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"We need a new economic balance"

by Democracy Think Tank in Germany Saturday, Mar. 02, 2013 at 6:21 PM

If the US removed the cap on social security taxes, public spirit and generational fairness would return to the states. At present, there is a cap at $106K. If you make $4 million, you only pay social security tax on the first $106K.


Discussion paper for the conference “Tomorrow's Prosperity. Ways to a Sustainable Economic Model,” February 14, 2013

by Democracy Think Tank in Germany

[This discussion paper published in February 2013 is translated from the German on the Internet,]

Germany is thriving economically – if one only looks at two numbers. Measured by the “gross domestic product” and the “number of employed persons,” we obviously are living in the Golden Age. However an analysis limited to these two facts is short-sighted. The classical indicators of statistics tell us little about the social reality and quality of life in this land. They veil growing injustice and discontent and give little information about the future friendliness or viability of our economy. Often they serve as reasons for short-sighted decisions and plans that contradict the principle of economic, ecological and social sustainability.

A more exact analysis shows: our economy is out of balance in many regards.

The extremely unequal distribution of income and assets endangers the macro-economic equilibrium. The social balance of our society is lost. For a long while,. Education chances and work were not distributed fairly. Our economic mode threatens our natural foundations of life.

Unbroken Finance Capitalism. The dominance of financial management with its false models, wrong incentives and short-term profit interests over against the real economy is not broken. Up to today, there has not been a real financial participation of the financial sector in the high public costs of crisis management.

Europe out of Balance. In many countries, management of the burdens of the financial crisis – on account of the policy of the German government – is carried out on the backs of employees and the weak. The economic imbalances between the countries is a persistent risk for economic stability. Germany is too dependent on the world economy.

Climate Change and Destruction of the Environment. Our present growth path is not sustainable or future-friendly in a world of increasing prosperity and growing population. We need greater efforts from politics, the economy and society for the energy turn, reduction of harmful emissions and increased resource productivity. A responsible macro-economic analysis must consider the costs through environmental- and climate damage, the loss in biodiversity and natural landscapes, as the Stern Report did on the economic costs of climate change.

Good Work – But Not for Everyone. We have set a record in gainful employment, fortified long-term unemployment and the high share of precarious working conditions. Women do not have the same chances as men on the labor market. 25 percent of women and 15 percent of men work for a wage of less than 8.50 euro an hour. Strain and pressure increase for many employees in secure working conditions which appear in the increased mental illnesses.

For Many, There is no Prosperity. The promise of the social market economy of creating “prosperity for everyone” is not valid any more. The gap between poor and rich widens. The German government also recognizes: “Private assets in Germany are distributed very unequally. Households in the bottom half of distribution only have one percent of the total net assets while the richest ten percent of households have half of the total net assets. Private net assets rose 1.4 trillion between 2007 and 2012 (draft of the Poverty and Wealth Report). On the other side, income poverty climbed to 15 percent. The “income of the middle class” shriveled (according to a study of the Bertelsmann foundation and DIW) since the middle of the 1990s from 65 to 58 percent. While corporate profits, manager salaries and private assets rose, real private investments in Germany lag behind this development.

Private Riches and Public Poverty. The high public indebtedness is the expression of an under-financing of the state. The draft of the Poverty and Wealth Report explains: “While the net assets of the German state decreased about 800 billion euros between 1992 and 2012, the net assets of private households (including private organizations without commercial objectives) more than doubled from 4.6 to around 10 trillion euros.” While private assets grow, the community lacks funds for child care, schools and public infrastructure. The German league of cities and communities recently decried an investment backlog of 100 billion euros.

Rule of Markets Instead of Democracy. The dominance of the “markets” over democracy deplored by considerable parts of the population weakens the cohesion and trust in the political possibilities of the future. Europe is seen as a bureaucratic machine. Instead of political leadership, people witness more and more the powerlessness of politics before the real challenges of the world. Poor voter turnout and political extremism are manifestations of these tendencies and alarming signs for democracy.

These imbalances negatively amplify one another. We have not exhausted our potential for an innovative, socially just and ecologically sustainable economic model. We lag far behind our possibilities.

All these serious structural imbalances are not reflected in the code numbers of the GDP. Therefore there is increasing awareness in politics, academia and society that the gross domestic product alone cannot define “prosperity.” International and national groundwork for new and better “prosperity indicators” can be reviewed. The Enquete commission “Growth, Prosperity and Quality of Life” of the German Bundestag has worked out proposals for new indicators.

We need a change of course in economic policy. We need a public consciousness that economic policy must be committed to economic, social and ecological goals. Therefore we plead for setting the goals of economic policy in the sense of a new balance.

According to the model of the traditional “magical square” of the 1960s (growth, employment, price stability and foreign trade balance), we want to define a new “magical square” that does justice to the challenges of the 21st century.

Sustainability of State Activity and State Finances: Necessary state expenditures must be financed through adequate revenue. The public debt burden must be reduced without neglecting necessary future expenditures.

Material Prosperity and Economic Sustainability: An efficient national economy that strives for full employment and shows a balanced balance of payments.

Social Sustainability: Reduction of poverty, good work, a more just income distribution and better education chances.

Ecological Sustainability: Uncoupling growth and resource consumption, reduction of greenhouse gas emissions and higher resource productivity.

A future German government should establish these goals of a new “magical square.” Replacing the outdated Stability and Growth law of 1967 with a “Prosperity and Sustainability law” is conceivable.

3, Including the extensive preparations of new indicators for a new “prosperity” measurement, the German government should report on progress in realizing this goal to the German Bundestag and the general public. An “annual prosperity report” should be presented that combines the different individual reports (including the annual economic report, the Poverty and Wealth Report, Progress report on sustainability strategy for Germany).

These democratically-defined goals of prosperity and sustainability are the guard rails for politics, the economy and civil society.

The Democracy think tank will work on this concept together with experts and present a position paper in the spring.

Yasmin Fahimi, Michael Guggemos, Steffi Lemke, Andrea Nahles, directors of the Democracy think tank
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