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Screw (Down) the Debt: Neoliberalism and the Politics of Austerity . . . . . . . 1

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Screw (Down) the Debt: Neoliberalism and the Politics
of Austerity
By Suhail Malik
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Under the name of âausterity’ many governments are currently looking to drastically reduce public
expenditure and impose tax increases to cover a rapidly and dramatically increased state debt. Beyond
their attack on those who most call upon state support what is so galling about these measures is that
this debt was drawn in order to channel credit into the banking system as it took huge hits in the
2007-09 credit crunch, a falling apart of its credit structures - or deleveraging - that threatened the very
solvency of financial corporation of all sizes. The reasoning and justification for austerity is that such a
sharp contraction of crecit would have ceased up commerce, leading to massive job losses and
reduction in consumption, in turn resulting in the destructive effects of severe global recession if not
depression (though such commercial credit has not in fact been exactly forthcoming, the banks
channeling the supporting funds into financial instruments generating high enough rates of return to
ensure a profitability that will keep their shareholders and managers happy). The size, imponderability
and systematic importance of national debt at these scales, necessary to maintain the credit âto keep
the economy going’, gives it weight and urgency - a momentum - that assures its political and
economic priority, thinly cloaking the âideological’ cutback of the state in favour of contracting out of
public services to the private sector to the great benefit of those company’s profit margins and
disadvantage of those who work for them.

But as slogans such as âWe Won’t Pay For Your Crisis!’, âPay, You Fuckers!’, and âNo Profit On Our
Future’ make clear, in addition to the attacks on public provision austerity is but another name for the
transfer of debt from the international finance sector to national populations, with governments acting
as the transmission mechanism not just for the old banking adage to âprivatise the profits and socialize
the losses’ but also for the legality and putative legitimacy of such a transfer. As well as rightly
blaming the finance sector as historical cause for the crisis, protests against austerity therefore also
incisively highlight the disservice that, in their subordination to the mechanisms and power of
international finance, governments now do to their own populations (who, through representational
procedures, are putatively supposed to âown’ these very governments). The post-war settlement of
social security and state arbitration of the labour-capital relation prevalent in Western Europe for the
last half-century or so is stripped further back as populations are now exploited to cover the costs of a
financial sector that holds states to ransom with its own power to close down business by destroying
its basic fiscal condition: credit.

In addition to the individual and sectorial politics of the current protests (respectively, massive
personal debt burdens and the privatization - which is to say creditization - of what remains of public
services such as education, health, care, etc.), the implementation or not of austerity then involves a
systematic politics of debt. Systematic because, contrary to assertions that the credit crisis marks the
end of neo-liberalism, austerity as the means of ârecovery’ from the financial credit-crisis turned
public debt-crisis will instead inaugurate a further diversification of capital accumulation for the
already wealthy, entrenching neo-liberalism mechanisms and conditions of one-sided capital
accumulation. That is, austerity is not just the cutback of the state but the entrenchment of
neo-liberalism (as the acceleration of capital accumulation on the basis of leveraged credit revenue).

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This future of neo-liberalism is what governments are now seeking to implement. And vectored
through individual and sectorial interests this is what the current spate of protest struggle against, what
they have in common - what is systematically political in the current conflicts.

The practical parameters of national debt financing

A broad outline of the basic mechanisms of debt and its funding at state level suffices to capture the
systematic operation of austerity.

In economies with large private sectors the circulation and leveraging of credit central to the
transfer of debt from the finance sector to general populations has two principal sources: the bond
markets, where governments, agencies and corporations borrow at rates of interest determined by
risk, and the extraction of revenue on the basis of private debt, which provides the basic revenue
leveraged by financial institutions to generate escalating levels of profit.

State intervention to compensate for a deep contraction in credit and liquidity, and of large drops
in asset prices of financial institutions (and so their net worth), has two main channels: (i) direct
backing of banks and other financial institutions to cover losses and keep them solvent; (ii)
boosting the economy to ensure its non-stagnation in the face of the contraction of credit and
liquidity, loss of jobs, drops in tax-income, etc., This is a proto-Keynesian âsupply side’ stimulus
favoured by the centre-left. Both routes lead to a rapid escalation of national debt which must be
able to be paid down (even if in fact it never is) if the state is not to lose its credit-worthiness.

