Wayne O'Leary

Austerity Hits Home

An invisible boundary seems to have been crossed. After three decades in which the economic ills of the developed world were variously blamed on excessively activist and spendthrift government, uncontrolled immigration and racial preferences, the natural and inevitable forces of globalization, or the moral shortcomings of the have-nots themselves, ordinary people, here and abroad, have more or less figured it out.

The villain turns out to be the unaccountable free market, operating across international borders without limits or conscience, and backed at the national level by highly developed and institutionalized corporate states whose governments do its bidding. Implanted in the 1980s with the aid and encouragement of political parties labeled centrist, third-way, or just plain conservative, this system has produced a generation of stagnant growth and inequality, chronic unemployment, and, as it reaches its crisis point, a worldwide reduction in social safety-net protections falling under the rubric of “austerity.”

Austerity, as we are learning, is laissez-faire at the end of its journey, a kind of economic Bataan Death March marked by victims left by the side of the road. Evidently, those political elites who ushered in the tarnished golden age of profit have no other answer for its recessionary downside except to punish their populations.

In America, the punishment was to be administered by the late, disbanded supercommittee of Congress, which was charged with finding $1.2 - $1.5 trillion in specific federal budget cuts before the end of November; its failure to do so will now trigger comparable automatic cuts across the board. Democrats on the committee actually offered up the entitlements as sacrificial lambs, if only Republicans would agree (pretty please) to a few symbolic tax increases on the wealthy; they refused.

Approval of Congress is at 9% and falling, its lowest polling level in memory. Yet the supercommittee — let’s call it the “simple” committee — and its Beltway supporters appeared to believe public unhappiness existed because lawmakers were not cutting the annual deficit and national debt fast enough.

That’s not what the protesters of “Occupy Wall Street,” whose cachet exceeds that of Congress, are saying, and it’s not what demonstrators elsewhere — this crisis is international — are saying. Europeans, with a long history of taking to the streets, have shaken the birthplace of Western civilization to its foundations with their more raucous expressions of “occupation.”

In Britain, Conservative Prime Minister David Cameron dismisses London’s August riots as criminal behavior, pure and simple. That blanket description, Tory arrogance at its worst, is far wide of the mark. The British publication The Economist is much closer to the truth when it observes that the country has produced a marginalized and angry underclass with no stake in society and nothing left to lose.

Others go further, pointing out the UK’s virulent form of Anglo-Saxon capitalism, the closest in Europe to our own, which glorifies finance (making money from money) and regards its people as merely disposable commodities. Add in the crude, meat-axe budget cutting of the ruling center-right political coalition, Europe’s leading promoters of austerity, and you have ample ingredients for social turmoil.

The connection between austerity and unrest has been clearly made by the British Left, more perceptive in this regard than American progressives. Ken Livingstone, former Labour mayor of London, says of his country’s shortsighted fiscal policies, “the economic stagnation and cuts being imposed by the Tory government inevitably create social division.” That’s not just provocative hyperbole from “Red Ken.” There is evidence from academic circles, acknowledges the conservative Economist that he’s right.

Two Spanish-based professors, Jacopo Ponticelli and Hans-Joachim Voth, have released research closely tying European social chaos over several decades to episodes of budgetary austerity; the higher the spending cuts, they find, the worse the societal instability, and economically based disruptions dwarf those associated with more publicized antiwar protests. This reinforces findings from Harvard in the 1990s that increased levels of income inequality between 1960 and 1985 could be correlated with greater disruption as well, especially when negatively impacting the middle class.

Today’s besieged middle class has so far been comparatively restrained, but “Occupy Wall Street” is the tip of a very deep iceberg. The vast American middle will not remain on the sidelines indefinitely, content to merely sympathize with the youth-led rebellion against corporate-dominated government. Joblessness and wealth disparities produced as byproducts of unrestrained corporatism are powerful issues, but what has the potential to inflame the middle class above all is the home-mortgage crisis created by Wall Street’s bankers, which is eating away at America’s vitals.

The recent housing initiative of the Obama administration, its attempt to ease refinancing of threatened mortgages, is a belated recognition of the political ramifications of this issue; it’s been a long time coming.

Since the housing collapse began in early 2007, several million families have lost their homes, and millions more (up to 13 million, according to congressional investigators) face risk of foreclosure. Exacerbating this situation, house prices have fallen by a third in five years and continue to fall. Analysts agree that nationwide about a quarter of all mortgaged homes are now in negative equity or “underwater” —that is, more is owed on them (up to $700 billion more) than they’re worth.

The Republican answer to this is more austerity. “Don’t try to stop the foreclosure process,” says the GOP’s presumptive 2012 presidential nominee, Mitt Romney. “Let it run its course and hit bottom,” he blithely advises, so that reptilian “investors” can slither to the rescue — at a profit.

To his credit, President Obama rejected this heartless recourse from the start, but he also didn’t do nearly enough. Beginning in 2009, his twin Home Affordable Refinance and Modification programs (HARP and HAMP) allowed underwater borrowers to refinance their federally insured homes at lower prevailing mortgage rates and also subsidized them - - but only if excessively stringent requirements were met that eliminated most potential participants.

The new Obama plan attempts a course correction by removing the cap on negative equity to increase eligibility. But by failing to pressure bank lenders (whose own transgressions were ignored) to implement debt forgiveness by writing down the principals on their loans to reflect lost home values, it only stretches out the agony. Simple decency and common sense require this essential next step. Otherwise, beware the coming upheaval.

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history and is the author of two prizewinning books.

From The Progressive Populist, December 15, 2011