The Austerity Hoax

By Betsy Bowman, Ph.D. , President and Research Associate of the Center for Global Justice

Feb. 27, 2013

View the video at

The call for austerity – long imposed in the third world – the Global South — through structural adjustment programs implemented by the International Monetary Fund and the World Bank– is now being heard in the first world – in Europe, the US and Canada, Australia, Japan and elsewhere.  Austerity for the Global North is nothing less than a structural adjustment program for us.

Austerity means lowering our standard of living by changing government policies from providing goods and services that people need to not providing them.  Austerity means cutting many basic services such as fire and police protection, first responders, food and drug inspectors (the FDA), water and air inspectors (the EPA), job safety inspectors (OSHA), park rangers, the weather bureau, road and bridge maintenance, universities and hospitals.

Austerity also means low, stagnating wages.  Wages were at their highest level in the US in the mid 1970s.  Today, fully one third of  jobs in the US pay less than $15,000 per year.  One half  of jobs pay less than $25,000 per year.  Three quarters of jobs pay less than $54,00 per year.  The CEOs of the giant multinational corporations have already imposed austerity on US workers through stagnant, low wages.  And since 1973, 40 million jobs have been lost.

Our standard of living is determined by our wages, the services we receive free or at reduced cost from the government, and by our personal wealth.  Our wages are already very low.  Services are being reduced.  In other “advanced” countries, services such as education and health care are virtually free.  But in the US they are very expensive.  Personal wealth?  Eighty percent of the US owns only 7% of the wealth, a negligible amount.  We have already been subjected to a 40 year-long austerity program without knowing it.  How did we get here?

I will show that there is no reason for austerity due to:

    1. illegal and unconstitutional wars (Vietnam, GWOT (Global War on Terrorism), Iraq & Afghanistan, 1000 military bases in 140 countries, special operations in 120 countries).  The wars in Iraq and Afghanistan have already cost is $1.4 trillion.
    2. corporations don’t pay their fair share of taxes due to tax havens and loopholes.  Tax revenues from corporations pay only 13% of government expenditures.
    3. reduction in personal taxes (primarily the Bush tax cuts which have cost $2.4 trillion since 2001)
    4. bailout of the banks whose cost is about $9.2 trillion.
    5. Social Security is not in crisis and runs a surplus every year.
    6. future deficits are considered to be due to increases in health care costs, but these increases could be virtually eliminated with a single-payer system.


The Golden Age of the U.S. started turning sour in the 1970s.  One of the major reasons for this was the immense spending on the war in Vietnam of the Johnson and Nixon administrations. It has recently come to light that the Nixon election committee in 1968 contacted the South Vietnamese government, then engaged in peace talks with the Johnson administration, and urged the South Vietnamese government to scuttle the Paris peace talks to improve Nixon’s chances of winning the election in 1968.  When a non-government official negotiates with a foreign government against the express interests of the government, that is called treason.  Then President Johnson knew about this, and he himself used the word treason.  But he didn’t make it public, and his Vice President Hubert Humphrey lost the 1968 election to Richard M. Nixon.

We know the results of the failure of the Paris peace talks:  if a settlement  had been negotiated in 1968,  28,000 US military personnel would not have died and 1 to 2 million Vietnamese, Laotians, and Cambodians would not have died.  Also the US debt would not have risen so much.  The spending on the Vietnam war is a large part of what destabilized the US economy and the global economy in the 1970s and opened the possibility for the Nixon administration to take the US dollar off the gold standard and leave the fixed currency exchange rates established at Bretton Woods in 1944.

Also in the 70s the crisis in profitability of US corporations brought on the neoliberal policies in the 1980s.  Neoliberalism essentially was a project of the capitalist class to lower labor costs and raise the level of profitability.  It was successful  It also brought massive unemployment to the US.  The goal of the capitalist class – the elites — is still the same — to lower labor costs, today through austerity.  We are still paying the price of Nixon’s “win” in 1968.

The resistance to the Vietnam war also brought on the coordinated efforts of major corporations to shape public opinion in the US to make it more “business friendly” and more pro capitalist.  The Powell memo of 1971 exhorted business leaders to join forces and finance a public disinformation campaign to make capitalism more acceptable to the US public. The Trilateral Commission published its infamous 1974 report warning of the dangers of too much democracy titled:  The Crisis of Democracy,  Trilateral Task Force on the Governability of Democracies

In the 1970s, US businesses became fat and lazy.  Then President Carter knew that it was imperative for the US and the world to convert from a carbon based energy system to a renewable energy system.  Did Detroit build the best electric cars in the world?  No, instead we got gas-guzzling land yachts.  Did the US government or corporations develop renewable energy?  No we got nuclear energy.  On Monday, March 25, the BBC announced that climate change is real, and it is urgent that we reduce cabon emissions.

