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 currencies, these claims are false. Even in the eurozone the sovereign-debt crisis is a manufactured one that can be alleviated indefinitely by the European Central Bank. 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 net 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 of service, higher prices and economic 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 Modern Monetary Theory (MMT) makes clear, unemployment is a government policy choice. The result, again, is a more subservient general population.

The way the neoliberal policy agenda has been put into action is illuminated in an excellent feature-length documentary focusing on New Zealand. The documentary 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 the machinations have rarely been 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 fiscal and monetary authorities.

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 that 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 little or 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.