Whose State, Whose Interests?

When the US state, like most states, increases military spending or rescues banks while simultaneously cutting spending on health care, education, transportation, public housing, or unemployment benefits, it structurally transfers resources from the working majority to the 1 percent of the population that subsists mainly off capital ownership (i.e., stock dividends, rents, and interest). In other words, austerity is not about spending less but about spending in the “correct” way — in favor of the economic and financial elite and to the detriment of the majority of the population. While we struggle to afford basic medical treatment, are forced to send our children to overcrowded and underfunded schools, and wait in long lines to renew our official documents, the coffers of Lockheed Martin and BlackRock are constantly refilled. The US state bought nearly $50 billion in arms from Lockheed Martin in 2023 alone. Though social expenditures may be slashed, for the capitalist class, the idea that there’s no money doesn’t exist.

The same principle applies to state revenues, the other side of the austerity coin: it’s not about whether the state increases taxes but for whom it increases taxes. Today most governments enact regressive tax reforms, continuing to cut taxes for those with capital income (not to mention generous tax loopholes) while increasing taxes for those with labor income, who have little room for evasion given that they are taxed directly from their paycheck. In the United States, people who earn income from working are taxed disproportionately more than those who earn income through capital gains — most of which are earned by the rich (in 2019, the top 1 percent accounted for 75 percent of all capital gains in the US, and the top 0.1 percent alone nearly half). Moreover, while sales taxes, excise taxes (on fuel), and taxes on alcohol — which we all pay equally regardless of income — are growing in most American states, federal corporate taxes have been cut (from 35 percent to 21 percent in 2017) as well as taxes on top income brackets (from 92 percent in 1953 to 37 percent in 2023).

This leads us to the absurd situation where, at a corporation like Walt Disney, a custodian would have to work two thousand years to make as much as the CEO does in one, and shareholders pay far less taxes than the workers whose labor generates profits. Walt Disney is no rotten apple but rather a standard that pales by comparison to some other businesses. In 2018, American corporations that paid zero dollars in federal income tax included the likes of IBM, Starbucks, Netflix, Delta, Chevron, GM, and Amazon. The most glaring example of regressive taxation is the cutting of the inheritance tax, a tax that has become substantially irrelevant to fiscal revenues worldwide. In the United States, thanks to the mechanism of an annuity trust (the so-called Grantor Retained Annuity Trust), multimillionaires can pass on their wealth to the next generations completely tax free.

Bearing those facts in mind, we can dismiss the common trope by which austerity policies are conceived as a zero-sum game between the state and the market. Austerity capitalism doesn’t mean less state but rather a state that constantly plays an active role in buttressing the market by acting according to the logic of expropriating resources from the many (who make a living from wages) to favor the few (who primarily subsist off capital). Austerity “manages” the economy in the most radical sense: it makes us precarious and docile and ensures the economic system is never questioned. Austerity cuts across party lines. Often it is paradoxically the self-styled left that leverages austerity, from Luiz Inácio Lula da Silva’s government in Brazil to the Labour Party in the UK. This was particularly the case for Germany’s Social Democrat–Green coalition under Gerhard Schröder, which undertook sweeping social cuts and labor market reforms that, arguably, no conservative government would have dared.

The Austerity Trinity

Fiscal austerity often goes hand in hand with monetary policies of increasing interest rates, as the European Central Bank has done on an almost monthly basis since July 2022. This is good news for capital owners (those same individuals who the state chooses not to tax but instead borrows from, earning them interest). It’s bad news for families who depend on loans for their daily survival and who will find themselves paying higher mortgages and amassing more credit card debt.

Working families are hit not only as consumers but even harder as workers. First, the higher cost of money increases the government’s borrowing expenses for social services, which is then cited to justify further cuts. These, in turn, increase the commodification of those basic rights such as health care and education and thus workers’ willingness to accept whatever job they can find to pay for them. Moreover, monetary austerity directly impacts the labor market. The high cost of money, in fact, slows down the economy; fewer job opportunities and higher unemployment undermine the bargaining power of workers. Monetary austerity determined the US Federal Reserve’s agenda in 2022 and 2023 and pushed up the number of unemployed by 1.3 million between July 2023 and July 2024.

The current wave of monetary austerity was preceded by more than a decade of very low interest rates, especially in the post-2008 moment, which directly benefited the concentration of economic power in the hands of asset managers and “cloud” capital. However, as the current US Treasury secretary Janet Yellen reminds us, “interest rates can be low only when workers are weak.”

