Law and Economic Austerity

This is another cross-posting from the SALT blog.

Austerity Jurisprudence

Written by Martha McCluskey

Why was the message of austerity so appealing to economically insecure voters in this week’s election?    A more intellectual version of this passionate opposition to social spending, regulation, and deficits has become conventional wisdom in legal academia, thanks in part to several decades of lavishly funded law-and-economics programs.

The populist enthusiasm for austerity helps bring out a striking tension within the familiar efficiency-maximizing ideal of law-and-economics.  Efficiency is supposed to stand for increasing the size of the economic pie – for aggregate growth or maximization of resources (sometimes termed “welfare”) – as opposed to distribution of the economic pie (equity or fairness).   It teaches that soft-hearted liberals and progressives might want to spread the wealth around, based on our concern for some group of have-nots, but we will end up doing more harm than good to those have-nots if we don’t subject our compassion to a hard-nosed rationality that weighs the benefits of redistribution against the costs to growth.   If we choose policies aimed at equity for the have-nots over aggregate growth, we will end up with fewer resources to distribute, with the result of increasing the problem of have-nots.  So, the truly compassionate and moral – and rational – policy is to maximize overall growth, which should make it easier (and fairer) to spread the wealth around.

Yet how does law-and-economics teach us to maximize growth?  Typically, by promoting austerity.

At the level of normative or prescriptive policy, law and economics generally has promoted and rationalized neoliberal policies like structural adjustment, balanced budgets, deregulation,  reduced social safety nets, and reduced rights for workers –  all of which explain in some way how accepting less will bring us more, at least in the long run, in the aggregate.  At the more basic level, the logic of the seemingly more descriptive law and economics teaches us that focusing on scarcity – accepting constraints on growth as inevitable – is the best way to maximize growth.   Efficiency means choosing that allocation of inevitably scarce resources that will produce the least waste and the greatest aggregate gain.  But how do we know when and where and for whom a given resource is naturally or inevitably scarce – so that belt-tightening austerity is the best solution to not-having?  And how would we know that this belt-tightening austerity – this presumed scarcity – is just a way to keep increasingly squeezed people from challenging those who are taking the pie to achieve narrow short-term gains?   Or, returning to the recent election, how do we know when austerity is a way of redirecting complaints about being hungry to those who try to put good food on the table (or to those who are competing for the crumbs) rather than to those who are stealing it off our plates?

The legal theory that austerity brings growth relies on market magic for its logic:  with a wave of the invisible hand, when individuals give in to the discipline of tough choices, we will be transported to a world of the best possible choices in the aggregate.  If individual workers submit to low-waged jobs with reduced security, safety, benefits, environmental protection – rather than demanding policies to make jobs better — voila, we’ll eventually have more jobs with better security, benefits, safety, environmental protections etc., (leaving as a technical aside the questions of which of us and how many of us will actually get those better jobs).

This “logic” has intuitive appeal, as the recent election rhetoric suggested, because the dire economic context helps us ever more vividly imagine how our individual circumstances really are constrained, hemmed in by a scarcity outside of our control, so that it appears we can individually do little other than lower our expectations, hoard, hate, and do without.

But this essentialized scarcity is legal fiction more than economic science.  Many versions of economics explain – with substantial basis in evidence as well as logic – how and why policies enforcing individual austerity for most are likely to lead to aggregate austerity and instability, not growth.   Further, this myth of social well-being through individualistic austerity contradicts the reality that the contemporary “haves” enjoy their enormous gains not simply through individual sacrifice and savings but through extensive collective action, particularly by claiming the enormous power of government – law – to protect their interests, whether through the Federal Reserve, the U.S. Congress, or the World Trade Organization.  Though many tea party activists may well understand this power of government to bring security to some, they have lost faith that the laws governing the economy can be changed to make things better for more people.

To challenge the politics of austerity, we need an equitable jurisprudence of plenty.  That jurisprudence would shift the main focus of legal economics away from maximizing resources (however defined) within fixed conditions of scarcity.  Instead, it would focus on scrutinizing the policies that make resources so scarce for so many individuals and societies.  Instead of calculations of tough tradeoffs, it should scrutinize and re-imagine the legal conditions and institutions that constrain particular resources for particular people.

For just one intriguing example, Tim Canova recently noted how North Dakota’s longstanding and successful state-owned bank has helped reduce the tax burden in that state along with providing affordable, sound credit[1].  To quote Robert Gordon’s essay in the classic Politics of Law, critical legal theory and teaching can help by challenging law’s “false necessity,” and by striving “to demonstrate … over and over again, [that] the arguments for why nothing important can change are no good.”[2]

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This entry was posted in Financial Crisis, Heterodox Economics, Legal Theory. Bookmark the permalink.

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