By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil
What the bourgeoisie therefore produces, above all, are its own grave-diggers. Its fall and the victory of the proletariat are equally inevitable.
– Karl Marx and Friedrich Engels ‘The Communist Manifesto’
Calls for balanced budgets in the present environment have long appeared somewhat confused, of that we have had little doubt for some time now as balanced budgets seem to exacerbate the problems they target rather than solve them and may lead to higher debt-to-GDP levels due to the reduction in real economic growth that they lead to.
However, the left has generally agreed that the much of the motivation behind the balanced budget rhetoric was and is ideological. And with conservatives at organisations like the Peterson Institute and the Cato Institute, together with their counterparts at the Adam Smith Institute in Britain, daily attacking the deficit over the airwaves there seems to be much evidence of this assertion. Indeed, Paul Krugman recently caught some Tories with their ideological pants around their ankles in a discussion over at the BBC (watch from about 3.00 on).
This is all well and good. It would certainly seem that conservatives think that by battling the budget deficit they are eroding the foundations on which the Big Government monster sits, but is this really the case? What if I told you that all the balanced budget rhetoric was actually having the objective effect of placing us on the road to socialism?
Socialist Accounting and Accounting for Socialism
The following argument derives from Joan Robinson and John Eatwell’s excellent (though now hard to find) book ‘Introduction to Modern Economics’. It begins with the all too familiar formula for GDP stated in net terms in order to track changes in income. The formula runs as such:
Y = G + I + C
In English that reads:
Net National Income [GDP] = Government Expenditure + Net Investment + Private Consumption
Again, there is nothing hugely controversial about this statement. However, the beauty of it is that we can rewrite it in a number of different ways highlighting different aspects of how national income is produced or destroyed. Here’s the rewriting of the formula that concerns us:
(s +t) Y = I + G
In English that reads:
(Proportion of Private Saving to Total Income + Proportion of Income Paid in Taxes) x Net National Income [GDP] = Net Investment + Government Expenditure
What we’ve done here is essentially broken down the ‘Consumption’ element of the original formula to highlight what effect a rise in taxes or saving will have on national income. Such a breakdown can tell us a number of important things. Here I will let Robinson and Eatwell make the point themselves:
With investment constant, an increase in government expenditure increases income, and increases both total saving and the yield of taxes. The addition to the National Debt caused by a round of government expenditure is less than the expenditure, because of the extra tax revenue that it generates. This was an important part of the case for public investment to combat unemployment in the slump [i.e. the Great Depression]. (p. 211)
Now, that’s all well and good. This seems an obvious point today given the situation in many European countries where austerity has been implemented and yet the national debt continues to climb ever higher. But then Robinson and Eatwell go on to make a far more interesting point, one that I would argue cuts right to the bone of the ideological pretentions of conservatives budget hawks the world over.
Now, suppose that tax rates have been increased; t is higher. Then, if everything else, including I and G, are the same, Y must be lower. This comes about because higher taxes restrain consumption. In so far as a higher t means a lower s – the payment of higher taxes reduces saving – the reduction in Y is that much less.
This argument leads to a striking conclusion. Imagine a government that adopted a policy of ensuring enough outlay to maintain near full-employment while keeping its annual budget balanced. In a given situation, this government would have to make more expenditure than if it maintained the same level of employment with a deficit, for there has to be enough expenditure to make up for the restraint on consumption by higher taxes. The government therefore has to think of more things to spend money on. Unless it all goes on armaments and the moon, this must mean a greater involvement of the public sector in social policy. (p. 211)
Thus the idea that a government should engage in pro-growth policies while attempting to balance the budget through higher taxes is, as Robinson and Eatwell put it: “far more radical than the so-called Keynesian principle of allowing a deficit when effective demand needs a boost”. In a very real sense balancing the budget while targeting growth is a sure road to socialism, as it ensures that the government take over more of the role the private sector currently occupies in the economy. Again, if we accept the rather loose terms of the argument as laid out above, this is not really open to debate; it is a conclusion not reached by high theorising but instead by examining simple accounting.
Budget Hawk Socialism
But of course the reader will rightly point out that this is not the stance of your average Peterson Institute clone or Tory hack. To further their ideological project they want to decrease government spending rather than increasing taxation. This is true, of course, but in practice it simply does not work. Just look at the situation in Britain at the moment or in much of Europe where taxes have been hiked enormously in a bid to balance the budget. In theory it may be nice for our Peterson Institute clone to go on television and say that government spending should be cut and taxes left unchanged, but in practice this is politically impossible.
Now, if the reader concedes this point they might raise another: namely, that the goal of austerity is to both raise taxes AND lower government spending. Once again, it is true that this is the stated goal of austerity programs. But here’s the kicker: we know that it doesn’t work. We’ve seen it tried in Greece, Ireland and even Britain and we know that the real effect is a violent contraction of national income – i.e. seriously slowed, if not negative economic growth.
In Europe this has led to calls for more focus on growth – especially out of figures such as France’s Socialist president Francois Hollande, but also out of the IMF and others. This is where the above argument kicks in. Many economists and shrewd observers ponder over the fact that these figures call for a greater focus on growth while at the same time insisting on attempts to balance the government budget. Many dismiss this supposed doublespeak as nonsense, assuming that these policymakers would simply drop the balanced budget rhetoric as they extend spending programs targeting growth. But what if this is not the case? What if the real outcome of this rhetoric is not a contradiction at all, but a move toward a massive state takeover of the economy?
This is not a particularly unrealistic scenario. Imagine if M. Hollande and his ilk raised spending and raised taxation at the same time so as to promote growth while offsetting the deficit to some degree – perhaps even the Tories in Britain and the Republicans in the US might engage in this, as they must realise by now that austerity is a sure-fire way to get booted out of office. The real effect of such a policy – which, again it should be pointed out: their rhetoric commits them to – would be no less than a creeping takeover by the state of the economy; in short: a creeping socialism, as the state takes over the means of production and consumption.
So, we can only conclude that Budget Hawk Socialism may well be a very real potential outcome of the current balanced budget rhetoric; a rhetoric which is, quite literally, all pervasive in politics. The only ‘way out’ of the cul-de-sac of austerity if this rhetoric is adhered to is to raise government spending while increasing taxation and this is, effectively, moving resources from the private sector to the public sector.
Having no particular ideological investment in socialism I can only watch this with mild amusement. The conservatives, in thinking that calling for a balanced budget will provide the vehicle through which they can dismantle the state, have opened up the path for that which they fear most: a destruction of the private sector by the public sector through government spending and taxation.
Today then, to be against socialism and remotely realistic about how to generate economic growth, one must be a Keynesian and call for an unbalanced budget. To fall on the other side and call for total austerity will merely get you booted out of office and pave the way for Big Government socialists to destroy the private sector through increasing government spending and taxation.
Will the conservatives realise this before it is too late? Fat chance. The conservative class have become extremely myopic in the past thirty or forty years. They have invested themselves in dogmatic and unpragmatic free-market ideologies that have always been fantasies and in doing so have completely blinded themselves to the bigger picture. Their own idiocy will destroy them – and in their foolishness they will pave the way for their own expropriation.