The State and the Budget Deficit
The state is not neutral but focused on class interests. Lower profit rates caused the indebtedness of the German state (2.3 trillion DM), not the welfare state. The state counteracts falling profit rates as shown in this article by Herbert Bartik translated from the German.The US balance of payments deficit now $400 bill could rise to $600 bill.
The State and the Budget Deficit
By Herbert Bartik
[Redistribution is involved in discussions of the budget and budgetary policy. This article is translated abridged from the German in the Berlin online journal trend, www.trend.partisan.net/trd0202/t200202.html.]
What is the State?
A central distinction exists between marxists and all other currents in the working class movement in assessing the state. Different analyses of the state appear in the budget debate. Social democracy and reformist currents in general deny any class character to the state. According to their view, the state is essentially neutral and acts as an arbitrator in the class struggle. The state can be used for progressive goals. The Austrian model of social partnership or the famous "march through the institutions" to change political policy from within are two different products of this theory.
Marxists see this somewhat differently. Friedrich Engels once described the state as a formation armed to defend certain interests, the interests of the political and economic rulers. The state is not an independent structure arising outside of society but is a product of society. How political structures ultimately appear depends decisively on the economic base. The fundamental task of the civil state is the protection of private property. This can happen in different ways. Distinctions exist between the feudalist or absolutist state and the capitalist state as well as distinctions and modifications within the capitalist state itself.
In discussing the problematic of the budget and state indebtedness, the central role of the state in capitalist accumulation must be recognized.
The State and Accumulation
This task of the state in advancing the capitalist production process is not a new function. This function was true for pre-capitalist societies. For example, the state in the "Asian mode of production" financed and maintained irrigation plants and canals. The Rome of late antiquity guaranteed the transportation of food. This was also true for the absolutist state. The absolutist state played an indispensable role in original accumulation through the following measures: as the big consumer of industrial products (providing for the new army), through investment possibilities for capital in the form of government loans, through military and colonial policy, through mercantilist economic policy (protection of national capital through tariffs etc), through state promotions of the manufacturing systems, through the legal extension of the normal work day and through assuring a stable monetary system.
One important distinction between capitalism and other social systems is that the former was not founded on coercive non-economic relations but on economic dependencies. Therefore the classical state of expanding pre-imperialist capital was rather weak. A dismantling of state intervention in the economy occurred. The infrastructure was an exception.
The power and tasks of the state constantly grew in the history of capitalism (with extraordinary heights through war and fascism). The superstructures devour more and more surplus and tend to make themselves independent (a phenomenon that can be seen in other forms of society in history). These superstructures are simultaneously a basic condition and an obstacle for the further development of productive forces. The activity of the state expands and becomes increasingly more complex. Both economic theories, neoliberalism and keynesianism, recognized this tendency and did not reduce state functions.
The Budget Problematic
... On account of commercialization problems in the respective homeland, capital tends to activities on the international markets. Export capital (above all of strong countries like Germany for example) is interested in relatively stable rates of exchange. Unpleasant devaluations endangering exports should be prevented. "Sound finances" and a system of fixed exchange rates in the Euro area are means for achieving this stability.
Enormous amounts of capital are invested in the financial markets. Speculative capital plays a role here and causes instability. However most "financial capital" has a certain interest in stability and does not only seek short-term profits in currency speculation. State loans for financing state debts are an important investment possibility. Thus Japanese investors hold 5% of the state debts of the US. The Euro-Dollar-Yen rivalry could be mentioned in this connection. The US can only finance its balance of payments deficit because foreign investors are ready to hold dollars. Tremendous problems will occur for the US if the Euro or Yen should turn out to be more interesting investment possibilities. As a result, US financial policy walks on a narrow stage...
The world economic system is full of contradictions. "Management" of these contradictions is not possible without the influence of individual states. Financial capital needs the state.
The Role of the State on the National and International Planes is Greater than in Peace Times
The role of the state must be seen on the background of economic development. The long post-war boom came to an end at the end of the 60s. This was manifest in declining profit rates. While they amounted to 20% in the 50s and 60s, they fell in the 70s to around 13%... The high profit rates of the "golden era" of capitalism in the 50s and 60s cannot be reached any more. The claims on the state from owners of capital obviously increase in a crisis situation. Today a structural crisis of capitalism occurs (unlike a cyclical crisis). State expenditures are permanently enlarged confronting civil states with financial problems.
