The Urban Fiscal Crisis as Neoliberal Shock Therapy: Towards A Cartalist Fiscal-Sociological Approach

Capital Accumulation and Urbanization

There is a symbiotic, interdependent, codeterminous relationship between the process of capitalist accumulation and urbanization. Capitalist accumulation presupposes a ceaseless process of material investment to uphold and enhance effective demand to such an extent that the capitalist system does not fold under the logic of its own pretenses. What is primarily relevant to the interests of the capitalist class, is what contributes to a ‘productive’ material investment’, which directly or indirectly endlessly expands the inherent basis for the production of surplus value (profit), and its realization.

Urbanization refers to the ‘constitution of specific spatial forms of human association’ that is characterized by a qualitatively distinct concentration of social activities (Castells, 1972[2002]). Under capitalism, spatial forms of concentrated social activity take the form of particular ‘built environments’ (Harvey, 1978), which represent ‘spatial practices’ (Lefebvre, 1991) of capitalist production. The ‘habitus’, or ‘life’ of a city, is determined to the extent to which it has the capacity to ensure that that the logic of capital accumulation perseveres without negative externalities, either internal or external.

Neo-Marxist Fiscal Sociology and ‘The Fiscal Crisis of the State’

To ensure a relatively ideal geographical space of production, circulation, exchange and consumption is manifested, what is requisite is stable macroeconomic coordination.  This includes a range of state expenditures, which can usefully be divided into investments directed towards the qualitative improvement of labour power (e.g. investment in education and health by means of which the capacity of the laborers to engage in the work process will be enhanced), investment in science and technology (the purpose of which is to harness science to production and thereby to contribute to the processes which continuously revolutionize material productive forces), and investment in co-optation, integration and repression of the labour force by means of ideological, military and various other tools by which the state has a ‘monopolization over the means of violence’ (Harvey, 1978).

Only [a] sociology [of public finance] can show how social conditions [of the built environment] determine public needs and the manner of their satisfaction by more direct or indirect means, and how ultimately the pattern and evolution of society determine the shaping of the interrelations between public expenditure and public revenue. (Goldscheid, [1925] 1958: 202)

This presupposes a critical analysis of the social struggles over public finance; the social processes that underlie fiscal policy have extensive influences on the nature of economic organization (Schumpeter, 1954: 6-7) since they reflect ‘the immanent contradiction between capitalist economy and [a] socially productive [...] economy’ (Goldscheid, [1925] 1958: 202). James O’Connor’s ([1973] 2002) The Fiscal Crisis of the State and Erik Olin Wright’s (1977) Class, Crisis, and the State together provide a unique fiscal sociological framework for analyzing the intricacies of public finance concerning capital accumulation and the urban built environment.

Following O’Connor and Wright, we can divide the state budget into three categories that correspond to Marx’s reproduction schema: Social Capital Expenditure corresponds to Marx’s value category of constant capital, which consists of expenditures on capitalist means of production that include physical economic infrastructure, research and development, and outlays on various forms investment that enhance the productivity of labor power; Social Consumption Expenditures correspond to Marx’s value category of variable capital, which corresponds to reproduction of labor power, and consists of state investments on labor training services, housing, education, health (medicare/medicaid), and various forms of social insurance, e.g. publicly funded pensions; and Social Legitimization Expenditures, which are outlays that serve to legitimate the capitalist social structure, and serve as a Keynesian source of aggregate demand management.

The fundamental quality of the O'Connor/Wright model fiscal sociological model is that it assumes that specific institutions are what create the space for constant capitalist production and realization of surplus value.  Specific elements of public spending condition the level of stability for capitalists to make reasonable calculations about expected rates of return on investment. In this sense, there is a direct connection between urbanization and growth in public spending, as states socialize a large share of the costs of urban investment projects. Hence, as long as the state, through various types of expenditures provide for a favorable geographical environment for capital accumulation, the capitalist tends to expand vigorously.

