THREE APPROACHES TO THE ECONOMIC CRISIS:
BEYOND FINANCIAL MARKET REGULATION
By Patrick Schreiner
[This article published July 4, 2012 is translated from the German on the Internet, http://www.annotazioni.de/post/636
The following text attempts to order the current discussions on the causes and possible ways out of the financial crisis. Three orientations of political “crisis thinking” can be distinguished. Two hold to the neoliberal capitalism model. This model must be questioned and replaced by another model that emphasizes wage-based demand for economic policy and solidarity for social policy.
Thomas Palley, senior economic advisor of the AFL-CIO, recently published a text on the financial crisis in the Online magazine “Gegenblende” of the German DGB union [http://www.gegenblende.de/15-2012/
]/]. He distinguished three different ways of looking at the crisis:
1. A radical-neoliberal “state failure” led to too many, not too few state interventions, it is argued. From this perspective, the crisis can only be overcome through more market and less state.
2. A moderate neoliberal “market failure” argument claims the crisis in the first place is a consequence of inadequate regulation of the financial markets. From this perspective, the solution consists mainly in a regulation of the financial markets.
3. Finally a third argumentation, Palley explains, refers the crisis back more fundamentally to the neoliberal model of the economy and society carried out since 1980. Its main elements are
1. Fueling international competition between employees of different countries (through free trade agreements and capital mobility),
2. Weakening employees and their unions (for example by reducing social benefits, permanent mass unemployment and flexibilization of the labor market,
3. And as a consequence the politically desired and consciously executed freezing of wages behind the development of productivity.
With this model, economic policy was radically turned around. Before 1980, Palley argues, wages, productivity, investments and production pushed one another and ensured general prosperity. High wages made possible profits, extensive investments and growth. But after 1980 wages were dropped as a driving force of economic demand. The financial sector should compensate for the arising “gaps.”
In the United States, deregulations, financial innovations and speculation enabled the financial sector to fill these demand gaps through consumer credits and enlivened asset price inflation. US consumers again filled the global demand gaps.
Empirical data supports this analysis. The increase in globally-invested assets greatly disproportional to the real economy, the exploding social inequality, the general collapse of wage rates and enormously soaring public indebtedness not only in the US could serve as examples.
If one follows this analysis, the deregulation of the financial markets was only a logical element of the neoliberal model, not the main cause of the crisis. Therefore a regulation of the financial markets is not enough to permanently end the crisis. A complete turning away from neoliberalism is necessary. The question how future economic demand can be generated is raised as the more urgently. Finally there will be no enormous spirals of private indebtedness and stock or real estate bubbles any more – in the foreseeable future – and hopefully for the long run – that could create artificial demand until bursting some time or other.
On this background, the question how future demand can be generated should be the crucial criterion in judging political reactions to the crisis. While regulation of the financial markets is right and important – a stricter bank monitoring, a financial transactions tax and higher capital holding requirements – the demand problems will not be solved. Whoever stops with these beginnings persists in the neoliberal model. Palley’s descriptions are correct: the boundary between reasonable and unreasonable policy does not run between “moderate-neoliberal” and “hardcore-neoliberal” but beyond both of them.
Withdrawal from the neoliberal model requires a policy that makes wages the crucial driving force of economic demand again. This also necessitates replacing the “activating” social state with a solidarian social state, regulating the labor market again, strengthening the rights of employees and unions, radically reducing social inequality, strictly controlling capital and setting minimum social standards on a high level at least across Europe. Genuine growth impulses through higher wages, extensive investment programs (with emphasis on future technologies) and a spending policy of the state that does justice to the economy are measures that could be started in the short term.
On the other hand, other actions do not reflect a withdrawal from neoliberalism: debt brakes and fiscal pacts, cuts of public budgets, “structural reforms” in southern Europe and “fighting” youth unemployment through more mobility are all in a terrible continuity to neoliberalism.
Christian Zeller, “Cancellation of Illegitimate Debts Instead of Bailout Umbrellas for Financiers,” 2012 http://portland.indymedia.org/en/2013/01/421458.shtml