MEMORANDUM 2015
40 YEARS FOR AN EFFECTIVE SOCIAL ECONOMIC POLICY AGAINST MASS UNEMPLOYMENT. SHORT VERSION
by Alternative Economic Policy study group
[For 40 years, the Alternative Economic Policy study group has published memorandums. This Memorandum 2015 published in February 2015 is translated abridged from the German on the Internet,
http://www2.alternative-wirtschaftspolitik.de/uploads/memorandum_2015_kurzfassung.pdf]
CONTENTS
1. 40 Years Mass Unemployment – Alternatives in Economic Policy are Possible
2. The Dilemma of Current Economic Policy
2.1 The Strain of Monetary Policy
2.2 The European Crisis
2.3 The Dilemma of Unequal Distribution
2.4 No Economic Development Without Adequate Investments
3. An Alternative Policy is Possible and Necessary
3.1 For an Investment, Distribution and Spending Program
3.2 A New Perspective for Europe
1. 40 YEARS MASS UNEMPLOYMENT – ALTERNATIVES IN ECONOMIC POLICY ARE POSSIBLE
The Alternative Economic Policy study group was founded in 1975 to oppose the rising mass unemployment and the neoclassical instrumentalization for wage- and social cuts. Since then, neoliberal prescriptions have aggravated the crisis on the labor market. Alternative concepts were not given any hearing for many years, it seemed. Nevertheless critical standpoints were sometimes given a stronger weight although the dominance of neoliberal policy has not been broken. More and more themes discussed in the memoranda for 40 years mark the agenda from legal minimum wage and the distribution debate to the question of public investments.
In the founding year of the Alternative Economic Policy study group 1975, the most successful period of German economic and social-political development after the Second World War came to an end with the 1974/75 world economic crisis. In the 1960s the unemployment rate was lowered below one percent and full employment was achieved. Many foreign workers were recruited to satisfy the labor demand. In addition, there was an enormously important thrust in urban development, house building and public infrastructure. Many advances were realized in social-, pension, labor market, general education and university policy.
Economic policy was obligated to a high state of employment, price stability, foreign trade balance and growth (“the magic square”) by the 1967 Stability and Growth Pact. The greatest political-economic attention should be given to the most vulnerable goals. Distribution justice and the ecological question were not adopted in binding law. Growth had to be pursued unconditionally under social-ecological aspects. Then a slackening economic growth in western industrial countries led to an unparalleled stagflation and ultimately to an over-production crisis in 1974/75 with a rise of the unemployed to over a million and an unemployment rate of five percent. This was connected with the first oil price crisis, the costs of the Vietnam War and the transition to flexible exchange rates (fixed exchange rates were codified in the monetary system in Bretton Woods 1944).
Economic life was accompanied by far-reaching branch crises (steel, construction and textiles). Since then, a mass unemployment has become structurally fortified in Germany and is not overcome today. The Alternative Economic Policy study group clearly saw the problem of fortified unemployment in its first memorandum: “Unemployment continues undiminished – measured by production and investment – even through a two-year period of economic upswing. A unique industrial accident did not occur. Rather long-term tendencies broke through intensified by the economic crisis from the end of 1973. The economic vicissitudes survive and possibilities of economic development are limited in the long-term. […] The council of experts and the majority of official economic policy-makers explain the continuing mass unemployment from the capital profitability that has fallen since the end of the 1960s. Its causes are derived one-sidedly from the higher claims of unions regarding wage policy and the supposedly exaggerated social-state reform policy of the state. […] The global promotion of business profits is the core of the council of experts’ recommendations and develops as a growth program from their reflections on structural unemployment (Memorandum 1977).
The 1974/75 crisis was the catalysor for a paradigm shift in economic policy. The welfare state was no longer the determining model. The phenomenon of stagflation discredited the old economic approaches. In the theoretical debates, a negative connection was often identified between inflation and unemployment (Phillips curve). Economic policy must decide between higher prices and massive unemployment, it was said. According to this interpretation, economic policy was powerless with simultaneous higher prices and unemployment. The Keynesian demand policy practiced in the postwar years was decried as failed. In their appraisal of the aggregate economic development, the council of experts, the forerunner of the neoclassical turn, promoted the profits of businesses, not aggregate economic demand. This position resonated in politics with the first budget consolidation law of 1975. The orientation of economic policy remained vague and contradictory in the following years.
