This month the Irish state and its taxpayers guaranteed €50,000 million (€50bn) on bailing out its banks, raising the budget deficit to 32 percent of GDP. In effect, the state has risked sacrificing the economy to ensure the holders of private capital do not lose money. To do this, they are asking everyone else to pay for it. But, is it the bank (as a financial organisation that circulates credit to the Irish economy) that the state is protecting or is it the owners of financial capital with assets in the Irish banking system?
It is, of course, the holders of financial assets. Why would a democratically elected government of the state do this? According to Brian Lenihan, in this interview, it is because the state needs those same holders of financial capital to fund day to day spending in the state (public sector employment, healthcare, education, social protection). When directly asked why capitalism cannot work both ways (i.e. let bondholders take a loss) the Minister for Finance responded quite frankly “we cannot allow investors to take losses on their bonds in Irish banks because the state has to borrow from those ‘very same investors” So, there it is in black and white. Those with capital can’t lose because they have rigged the game both ways.
The state has stepped in to make sure financiers do not lose the gamble because they have to go back to the same gambler to fund a) the cost of bailing them out in the first place and b) to cover the collapse in tax revenue due to the institutionalisation of a low tax regime. This is a regime that taxes capital at far less than any other European country (12.5 percent). So, you would think the government would ask the banks and other corporate actors to pay a little bit more for their follies, to contribute some of their profits back to the public? Afraid not, the government has made it clear, it will tax income, property and water not corporate profit.
Keep in mind the shape of Irelands income distribution and its impact upon income inequality. In 2008, 9000 people or 0.3 percent of the population earned €6.7 billion, 0r 6.6 percent of all income. 71 percent, or 1.3 million people earned an avergae of €38,000 a year. Also, in the same year Irelands adjusted wage share of the economy was 55.2 percent of GDP. The EU average was 64.2 percent. In terms of wealth (in the form of assets, shares, property) the top 1 percent hold 20 percent, the top 2 percent hold 30 percent and the top five percent hold 40 percent. We have no wealth or financial transaction tax.
The policy response is to not tackle low taxes or let the financiers fall but to slash public spending. This is being done in an attempt to reduce the budget deficit from 32 percent to 3 percent by 2014 (not remotely realistic but designed to send a signal to the markets that the government is tough on you and me), as part of the EMU ‘Stability and Growth’ Pact. This reduction in public spending further deflates the economy and depresses economic growth which in turn reduces state revenue and requires more borrowing at higher interest rates to pay the same financers who hold all the cards.
So, to recap, the state, given the constraints of financial markets, must operate according to the interests of the ‘market’ because it is dependent upon holders of private capital for funding state services. Given that they are not being asked to pay more in capital taxation, and we have paid for their losses surely they won’t charge higher interests rates on the states borrowing cost? Afraid not, they are increasing it all the time. Why? Because they can see that they will make money out of it given that the state must borrow in the absence of a secure tax-revenue base.
Given all these contradictions (internal to finance markets) you would think economists, those clever mathematicians in our universities, would encourage the state to fix the tax base, generate growth and bully back the financiers. More bad news I am afraid. Ireland’s plethora of economists are encouraging the state to cut public spending, to roll back social services and hope that growth will pick up through private-market expenditure. They are encouraging the government to shift the entire burden of adjustment on to those who paid for the bailout, a double whammy. The logic of this argument is total utopianism. It is premised on the assumption that when the state cuts back public spending and outlines a clear strategy of ‘retrenchment’ consumers will step in and start spending money again. This private expenditure will start the economy growing. Alice in Wonderland (aka neo-classical economics).
So, it is quite simple, the state (the public representation of citizens in a democratic republic) is being forced to sacrifice the economy for the holders of private capital. There is a name for this and it is not austerity. It is class politics.