Excesses of Supply Theory

EXCESSES OF SUPPLY THEORY

In Germany the competitiveness of businesses is still set above strengthening domestic demand. Therefore Germany could skid into a recession

By Lucas Zeise

[This article published in: The Financial Times of Germany, 9/2/2008 is translated from the German on the World Wide Web, http://www.ftd.de.]




At the end of August 2008, Ralph Atkins, correspondent of Financial Times in Frankfurt, listed many reasons why the Euro zone will not skid into a recession. His arguments were unsystematic. The argument that French president Nicolas Sarkozy would not allow a recession was particularly strange. A French analyst told him, Atkins said, Sarkozy would send his wife shopping if necessary.

In my opinion, the diversity of Europe underlies his confidence. Because conditions are so different in the countries of Europe, because there is an easily freaked-out president in France, it is unlikely the region will really slide into a complete recession. The different follies of politics in the different countries will neutralize one another.

There aren’t such mitigating circumstances for Germany. Rather folly is raised to a new power in Germany. Bad policy is not thwarted by another bad policy. The second policy is always the same kind as the first: supply side theory as developed in Kiel and with the council of experts in the 1970s as a counter-concept to the ideas of the social-liberal coalition inclined to mild reforms.

DILAPIDATED INFRASTRUCTURE AS MODEL

This supply theory wouldn’t be so bad if it led as its names suggests to strengthening supply (in production factories). But that cannot be claimed. Investment in training workers is cut. Savings are realized here. The infrastructure is privatized or passed off as a public-private partnership according to the model of Great Britain’s dilapidated infrastructure. Unprofitable rail lines are eliminated. More traffic is redirected to the highways. The productivity of the national economy is reduced through constantly growing traffic jams.

German policy means something else with supply in theory and praxis. The production factors themselves are not strengthened. Rather businesses should obtain cheap production factors at garage sale prices. Top-flight reliable workers who cost almost nothing increase the competitiveness of industry abroad and ultimately increase profits, the goal of the increase.

The key economic data for the second quarter of 2008 clearly shows the consequences of this disastrous economic policy. But hardly anyone looks at this data. The growth of the gross domestic product (GDP) was negative at minus 0.5 percent. This was known in advance. All the appeasers had already calmed themselves that this was only an inevitable reaction to the highly distorted growth rate of the first quarter. Hardly anyone is interested that per capital net wages fell one percent compared to 2007 and that the consumption of private households slipped 0.9 percent compared to 2007.

The development since 2000 is even more alarming. On his website (jahnke.net), the economist Joachim Jahnke presents disquieting long-term charts on this theme. Since 2000, the gross wage per worker fell five percent while business- and assets income in the same period skyrocketed 40 percent. The public has accustomed itself to this development. Profits now rise faster than wages and salaries.

AN IRON LAW

This catastrophic development has become an iron law in Germany. This does not hinder some from hoping for a surge in consumption. “Das Kapital” caricatures this attitude with the words “How should domestic demand rise when it has stagnated for eight years? The pent-up demand must have been tremendous” (FTD, August 27, 2008).

Massive pressure on the lowest wage groups, growth of the low wage sector and strangulation of consumption are all extreme in Germany. Therefore this country will be most severely affected by the growth weaknesses of the world economy on account of the constantly miserable domestic demand and skid into the recession when the Euro zone altogether can avoid it.

Compared to the Kohl years, downward wage pressure, the income spread and the other disastrous effects of supply policy intensified with the start of the Red-Green Schroeder government. While social democracy had a certain protective function for dependent employees, Red-Green moved to the employer-camp and is firmly on their side. Privatization of state assets advances unchanged…

From an economic perspective, a breach with the harmful supply policy is urgently necessary…