Despite desperate savings measures, the state in all industrial countries is de facto bankrupt. In Germany, state debts amount to 2.3 trillion DM (134 billion DM in interests per year). In Germany interest payments in 1952 amounted to 1% of total expenditures. By 1997, they amounted to 22%. Two current explanations are offered for this bankruptcy:
1. The explanation of the unions: the main cause is tax policy in the interest of corporations. Enough money exists. This money need only be spent for state infrastructure programs and strengthening domestic demand. A correct policy could accomplish this.
2. The explanation of capital: investments are weighed down through fees and taxes on profits that are used for the welfare state. Therefore a weakening of the economy occurs.
Both explanations contain correct elements but remain superficial.
State Reactions to Declining Profit Rates
One strategy applied worldwide is lowering taxes on profits. This leads de facto to an abolition of tax progression. Germany and Austria are examples but similar developments are manifest for all other industrial states. The share of taxes on profits in total tax revenue in Germany amounted to 22.2% in 1950, 32.6% in 1960 and 12.3% in 1998. In Austria, the share of taxes on profits has been cut in half since 1970... As a rule, the transfer of the state to corporations is greater than the return flow from the profit tax. Capital pays no taxes in progressive industrial states!
State subsidies counteract the fall of profit rates... Capital is always invested in the sectors where the rate of profit is above the average profit rate. Subsidies keep capital in those sectors which are not sufficiently profitable from a business perspective. This is true for example for mining, the shipyard industry in Germany and agriculture. These subsidies cannot stop the decline but only provide orderly conditions for the withdrawal of capital and prevent potential losses for owners of capital. These subsidies are not unjustified subsidies of wages but profit subsidies... Profits are privatized; losses and social costs are socialized.
Subsidies do not only occur in falling industries. On the contrary, there would be no further development of productive forces without subsidies. Technical developments would not be possible without state subsidies on a free enterprise foundation. Investment promotion is normal in the high-tech realm. The promotion of investments is demanded by capital without capital being invested.
Stimulating Demand and Growth through State Indebtedness
This stimulation functions first of all through the welfare state. This is a very contradictory entity from its historical genesis. On one side, the ruling elites guarantee a certain minimum in the social standard to simply safeguard the reproduction of labor. On the other hand, the radicalizing working class movement could be integrated in the capitalist system. After the 1st World War, the welfare state was a product of the revolutionary movements in all Europe. After the 2nd World War, the economic upswing made possible welfare state benefits.
However the welfare state always has another function. The state acts as an "ideal aggregate capitalist". The state assumes the task of creating demand since individual capitalists are unable to do this and constantly limit demand through wage cuts, unemployment etc. This mechanism operated in the post-war boom and especially in crises. Welfare state benefits developed both in Germany and Austria in the crisis years 1973-75. This was a "special" keynesianism. It was not financed from higher taxes on profits but on one hand through increased taxes on wages (employees paid for their increased demand themselves) and on the other hand through state indebtedness. Lower profits causes indebtedness, not the welfare state. A crisis development of capitalism increased the necessity of welfare state measures.
The expansion of welfare state measures is only a theoretical necessity. In reality, social expenditures remain constant measured by the gross national product. In this question, there is again a contradiction. On one hand, the welfare state needs capital. On the other hand, a further dismantling is sought to further reduce taxes on profits. Welfare state benefits become increasingly vital since wages tend to fall below reproduction costs. More and more state benefits are necessary to guarantee the reproduction of labor.
Direct and indirect wage subsidies are a vehicle for that reproduction. Indirect wage subsidies include lowering prices of different elements of reproduction, for example through state child assistance, rent subsidies, state grants for social security (a means for lowering net wages) and child care during working hours through social expenditures (and not through the money of corporations).
One classical example for indirect wage subsidies is housing construction. Without state financial support, there would be no housing construction for the simple reason that market rents would not be affordable for the overwhelming majority of the population. Profits are planned in the production costs of the commodity housing... Promotion of opulent housing exists in all industrial states...
Direct wage subsidies occur when wages are raised governmentally whether in financial promotions for corporations, training apprentices or wage subsidies for older employees etc...
