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The State Should Rescue the Market Economy

by Markus Mugglin Tuesday, May. 14, 2013 at 7:54 AM

A balance recession is more than a temporary slump of the economy. During a balance recession, private economic actors try to reduce their debts. The cheap money seeps out on the financial markets where it leads to new bubbles. The labor market does not function like other markets. Falling wages did not lead to more employment - as claimed for decades.


The economic signs point to storm but it's not too late for a conversion. That is the appeal of five noted economists from three continents

by Markus Mugglin

[This article published in the Swiss WOZ journal on 4/18/2013 is translated from the German on the Internet.]

"Most have not heard anything about balance recessions." "Unfortunately many European politicians are not aware of an economic sickness called balance recession," Taiwanese economist Richard C. Koo complains in his contribution to an economic manifesto presented by five noted economists.

The message is explosive while the criticism of the chief economists of the Nomura Research Institute in Tokyo is technical. It is only one objection among many that show how little the current debates on the economic crisis focus on the real economic courses of events. The consequences are fatal as demonstrated by the crisis deepening for years.

A balance recession is more than a temporary slump of the economy. During a balance recession, Richard C. Koo explains, private economic actors try to reduce their debts. Debts are minimized instead of businesses taking credits to finance production and maximize profits.

That is the great problem that confronted central bankers worldwide for months. Their broadmindedness is unbounded like their powerlessness. The cheap money seeps out somewhere on the financial markets where it leads to new bubbles.


The consequences can be seen everywhere - in the US, Japan, Britain, Ireland and Spain where the crisis deepens on and on. The Great Depression of the last century that plunged North America and Europe into poverty and distress shows the dramatic effects of a balance recession. The warning to politics lies here, Koo says. The countries mired in crisis risk the collapse of their economy or a long-lasting economic trough with high unemployment and additional massive debts.

According to the economists who composed the Manifesto, the balance recession is only one of many problems raised at the most different points of the global economy.

Heiner Flassbeck, former chief economist of the UN organization for trade and development exposes the gulf between theory and reality in the example of the labor market. The labor market does not function like other markets - and different than the mainstream economy claims. Falling prices led to a greater demand on the commodity markets - but not on the labor market. Falling wages did not lead to more employment - as claimed for decades.

On the contrary, wage flexibility slows down the demand for goods and ultimately leads to more unemployment. "Unemployment after the 2008/2009 financial crisis jumped to nine percent, the highest level in the last sixty years despite the lowest share of wages in the gross domestic product" (Flassbeck).


The crisis makes clear how the functioning of the free enterprise system is hardly understood. That is the deeper reason why the crisis worsens, unemployment rises and the gulf between rich and poor becomes greater. That is the main message of the Manifesto.

"Act Now!" does not promote revolution. With different arguments, the authors expose the failure of economic policy and are united in decrying boundless capitalism. The active state is necessary and must intervene so the market economy can function.

The command of the hour is the "immediate ending of austerity policy." As long as the economy does not invest, the state must step into the breach. Otherwise the prosperity built over decades and the democratic order will be endangered, not only income and jobs.

That does not sound revolutionary. Still the call does not have a majority.


by Albrecht Mueller

[This review published April 18, 2013 is translated from the German on the Internet,]

Correct fast action is urgently necessary. However the majority opinion in politics, science and the media is so hardened and narrow-minded that the pressing demand of economists Paul Davidson, James K. Galbraith, Richard Koo, Jayati Ghosh and Heiner Flassbeck that could save us from the dangers of a new worldwide economic crisis will probably ricochet off the concrete of dominant opinion. I hope for another fate for this book and call from the heart. Still the constant resurrection of the dominant circles is simply disillusioning. In this review, the most important elements of the book oriented in the manifesto will be outlined.

The common clear message of all five authors is: take measures to stimulate the world economy. Neoliberalism has failed. Prevent a relapse in nationalism and a war of the nations. A serious international cooperation and an immediate ending of austerity policy are the commands of the hour.

Several statements and demands follow:

The world economy is in its most serious situation since the 1930s.

The financial crisis and the new crisis in the real economy are not natural phenomena. They are made by people and are the mediate and immediate consequences of false economic doctrines revived in the last 30 years while the important lessons from the Great Depression were forgotten and repressed. The meaning of objective insecurity and the necessary role of the state are not understood, as Paul Davidson shows in this book.

Politics must drastically limit the power of the financial markets.

The labor markets of the western world must be oriented in stable returns for people, not made flexible again.

Monetary policy must combat the deflation danger in the crisis with all available means.

Fiscal policy in the industrialized world must now steer against a new recession.

Global economic policy must take necessary steps on all planes and quickly draw lessons from the failure of neoliberalism. If that doesn't succeed, more than only income growth and some jobs will be endangered. The prosperity built over decades will be in danger along with the democratic order of our states.

That Heiner Flassbeck brings up this subject to his colleagues and that Westend published this book is very commendable.


by Heiner Flassbeck

[This paragraph published May 1, 2013 is translated from the German on the Internet,]

The FAZ writes about full employment. This is like Ptolemy writing about the Copernican worldview. It could be great fun if they at least had good writers... The labor market does not function like a normal market because supply and demand are not independent of one another unlike the potato market. If the supply curve and the demand curve that economists like to describe as a cross are not independent of one another, there is no normal market outcome and the beautiful free enterprise notion, failing wages bringing more employment, remains a mirage. The FAZ gloats about exports and competitiveness which is not a solution of the problem. Neither they nor mainstream economists recognize the crucial domestic economy connection.

A book in which the Copernican worldviewwwww is explained in detail is "The End of MUnemploymentntntntnt" (Das Ende der Massenarbeitslosigkeit") published by Westend in 2007.


Myth #1 - "The state wastes tax funds"

Myth #2 - "Our tax money seeps away in the social bureaucracy"

Myth #3 - "Taxes, the state and bureaucracy grow rampantly at the expense of citizens"

Myth #4 - "Taxes slow down growth and are poison for prosperity"

Myth #5 - "Germany is a high tax country"

Myth #6 - "Top earners are fiscally burdened most strongly"

Myth #7 - "The top income classes bear the large part of the tax burden"

Myth #8 - "Property taxes strike the middle class"

Myth #9 - "Record business taxes endanger the location Germany"

Myth #10 - "A financial transactions tax would hit small investors and pension savers"

Myth #11 - "One tax record chases another with the German treasury"

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U make it so easy PrionPartyy Tuesday, May. 14, 2013 at 6:41 PM

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