Only one interpretation of Keynesian theory broke down with the crisis – the interpretation of British economist John R. Hicks and US economist Paul A. Samuelson. This variant is often criticized in the debate as “hydraulic” Keynesianism or “bastard Keynesianism” (Joan Robinson). It is marked by very mechanical market assumptions and neoclassical labor market assumptions (neoclassical synthesis). Turning away from a Keynesian policy did not lead to overcoming unemployment. Quite the contrary. That must not be forgotten.
At the end of the 1970s, the worldwide economic situation was aggravated again through the second oil price crisis. The neoliberal “Friedman monetarism” was predominant. The increasing supply-oriented economic policy that relies on wage reserve, social cuts and lower taxes on profits and radical monetarism led to a sharp economic collapse in Germany in 1982 with a shriveling economy and more than two million unemployed. As radical monetarism, a phase of high interest policy was initiated under US president Ronald Reagan. Memorandum 1982 titled “Qualitative Growth instead of Profit Promotion” with a special section “Ensuring and Developing the Social State instead of Social Dismantling – Alternatives for Financing Social Policy” showed concrete alternatives but was not considered in the German government’s economic policy. On the contrary, the financial- and monetary policy changed course with the change of government to a Black-Yellow coalition under Helmut Kohl to the neoliberal course of the Reagan administration in the US. An EU member Great Britain converted neoliberalism into praxis with its Thatcherism since 1979.
The implosion of East Germany (DDR) – and the collapse of the whole command socialist way – in the fall of 1989 and the spring of 1990 – confronted economic policy with completely new problems. On July 1, 1990, the monetary union with the exchange rate of 1:1 or 2:1 suddenly destroyed East German industry. In an expert opinion in February 1990, the council of experts proposed a Ten-Year Confederation to systematically adjust the DDR economy and society to the “raw world” of western competition. The Alternative Economic Policy study group urged a concept for the long-term stabilization and modernization of the DDR economy through a transformation process. The essential points were measures to reduce competitive pressure, the principle “revitalizing before privatizing” and measures preventing employees and social insurances from financing the unification…
Despite many early pensionings, unemployment exploded. By the middle of the 1990s, the number of registered unemployed in all Germany surpassed the four million mark for the first time. The breakdown of command socialism led to discrediting all budgetary and solidarity approaches to social organization.
In the 1990s, a technology boom was triggered in the US that also seized Europe with a certain time delay. The information- and communication technologies were revolutionized. This set off a gigantic wave of concentration, centralization and privatization… The points were set in the US in the new high-tech sectors (Google, Apple, Microsoft, Amazon and so forth). The newly arising IT-world appeared in many successful start-ups. The so-called New Economy electrified people and markets. The American economy experienced a tremendous growth push. The end of economic crises and continuous prosperity were seriously discussed among economists. This boom was also ascribed to the dominant economic doctrine. The innovative powers of the New Economy could only unfold without state paternalism and regulatory chains. The dependencies of the “old” work society were overcome.
In the herd instinct, a speculation bubble arose on the basis of completely overrated profit expectations in the New Economy. With the bursting of the New Economy bubble, the illusions of perpetual crisis-free growth finally broke down. Many new start-ups developed into flops and the subsequent founder crisis from 2000 had negative aggregate economic effects and aggravated the general over-production crisis. The terrorist attacks on the twin towers of the World Trade Center in New York on September 11, 2001 and the Iraq War unleashed a new armament wave in the US and destabilized the world economy.
With the orientation in the Maastricht-treaty, Red-Green in Germany set out on the completely false way of a pro-cyclical and supply-oriented economic policy vigorously criticized by the Alternative Economic Policy study group and thereby intensified the New Economy crisis that also arrived in Germany. As a result, the average annual real economic growth in Germany from 2001 to 2005 was only 0.6%. Mass unemployment became more critical; the number of unemployed rose from 3.9 to 4.9 million persons.
