Dear readers. The article below was written in April, 2017, and submitted to Spain’s socialist party (PSOE) for publication. It remains relevant to wider debates about the collapse of social democracy, and so I am re-posting it here.
The collapse (or Pasokification) of social democracy in Europe and the United States is tragic, but was not inevitable. The exhaustion of PSOE and Spanish social democracy was particularly tragic given the critical role played by the party during the transition from Francoism, and given its history of governing with popular support for longer than any other Spanish political party.
But the most tragic dimension of the demise of social democracy across Europe is that it has led directly to the crumbling of democracy. Disillusionment with democracy is fuelled by the belief that social democratic politicians could not, and would not protect populations from the catastrophic impact of market forces after the 2007-9 financial crises. The political class appeared unwilling to restrain or tackle (through regulation) the sustained rise, and then implosion, of excessive private debt-creation by bankers and financiers, which in turn was used for reckless property speculation. Second, after the economic slump caused by the financial crisis, they failed to tackle the massive rise in Spanish unemployment. Instead politicians focussed relentlessly on trying to ‘balance the budget’. The focus on public, not private debt, hurt those innocent of causing the crisis, because in a vain attempt to fix the budget, politicians worsened the already falling living standards of their own supporters.
But even before the crisis, social democratic politicians had already been weakened. By gradually relinquishing public authority over private markets in finance, labour and trade, and by handing power over these markets to private authority, social democratic politicians had hollowed out their own role in the economy. By agreeing to relinquish the support of a publicly-backed Spanish central bank, and to depend instead on an unaccountable European Central Bank, Spanish politicians gave away a great power. They weakened their own authority and influence. No wonder they were powerless to protect society from the relentless and devastating impact of market forces during and after the period of the Great Financial Crisis. By contrast, British and American politicians could call on their central banks for support.
Private authority had naturally moved into the power vacuum created by the Eurozone, and seized control. Today, it is private authority that governs financial markets in Spain and across Europe, not public authority.
Zapatero, deficit targets, and why Government budgets are not like household budgets.
It is now widely accepted that José Luis Rodríguez Zapatero, PSOE’s leader in 2010, committed a form of ‘hara kiri’ when, with youth unemployment at a staggering 40%, he agreed to a budget deficit target of 6%, froze pensions and other benefits, raised the retirement age, cut civil-service pay, imposed austerity on regional governments and made collective bargaining ‘more flexible’.
Perhaps the most disastrous error was the decision to adopt a German-style ‘golden rule’ designed to embed policy on budget deficits into the constitution. In other words, policy would become like concrete – unchangeable and immoveable. This decision reflects a deeply flawed understanding of how economies work. Contrary to the ‘ordo-liberalism’ of reactionary politicians like Wolfgang Schauble, economies are ‘moving feasts’. They rise and fall, expand and contract, depending on a range of factors. Economic policy therefore cannot be fixed in concrete. It cannot be made law. It must be possible for government policy to respond to the ebb and flow of the wider economy. When the economy heats up, and inflation threatens, action to cool the economy must be taken. When the economy slumps, and unemployment and deflation threatens, policy must respond to prevent prolonged economic failure.
The ‘golden rule’ embedded austerity and with it continuing and high levels of unemployment into the Spanish economy. Unsurprisingly it led to a crushing defeat for PSOE in 2011.
Government debt is not like household debt
Mr. Zapatero was not alone. Across Europe and even in the US, there is unanimity amongst social democrats, policy-makers and mainstream economists that ‘austerity’ or fiscal consolidation is the answer to a rise in public debt caused by private economic failure. But ‘austerity’ at a time of crisis is a particularly deformed ideology, spouted by financial interests, concerned that there will not be enough money to support the private sector if it is ‘crowded out’ by the public sector.
It is an ideology based on the microeconomics of the household. Most of today’s economists are trained mainly as ‘microeconomists’ – with an intense focus on the firm, households and individuals. They use microeconomic reasoning to arrive at macroeconomic conclusions for the whole economy. But common sense dictates that governments are not like households. Unlike households, governments collect income from taxpayers – by law. Unlike households, and thanks to the backing of taxpayers, governments can easily raise finance by borrowing from both domestic investors, but also international investors. Government debt, including Spanish debt, is a scarce and valued asset or collateral, and is in great demand by millions of investors around the world. The reason is that all democratic governments are backed by taxpayers – and so repayment of public debt is much more assured than the repayment of private debts.
Public debt is like a see-saw
To understand how and why government debt rises or falls, it helps to visualise a playground see-saw. When the private sector slumps, and tax revenues fall, government debt, like a see-saw, rises. Why? Because private sector failure leads to a collapse in tax revenues, and in a democratic economy, to a rise in welfare benefits. When the private sector recovers, unemployment and welfare benefits fall, and tax revenues rise. Then, government debt, like a see-saw, falls too.
So the answer to a rise in public debt at a time of private sector failure, is not to worsen conditions by cutting public sector spending and investment. Instead it is vital for government to borrow and spend to revive employment and economic activity, which in turn will raise tax revenues, and also revive the weakened private sector.
The way forward: realize the power of public authority
For social democratic politicians to regain power and the support of their electorates requires a total rejection of the deregulatory economic policies that led to the Great Financial Crisis. Above all, social democrats must end their obeisance to financial markets, and must once again actively and publicly commit to subordinate financial markets to the public authority of Spain’s regulatory democracy.
To do this, social democrats must regain and realize the potential power of public authority backed by taxpayers. Private financial markets are excessively dependent on public institutions such as central banks and governments for massive bailouts, QE, low borrowing costs, and ongoing taxpayer-backed guarantees against market failure. Recognising this private sector dependence on the public realm, social democrats should demand reciprocity: stringent terms and conditions applied in exchange for public sector largesse. Since the crisis, the private finance sector has not only benefitted from public sector bailouts and private debt subsidies, it has effectively looted government treasuries and totally abandoned so-called ‘free market’ theory. Bankers, private equity firms and other financiers have got away ‘scot-free’, and returned to their old, dangerously reckless speculative ways – this time backed by taxpayers. Most remain ‘too big to fail’ and ‘too big to jail’.
Politicians continue to allow bankers to threaten the global economy with another grave financial crisis, even though today all global banks are effectively nationalised banks. Without the largesse of $500bn of QE every quarter (from the ECB, the Bank of England and the Bank of Japan) plus historically low borrowing costs, backed by government guarantees – they would be bankrupt. These are not private sector banks, battling so-called free market forces. Yet even with generous public backing, the private banking sector still fails to lend to firms active in the real Spanish economy at sustainable rates of interest.
Such one-sided generosity must end. It is time for Spanish bankers to be made to prioritise the interests of the Spanish economy, or be faced with the loss of the publicly-backed support gained via the Spanish Treasury, the ECB and other public institutions.
Second, all private bankers rely on taxpayer-backed institutions like the judicial and criminal justice systems, for the enforcement of contracts. Is it not time to insist that these taxpayer-funded institutions cannot be used for the enforcement of contracts, unless private bankers play their part in restoring the health of the Spanish economy?
Much can be done to challenge the apparent overwhelming dominance of the private finance sector. But first, Spanish social democrats must recognise and reinstate the power of a regulatory democracy. They must publicly elevate the interests of their own electorates above the interests of the private finance sector. They must pledge to restore public authority over private markets in money, labour and trade.
Only by so doing, will it be possible to regain public confidence, and with it political power.