By Marc Morgan
“There are no conditions of life to which a man cannot get accustomed, especially if he sees them accepted by everyone around him”- Tolstoy
The “complex network” of financial contracts that seemingly justify the need to pay back unguaranteed holders of private sector debt turned public debt only appears to be transferring money from those in need of it to those in search of it. But it would be a mistake to think this a recent phenomenon. Since the early 1980’s this transfer of wealth has been almost a social norm in government policy on both sides of the Atlantic, to the extent that we have accustomed ourselves to its existence by being ignorant of its very dynamic. The passing of time and events we study as ‘history’ can help us reflect on exactly what we had accustomed ourselves to, and what we are in danger of ignoring from the remedies to the recent crisis.
Over the last three decades the dominant fiscal policy, initiated in the U.S and imitated across much of Europe, essentially turned public debt into a mechanism of relocating wealth from ordinary contributors to rent seekers. Although verification of this can be found from history, justification cannot. Governments over these past thirty years lowered the taxes, thus augmenting the disposable incomes, of those who needed it less in society. The reduced receipts on high income earners, corporations and capital gains forced governments to go into debt with financial markets in order to recuperate the loss of revenue arising from the very policies requiring firm justification. The justification of these anti redistributive measures was that they were a means towards economic growth. This was helped by the growing presence of financial globalisation, allowing capital to move beyond national borders in search of the highest possible returns. But any direct contribution of these measures towards increasing national (and not just individual) wealth has been very uncertain in addition to being difficult to measure.
What has been undoubtedly a direct consequence of the lower tax rates to the highest earners has been widening government budget deficits. According to recent figures compiled by the Institute for Taxation and Economic Policy the projected loss of revenue to the U.S Treasury over the next ten years from tax cuts to the wealthiest five percent of citizens is over $2,150 billion. In other terms since 2001 the fabled ‘Bush’ tax cuts, extended under the Obama administration, have added 12.3% to annual deficits. Over the last three years Republican politicians have been repeatedly pointing the finger towards this deficit, labelling it the root of the country’s debt related difficulties, instead of redirecting it on their selves and the fiscal policies advocated on their part. A metric that has increased in a linear fashion since the 1980s has been income inequality, something which has not, until now, occupied much political debate anywhere across the West. The current levels of unemployment in the ‘developed’ countries as well as the present debt crisis help to illustrate how much these fiscal policies have contributed to national wealth ‘creation’.
It is of upmost importance that we understand the dynamic of these policies in relation to our current debt crisis, before any justification for them can be made. As governments went into debt with financial markets the interest paid on the bonds sold went largely to those individuals that saw their tax bills reduced in the first instance. This is a rational claim, justified by the fact that a reduced tax bill for already high income earners creates further excess income which can be invested in financial markets. From a different perspective, the ordinary taxpayers, not fortunate enough to see their taxes reduced have been financing these holders of public debt, who continue to be substantially better off. In economic terminology this transfer of wealth from ordinary taxpayers to the rich is known as the “jackpot effect”, and it can amount to large sums of money. In France for example these payments represent “€40 billion, almost as much as the total receipts from income tax”, according to researchers from the Centre National de la Recherche Scientifique (CNRS). In other words nearly all the money collected in income tax has gone to pay a government debt heavily accentuated by the implementation of low tax regimes for the wealthy. In accounting terms this represents a double payment for the state (less tax revenue and increased interest payments) and a double earning for those fortunate to live off dividends and investments (lower tax bill and higher return on investments) – hence the jackpot for the rich. This unjust set of circumstances went hardly noticed or debated during the ‘booming’ ’90s and ’00s. However hidden under the overly-adhered to GDP/GNP figures was a growing inequality which has only just begun to resurface public debate since the crisis of 2008.
The current European debt crisis is only continuing to aggravate national and global levels of inequality, due to our collective ignorance of the financial mechanisms put in place all over Europe since the Maastricht Treaty of 1992. Our honouring of wealthy bondholders in favour of ordinary citizens, evident from the austerity programmes advocated by the very individuals partly responsible for the debt and inequality crises, dangerously shows the legacy our ignorance might have in the not too distant future. This is what we became accustomed to. Whether we decide to go on accepting it will be determined by popular will to instruct politics in the name of justice.