With the argument that the location conditions in Germany were unprofitable, Red-Green in 2003 introduced a radical labor market- and social policy to the one-sided advantage of capital that was even welcomed by the rightwing opposition. Higher unemployment rates and an allegedly excessive social state made “reforms” necessary, it was said. Phrases like “demographic change and aging,” “non-wage labor costs” and “international competitiveness,” “activating instead of socially subsidizing” and the picture of Germany as “Europe’s sick man” were spread like prayer wheels by neoliberal think tanks, most parties and much of the media. The Riester pension introduced by the Red-Green coalition was a partial privatization of old age pension schemes that gave new investments to the insurance industry and financial providers. The crisis-susceptibility of old age pensions increased through the growing dependence on financial markets. Old age poverty was programmed. In addition, the initial pension age was raised to 67. The labor markets were flexibilized. An unparalleled precariousness of job conditions was initiated with the “Hartz laws.”
The decline in unemployment from 2006 is regarded as legitimation of this approach. Even today these reforms are said to have healed “Europe’s sick man” and made the German economy fit for the new challenges. They are seen as a blueprint for European anti-crisis policy. In many memoranda, the Alternative Economic Policy study group refuted this explanation. Such reforms lead to a decline in domestic demand since demand is weakened enormously through erosion of mass income. Only the export sector can profit from these reforms – through lower wage costs. Since the sum of worldwide exports and imports is the same, all states cannot realize export surpluses. Unemployment fell while work volumes did not increase in export-rich Germany owing to the Agenda policy. 2013 was below the level of 2000. Work was merely redistributed, not created. Working hours were reduced under precarious conditions with the dramatic increase of mini-jobs in the first half of the 2000 decade and the continuing increase of part-time jobs (often involuntarily for the affected).
The shocks of the worldwide 2008/09 economic and financial crisis – the most serious crisis since the Great Depression at the beginning of the 1930s – upended the neoclassical or neoliberal hegemony. The claim of promoting profit revenue and limiting wage- and transfer income by fighting crises and unemployment – the central core of this ideology – was massively put in question. The standpoint of the Alternative Economic Policy study group – seeing redistribution from bottom to top as a cause of crises and not as a solution – found broad acceptance. US economists Paul Krugman and Joseph E. Stiglitz, the German historian Hans-Ulrich Wehler and French economist Thomas Piketty represent the views of many.
“Did increased US inequality contribute to the financial crisis of 2008? In my opinion, growing inequality undoubtedly contributed to de-stabilization of the American financial system” (Thomas Piketty, Capital in the 21st Century, 2014, p.391).
The crisis was rightly fought with an expansive worldwide monetary- and fiscal policy – not included in neoclassicism. Expansive fiscal policy was quickly abandoned again. In the EU, austerity policy was applied intensively as a crisis solution for southern Europe. Still the limits of this policy are clearly manifest. Nevertheless this message has not arrived today at German universities dominated by neoclassicism. The economic mainstream and economic policy in Germany face a dilemma because they cling to the failed ideas of neoliberalism. At the same time acceptance of this ideology fades and practical conversion encounters ever greater problems. This policy functions less and less in many areas.
The dilemma is striking in the council of experts’ position on the aggregate economic development. Since the middle of the 1970s, the council of experts (SVR) has been a refuge of pure neoclassical or neoliberal doctrine. It made a central contribution to implementing this policy. In its correct expert opinion, the council of experts does not deviate from this line. Quite the contrary. In a provocative way, it titled its 2014/15 opinion “More Trust in Market Processes.” Only the minority votes of Peter Bofinger contradicted the neoliberal majority opinion. The SVR loses its reputation by ignoring the development of the past years and the current debates. To many, the title of the expert opinion is incomprehensible after the worldwide economic financial crisis that came about through enormous market failure. However the SVR ignores important positionings on economic analysis that have broad consensus both in the academic debate and in public opinion. An increasingly unequal distribution of income and assets and massive investment weaknesses in Germany and Europe can be established almost unanimously. The SVR tries to deny both with dubious methods. In the meantime, the German government transitioned to a cool disinterest in the expert opinions. Devastating evaluations have been published even in newspapers like the Handelsblatt near the neoliberal mainstream.
2. THE DILEMMA OF CURRENT ECONOMIC POLICY
2.1 THE STRAIN OF MONETARY POLICY
All central banks worldwide rely on an expansive monetary policy in the battle against the crisis. The German Central Bank is one of the few exceptions. It is bound in the European system of central banks and cannot pursue its own monetary policy. Milton Friedman’s idea of realizing a continuous, crisis-free money supply ran aground in reality.