Given the inherent ‘anarchy’ of capitalism, however, it is not a social fact that potential social transformations will not eventually contradict the institutional structure. If public spending is unable to overcome the doubling over of contradictions that arise from the process of capitalist development, uneasiness and uncertainty predominate. As the capitalist state assumes the responsibilities for maintaining capitalist economic growth and social stability through social capital, consumption, and legitimation expenditures, it dialectically contradicts its mode of operation as such policies “become progressively increasingly out of proportion to the requirements of [capital] accumulation” (Wright 1979: 157). The increasing pertinence of fiscal policy outweighs the state’s capacity to finance it through tax receipts, especially if social consumption legitimization expenditures take more of the state’s fiscal outlays.

Cities in the United States are permitted to issue bonds, to be bought by private investors, particularly by financial institutions, in order to cover budget shortfalls. Finance capital, yet, does not make funds available, for any economic activity if it competes with ‘laws of motion’ of capital accumulation (O’Connor, [1973] 2002: 193-4). As such, balanced-budget requirements ensure that city governments are more-or-less dependent on banks and other financial institutions, so that the proper scope of city government is largely enmeshed in ensuring that the urban political economy fosters ‘business confidence.' This guarantees that borrowing finances social capital, consumption, and legitimation expenditures that strictly serve to expand the productiveness of the capitalist economy, so that tax revenue from the potential increased income/output can immediately offset original debt incurred.

Bond-rating agencies evaluate the creditworthiness of city governments, which, in the United States are privately administered (e.g. Moody’s, S&P, and Fitch). Ratings are based on assessments of a city government’s financial history (past and current public debt), its administrative structure and history (whether there is evidence of government malfeasance, lack of accountability, or mismanagement), and the potential for extensive urban economic vitality (whether growth is likely to occur). The threshold that the rating agencies police is whether or a bond is rated as ‘speculative’ or ‘investment’ grade’ Speculative-grade bonds resemble a city’s relative incapability of being 'fiscally prudent', with respect to keeping finances limited to capitalist growth with high tax revenues. As such, the ‘politics of creditworthiness’ not only will determine how expansive a city’s loan will be, but essentially will the affect the general nature, scope, and functionality of city government.

In theory, the federal government of the United States can provide resources to help city governments escape the predicaments of ‘fiscal crisis’ by way of the US Federal Reserve purchasing bonds issued by city governments. Given the unique political structure and regulatory divisions between the local and federal level in the United States, however, institutional constraints make this source of urban fiscal support highly unlikely. More importantly, it is contended, the use of such monetary policy is inherently inflationary (O’Connor, [1973] 2002: 192), as this implies an ever increasing growth in the money-supply, creating a classic problem of too much money chasing too few goods, which only adds further fiscal strain to cities (Block, 1981). Thus, the only means by which the federal state can assist is through federal fiscal transfers from accumulated federal tax revenue (Friedland, Fox Piven, & Alford, 1984: 284; Block 1981). This policy instrument, however, is also limited, as it is argued that the capacity for the federal to engage in fiscal transfers is measured by the degree to which federal taxes are matched by federal fiscal transfers (Block, 1981).  Hence, what prevents the federal government in providing much needed fiscal transfers to cities stems from the same problem faced by the cities. The O’Connor/Wright neo-Marxist fiscal sociological model presupposes a ‘mettalist conception of money'.

From a cartelist perspective, the US is a monetary sovereign, and, as such, the federal government can easily provide necessary fiscal assistance to cities. The reason it chooses not to is not an economic problem, but rather more of a social and political issue reflecting conflict between financial & industrial capitalists and the working class. Rising federal fiscal assistance would give more strength to working-class militancy, potentially doubling over the contradiction of inflationary wage-price spirals. Federal fiscal retrenchment (austerity) pushed on cities forces municipalities to transform the uses of public debt into enhancing the value of commercial property. The urban built-environment becomes a marketable space for gentrification (yuppieville). Through ‘civic booseterism’ by way of the promotion of urban government sponsored beautification initiatives, cities encourage, it is assumed, the attraction of wealthy residents and associated boutique businesses into the urban built-environment, so as to accumulate potential tax revenues such that the city can be perceived as being in good financial standing, per commercial lenders and associated credit-rating agencies. Tax abatements, land giveaways to various sorts of financial and industrial capital and lax or nonexistent zoning became the modus operandi for cities, setting in motion a ‘spatial fix’ of urban neoliberal governmentality.