In 1979,  Pres. Carter got diverted from his domestic concerns by the Iranian revolution and the taking of the US Embassy employees as hostages – no doubt blow back from the US engineered coup in Iran in 1953 whereby the elected Iranian leader Mossadegh was replaced by the despised Shah of Iran.  The goal of the coup was to return profits from petroleum extraction and sale to US and British companies instead of the profits going to benefit the Iranian people after Mossadegh nationalized the oil corporations.  The entire Global War on Terror I consider blow back from that US coup in 1953.  The decades of slaughter and death squads in Latin America are the results of another US coup when the US toppled the then President of Guatemala Arbenz in 1954.

We know that the Reagan election committee in 1980 negotiated with the revolutionary Khomeini government in Iran to hold the US Embassy employees hostage until after the election, thereby jeopardizing Carter’s chances of re-election.  This also was treason. So Reagan was elected; he took the solar panels off the White House, and he started busting unions and cutting taxes.

So now we come to austerity today.  It appears that the Republicans and the business class want to reduce the federal debt – now at $16.7 trillion – and that they want to reduce annual deficits.  When the banks needed bailouts, there was no call for austerity.  Now we the people need a bailout.

The national debt is the life blood of the banks and the wealthy.  The government money spent on interest on the debt – interest on money borrowed from the private banks – is the anchor of the bond markets, and it is what guarantees that the US dollar is the world’s reserve currency.  US Treasury bonds are the safe-haven for government reserves and investors around the world.

In addition to maintaining the US dollar as the world’s reserve currency, There are two main goals of the elites:  lower labor costs and divert all government expenditures to payments on interest on the debt or on purchases of goods and services from private corporations.  Thus prisons are privatized; military functions are privatized.  Why waste government money on unionized prison guards who have benefits and retirement pensions when private corporations can take the same money, pay low wages to the guards, and keep the difference as profit? This of course is the impetus behind the push to privatize any and all government-supported jobs.  Privatizing public jobs puts money in the pocket of private corporations and deprives the workers of decent wages, benefits and retirement

The demand for austerity rests on assumptions that have been carefully constructed and perpetuated by the media, think tanks and universities, governments, and officials of international agencies, among others.

One of these assumptions is that the US government cannot issue US currency interest free. The Federal Reserve, a corporation owned by the big banks, creates the US dollar through debt – by loaning money to the US government and other banks. So governments don’t create money;  they could, but instead central banks and privately owned banks create money by making loans at interest.  If governments created the currency for their country, governments would not have to borrow money at interest from banks.  Abraham Lincoln financed the Civil War with greenbacks, US government issued money.  The US Constitution gives Congress the right to “coin” money.  That has been taken to mean that Congress creates the coins, but the banks have somehow usurped the power to create dollar bills.  It’s been a long struggle in the US – it goes back even before the conflict between Jefferson and Hamilton – and the wealthy bank owners only “won” by convincing Congress to establish the Federal Reserve in 1913.

Another false assumption underlying the austerity hoax is that the federal debt, now standing at $16.7 trillion – is somehow everyone’s problem and that the annual budget deficit is also everyone’s problem – asif the outcomes of the political process represented what the vast majoritiy wanted!  It is clear that the government does what benefits the corporations which pay their campaign costs and not what the voters want.  There is no democracy.

But, the huge increase in the federal debt is due to Bush’s tax cuts for the wealthy and the GWOT, the Global War on Terror with its two illegal, unconstitutional and reckless wars. The bubble of the late 1990s actually balanced the budget under then President Bill Clinton.  Statisticians figured tax revenues would continue increasing in the future as at the same rate as they had in the 90s.  So George Bush figured that tax payers should just keep their money since the government didn’t need it given that the budget was balanced.  The Bush tax cuts for the wealthy have cost $2.4 trillion dollars since 2001.  That’s $2.4 trillion dollars that could have been spent on health care, education, infrastructure, instead of giving it to those who are already wealthy!  Other countries have sovereign wealth funds – ie savings for the future.  But why would the US save for the future?  Why spend tax revenues to improve the standard of living of the average people?  Why improve health care delivery, education, why invest in renewable energy?  No – just give the illusory wind-fall to the rich.