Easy money and recent forms of quantitative easing that immediately secured the assets of large corporations were politically compatible with the capital order because of previous waves of austerity. This is the role played in the US by the infamous Volcker shock. It takes its name from the Fed chairman Paul Volcker, who raised interest rates to 20 percent in the early 1980s, causing an economic recession in the United States and an even larger one for Latin American countries that were heavily indebted in US currency. Like in many other parts of the world, this dosage of dear money increased unemployment to 10 percent and broke the back of organized labor at a moment when workers were going on the offensive in ways not seen in decades.

Yet the ruling elite knows that there is no permanent victory. As recent events demonstrate, any acceleration of wage growth amid tightening labor markets is a potential threat that needs to be stamped out. The risk of spiraling an economy into a recession is a short-term cost compared to the vital prerequisite of capital accumulation: securing workers’ subordination and a healthy rate of exploitation. Far from “natural calamities,” economic recessions are often deliberate outcomes designed to ensure wage contraction and maintain the unquestioned dominance of profit.

Finally, we cannot forget the third element of the austerity trinity — namely, industrial austerity visible in direct state intervention in the labor market through privatization, dismantling hard-won labor rights, and the weakening of unions. The three facets of austerity — fiscal, monetary, and industrial — reinforce each other and work in unison to continuously shift resources from workers to capital holders.

More Than a Flawed Framework

A wealth of research has already established that austerity almost never stimulates growth nor reduces debt. Given that, the relevant question is not about austerity’s track record but why it continues to be the preferred course of action for governments all the same.

When thinking about the reasons behind austerity, the biggest mistake we can make is to treat it as merely a flawed policy that hinders economic growth. This sort of position is typically taken up by economists who are critical of austerity but still operate in a technocratic framework that assumes an absolute separation between economic and political problems. Austerity’s dominance is not the result of sheer stupidity or corruption on the part of those in government; on the contrary, the latter adhere to the former because they find it to be particularly effective in reinforcing class relations. One cannot understand fiscal and monetary policies without considering their impact on labor relations and, ultimately, on what we call the capital order as the foundational social relation of our economic system. Austerity was never about curbing inflation or keeping spending in check — its manipulations of aggregate demand have always been a means to a deeper end: namely, ensuring that for the majority of people on this planet, there are no alternatives to selling their labor to earn a living.

This goal takes precedence over all others, even at the cost of a temporary economic recession or greater debt. It is easy to unmask the political priorities at stake when considering, for example, the cost to American citizens of not taxing the rich. According to the US Treasury, taxing capital gains at death instead of allowing them to be passed on untaxed would raise over $400 billion over the next decade, almost exclusively from the wealthiest 1 percent. That is three times what the US government spent on food assistance programs for low-income families in 2023. The systematic defunding of the Internal Revenue Service is an emblematic case in point. The firing of public employees under the pretext of cutting costs has ironically cost an estimated $7.5 trillion in over a decade due the failure to collect tax money, nearly 4.5 times the deficit of the 2023 fiscal year.

In summary, the primary goal elites seek to achieve with austerity is to increases workers’ dependence on the market. If, for example, an American worker fears losing their job and, with it, the ability to pay for medical care, they become more controllable. If job opportunities are scarce, wages decrease. As the state cuts back on health care, education, social housing, transportation, and public services, people worry about having money in their pockets to secure a good education for their children, adequate medical treatment, a roof to live under, and the right to transportation. They are increasingly tied to the need to have sufficient money, which most can obtain in only one way: by selling their capacity to work in exchange for a wage. They barely have the energy to make it to the end of the month, let alone engage in a collective struggle to change their working conditions.

There is, however, a second motive: the austerity trinity supports capital investment by attracting the wealthiest investors through subsidies and state incentives, obscenely low taxes (on capital gains, wealth, and corporate profit), low wages, and the gutting of labor guarantees and protections. By ensuring the best possible conditions for profits to skyrocket, austerity policies become tools for redistributing wealth upward, benefiting a minority of the saver-investor elite (who tend to consider themselves the most virtuous and deserving anyway).

Hence, the true measure of austerity’s effectiveness lies in its ability to impose and reinforce a class structure to serve and, above all, protect the capitalist order, the very order that underpins economic growth. In this sense, austerity has never been an irrational calculation.

Disciplinary by Design

The dominant financial institutions of our age, from the Federal Reserve to the European Central Bank to the International Monetary Fund, ostensibly serve the primary purpose of “stabilizing” the economy. However, a closer reading of history reveals that the fundamental prerequisite to this stabilization is rigging the game against workers so that they have no alternative but to accept a subordinate role in the production process. As the American economist Duncan Foley brilliantly put it, monetary and fiscal policies ostensibly targeting inflation should be best described as “rate-of-exploitation targeting.” The toolbox of macroeconomic management—interest rate hikes, social expenditure cuts, regressive taxation, privatizations—is based on the targeted sacrifice of working people in the form of job losses, social precarity, and market dependence.