The State Grants Investment Possibilities for Surplus Capital
Two possibilities exist here:
1. Promotion of stock speculation. Taxation of financial capital is lower than taxation of real capital. The state recognizes the necessity of capital to counteract falling profit rates with the help of speculative financial transactions. The stock market fulfils a function similar to the "permanent inflation" of the 70s. Accordingly production was and is permanently expanded beyond the borders of the market with the well-known consequences of a later deeper slump or collapse. With their proposals for regulation and taxation of financial markets remaining in the framework of capitalism, leftwing keynesians like Attac attempt to take the nerve center of capital.
2. Privatization of state operations. These serve as an investment possibility for fallow capital. This also reflects the capitalist tendency to make everything into a commodity from literature to the communal water supply. In addition, privatizations extend the market influence of private capital by first cheaply taking over state rivals and later often closing them.
The same principle is true for privatizations and other economic activities. There are no private enterprise investments without state subsidies. To make possible privatization, the debts of the public enterprise are taken over (with the German mail, the state assumed obligations from the pension funds alone of 75 billion DM). With privatization, the state provides for the necessary modernization of businesses. A good example is the Austrian Telecom. An ambitious privatization was carried out, financed with the money of dependent employees. At the end of this modernization process was the sale. The new owners climbed into a feathered bed. The subsidy award did not end with the privatization. The best known example is the privatized English railway that now receives more state subsidies than its state predecessor.
Two additional aspects in the question of the public budget reveal how wrong are the diverse globalization theoreticians when they speak of the state's loss of significance.
1. the greater regulation of public life - the so-called "flood of laws" - and
2. the expansion of state personnel.
Middle class commentators regularly complain about over-regulation and the flood of laws. An abundance of economic laws exists. This is not an expression of the regulatory fury of the welfare state but of contradictory private interests. Many different capital factions want to get the best for themselves and lobby the state for measures. Another reason for the extremely complex legislation in tax law is capital's desire for the most generous tax conditions. Countless deduction possibilities and exceptions legally save enormous sums in taxes. A contradiction exists here between the interests of shareholders and individual corporations. They need not be actors independent of one another. Rather the different interests of one and the same concern clash. One time the concern acts as a shareholder and another time as someone who seeks to save the profit tax. Stock prices and dividends rise as a rule with increasing profits. An interest in announcing higher profits also persists.
The social area is also an increasingly complex system. On one hand, more and more poverty must be managed. On the other hand, there are numerous restrictions, exceptions, special regulations etc. with only one purpose, cheating those with legitimate claims. This system leads to 50% of those with legitimate claims in Germany claiming no income support.
The importance of the state in increasing personnel resources is very vivid. This involves the top floors of the state machinery, not the small or intermediate officials who are diligently reduced. A considerable growth in personnel occurs there. The state has to master more and more tasks and solve more and more social contradictions. 5000 ministerial officials work in the German defense ministry. In 1939 before the surprise attack on Poland, there were 400.
All these developments led to a higher state share in the middle of the 90s than in the 70s.
Conclusions and Prospects
The state is an enormously complex structure. If it was impossible in the 19th century for the working class movement to simply take over the state, this is less possible and conceivable today. In the present period, the state clearly demonstrates the correctness of marxist analysis. The state neither disappears nor acts neutral in the class struggle. Capitalism created an instrument with the modern state that artificially keeps it alive... On account of this economic development, every attempt to invest capital in the real economy was ultimately condemned to fail. Japan's history of the last 10 years is another proof.
The structural crisis of capitalism is that capital is not capable of surviving without the support of the state and capital thinks less and less of productively using that money which it steals fr4om society day after day.
All reformist measures must fail because they are limited to the state. The state is not able to solve the problems of capitalism. Rather all the contradictions produced by this economic system are reflected in it. Reformist measures simply do not correspond with economic realities, whether regarding controls of the financial markets, lower interests or the hope of attaining a standardization/increase of capital taxes without the means of class struggle.
The crisis of state finances is bound inseparably with the general crisis of capitalism. This crisis not the product of a false economic policy or rash speculators but of the unsolvable contradictions inherent in this system. Neither neoliberalism nor a new version of keynesianism can change anything. The crucial question facing our society and the working class movement is not the question of higher or lower interests or regulation of the financial markets but rather the question who invests capital and what is the purpose of investment. If the goal is the general satisfaction of needs and the means is the democratic control of the economic process by wage earners, our present situation is a cul-de-sac.
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