With its disguises as “high finance” for the mystified and “Keynesian fiscal policy” for those “in the know,” deficit spending by the government was quite a successful scam for a long while. When the UK’s ex-prime minister opened her new government in September, Liz Truss followed tradition by trying to run the oft-used scam again. But this time it did not work. Eventually, even successful scams stop working. Its failure became hers but also her party’s, the Conservatives.’ Neither of them understood the scam’s limits. Perhaps its disguises had worked best on those who repeated them most in thought and word.
In its UK version, the deficit spending scam entailed the Conservative (but also some Labor) governments repeatedly cutting taxes on corporations and the rich. Serving their donors explains most of this. Without this scam, such behavior would have forced governments to act in traditional ways they now sought to avoid. One way would be to raise taxes on others to offset tax cuts for corporations and the rich. Governments only dared to do that partially, never enough to compensate for revenues lost from the tax cuts benefiting corporations and the rich. The other way would be to cut government spending. Governments did that also, especially when the Conservatives recast public services as unnecessary, wasteful, counterproductive, or in short, “socialistic.” But doing so angers the masses and risks losing votes for the government. Even when the masses could be distracted by campaigning against select foreigners (via Brexit against Europe and via Ukraine against Russia), public service cuts never compensated for what corporations and the rich were saving by having their taxes cut.
Enter the scam that claimed deficit spending “solved” the governments’ problems. Governments could 1) keep cutting their rich patrons’ taxes, 2) avoid offsetting tax increases on the middle and poor, and 3) avoid social service cuts. The scam was to spend without imposing taxes to raise the funds required to support spending (“deficit spending”). While deficit spending violated traditional rules for governments to balance their budgets, new and extreme economic threats (the dot-com crash, the Great Recession, the COVID-19 crash, and the sanctions war against Russia) justified trying to implement the scam. Alternatively, deficit spending could be justified as practical, a regrettable necessity of managing those recurrent business cycles.
Deficit spending came to be politicians’ magic sauce. It enabled them to boast about all they could spend on (for employers and employees) without raising taxes as if doing so flowed from the governmental efficiency of politicians. Governments could pander to corporations and the rich without it leading them to impose government austerity measures on the rest. The 1 percent gained a lot while the 99 percent gained a little.
The scam’s seamy side was massively “underreported.” It was and still is a fact that UK governments borrowed most of the money for deficit spending from the UK corporations and the rich. Once the government had cut taxes, the money saved by those corporations and the rich could be and was often lent to that government. The scam offered a certain “no-brainer” opportunity to corporations and the rich. Instead of making a one-time tax payment to the government (like other taxpayers do) corporations and the rich can instead lend that money to the government. The government security obtained in exchange provides repayment in full in the future plus annual interest payments till then.
This scam has worked for many years across global capitalism. After former UK Prime Minister Boris Johnson lied his way out of office, Liz Truss presumed she could and would run the scam again, loudly and proudly, with the usual political applause. All her predecessors had. But this turned out to be the time and the place where the scam would hit its limits. Ironically, the very beneficiaries of the tax cuts Truss proposed for the corporations and the rich were the “investors” who balked. They took a good look at the UK government’s financial conditions and decided not to lend it more money without much higher interest rates (and maybe not even then). Very quickly—as these things often go—higher interest rates drove down bond prices threatening UK pension plan assets. Suddenly, the unraveling of the UK economy could be glimpsed as could be its risks for global capitalism. Leading the blind, President Joe Biden said of Liz Truss that she had “made a ‘mistake.’”
The old scam’s Achilles’ heel: at some point, corporations and the rich might see too much risk in lending the government money they saved from their cut taxes. The very repetition of the scam over decades might accumulate levels of the UK’s national debt plus conditions in global capitalism that are rendered risky. Lending the UK still more money suddenly made little sense as an investment; other options were better.
It is true that the capitalist political economy positions the government in a structurally impossible dilemma. Both employer and employee classes want government services for themselves and likewise want to pay minimal taxes. The wealth and power concentrated with the employer class make them consistently more successful in tilting public finance their way. They get the services they want and likewise, shift the tax burden onto others. When conditions change and no longer enable the employer class to prevail that way in determining what the government does, big changes happen. In the 1930s Great Depression, John Maynard Keynes showed how deficit spending could fix broken capitalism without endangering capitalism itself. In the awful depths of that crash (capitalism’s worst to date), there was no time or space to worry that deficit spending’s “fix” was only partial and temporary or about limits to its effectiveness. That would excuse Keynes, but hardly the multitude of politicians, academics, and journalists who could have and should have seen—but never saw—the scam and the injustice involved.
Will the UK working class learn that prevailing economic theories and policies have always been partisan in the class sense of serving and favoring employers over employees? Most of what passes as “the economic policy we need now” is really pleading by a self-interested employer class. Raising interest rates to fight inflation is the big example these days. Among the forms and fields of class struggle, debunking economic policies’ claims of being class neutral is an ongoing battle.
Richard D. Wolff is professor of economics emeritus at the University of Massachusetts, Amherst, and a visiting professor in the Graduate Program in International Affairs of the New School University, in New York. Wolff’s weekly show, “Economic Update,” is syndicated by more than 100 radio stations and goes to 55 million TV receivers via Free Speech TV. His three recent books with Democracy at Work are The Sickness Is the System: When Capitalism Fails to Save Us From Pandemics or Itself, Understanding Marxism, and Understanding Socialism.
This article was produced by Economy for All, a project of the Independent Media Institute.