Public Debt: a Supply-side Scam

Most political parties, central banks and the corporate media insist that public debt is the most pressing problem facing governments. Meanwhile, real wages in the U.S., UK and Canada, and much of the EU continue to fall. Disparities widen. Rates of chronic unemployment are rising.  Unemployment levels for young people are at historic highs, over fifty per cent in Greece, Spain and Portugal. But capitalists—whose income comes from profits, dividends, interest, rent and capital gains—are preoccupied with public debt.

For centuries, public debt has been a driver of capitalist growth. By increasing financial reserves, government bonds and treasury bills add to the credit available to business. Most of the interest on public debt is paid to financial institutions and wealthy individuals.  Capitalists clearly benefited from the trillions in the additions to public debt to bailout financial institutions after the 2007-08 sub-prime mortgage crash.

For capitalists the only real problem with public debt is that it might not be repaid. In a time of declining government revenues, creditors have reason to worry. But additional revenues could be raised with little damage to most markets by restoring taxes on corporations and top incomes to earlier levels. This is not happening because it would be contrary to entrenched supply-side policies that have dominated political agendas for more than thirty years.

In the 1970s neo-conservatives, liberally funded by the super rich, began to stridently demand an end to Keynesian demand-side policies. They claimed that rising real wages and expanding social entitlements were lowering the income of capital, reducing the supply of funds for investment, leading to stagnation and inflation. They demanded that governments cut spending on social services, weaken unions, reduce regulations on business, and leave economic priorities to the marketplace.

Keynesian times

The Keynesian period that preceded the neo-conservative reaction was no utopia. It was a time of paranoid anti-Communism, institutionalized racism, discrimination against women, homophobia, and genocidal imperialist wars. But in many countries laws were passed to make it easier for unions to organize and engage in collective bargaining.  Common people gained rights to public pensions, unemployment insurance, family allowances and post-secondary education. Governments made major investments in transportation infrastructure, electrical utilities, schools and hospitals. Capital movements, currency values and interest rates were regulated. International trade was encouraged, but reciprocal tariffs were kept high enough to protect domestic production for domestic markets.

To pay down heavy war debts and to increase spending on social services and public infrastructure, taxes on corporate income were 50 per cent and higher; taxes on top personal incomes were 70 and 90 percent. Although the share of total income appropriated by the richest two percent fell during Keynesian times, corporate investment rose steadily, as did markets and real wages.

Supply-side policies

The first major neo-conservative victories were the elections of Margaret Thatcher in the UK in 1979 and Ronald Reagan in the US in 1980. Taxes on capitalist income and corporations were cut. So were social programs. Regulations on corporations were eased and eliminated.  Laws were changed to make it more difficult for unions to organize and bargain successfully.  Neo-conservatives claimed that increasing the after-tax income of the rich and freeing corporations to maximize profits would increase the supply of funds for investment. They said  employment would increase, as would the supply of goods and services.

The top two per cent of income earners did double their share of total income to twenty percent. However, the rate of investment did not increase. Real wages declined. Chronic unemployment increased. Growth in markets for consumer goods slowed.

Supply-side policies—now more often called neo-liberalism or the Washington consensus—have a fundamental flaw. Individual capitalist investment has little impact on real economies. Most private investment in machinery, equipment, buildings, land, resources, and on research and development comes out of depreciation and depletion allowances and other pre-tax corporate revenues.

In a recent study commissioned by the UK government, prominent economist John Kay reported that the total capital raised by British companies in equity markets is actually negative. He concluded that financial markets serve the narrow interests of financial institutions and wealthy investors who can make quick profits by buying and selling shares, taking control of companies and stripping assets.  “In a paradoxical way, the function of equity markets today is not to enable savers to put money into companies. It’s to enable them to get it out.”

Capitalists help themselves

When capitalists do invest in real means of livelihood, they look to places where labor is cheaper. As more jobs move abroad, overall wage income falls, further weakening markets. Private domestic investment focuses on speculation in real estate, high tech start-ups, futures markets, derivatives, and to mergers, acquisitions and takeovers. Few of these investments add anything to real means of livelihood. In casino capitalism, excess capital drives up share prices, overvaluing assets. Financial booms are followed by busts, capital evaporates, credit dries up, real enterprises go bankrupt, more people lose employment.

Instead of the frugal savers in Adam Smith’s free market, today’s capitalists are self-indulgent gamblers. They spend extravagantly on lavish mansions, luxury condos, private jets and yachts.  They have more than enough left over to fund the political campaigns and lobbying that give them effective control of political agendas.

Letting the market decide may sound benign. In practice it means giving a wealthy minority–major shareholders and top corporate executives—free rein to direct economies for their private short-term profit. Meanwhile, tax cuts for corporations and the super rich have reduced the capacity of governments to limit the damage done by capitalist self-interest. In Canada, in the last decade, total government revenues have fallen from 43 percent of GDP to less than 38 percent.

When current governments do intervene they do so to defend capitalist interests. Public services are frozen and cut, public employment is reduced. Yes, austerity policies, by assuring creditors that they will be paid, help keep capital markets booming, but cuts to employment and consumer income weaken most other markets, discouraging investment in real means of livelihood, increasing unemployment and poverty. As disparities within and among countries widen, capitalist minorities turn to more internal repression, more surveillance, more public spending on weapons of mass destruction and foreign military intervention.

Allan Engler is a Vancouver trade unionist and social and environmental activist. His Economic Democracy, the working-class alternative to capitalism was published earlier this year by Fernwood Books. Read other articles by Al.