Why Neoliberals Pretend Private Debt Doesn’t Matter and Public “Debt” Does

The neoliberal policy approach in the decades leading up to the crisis basically amounted to enticing or pushing people into increasing levels of private debt. With private debt burdens mounting in relation to real GDP, we were told that consenting adults knew what they were doing. Then the crisis hit. Since then, as the private sector attempted to deleverage and get its unsustainable debt levels under control, we were told that the government’s deficits, which increased as a matter of accounting, were unsustainable. The outcome, depending on which doomsayer you listened to, would supposedly be hyperinflation, escalating interest rates, sovereign default, a crippling debt burden on future generations or some heady combination of any or all of these calamities. For governments that issue their own flexible exchange-rate nonconvertible currencies, these claims are nonsense. Even in the Eurozone the sovereign-debt crisis is a manufactured one that can be alleviated indefinitely by the ECB. So what explains the neoliberal preference for private debt and aversion to government deficits? The class-interested motivations seem crystal clear.

Private indebtedness, unlike government deficit expenditure, binds the majority of individuals more tightly to the wage labor relation. Workers with mortgages or other debt obligations will be more subservient in relation to their employers, and less likely to risk their present positions in negotiations over wages and conditions.

The neoliberal policies of deregulation, privatization, the user pays principle and austerity all played their parts in weakening the position of the vast majority relative to capitalists and government, and pushing general populations into indebtedness. Labor-market deregulation assisted capitalists in the defeat of organized labor. Financial deregulation opened the way for credit-fueled private consumption, the real estate bubble and interest and service charges for the rentiers. Privatization of public utilities brought declining standards, higher prices for essential services and monopoly rents for owners. The user pays principle has been instrumental in the case of education. By loading students with debt, lifestyles other than wage slavery are deliberately made less viable. Rising university fees also ensure plenty of young people are desperate enough to join the military as a way of getting an education.

In all this, austerity plays a key role. It intentionally creates joblessness and precariousness for many. At the macro level, as Keynesian and Kaleckian approaches make clear, unemployment is a government policy choice, a choice that is activated by keeping the budget deficit at a level too small to eliminate the output gap. The result, again, is a more subservient general population.

The way the neoliberal policy agenda has been put into action is illuminated in an extraordinary feature-length documentary focusing on New Zealand. The documentary, which I have linked to previously, makes very clear that the neoliberal attack on workers’ pay and conditions from the early 1980s onwards was highly orchestrated. The same basic experience has been mirrored in many places, but I have not seen the machinations stripped so bare as in this film.

The documentary traces several clearly defined steps that were followed by both major parties in tandem with the treasury and central bank.

First, austerity was consciously imposed to create mass unemployment. It is very noticeable in the early stages of the policy assault that protesting workers were most focused on the right to work. The government’s implicit employer-of-last-resort role was being withdrawn, and this fact was obvious to protesters at the time.

Second, with unemployment much higher (deliberately so) than before, this was then used as “evidence” that wages were too high, legitimizing real cuts in pay, particularly in the minimum wage. Not surprisingly, the cuts in pay did not boost employment, since it is a fallacy of composition to expect otherwise, but this was never the intention of policymakers, as the documentary evidence makes clear.

Third, with unemployment still high and real wages reduced, it was argued that unemployment benefits must be too generous relative to the minimum wage, and this was the cause (via “disincentives to work”) of the high unemployment. This is despite much of the protesting having initially been over the right to work.

The end result was mass unemployment alongside lower wages and a weaker safety net, precisely as intended. This led, predictably, to further wage and benefit cuts being demanded, in a supposed effort to reduce unemployment.

Current parallels in Europe are obvious. Austerity is demanded on the pretext of bringing public debt under control. This weakens demand, depresses income and hits tax revenues. The result – intended all along – is that there is no improvement in the public debt position, which can then be used to legitimize further austerity to bring public debt under control. Stir and repeat. The process can recycle for as long as enough Europeans are prepared to go along with it.

The neoliberal policy agenda of deregulation, privatization, user pays and austerity appears to be delivering beyond the wildest dreams of its adherents. In most parts of the world, there is mass unemployment, private indebtedness and an ongoing massive upward redistribution of wealth that shows no signs of abating.

The neoliberals must think they’re in heaven.