You may find these scenarios paradoxical or even the expression of a failure of our economic policies. We don’t blame you. What we want to stress, however, is that these results are not a failure but rather the desired result of the logic of our economic system. The confiscation of working peoples’ resources increases their economic vulnerability, their precariousness, and dependence on the market. These are definitely problems for us but not for the system — securing market dependence means securing the foundations of the capital order.

It’s time to stop buying into the idea that, within a capitalist society, it makes sense to discuss economic policies according to the criterion of “right” and “wrong” for an elusive common good. Once we dig into the history of capitalism, it becomes clear that what critics describe as problems of the system (poverty, inequality, and unemployment) are actually solutions, albeit solutions to different problems. In a capitalist system, economic policies always work to the advantage of some and to the detriment of the majority. Our economic machinery is not meant nor structured to meet the needs of ordinary people but to increase the rents and profits of the few capital holders. What is advantageous for profits is certainly disadvantageous for the majority of people, since the advantage for the former is largely based on the sacrifice of the latter.

The vital role of austerity, so deeply rooted in policymaking as to be almost invisible, becomes glaringly apparent when the economic system it undergirds enters an existential crisis and the illusion of a stable capitalism wanes. Far more than a mere slowdown in economic growth, these crises are moments when the very essence of the system (selling goods for profit) and its pillars (private ownership of the means of production and wage labor) are questioned by most of the population, particularly by workers, on whose acquiescence the system is based.

The aftermath of World War I was just such a moment, when even in the heart of the capitalist West, visions of an alternative to capitalism garnered wide popular sympathy. From Britain to Italy and Germany, concrete institutional changes were taking place: in some cases, workers’ councils organized production horizontally and proposed themselves as the embryo of new, authentically democratic political organizations. Large-scale social mobilization was achieving profound redistribution.

What halted the transition toward greater economic democracy was an expert-driven campaign to code austerity as an objective resolution to the crisis of capitalism. A minority of powerful technocrats intervened to remedy what they considered a world in disorder. In the name of fighting inflation and achieving a balanced budget — key arguments that remain cornerstones in the rhetoric of experts today — economists worked in service of a specific goal: to resubjugate the majority of citizens to the dominant economic order. As discussed in The Capital Order, to impose austerity against Italian workers, economic experts could rely on the strong hand of Benito Mussolini’s fascist regime, which was widely supported by the international liberal elite. Mussolini formalized the alliance of neoclassical expertise with authoritarian government, which is no exception in the history of 20th- and 21st-century capitalism.

The explicit connection between austerity and political repression — so evident under fascism — reveals how the economic treatment of Italian citizens was not in fact so different from the treatment the British experts envisioned for their own people. Indeed, British technocrats pushed hard for a nondemocratic implementation of economic policy through the independence and authority of central banks. The continuities between the fascist and liberal versions of austerity show how protecting the capital order requires a constant effort to insulate the levers of macroeconomic management from popular interference. The dynamics of a hundred years ago still speak to us in revealing insidious tendencies in contemporary political economy.

Investigating what happened back then, when austerity emerged to discipline workers across Europe, allows us to dig more deeply into its current logic and better dismantle those misunderstandings that silence dissent and resistance. History reveals that austerity is not merely an aberration of the neoliberal turn in the 1970s, as is often believed. Rather, it is a structural tool of our economic system, wielded to preserve a healthy rate of exploitation. Although austerity becomes more explicitly visible as a counteroffensive in times of greater protest by workers and social movements, it represents the fixed rule of governments — and very narrow limit of electoral democracy — within a capitalist system as such.

Ending austerity will thus take more than winning a few elections on a progressive platform. We have to understand where it came from in order to chart a path to where we want to go. Historical studies can pierce economic abstractions to deliver an empowering message: unlike what experts would have us believe, our economic system is neither natural nor spontaneous. Capital as “money” and as “GDP growth” is based on a specific political order that relies on the subjugation of the majority. For this reason, our economic system requires constant life support. It is inherently fragile, and austerity has been perfected over time as the means to safeguard it. Our capital order relies on active state intervention to control the labor market and weaken the possibility that any alternative economic system might emerge. Paying attention to the political strategies continuously implemented to protect the capital order demonstrates that our current socioeconomic system is not inevitable. Nor should it be passively accepted as the only way forward. Hence the empowering message: it can be subverted through collective action. The study of austerity’s logic and purpose is a first step in that direction.