There are in turn four basic inter-connected ways of decreasing national debt: directly increasing
state income (by taxation and one-off privatizations of national industries), expanding the
economy to indirectly increase revenues, cutting expenditure, and opening new channels of credit
that circumvent state debt financing. Practical orthodox responses to the credit crisis and risk of
global recession are for the most part constrained by these two-plus-four standard parameters.
Schematically outlining what each involves will serve to demonstrate how the austerity
implemented by governments - seeking in the form of credit-worthy bonds to placate the very
markets they are securing through their new debt - strengthens not just the immediate
continuation of proto-neo-liberal economic policy but also its systematic promulgation; how, that
is, the recent crisis is not the end of neo-liberalism as is sometimes proposed but an opportunity
for its further entrenchment.

Taking in turn the four basic ways of decreasing national debt:

(i) Taxation: Tax increases are taken to be âpolitically unacceptable’ by parties contending for
government in largely privatised economies though that that does not prevent them from being
implemented by âstealth’. The economic argument is that increased taxation removes income and
profits from the private sector, decreasing private consumption and private re-investments. Economies
based on high consumption levels - notably the United States, Britain and others that have followed

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neo-liberal principles - cannot increase tax levels easily without causing further recessionary effects or
compensating through state expenditure. Furthermore, increased taxation income does not necessarily
mean increasing tax levels: tax policy in the US and the UK since the 1980s has consistently striven to
reduce the tax rate for the wealthiest sectors of the population, proposing that lower taxes makes such
high earners more likely to remain residents and pay taxes rather than leave their countries or find
loopholes, thereby increasing overall revenue from this notoriously tax-shy sector. Further, given these
incentives, the very wealthy are supposed to invest their earnings into the broader economy and
stabilize production through their marked consumption, both of which serve to generating growth. The
rapid growth of overall net income of the super-rich has however, and not entirely unpredictably,
tended to be invested not in domestic production but in emerging economies and finance sector where
the levels of return are much higher, generating yet further returns for the wealthy themselves.

(ii) Economic expansion: This route requires pump-priming the economy either by backing private
sector creditors or through its direct financing. Without current surpluses both routes require
increasing national debt levels or, if undertaken by central banks, increasing money supply
(Quantitative Easing). But the ability to raise national debt to maintain open-enough credit and
liquidity are limited by the conditions under which debt is raised in the first place through bond
markets, where governments like private corporations regularly borrow money by selling
interest-bearing bills. (The next few lines schematize the conditions bond markets impose on
borrowing levels; readers familiar with this may skip to the last paragraph of this section.) As with
other borrowing the basic parameter of these markets is that the risk of lending is offset by higher
interest: high-risk borrowing needs higher interest rates on repayment to attract and secure lenders
despite the various disinclinations against the chances of default, long-term risk, etc.. Such risks
reduce the cost of the bonds and therefore the amount of money that can be raised from them. If the
risks of lending are perceived to be too great funds cannot be raised on the bond markets and states
cannot pay back their existing bonds or, in expectionally bad cases (when interest is about 12 percent
of GDP), even the interest on them. Commercially, this is bankruptcy and insolvency; for states it is
sovereign debt default. Since governments are usually considered to be the safest bet of all on bond
markets because they can always raise revenue by increasing taxes, sovereign debt default is not only a
problem for the states whose borrowing capability is at risk; it is also a fundamental risk for the bond
markets themselves, and therefore for the entire state-commercial credit system.

