All You Need to Know about Budget Deficits

All you need to know about the budget debates, austerity, cuts, and taxes is this: The basic function of the state in capitalist societies is to secure the conditions for profitability at any cost.

In less jargonistic language, that means that of everything the state does, we can almost always say that it is aimed at restoring, maintaining, or otherwise fostering the conditions in which capitalists can accumulate profits. The health of the capitalist economy, after all, depends on the profit rate being sufficiently high. When it is low, capitalists don't invest and hoard their capital: in this way capital "goes on strike" and makes political demands aimed at restoring profits (see the 1970s for an excellent example of this). In such cases, growth withers on the vine, production grinds to a halt, layoffs are implemented, and tax revenues plummet.

We are all in a relation of dependence on the capitalist class in a way that they aren't dependent on us: whereas they have massive reserves of capital that they're happy to sit on in a recession (which they can live off of in the meantime), we have no such reserves. We don't own any substantial productive wealth or capital to live off of in a recession. The vast majority of us rely on our month-to-month paychecks as well as various social services (e.g. Public Education, Pell Grants, fire protection, public transportation, public infrastructure, Libraries, public grants, Social Security, Medicare, unemployment insurance, etc. etc.) to procure the basic necessities of life. Recessions are far more dire, pressing, and threatening to us than they are to the ultra rich.

Every vital service and virtually all social goods depend upon the health of the capitalist economy, and, by extension, our access to all of these vital services and goods depends upon capitalists getting their way. And capitalists only "get their way" when their earning a sufficiently high rate of profit. What they think is "sufficient" is hard to specify abstractly, and depends on history, expectations, and their class power. But this much is true: when capital is not happy, the economy goes into crisis and everyone suffers as a result.

The function of the state is to make capital happy again so that the whole seedy process can resume. Capital, thus, can be thought of as a whiny, spoiled, short-sighted trust-fund baby... whereas the state can thought of as the underpaid nanny, who will do anything necessary to stop the spoiled brat from throwing a fit. That is the basic relationship between the capitalist class and the state.

Why think this is true? Well, let's look at the major things the state has done in the last 2 or 3 years and see how well it is explained by the model.

Take the bailout, first of all. What was the function of TARP? It was, quite obviously, a policy designed to shift massive amounts of toxic assets from "too big to fail" banks onto public rolls. It was a massive conversion of private debt into public debt. Why did the state do this? In order to restore profitability to the big banks since they teetered on the verge of collapse. So, when people think it odd that the banks are able to use the TARP funds to purchase federal bonds and earn money off the difference... what they're missing is that this is an intentionally designed function of the policy. The goal was to make the banks profitable again, the thought being that "what's good for Wall Street is good for Main Street". Policy makers from both parties agree on this whole-heartedly: the way to get the economy running again is to restore the conditions of profitability for big business.

Or, take another example: the stimulus bill. The basic goal of the bill was the traditional Keynesian one: to prop up effective demand. When you layoff millions of workers, cut their pay, force them into foreclosure and bankruptcy, etc... you create a problem for yourself if you're a capitalist: who is it that is going to buy all the commodities you produce if everyone is broke? The goal of the stimulus was to try to increase the purchasing power of workers in order to enable them to go out and buy things so that profitability can be restored to the system. Now, there is certainly a sense in which the stimulus bill wasn't Keynesian through and through: too much of it included worthless tax breaks for the rich, and the spending component of it was much too small. Still, it is a better solution than the neoliberal medicine of cuts and austerity. But let's be clear: the stimulus wasn't pushed through because of some sentimental concern for the well-being of the working class majority. It wasn't pushed through because lawmakers thought it the most just way to go. It was passed because Washington thought it was key to restoring profitability to the system.

Finally, take one further example: the austerity drives to slash basic services. Why is this happening? There are at least four reasons to explain it:

1. For starters, it's happening because the recession severely decreased tax revenues. When companies earn less, tax revenues decrease. When companies layoff millions of workers who then have no more taxable income, that hurts revenues. When workers' consumption plummets, so do sales tax revenues. And when you push down workers standard of living and lay them off, they need to rely more on the very services whose present sources of funding are being eroded. Recessions hurt the state's capacity to do what it does, since it is, like all the rest of us, dependent on the engine of profit accumulation.
2. Another reason is that the ways of collecting taxes in place before the recession were, in almost all cases, highly regressive and biased against the working majority. Payroll taxes, which the rich don't pay, tended to be high, whereas taxes on productive assets and property tended to be low. Many states rely heavily upon regressive, high sales taxes. Others, like Illinois, rely upon an ultra-regressive flat income tax that taxes corporate fat cats at the same rate as working class single mothers. The top marginal rate of taxation at the federal level is obscenely low. And there are more loopholes in the corporate tax code than anyone could ever hope to count in one lifetime. Finally, we must note that corporate profits reached record levels last quarter. So, it's false that our society doesn't produce enough to pay its bills. We produce plenty. But the disposition over and control of what we socially produce is limited only to a small class who owns the means of production. The simple, socialist thought here is that we, as a society, should have democratic control over what we, as a society, produce together.
3. When there is a budget shortfall, there are always at least two things that can be done: one can cut services or collect more revenue. Since the political system is committed, as I argued above, to securing the conditions for profit accumulation at all costs... the preference for cuts is obvious. Think about it: if you're a corporate elite, you certainly don't want to pay higher taxes. And you don't care a thing about the well-being of the working majority, as evidenced by the fact that you've likely laid off hundreds if not thousands of your employees in order to keep your profit margins intact. You're happy to have the state pick up the slack for your layoffs by giving struggling workers unemployment insurance and food-stamps. But you're not necessarily happy to have to contribute to the state in order for it to provide these basic services. When push comes to shove, you want to keep what you have at all cost. Thus, rather than helping to pick up the tab, you do what you always do: protect your own profits and force the working majority to take a sharp cut in its quality of life.
4. At the Federal level, austerity also has another function. Insofar as massive private debt was transferred onto public rolls... this puts even more pressure on the budget. In order to finance the bailout, now we're being told that we have to "live within our means" and accept deep cuts to our quality of life.

In all cases, the basic function is clear: the goal is to restore the conditions in which profit accumulation can resume. If this means massive human suffering, economic misery, and massive blows to the living standards of the vast majority... well, so be it. There's a question about whether this is self-undermining in the long-run even for capitalists, since it threatens to severely undermine effective demand. But at present (and the short-term present is all that capitalists care about), capitalists are earning big profits so they aren't likely to be moved by such long-term problems. After all, most of them have invested their new masses of capital outside of the US rather than right here at home, so it's not even obvious that all sectors of industry are worried about eroding effective demand here.

So, to understand what's happening from Greece, to London, to Washington, to Madison... all one really needs to know is that be basic function of the state is to secure the conditions in which stable, sufficiently high profits can be made by the ruling class. This has nothing to do with "fiscal responsibility", an empty and ultimately meaningless phrase. This has to do with forcing those least able to fight back to foot the bill for a mess caused entirely by those who own and control the basic structure of our economy. This is a class war being waged on us from above. Those occupying the Capitol in Madison recognize this, and their doing something that hasn't been done enough in the last 30 years in the US. They're saying enough is enough and they're fighting back. If the Democrats in opposition in WI are getting dragged along by this movement, we shouldn't be surprised at their opportunism. But we shouldn't make the mistake of thinking that they're unqualified allies in the struggle. When they are forced to act by big movements on the ground, they behave a lot differently than they do in the absence of struggle. This is instructive.