So after George W. Bush was appointed by the Supreme Court to the Presidency in 2000, he engineered massive government borrowing to give money to the wealthiest people via tax cuts. Sen. Robert Byrd in 2004 [1] stated that:  “for the Fiscal Years 2001 – 2010, this Administration’s policies have transformed a ten-year, $5.6 trillion surplus into a $4 trillion deficit.”  That was a massive transfer of wealth from the poor, lower and middle classes to the wealthy.  Again in 2008, we witnessed yet another, massive transfer of wealth — this time the largest transfer of wealth in history from the poor, lower and middle classes to the rich via the bailout of the banks.  Nomi Prins estimates the cost of the bailout at $9.2 trillion.

This past week as we commemorate the 10th anniversary of the beginning of the 2nd war in Iraq, many commentators have slammed the Bush/Cheney administration for conducting an illegal and unconstitutional war.  To date the US has spent $800 billion on the war in Iraq and $600 billion on the war in Afghanistan, for a total of $1.4 trillion dollars.   Again, is $1.4 trillion dollars spent killing innocent people a good way to spend borrowed money?  Wouldn’t we prefer to have low cost health care.

The annual budget deficit is due primarily to military spending which consumes about half of the annual budget.  We now have an unending war, the GWOT, at least 1,000  military bases in 140 countries around the world, and “special ops” in 120 countries.

Another reason for the annual budget deficit is that every year the US Treasury takes in less tax receipts from corporations than in the past.  Today the taxes paid by corporations cover only 13% of government expenditures. For example, corporations have $1.5 trillion in off-shore tax havens with no taxes paid on that $1.5 trillion; annual loss of tax revenues due to off-shore tax havens is $70 billion.  Many hugely profitable corporations not only pay no taxes, but they get tax rebates! For example, in 2009 Exxon made $19 billion in profit, paid no federal taxes and got a $156 million tax rebate; Chevron made $10 billion in profits and paid no federal taxes; Citigroup made $4 billion in profits and paid no federal taxes; in 2008 or 2009 GE got a $140 billion bailout; in 2010 GE made $26 billion in profits and got a $4.1 billion tax rebate, and paid no federal taxes.

The corporate tax rate is 35%, but the effective tax rate is much lower.  In 2010 Coca-cola paid 6.6% in taxes; Verizon paid 5.9% in taxes.  These figures come from the documentary “We’re Not Broke;”  there are lots more statistics in the documentary.   Most large corporations run their accounts through off-shore tax havens and “earn their profits” in countries with no corporate taxes like the Cayman Islands, the Bahamas.  There are now 50 countries in the world that are tax-havens.  So the annual budget deficit is due to the loss of tax revenues.  Since 1973, 40 million jobs in the US have been lost or moved overseas.  Loss of income tax on these jobs is significant.

Another false assumption underlying the austerity hoax is that somehow Social Security is in crisis.  It is not.  Social Security has nothing to do with the federal budget nor the deficit.  It seems that no one knows this.  Actually, there is a Social Security SURPLUS every year that the government borrows to make the deficit look smaller!  Remember Al Gore’s pledge in the 2000 Presidential campaign to put the Social Security surplus in a lock-box?

Once a decade or so the anti-New Deal right-wingers get apoplectic about the debt, and get on the Social Security crisis band-wagon and call for abolishing or privatizing Social Security.  But it’s usually the right-wing Republicans who pass astoundingly expensive programs and have done so at least since Reagan’s and the Republicans’ tax cutting mania started in 1986.

In 1981 Ronald Reagan appointed Alan Greenspan to head a commission to “save” Social Security.”  He did so by increasing the FICA tax, thus increasing taxes on the middle and low income and giving the high income people a free ride. We need to keep in mind that the FICA payroll tax as of now is only assessed on the first $106,800 of salary.  If it were assessed on 100% of everyone’s compensation, everyone could get a substantial raise in their Social Security.  But Goldman Sachs and the other big rollers don’t want to pay FICA tax on the millions in bonuses they pay to their executives and employees, and the executives and employees don’t want to pay the tax on their millions in compensation. The Republicans have been borrowing our FICA taxes that we have been saving for a rainy day and they are spending our savings on tax cuts for themselves and their rich friends.  And today Social Security runs a $2.7 trillion surplus.  So don’t let anyone tell you that Social Security is in crisis.  I suggest the borrowed Social Security surpluses be paid back and that the FICA and Medicare tax be assessed on 100% of everyone’s compensation.  Then we could all receive double or triple the amount we get in our Social Security check.  Fully half  of US retirees get 84% of their income from Social Security.  It’s time we had a raise.

This year the anti-New Deal right-wingers are greatly empowered by a new group called “Fix the Debt,” an organization composed of CEOs and the richest people in the U.S. led by billionaire Peter G. Peterson, a private equity mogul and member of the Council on Foreign Affairs, and Erskine Bowles, a member of Congress and Director of Morgan Stanley, along with a host of other very wealthy and powerful people.  They are pushing a new campaign to end Social Security and Medicare:  this time it’s called “Fix the Debt.”  New name, same program.