Two often inter-linked routes to the risk of sovereign debt default are chronic debt overhang, when
long-term state borrowing is too large for confidence in its repayment to be maintained, and a rapid
escalation in borrowing, when state income is not high enough to cover the increased borrowing costs.
In either case borrowing becomes difficult to impossible, and not only is it then impossible to secure
commercial credit systems or boost economic activity but the very circulation of credit in the bond
markets themselves becomes fragile. In order to âre-assure’ these markets of their continued viability
over the duration of the period of the bond, and to support the continued operation of that market itself,
governments must ensure that the debt to GDP ratio is reduced to risk levels acceptable to the bond
markets. Governments pressing for austerity measures therefore insist that the high levels of national
debt (more accurately, national debt to GDP ratios, which depends on the earnings from production of
the particular national economy) require urgent attention because of the risk of default anxiety in the
bond markets. This is exactly what has taken place in the large-scale bail-out of the finance sector -
dramatically so with Greece and Ireland recently, where the flight from those states’ bonds was
mitigated by exceptional intervention from the European Central Bank in conjunction with IMF
intervention to provide loans to those economies with the added condition that they not raise capital

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from the bonds markets.

Even if sovereign debt default is not such a great risk for countries such as the UK that have strong
enough production and consumption sectors to secure high levels of borrowing, increased debt burdens
can nonetheless be politically mobilized to justify austerity measures. For example, the repayment of
debt interest alone, never mind the borrowed capital, for the UK in 2010 is £30 billion (though this is
only 2 percent of GDP) and is predicted to climb to £60 billion by 2015 (3.3 percent GDP) which, as
current costs to be paid by future income, is revenue that does not go to direct re-investment into
productive capital, social expenditure or wages, and is taken to be a straightforward loss of productive
capacity. The slight of hand in this argument is that this interest repayment is what maintains current
production and investment, and does so at relatively low levels interest levels in terms of GDP.

Given these operational conditions for where and how national credit is raised, it’s worth highlighting
that while the recent rapid increases in national debt and interest repayment levels have been made in
order to keep the highly transnationalized financial sector solvent - for example, by sustaining credit
and liquidity in the economy, re-assuring stock markets and their shareholders of their continued
viability as going concerns and, as in the case of Ireland, insuring of bank deposits to prevent a bank
run - this life-support of transnational finance at a time of its crises not only requires states to raise
capital at higher cost to themselves but those very bonds are themselves subject to much speculative
trading and leveraging by the finance sector, which therefore profits well from the increased cost of
borrowing generated by the efforts to stabilize that system.

(iii) Cutbacks: The reduction of government expenditure is the most overt attack on public services,
usually with the most destructive effects on the poorest. Cutbacks to public services such as the
reduction or closure of public facilities, either directly through outsourcing or indirectly as providers
of the next nearest alternative (the shopping centre rather than the park, the bookstore rather than the
library), pushing social or non-work time and spaces into the hands of private ownership and their
âfacility charges’, caps on housing subsidy, unemployment payments, disability benefits, and so on, all
serve to put what were once public responsibilities and interests into the private sector whose
ownership extends not just to the material facility, service or entitlement (the park, the building, the
benefit) but also to the right to access it, the requirement to generate a profit. As such, not only do
cutbacks in public services corrode the practical and material conditions of what and how a public is
constituted, making it ever more distant and idealized, it also redistributes and deepens the dependence
between the poorest and the private sector. (What is politically astute and disturbing about the logic
put forward for privatizing tuition costs - why should the hard-working poor subsidize those who will
privilege in status and earnings from a Higher Education? - is not only the defense it presents against
the very exclusion of poorer people from HE but that it makes the case for the destruction of public
funding into an argument by and for the poor precisely when it will be only those with a large enough
capital base - definitionally, not the poor - who will be able to take advantage of such provision in the
revised funding structures.)

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(iv) Extending Private Debt: The consumption boom of the decade to 2008 was premised on the
massive increases in private debt mortgages and, to a lesser but still significant extent, the escalating
individual and aggregate debts of private consumption organized through low-interest loans, credit
cards, and so on. The rapid growth of financialization of that period - capital accumulation through
ownership titles rather than production or services - depended not only on an increase of indebtedness
with interest-bearing repayment but also on the acceleration of accumulation by the fabrication of new
financial instruments leveraging that initial income (what is called securitization: high levels of
speculative investment backed with the âreal money’ earned from interest repayment). Interest bearing
loans - debt - generated a supposedly reliable revenue stream without depredation of the capital (other
than inflation, which was at exceptionally low levels during the period). That is, debt interest became a
constitutive feature of economic growth, accumulation itself being organized increasingly through
financialization.

