As the news concerning the debt crisis unfold, it is becoming increasingly hard to keep track of what the latest developments are, let alone to grasp why they are taking place. The origins of the crisis are not entirely clear either. Many narratives as to why we are currently experiencing a debt crisis coexist in the public debate.
Some say it was the result of carelessness on the part of governments too often accustomed to spend their way out of elections. Others have blamed the presumed laziness of workers in warmer parts of the European continent.
For Eurosceptics it was the inherently flawed design of the stability and growth pact or the original sin of a non-optimal Monetary Union. Euro-federalists on the other hand blame the lack of fiscal federalism or the intergovernmental nature of European Integration.
Alternative explanations include the capture of national budgets by greedy bankers as the financial crisis enfolded or the subsequent inability of the sovereign to exercise their fiscal authority.
However, what these explanations have in common is that they all assign too much explanatory weight to issues of agencies: either the agents did too much or not enough, they chose the wrong design or they faced the wrong set of incentives.
I argue instead that this crisis is neither the product of bad luck nor of bad apples. Stronger regulations, allocating additional funds, or giving a ‘fresh start’ to indebted countries in the form of restructuration may alleviate some of the symptoms but it will do little to address the causes. This is because it is the attempt of State to solve the inherent contradictions present in Capitalism that have been the main cause behind the debt crisis we now face.
The State in contemporary political economies is faced with a dilemma: How to make the economy sufficiently efficient to have economic growth and sufficiently equitable so that it is not contested? Paraphrasing Claus Offe one may conceptualize these questions as the Accumulation and the Legitimation roles of the State in Capitalism.
But the State does not act out of sheer benevolence. For failing to address satisfactorily either one of these questions would inevitably lead to the demise of the State. This is because the State relies on the economy to derive its finances while the system must be seen as legitimate for the State to derive its political support. In other words, the State must walk on two legs: Economic and Political.
But these two functions are ultimately antagonistic as the rise of Legitimation eventually infringes on the imperatives of accumulation, and vice versa. Rising efficiency generates income inequality between different workers but also between workers and owners of capital. The income share (as a proportion of GDP) has fallen throughout developed economies in the three decades. This has no doubt contributed to undermine the legitimacy of the system and called for ever more redistribution. Social expenditures have therefore climbed, regardless of the party in power.
Taxation on capital becomes harder as it is increasingly mobile while taxes on labor are electorally unpopular. Financing the welfare state through social contributions may have detrimental effects on employment levels. In parallel, the onset of substantially higher unemployment in most developed economies further undermines the financing of the State. In addition, as the income share falls this mechanically decreases taxes as marginal tax rates are notoriously higher for Labor than for Capital.
In this context, deficits should be seen as a way of postponing the consequences of this antagonism. For Keynesians, deficits are a temporary fix to cyclical problems. By contrast, in this model, deficit increasingly act as a permanent fix to a structural problem. It works because savings stemming from heightened inequality can partly be channeled in the bond markets. Government expenditures are self-sustainable to the extent that the Keynesian multiplier works its magic and social expenditures maintain demand despite stagnant wage growth.
But as the process unfolds, the fall in wages as a share of GDP depresses fiscal revenues and drains social expenditures to a point that becomes unsustainable. The 2008 economic crisis dealt a fatal blow. Thus, the State then needs to face the twin evils of falling revenues and rising expenditures. To this must be added the servicing of the accumulated debt and the discretionary fiscal spending and automatic stabilizers that responded to the downturn.
When holders of wealth stop channeling their wealth into the bond market, the fundamental antagonism of Capitalism comes back with a revenge: Austerity at best sacrifices legitimacy for accumulation and at worst does neither. The growth alternative does little to address the ‘social chains’ that have developed to legitimate the system and that now encircle the accumulation functions of the system, as the fiscal requirements of the state are bigger than ever.
What is therefore needed is not a parametric discussion about whether we tighten at the margin or maintain expenditures, nor about the size of the collateral or the introduction of a European ‘mutalisation’ of debt. Instead, there should at the very least be a fundamental revision of the underlying distribution of wealth and income in our societies, and the role that these play in fostering economic growth. Progressives need to rise up to this challenge if we are to get out of this crisis for good.
