “economically inefficient”, “politically corrosive” and “socially divisive”. This is because since the wealthy spend a smaller proportion of their income than the less well-off, excessive inequality depresses demand – with adverse effects on growth. Extreme wealth and inequality can undermine political processes if the wealthy use their position to secure excessive influence. Inequality can also be socially divisive, because the better-off have private access to services that the majority depend upon the state to provide – and they often lobby for withdrawal of support for those public services. However, the report ends on a more positive note, concluding that wealth and income inequality are “not inevitable”.

In recent years, even organisations like the IMF
and the World Economic Forum have recognised the dangers of inequality.  In particular,
they have both drawn attention to both the high
and rising inequality caused by austerity, and its damaging effects on both
social cohesion and economic growth.

A 2011 IMF
research paper
identifies income equality
as by far the most significant factor supporting sustainable economic growth.
While the benefits of lower inequality are shared by most income groups,
extreme inequality has historically given rise to crises, with the current rise
being “strikingly similar” to that of the turbulent inter-war years. According
to the IMF report, “in both cases, there was a boom in the financial sector,
poor people borrowed a lot, and a huge financial crisis ensued”. The study
concludes that “the recent global economic crisis … may have resulted, in part
at least, from the increase in inequality”.

Recent surveys from 2012 and 2017 of
leaders in business, government, academia and NGOs by the World Economic Forum
(WEF) also point to the potential for extreme inequality to trigger a crisis.
Assessing the likelihood of fifty global risks during the coming decade – and
their probable impact – extreme income disparity topped the list in both. On
the basis of these views, the WEF warns of a “potentially potent combination of
chronic labor market imbalances, fiscal imbalances and severe income
disparity”. It goes on to argue that “[w]hen amplified by extreme demographic
pressures, these conditions could lead to a retrenchment from globalization and
the emergence of a new type of critical fragile states – formerly wealthy
countries that descend into a spiral of decay as they become increasingly
unable to meet their social and fiscal obligations”.

There is good reason for these
concerns. Social welfare was originally introduced in many countries due to
inequality and the appalling conditions in which many were forced to live and
work. It was also significantly motivated by concerns about how the
increasingly numerous urban poor might react – especially when they had very
little left to lose and had started to organize themselves. The Russian
revolutions of 1905 and 1917 had a powerful influence on policy between the two
World Wars, with many governments keeping at least one eye on the possibility
of a Communist revolution – and continuing to do so throughout the Cold War.

However, the collapse of the USSR did not end the need for
social security. The recent cuts to public services, affecting large numbers of
people, have inevitably had a disproportionate impact on those who rely upon
them the most. During the latter part of the Industrial Revolution and the
first part of the 20th century, it was precisely these sorts of
conditions that fueled organized industrial and social movements, demands for
political representation, and the birth of both new ideas about the economy and
society and new political parties. Whilst austerity wasn’t the only factor
driving these processes, it was certainly a contributor.

It seems that this dynamic is a permanent part of the
“austerity equation”. It is clearly apparent in the movement of the Labour
Party sharply back to the left, motivated chiefly by those experiencing the
brunt of the Coalition and Conservative governments’ austerity measures. It is
also evident in the rise of so-called “populist” social and political movements
across Europe and the United States – a worrying number of which are far-right
in nature.

The message therefore seems clear: No one benefits from austerity – and everyone pays. By contrast, social security and high-quality public services benefit everyone, as they help to maintain social, industrial, political and economic stability. Without such stability, some very challenging economic, social and political conditions can emerge – and surprisingly quickly.

Photo credit: Flickr / ilirjan rrumbullaku.

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