If neo-liberalism is often taken to be a free-market ideology it practically amounts to just this

escalation of private debt as primary source for the rapidly escalating leveraging of the finance sector.
In the US, which has most shaped its economy to this model, with global consequences, this escalation
took off markedly with Reaganism in the 1980s, was consolidated through the transfer of debt from
the state to the private sector in the 1990s - compensating for the Clinton administration’s reversing of
government debt into surpluses by shrinking public expenditure through shutting down Federal public
services and shrinking its consumption - and peaking in the 2000s with the speculative transformation
of private debt into speculative credit through house-price inflation, fuelled by chronically low interest
rates set by Greenspan’s Federal Reserve coupled to low inflation rates thanks to the cheap prices of
imported consumer goods enabled by very low Chinese labour costs.

Incurred upon housing and consumption, such debts and interest revenues presumed earnings to
facilitate a minimal enough repayment of interest and charges to ensure non-default. However, the
trick of financialization can be played out at the literally domestic level and the revenue from which
private debt repayments are made do not have to take place through labour or other production. The
house-price boom to 2008 allowed those with mortgages to take out loans against the added value of
the property without any productive expenditure, generating a form of income predicated on the future
disposal of the house at a higher price than it was brought for. But such income is of course only an
increase in debt and an increase in interest earnings by the lender, allowing the creditor to increase its
revenue stream and increase the revenue available for further leveraging. This base revenue is what
became systematically insecure in 2007-08 when the volume of mortgage defaults reached a level high
enough to not only cause the downfall of several lenders but to make the highly leveraged basic
debt-incurred income susceptible to doubt as to its viability, resulting in a rapid deleveraging across
the finance sector. Given the degree and complexity of leveraging typifying finance since the
mid-1990s, doubts on the security of most financial products could not be contained or âsterilized’
resulting in the withdrawal of confidence in commercial lending, and so a rapid credit contraction
threatening international insolvency.

The credit crisis and the need for new sources for securitization

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What remains a cause for concern for speculative neo-liberalism after the unraveling of financial
leveraging is how to maintain securitizable income when earnings-based debt - mortgages, credit
cards, domestic consumption, etc - can no longer be ensured and presents too great a risk of default. It
is here that governments’ withdrawal of state support for non-labour activities such as education,
health, retirement and so on - that is, austerity - takes its role in diversifying the revenue stream for
financial securitization. As much as bond markets may be re-assured that national debt and its interest
can again be financed by governments, so austerity measures that require schoolchildren or students
and their parents, the elderly and their children, the unwell and their relatives, the unemployed and
those who rely upon them - in short, non-earning non-labour - to finance (the term is exactly right)
their provision through loans and incurring debt, providing a more or less direct source of primary
revenue for leveraging.

That source of securitization is by now familiar: it is a lesson (not) learnt from the extension of the
lending practices of credit-card companies and loan-sharks, as well as for lenders of âsub-prime’
mortgages. The point here is that such basic income generation for financialization now takes place not
just on revenue predicated on earnings through labour or other credit generation at smaller or larger
scales, but also on the basis of those who have no earnings yet or any more, of those who will earn
(schoolchildren and students) or have earned (retirees, the unemployed), of non-labour. As such,
austerity measures implemented by governments seek to support financial leveraging not only by
restoring confidence to the bond markets but also by securing and officialising new non-earning
revenue for it.

In this respect the politics of the current protest against austerity are not just a politics of who pays for
a historical and systematic near-insolvency of the finance sector, but a politics of the continuation of
the system of financialization of not just present but also future and past earnings. To be clear: not just
the future and past earnings of those who can earn (the mortgage you can take out once you have an
income that enables you to have one) but on coming-to-have or having-had the ability of earning at all
(schooling at all levels, retirement) and even of not-being-able-to-earn. The credit crunch and
subsequent efforts to salvage the economy through pumping liquidity into the system and imposing
austerity measures configure non-earning as a new primary revenue for finance to leverage and extract
speculative earnings. Austerity is another turn of the screw of debt-based revenue for financial
leveraging.