Of course they don’t really want to fix the debt.  The US government pays fantastic sums in interest payments to them every day.  The people who would lose their jobs, those who provide public services such as social workers, mental health care workers, park rangers, teachers, none of them are calling for austerity.  Only the wealthy are calling for austerity because their corporations don’t directly make a profit from the labor of public workers.  That’s what is behind the savage attacks on public school teachers.

Another sacrificial lamb for austerity’s chopping block is Medicare.  The US has the most expensive and inefficient health care delivery system in the global North.  All the other countries of the global north pay far less for health care and get far better health care.  All studies show that future deficits are ballooning in large measure due to the increase in health care costs.  A single payer system would save trillions.  But the health insurance industry and big pharma would lose really big from a single payer system.   That’s why we don’t have one.  But we could.  Congress could pass a law mandating a single payer system such as what people have in Canada, France, England, and the rest of the Global North.

Another false assumption underlying the austerity hoax is that over the last few decades, as the financial industry was deregulated, it is assumed that all financial transactions have been done honestly – i.e. that there is competition in the market place, that prices are fair, that there is no manipulation of interest rates nor collusion between bankers to benefit themselves to the detriment of others.  We know that the housing mortgage market was fraudulently manipulated to the extent that it almost crashed the entire international financial system.  And still no one has gone to jail except Bernie Madoff.  Where is the special prosecutor investigating the banks, their CEOs and other top officers?

What is less well known is that speculation on the commodities exchange (which was also deregulated) in 2008 led to a precipitous rise in world food prices.  Once again we see traders – gamblers – through this speculation manipulating the system for their own gain regardless of the costs to others – costs such as starvation and death.  We can expect increasing world food prices due to climate change, drought and speculation.

And even less well known is the bid-rigging scandal of municipal bond interest rates and the LIBOR, the London Inter Bank Offer Rate.  Matt Taibbi in The Rolling Stone [2] and Ramaa Vasudevan in Monthly Review[3] describe these illegal and fraudulent schemes undertaken by bankers.

The big-rigging scandal of municipal bond interest rates involves the interest rates that municipalities receive on the monies they have raised by issuing bonds as these monies are slowly spent over a longer or shorter period of time as schools or sewer systems are built, etc.

Vasudevan describes the municipal bond bid-rigging scandals in these words:

…blatant forms of collusion have recently come to light in the context of the municipal bond-rigging scam involving major banks, including J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, and Bear Stearns, who conspired and colluded to deliberately rig the public bids on municipal bonds, a business worth about $3.7 trillion.  Towns and municipalities that borrow by issuing municipal bonds to finance various projects have also turned to brokers on Wall Street to handle investment of some of this money instead of keeping it idle over the course of the project.  The bonds are supposed to be submitted to a competitive auction (of at least three bids), but what the brokers actually did was allow the bankers to collude to carve out chunks of business.  The brokers charged with getting municipalities the best deal actually let the prearranged “winner” have a “last look” at the bids of the competitors, thus allowing the bank to make the lowest possible winning bid.

Matt Taibbi comments:  “By shaving tiny fractions of a percent off their winning bids, the banks pocketed fantastic sums over the life of these multimillion-dollar bond deals.”[4]  Vasudevan explains:  “…while the broker collected not just fees and commissions but also a fat bribe.  Four banks that took part in the scam have agreed to pay $673 million in damages.  This is likely to be just a fraction of the actual sums skimmed from public projects all over the United States.  Yet for the bankers concerned, this was a perfectly fair auction, since, despite the fact that the secret collusion resulted in lower returns to the municipalities, they still got the highest of the bids.”[5]

Matt Taibbi asked:  “Who ultimately loses in these deals?  Well, to take just one example, the New Jersey Health Care Facilities Finance Authority, the agency that issues bonds for the state’s hospitals, had their interest rates rigged [by the Carollo defendants] on $17 million in bonds.  Since then, more than a dozen New Jersey hospitals have closed, mostly in poor neighborhoods.”[6]

In the LIBOR – London Inter Bank Offer Rate –scandal, bankers in the City of London colluded to adjust the LIBOR interest rate to their benefit and to the detriment of millions of regular consumers by overcharging on mortgages, etc.  “The LIBOR is the interest rate that is the anchor of about $800 trillion worth of international financial transactions.[7]” It’s impossible to estimate how much money the banks gained on this collusion, but it’s a lot.