9 thoughts on “Why Neoliberals Pretend Private Debt Doesn’t Matter and Public “Debt” Does

  1. If we lookk at the timeframe when this was being imposed successfully, Western elites were confident that the masses were sufficiently programmed by anti-communistic propaganda to be adverse to “socialism.” Thus, it became safe for them to re-impose the neo-feudal system that had existed prior to the Great Depression, when Keynes convinced capitalists that they needed to compromise in order to avoid social unrest and political reaction in the West along socialist lines.

    When the velvet revolutions gained ground in the East Bloc, the Berlin Wall came down, and the USSR dissolved itself, the signal was given that no longer was there any obstacle to full press against labor and the middle class. Western elites have initiated full-on class warfare against their own people, whereas previously this effort of subjugation had been largely directed toward the Third World through neo-colonialism and neo-imperialism. Now the way seems clear domestically, and the elites have managed to suspend constitutional rights through endless war. They are going for it all, and the goal is world subjugation. This is not a new phenomenon, but rather a return to the status quo of elite domination that has been the historical norm since the advent of surplus societies.

    The fly in this ointment is that Western powers intend to subjugate the rest of the world financially, but emerging great powers like China, Russia, India, and Brazil are well aware of it and aligning against the US and its allies. Russia and China are now moving strongly into Latin America, and the US will feel it has to respond iaw the Monroe Doctrine soon. So this global take-over is not baked in by any means.

    Moreover, the rest of the century is going to be greatly complicated by the pressure of climate change, which the world’s militaries have already identified as the primary threat to global stability. Anyone reading the news realized that things are beginning to hot up, and the possibility of war is becoming more and more likely. For example, recognizing the growing might of China, the US is pivoting militarily to the Pacific. However, the West cannot take is eye off Russia, either. So the US will have to gear up for major confrontation on two fronts. This threatens a new Cold War and huge military build-ups and build-outs, draining resources from domestic uses.

  2. I’m a frequently lurker here, but I hardly ever post. I don’t have anything constructive to add, but just wanted to say that I think this is one of your best posts.

  3. Neoliberals don’t want to deal with the ugly truth that is that public debt and private debt are offsets that counterbalance each other in the grand economic equation. As L. Randall Wray succinctly points out a reduction in public debt can only occur through a drawdown of private sector savings or an increase in private sector debt or when there is a current account deficit, a reduction in the current account deficit. As the 99% have no savings left and the 1% is unwilling to part with their savings, a reduction in the public deficit can only come if the private sector is able or willing to increase their debt load. If private sector is unwilling or unable to increase their debt levels then the only other option left is to reduce spending in the economy. A reduction in spending would impact the current account deficit and possibly any saving left in the private sector. This would most certainly reduce GDP and tax revenues and when the measure of the public debt is the size of the deficit to overall GDP, an attempt to reduce the public debt almost always leaves the government in a worse position than before any reduction were attempted.
    It is a tough sell. It is much easier to treat private debt as analogous to public debt. It fits better with the neoliberal meme that smaller government is better, that government spending crowds out private investment and that taxes and not rents or debt interest enslave the average worker.
    How do we get the message out that government deficits are the lifeblood of any modern economy with their own sovereign currency and inextricably tied to the health of the economy and wealth of the nation?

  4. Peter – - Reading your post reminded me of this from James Galbraith (from “In Defense of Deficits” published in The Nation magazine):

    “To put things crudely, there are two ways to get the increase in total spending that we call ‘economic growth.’ One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.
    For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.
    And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.
    All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters–led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous “bipartisan” enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget–have labored mightily to confuse the issues.”

  5. “The neoliberal policy agenda of deregulation, privatization, user pays, and austerity appears to be delivering beyond the wildest dreams of its adherents. In most parts of the world, there is mass unemployment, private indebtedness, and an ongoing massive upward redistribution of wealth that shows no signs of abating.”

    It is not sustainable. That’s the good news. The bad news is that the agenda will certainly result in the decapitalization of the West, and will destroy the world economy, if pursued to its conclusion.

  6. Joe: Great quote from Galbraith. Thanks. I’m pretty sure I read that article at the time, so no doubt the idea was planted in my head as a result. If every person on the planet took the time to read that passage from Galbraith’s article and digested it, the general attitude toward government deficits might change.

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