Is government austerity warfare against the middle class?

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Student protests could become regular in the new normal (Photo: Stefan Wermuth/REUTERS)

Prince Charles’s battered Rolls-Royce could become the symbol of the new economic reality facing the developed West – and the social and political dangers that come with it. After the U.K. parliament narrowly voted in favor of tripling the cap on university tuition fees to $15,000 last week, furious students rioted in central London, even assaulting the Prince’s armored Rolls with sticks while the stunned royal and his wife sat inside. Budget-cutting Prime Minister David Cameron called the attack “shocking.”

But is it really? The attack on Charles is just the kind of turmoil the leaders of the U.K. – and the rest of the debt-heavy Western economies – should expect as they cut the knife deeper into public spending. We’ve already seen the violent uprising in France over President Nicolas Sarkozy’s decision to raise the retirement age. Then there were the bloody street clashes over austerity measures in Greece earlier this year. And I noticed on a recent trip to better-off Germany how a debate over the benefits and costs of a multi-billion euro public railway project in Stuttgart led to street clashes. Unfortunately, this is very likely only the beginning of the public conflict we’re about to experience across the West as contending interests arm-wrestle over a diminishing pie of fiscal spending and the distribution of new tax burdens.

I fully sympathize with the public anger. Now I’m not advocating violence, or condoning the unseemly assault on Prime Charles. But at the same time, we have to question the fairness of the austerity drive in the West today. The fiscal retrenchment will not only likely slow the already slow recovery from the Great Recession and possibly prolong or even add to the current high rates of unemployment, but it also promises years upon years of pain – in the form of reduced income, job opportunities, and government services, and higher taxes and costs – on the middle and poorer classes throughout the developed world. These budget cuts and tax hikes have to be made very carefully, to minimize the impact on the most vulnerable and ensure the future health and competitiveness of the developed world. In other words, the fiscal retrenchment has to be tough but smart and balanced, for both moral and economic reasons.

But based on what I’ve been seeing, I’m not sure that’s the sort of austerity we’re getting. I’m afraid that budget cutting is going to be determined by ideological stubbornness and special-interest lobbying, not down-and-dirty pragmatism. The consequences could be huge, for the social stability of the West, and, dare I say, the prosperity of the world’s richest citizens.

We can argue as to whether or not the new austerity facing the West is necessary at this moment in the economic cycle. Sure, some governments don’t have the luxury of making that choice – most notably Ireland, Greece, Portugal and Spain. But with borrowing costs so low for the governments in the U.S. and Japan, we can make the case that many others still have room to spend to help boost the anemic recovery and reduce unemployment. But what we can’t argue about is the direction of fiscal spending – it’s going to go down – and taxes – they’re going up. As the severity of the euro crisis shows, investors see a limit to the level of debt and deficits an economy can sustain. That limit is different for every nation, but there’s still a limit. Austerity is the inevitable result for everybody.

That uncomfortable reality is going to create a lot of uncomfortable questions about how the more limited government resources will be allocated – who will eat the reduced pie, and how big or small a piece everybody gets. Will it be new weapons systems or new schools? Job training or welfare payments? An army base in Japan or a new airport in New York? The rich governments of the West haven’t had to make such hard decisions in recent decades, since financial markets have generally not demanded a great deal of fiscal responsibility. But that grace period, in my opinion, has come to an end.

That’s why we should give a lot of credit to the U.K.’s Cameron for coming out ahead of the game and making the hard choices that need to be made. He’s gone so far as to cut from parts of the budget usually considered sacrosanct, such as defense spending. Even the outlay for the royal family is taking a hit. They’re expected to face a 14% drop in government funds (from a budget of $57 million this fiscal year).

But inevitably, it’s the middle and lower income classes, not the rich, who really suffer from austerity measures, simply because they have more limited sources of income and rely more on government programs. My guess is that the average British family is going to feel the pain of the tripling of university fees much more severely than the royal family will suffer from the mini-budget cut.

That forces us to ask the awkward question: If there isn’t enough money to subsidize university education, is there enough money to pay for the luxury of the royal family? Obviously, cutting the royals off wouldn’t close the budget deficit as significantly as reducing the tuition subsidy. (According to research by our industrious London intern, Hanna Jones, the tuition hike is expected to save the government some $4.75 billion a year.) Nevertheless, we have to ask what’s more productive for a modern economy – a highly educated workforce, or Prince Charles & Co.? We could argue that the royals pay the country back by attracting more tourists. But on the other hand, the royal family has other sources of income, and wouldn’t an extra $57 million in university scholarships help a lot of people get an education and aid the entire U.K. economy as well? (Since I possess the typical American antipathy towards monarchy, you can guess how I’d spend the money.)

No wonder, then, that Prince Charles became a target of angry students. Just as they’d been saddled with a tremendous financial burden, in waltzes Charles in his Rolls for a night out on the town. Talk about out-of-touch with the real world.

The situation is even worse in the U.S. Many politicians in Washington seem outright oblivious to what’s going on in the lives of real Americans. Fiscal austerity the American way seems to mean class warfare – against the middle class and poor. The incoming Republicans believe the budget deficit is a dire danger only when government money is headed for the country’s most needy (those without jobs and healthcare), while the deficit doesn’t seem to matter when it comes to perquisites for the connected and powerful (those tax cuts for the rich). That’s morally corrupt. How can anyone who opposes benefits to the jobless (with unemployment at a depressing 9.8%) while supporting tax cuts for the corporate managers who laid them off sleep at night? Even more, the Republican way of budget cutting is idiotic economics. Sure, I get the whole “trickle-down” theory, that giving the rich more income will translate into more jobs and investment. But in my opinion, if a person making $250,000 or more a year sees an investment he likes or a Rolls-Royce he wants to buy, my guess is that marginal differences in tax payments wouldn’t dissuade him (especially with interest rates as low as they are). However, eliminating financial support for the unemployed would have an immediate and direct impact on consumption, since those unfortunate jobless will likely spend what they get to feed their families and pay for their kids’ soccer uniforms. We have to remember that the spending and investments of the middle class create jobs as well, and it’s the middle class, not the richest 2% of Americans, who are the backbone of the U.S. economy.

Beyond that, we need to ask if the estimated $858 billion in forgone revenue from the compromise  tax plan – bigger than the 2009 stimulus – is the best way to spend $858 billion. What the U.S. needs is better education (to ensure the economy can compete with China in the future) and infrastructure (which would also create jobs); instead, schools are closing and airports are deteriorating. In other words, should that $858 billion be plowed into education, and get cut from elsewhere instead? Or, if the national debt is supposedly such a worry, should we raise the $858 billion from taxes and not spend it at all? These are the decisions that have to be made in Washington, and they’re not.

What worries me is the drive for austerity is coming to mean the end of social services for the masses while sacred cows will continue feeding at the taxpayer trough. Free enterprise shouldn’t be used as an ideological shield for protecting special interests or big campaign donors. The government budgets of the West can’t become ATM machines for those lucky few who have the right bank card. That’s not free capitalism, that’s feudalism. As we just saw in London, the public won’t stand for it.

The enemies of smart austerity measures are privilege and ideology. Money has to be spent for the national good, for the benefit of the widest number of people and for the long-term health of the economy. Time for Charles to get out of his Rolls and into a job.