May 28, 2013

IN HIS 1873 afterword to the second German edition of Das Kapital, Karl Marx commented on how the conquest of political power by the bourgeoisie, or capitalist class, had "sounded the knell of scientific bourgeois economy."

Earlier bourgeois economists, like Adam Smith and David Ricardo, had made genuine scientific contributions to the understanding of capitalist society, but once its power was established, it became much more important for the ruling class to use economics to defend the status quo as both reasonable and inevitable. As Marx and Engels had put it many years earlier:

The class which has the means of material production at its disposal has control at the same time over the means of mental production, so that thereby, generally speaking, the ideas of those who lack the means of mental production are subject to it. The ruling ideas are nothing more than the ideal expression of the dominant material relationships, the dominant material relationships grasped as ideas; hence of the relationships which make the one class the ruling one, therefore, the ideas of its dominance.

Barack Obama speaks at a summit of G8 leaders held at Camp David (Pete Souza)

They put the idea more succinctly: "The ideas of the ruling class are in every epoch the ruling ideas." In terms of mainstream economics, this meant that science came to be replaced by ideology--a set of ideas developed not primarily to discover the truth, but to defend the interests of the bourgeoisie. As Marx wrote in 1873:

It was thenceforth no longer a question whether this theorem or that was true, but whether it was useful to capital or harmful, expedient or inexpedient, politically dangerous or not. In place of disinterested inquirers, there were hired prizefighters; in place of genuine scientific research, the bad conscience and the evil intent of apologetic.

MARX'S WORDS describe perfectly the recently discredited work of two prominent Harvard economists, Carmen Reinhart and Kenneth Rogoff. In 2010, they published a highly influential paper, titled "Growth in a Time of Debt," that purported to show on the basis of historical data than when a nation's public debt grows to be larger than 90 percent of its gross domestic product, it crosses a threshold, and its growth rates drop dramatically.

As soon as the paper appeared, it was seized upon by political and media figures who favor austerity programs that require sharp cuts in public spending as a vindication of their position, and they have been citing it ever since. Paul Ryan, the Republican chair of the House Budget Committee, explicitly cited Reinhart and Rogoff earlier this year when he unveiled a budget proposal that would result in savage cuts to social spending.

But in April, economists at the University of Massachusetts at Amherst (including Thomas Herndon, a graduate student who pestered the Harvard economists until they finally shared their data with him) demonstrated that Reinhart and Rogoff's research was riddled with errors.

First, their spreadsheet had a coding error that left out five countries when they were determining average growth rates. Second, they cherry-picked the data that they included, leaving out statistics for Australia, Canada and New Zealand in the immediate post-war era, when all three countries had high debts and high economic growth. Finally, they made what Princeton economist and New York Times columnist Paul Krugman called "some very odd choices about...how to weight the data that remained."

Once those errors were fixed, Herndon and two of his professors found that the average growth rate for countries with high debt jumped from -0.1 percent to +2.2 percent--a dramatic shift. That rate is still lower than in countries with lower debt levels, but there's no sudden cut-off point after which growth rates plummet. And, more importantly, the statistics tell us nothing about causality. Do high debt levels cause low growth, or is it the other way round?

This isn't the first time that Harvard economists have been caught massaging the data to support a ruling-class agenda. A study a few years ago by Alberto Alesina and Silvia Ardagna claimed to show that spending cuts boosted economic growth in the short term. This result, however, depended on fudging together cases where cuts were made when the economy was already growing and cases where cuts were made during a slump. Just as in the Reinhart-Rogoff case, the media and political establishment immediately began citing Alesina and Ardagna's paper as proof that their policies would be vindicated.

BUT IT doesn't take an economic genius to figure out that if government spending is cut sharply at a time when an economy is already depressed the fall in demand will only make matters worse.

This is the downward spiral that the Greek economy has been locked into for the past few years. With the economy shrinking, tax revenues fall, and the budget deficit increases. To cover the gap, the government is forced to borrow money, but in the Greek case, the loans have come only on condition that spending be cut even more to reduce the deficit. But the cuts reduce growth even further, unemployment goes up, and government revenues decline even faster than government spending, so the budget deficit gets bigger, not smaller.

Many liberals hoped that when Barack Obama was first elected in 2008, he would be the new Franklin Delano Roosevelt and initiate a 21st century New Deal that would both revive the economy and shift the balance of power in the U.S. back in the direction of labor.

The hopes were short-lived. Obama did push through a substantial stimulus package in his first year that stopped the U.S. economy from going into free fall, but which was not big enough to produce strong growth or make any significant reduction in unemployment. Since then, however, Obama has accepted the Republican view that budget deficits are the main problem, and since his reelection, he has taken the lead in proposing cuts to Social Security and Medicare.