As noted, the process is not new in itself, nor is its commonality: it replays the debt-transfer
mechanisms of the late 1990s and 2000s based at that time on the boom in house prices and the
income debt-driven stream of householders drawing loans on their mortgages and/or those of working
age drawing on their pension schemes, as well as the finance sector’s increasing need to expand credit
whose earnings it could rapidly leverage for speculative gain. What is perhaps new and certainly
exacerbated in the move to securitize non-earnings is that the income stream is entirely prospective
and retrospective, taking place on what which is without-earning never mind profit-making. What
itself earns nothing turns then into a speculative undertaking whose worth is that of purely future
earnings. There is no chance of not being indebted and paying interest on it, even if nothing is (yet or
still) being earned to pay that debt back and its interest. Austerity is not then only a matter of
individual and sectorial indebtedness and privatization but of systemic conditions of capital

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accumulation its politics (which is also why the United States, which already arrived at this point
about a decade ago, cannot take this route out of the crisis).

The political opportunity of austerity

In short, (i) austerity measures will implement the indebting of non-earning; (ii) austerity is an
opportunity for neo-liberalism to deepen and re-secure - refinance - its credit base by securing debt
into non-earning sectors, from not-yet or no-longer labour (childhood, study, retirement,
non-economic sectors). This in order for non-earning activities to repay the credit that will have
enabled them to take place at all. What is at issue is not the control or ruling in or out what happens
outside of earning (it is not a matter of content) but that whatever kind of non-earning it is, it is a
source of revenue for financialization through the interest-bearing loan it will require if it is to be
undertaken (including unemployment). The financialization of that whose worth is not capitalization,
of a future distinct from earning, is then predicated on the securitization of non-earning, ex-labour.
Furthermore, what ex-labour could earn will not be for productivity or its own reproduction (to use
only the basic Marxist categories) but as a continued income stream backing speculative capital. This
is the primary task of austerity, the organization of a future as inherently revenue generating not
through earning but, prior to that, as interest bearing. It screws down debt as condition for the further
entrenchment of neo-liberalism at the moment of its deleveraging crisis.

As much as the protests against austerity condemn the finance sector for the losses it has already
inflicted on the populations and no less government servility to their credit-making power, they also
refuse the further implementation of this logic and extraction of future and past earning. To say
âScrew Debt’ whether in the form of tuition fees, increasing the retirement age, fixing housing benefit
by average local rent, and to demand instead that the international finance sector takes a hit on future
earnings so as to pay back the total costs of government intervention (that anyway seeks to ensure
solvency of that sector’s key institutions) and the costs of supporting the economy through the
consequent recessionary period, all of this is to reject the turn of the screw of financialization and
securitization as a âsolution’ to the credit crisis in the guise of public austerity.

The fight against austerity is in other words a direct and for once blatant opportunity to defeat the
premise, logic and operation of neo-liberalism in its core mechanism of accumulation, and to do so as
its screw looks to turn again. This is what is dangerous in the immediate struggles against Higher
Education tuition fees, the preservation of a retirement age, for free education at primary and
secondary levels, a public health service, struggles that will dominate the headlines in the coming
period. Dangerous because the current beneficiaries of financial wealth generation, who by virtue of
such accumulation are necessarily the more powerful, have of course done very well from leveraging
securitized assets and will strive through state power to not only hold on to accumulation on this basis
but also to entrench it further though austerity; to do otherwise would literally be at great cost to it.

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These struggles then constitute a politics of neoliberalism in the exact sense: the implementation or not
of austerity is a matter of whether the credit crisis and consequent public debt is an opportunity for
financialization to deepen its hold on both earnings and non-earnings, or whether it is an opportunity
to defeat the extraction of past, present and future earnings from populations as interest-bearing debt.
It is a matter of whether the assumptions and material-technical practices of neo-liberalism are secured
and entrenched in the coming period, or whether they will be halted before they are necessitated by
government cutbacks on the material-technical-social conditions of public provision. Combatting the
further indebting of not just labour and earnings but now also of non-labour and non-earning, of
simply having a future at all - austerity or not - is the current politics of neo-liberalism.