As an economic system, capitalism is ONLY justified by the claim that there is competition and a level playing field.  Nothing could be further from the truth.  The system is rigged.  As in a casino, the house – that is to the big banks Goldman Sachs, JPMorgan Chase, Citigroup, etc. – always wins.

So there is no reason for austerity – not in the US., not in Europe, not anywhere.  In addition to the reasons I’ve already mentioned, in the US the wealthy are on a capital strike.  There’s $2 trillion sitting in banks and another $2 trillion of corporations’ retained earnings.  There’s $1.2 trillion in off-shore tax havens.  None of this $5.2 trillion dollars is being used to invest, create jobs, rebuild the infrastructure, provide social services, etc.  Of an average US annual GDP of $14 trillion, there are $5.2 trillion dollars available for investment that is being withheld as the banksters and corporations wait for better investment opportunities, that is to say as they wait for  wages in the US to go down even more.   There is no reason in the world why this money couldn’t be used to build electric cars or improve education – the only reason is that the people who “own” this money won’t make enough profit to bother.  Why is the entire world held hostage to the 1% — or more accurately to the top one one-hundredth of 1%?  It’s them or us.

Les Leopold in The Looting of America[8] estimates that wages today are 18% LOWER than they were in 1975.  Yet banks and multinational corporations (AIG, GE, GM) were bailed out with trillions of tax-payer dollars.  The banks could have been forced to reduce mortgages on under-water homes. Or corporations could have been forced to lend or give money to small businesses who are creating employment.  There is a host of other things the government could have compelled the banks and corporations to do, but it didn’t.   I suggest that it should have nationalized the banks, put the bankers who committed fraud in jail, and run them as public service organizations.

There is no reason for lowering the standard of living of most of the citizens and those living in the U.S., nor in Europe nor anywhere else.  The rich have recently stolen trillions and trillions of dollars from the US tax payers via the banks’ bailout and other schemes.  The bank bailout cost US tax payers $9.2 trillion according to Nomi Prins.  The US debt is roughly $16.5 trillion.  At the end of Clinton’s presidency it stood at $5.6 trillion; at the end of Bush’s presidency it stood at $10.7 trillion, and today it’s $16.5 trillion.  That means the debt has tripled since George Bush took office, AND we have soaring homelessness, increasing foreclosures, excessive unemployment, a woefully inadequate health care delivery system, crumbling roads and bridges, decaying schools and universities.  The list goes on and on.   Why do we have all this debt and nothing to show for it?  Would you willingly borrow a million dollars and give it to some very wealthy person such as George Bush and compel your children and grandchildren to pay the loan?  Well, that is in effect what we’ve done.  We’ve been had.

According to the US Constitution, Congress has the right to create the US dollar.  It could issue currency interest free to pay for everything needed.  But the underlying problem is two-fold:  first we do not have a political system in which the wishes of the majority are reasonably reflected in the outcomes of the political process. In other words, we have no democracy. Campaign finance reform would be a start.   And secondly,  criminal behavior and impunity have permeated our entire society.  Wealthy powerful people are not jailed for committing crimes and pursuing policies that literally kill people –  from the GWOT to poor people dying on the steps of public hospitals.  Corruption is rampant,  endemic and systemic.  Impunity is the law.  But their goals of lowering wages and keeping the US dollar as the international reserve currency are secure, for now.

I’ve made a series of suggestions of what can be done.  First campaign finance reform – get a Congress that is not beholden to big corporations and big money; abolish the Federal Reserve and create a central bank that creates dollars interest free for the economy; put the crooks in jail;  stop the GWOT, shut down the surveillance state, and take care of the problems.   We know what needs to be done – from renewable energy to organic agriculture to single payer – those who are in the way need to get out of the way.

If Gandhi and the peoples of India got the British out of India, we can get the banks and the banksters off our necks.

[1] Robert Byrd.,
[2] Matt Taibbi, Rolling Stone, 1160/1161, July 5-19, 2012, pp. 80-88.
[3] Ramaa Vasudevan, Monthly Review, Vol. 64, No. 8, Jan. 2013, pp. 1-12.
[4] Matt Taibbi,  Rolling Stone, op. Cit., p. 86.
[5] Vasudevan, Monthly Review, op cit, p. 9
[6] Matt Taibbi, Rolling Stone, op. Cit., p. 88.
[7] Cited by Vasudevan, Monthly Review, p. 1,  from “The LIBOR Scandal:  The Rotten Heart of Finance,”   Economist, July 7, 2012.
[8] Les Leopold, the Looting of America:  How Wall Street’s Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity and What We Can DO About It,  2009, Chelsea Green Publishing, p. 15.
Do you like this page?

Be the first to comment