Liberal Keynesian economists like Krugman have been arguing for the past several years that this is both bad politics and bad economics. Bad politics because the Democrats are, once again, attacking their base; and bad economics because cutting spending during a slump will prolong the downturn. Here's Krugman making this argument in a recent column:

The main reason our economic recovery has been so weak is that, spooked by fear-mongering over the debt, we've been doing exactly what basic macroeconomics says you shouldn't do--cutting government spending in the face of a depressed economy. It's hard to overstate how self-destructive this policy is. Indeed, the shadow of long-term unemployment means that austerity policies are counterproductive in purely fiscal terms. Workers, after all, are taxpayers, too; if our debt obsession exiles millions of Americans from productive employment, it will cut into future revenues and raise future deficits. Our exaggerated fear of debt is, in short, creating a slow-motion catastrophe.

But if austerity politics are so self-defeating, why have ruling classes in most leading capitalist countries embraced them with such fervor? The key question to raise in this connection is: "Catastrophe for whom?" While austerity has produced prolonged mass unemployment and falling living standards for millions of people, it has so far turned out rather well for the people at the very top of the economic pyramid.

According to a recent study by the Pew Research Center that analyzed data from the Census Bureau, from 2009 to 2011, "the mean net worth of households in the upper 7 percent of the wealth distribution rose by an estimated 28 percent, while the mean net worth of households in the lower 93 percent dropped by 4 percent." In dollar terms, the richest households saw their wealth increase on average by $800,000, while the rest of us suffered an average $6,000 decline.

Meanwhile, ruling classes in the U.S. and elsewhere are using the crisis to restructure their economies in ways that they think will make them more competitive in the long run. This includes wage cuts, attacks on public sector unions and significant cuts in social spending. If they can impose this agenda, then they may consider low growth for the foreseeable future a price worth paying.

Whether or not this strategy will actually produce stronger economic growth in the long term is another question, but a significant segment of elite opinion regards it as their best bet. Hence, it becomes necessary for them to tell the rest of the population that there is no alternative to the bitter pill of austerity, and that we should therefore downsize our expectations. Krugman gets this when he writes, "The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a façade of academic rigor. What the top 1 percent wants becomes what economic science says we must do."

BUT WHATEVER the long-term consequences of austerity policies, their devastating immediate impact on workers and the poor around the world is very clear.

In their new book The Body Economic: Why Austerity Kills, David Stuckler and Sanjay Basu, a sociologist and an epidemiologist, respectively, survey the historical and contemporary record of sharply cutting wages and social programs, and document the brutal toll in human terms. "The price of austerity is calculated in human lives," they argue. "And the lives lost won't return when the stock market bounces back." In the book's introduction, they write:

We were shocked and concerned at the illogic of the austerity advocates, and the hard data on its human and economic costs. We realized the impact of the Great Recession went far beyond people losing their homes and jobs. It was a full-scale assault on people's health. At the heart of the argument was the question of what it means to be a society, and what the appropriate role of government is in protecting people.

During the current crisis, Europe and North America have seen an additional 10,000 suicides and perhaps a million new cases of depression. In the U.S., there has been a 30 percent increase in suicides by middle-aged Americans facing financial stress, long-term unemployment and other economic problems over the past decade. These consequences, however, are largely the outcome of the ways in which different societies have chosen to deal with their economic woes.

For example, Stuckler and Basu compare Iceland, which has protected social spending since the current financial crisis began, with Greece, which has been forced to slash government spending to get new loans. During this time, Iceland has seen no rise in its death rate, while in Greece the death rate has soared. "The human costs have become dramatically clear: a 52 percent rise in HIV, a doubling in suicide, rising homicides and the return of malaria--all as critical health programs were cut."

Stuckler and Basu's comparison makes clear that the economic crisis was not responsible by itself for the subsequent health crisis. "Ultimately, what we show is that worsening health is not an inevitable consequence of economic recessions," Basu said in a statement. "It's a political choice."

There is little chance, however, that, left to their own devices, political elites will make a different choice any time soon. According to Stuckler,"Europe's leaders have been in denial of the evidence that austerity is costing lives"--and exactly the same could be said of political leaders in the U.S. Just as they have sought out and rewarded research that seems to support their self-serving prejudices, they are likely to ignore research that contradicts them by showing that austerity is positively correlated with illness and death.

Nevertheless, when ruling-class propaganda is exposed, that can only be a good thing. As Krugman points out, "[T]he drive for austerity has lost its intellectual fig leaf, and stands exposed as the expression of prejudice, opportunism and class interest it always was." Still, significant policy changes will require political mobilizations from below, widespread social unrest or both. The task of those opposed to the austerity agenda is to figure out how to bring that about.