Who does US austerity benefit?

A classic way to figure out why something is happening politically is to follow the money. It does not always work (ideas do matter), but it is at least a good starting point. Here is a survey of people who have been said to benefit from austerity, and my analysis (usually confusion) as to how they do so.

First, we should define austerity. I’ll just pull the definition from wikipedia: “austerity describes policies used by governments to reduce budget deficits during adverse economic conditions.” Generally this means raising taxes or cutting spending and using the surplus generated from each to reduce the deficit. One thing to note here is that privatization is not necessarily austerity. If you privatize something without cutting spending on it, you will not reduce the budget deficit. So privatizing schools and then handing out vouchers or directly financing them through public contracting is not austerity.

So the question then is what powerful people or industries does this benefit? If we pursue austerity through increasing taxes on the rich — as we have actually done — that really does not seem to benefit powerful people. It seems to actually harm their interest in having more after-tax money. So I will not focus on the raising-tax channel of pursuing austerity. Instead, I will focus on the cutting-spending channel, and try to work through who that does and does not benefit.

The last caveat before we get into it is that I will assume that austerity has the bad economic effects that Keynesians and other sorts on the left say it does. If someone supports austerity because they think that it will actually boost the overall economy, then as wrong as I think they are, it is not confusing why they are doing it. So the real question here is why would someone cynically support austerity despite knowing full well that it will depress output, employment, and so on.

People who lend money are not benefited by austerity. Supposing austerity harms production and employment. It is almost certain that the Federal Reserve will jump in and lower interest rates. In fact, since shortly after the Great Recession, the Federal Reserve has held the Federal Funds Rate at right around 0%. Beyond that, firms and households will probably be less interested in borrowing in uncertain economic times, and may even work to pay down their debts (as they have in this recession). Less borrowers will also be bad for creditors because it will drive both lending rates and lending volume down. So creditors would seem to actually be harmed by austerity. Even if you disbelieve these harms for some reason, there is nothing I can see that explains how they actually benefit from it.

Government Contractors
Government contractors do not benefit from austerity. If the government is looking to slash spending, that means bad things for the firms that provides the goods and services the government spends money on. For instance, the recent sequester cut quite a bit of money from military spending, which will be a bad thing for military contractors. Once again, even if you discount these harms somehow, it is very hard to imagine how government contractors in general get any benefit from austerity.

Real Estate
Real estate does not benefit from austerity. This recent recession is not necessarily a good case to look at just because it will be hard to separate the collapsing housing bubble from other effects. But you can see how this would work out. If the economy is not doing so great, the number of individuals and firms looking to sink a bunch of money into expensive houses and buildings will decline. Less interest in buying will mean less purchases and downward cost pressure, which means less income for those who make their money off real estate. But again, even if you discount the theory about how harmful austerity would be for real estate, what is the theory as to how they benefit from it?

Shareholders and Business Owners
Shareholders are a more complicated bunch to look at. In general, it seems like shareholders will face harm from austerity. After all, austerity would presumably mean less economic activity (like people buying the goods your companies sell). Less economic activity will mean lower revenues and therefore lower overall profits. At the same time, as Mike Konczal pointed out on twitter, a depressed labor market means downward pressure on wages. Downward pressure on wages means you can pay workers less, and you could clear those savings into profits and dividends. So in theory here, you would have less overall revenue from the austerity, but higher margins from the revenue that comes in due to the depressed wages. Whether that balances out into a net gain for shareholders is hard to say. I’d suspect no. Even if this suspicion is off, does anyone actually think this could be what’s cynically motivating austerity? Shareholders calculating that the losses they suffer from a bad economy will be overwhelmed by the gains they get in that period by a lax labor market? Seems far fetched.

Union Haters
Union haters do have something to gain from austerity. If austerity is strong enough and is horrible for the economy, it will cause lots of businesses to fail. The unionized workforce at those businesses will not be union anymore. If the economy picks up later and they get new jobs elsewhere, they’d have to organize a new union. It is possible then that you could get a net negative swing in overall unionization. Of course, it is hard to imagine business leaders trying to create economic conditions that bankrupt businesses as part of a long game of fighting unionization. You lose a union, but also your business. There also are just not that many unionized firms anymore. Now public sector unions could lose members (and therefore some funding) if austerity takes the form of shedding some public workers who have unions. This wouldn’t destroy those unions, just remove some of their members and some of their funding. You do not necessarily need austerity to shed these workers, although it could provide a good excuse. Once again, this seems like a questionable theory.

I fully expect that I have left some theory out, although these are the only ones I can think of. I’d appreciate those who think there are powerful groups that gain a lot from austerity to pipe in with their theories of who those groups are and how it is supposed to help them. If it is the case that there are not powerful constituencies that stand to gain that much from austerity, then that would suggest there are other motivations for it, e.g. motivations that have to do with ideas. If that is the case, then ideas might matter in this debate, contra those who dismiss ideas as missing the point that the rich and powerful are doing this for their own gain.