The European Central Bank can only restrictedly stimulate growth. Its powers are asymmetric. It can strangle a good economy in a completely unproblematic way (high interest policy, minimum reserves, inter-bank policy), deactivate a financial- and bank crisis together with the states, compensate the collapse of the inter-bank market and so forth. In this sense, the announcement of the European Central Bank president Mario Draghi in the summer of 2012 to buy unlimited state bonds from crisis states on the secondary market if necessary makes speculative businesses in this area unattractive. That calmed the financial markets and ultimately prevented the disintegration of the monetary union.
However the European Central Bank cannot give a bump-start to the economy without an expansive trade policy; it cannot create any demand. This can be clearly seen in that the extreme low interest policy in Germany has not led to the hoped-for dynamic awarding credits to businesses. The low-interest policy can reduce the savings-inclination, increase the consumption-rate and fuel (speculative) house purchases. It can encourage owners of single family homes to modernization investments but cannot spur businesses to investments when the corresponding demand is missing.
The liquid funds provided by the European Central Bank (ECB) remain in the financial system. Therefore it is hard for the European Central bank to fight the deflation tendencies with an expansive monetary policy. The central bank money winds up in financial loans and stocks. This is not different in the purchase of government bonds. The promotion of financial bubbles by monetary policy threatens without support by an expansive fiscal policy. Still the policy is right but needs the support by the fiscal policy of states.
The “stability fanatics” of the EU use an artful argument to drive the ECB. They shift the whole macro-economic control to the ECB and to the strained deficit states. But they also limit the monetary instruments of the ECB and prevent its functioning as “lender of last resort.” The German government and the German Central Bank have not been able to prevent the Draghi policy. The ECB is forced to bring the heavy artillery if necessary for the collaboration of fiscal- and monetary policy. Thus it is high time to relieve monetary policy through an expansive fiscal policy. The fundamental deficits are very clear if the macro-economic policy in Europe pushed by Germany is compared with the macro-economic policy of the US. The expansive monetary policy of the ECB with its programs on buying bonds from banks can only succeed when an expansive financial policy is carried out in Euroland. Therefore the fiscal union with its restrictive debt policy must be re-configured. Public credit financing is justified to finance public investments and to use the excessive financial assets.
2.2 THE EUROPEAN CRISIS
2.3 THE DILEMMA OF UNJUST DISTRIBUTION
The key for a different economic development lies in the distribution of incomes and assets (alongside the re-regulation of the financial markets). For many years, the Alternative Economic Policy study group has pointed to the trivial connections. Without increased mass income (wages and transfer payments), there is no expansion of private consumer spending. Without a better financial outfitting of the state, public investments will not increase. Without a stronger demand, private investments will not increase. For a long time, the Alternative Economic Policy study group was a solitary and hardly noticed voice in the wilderness. However the distribution question since Piketty has moved more and more into the focus of the debates.
“A fundamental contradiction is expressed in this inequality. The stronger it appears, the more the entrepreneur threatens to change into a financier and gain power over those with nothing but their labor power. Capital reproduces itself automatically – faster than production grows. The past devours the future” (Thomas Piketty, Capital in the 21st Century, 2014, p.785f).
Political conclusions are not drawn from this. The wage rate overcame its low-point of 2007 but persists at a state below the level at the beginning of the 2000s. Introduction of the minimum wage is a correct step but completely insufficient. A further re-regulation of the labor market would support the wage development and influence the primary distribution between capital and labor to the advantage of labor income. A more just tax policy that burdens high incomes and mammoth assets would improve secondary distribution to the benefit of lower income.
In December 2014, the OECD in a working paper titled “Trends in Income Inequality and its Impact on Economic Growth” concluded that income inequality in OECD states increased in the past 30 years. Negative growth effects of this growing chasm between rich and poor are manifest. Contrary to past recommendations of this organization, state redistribution by taxes and transfer payments is not necessarily harmful to growth.
Distribution of assets is far more unequal than distribution of incomes. The latest studies of the German Institute for Economic Research reveal an alarming picture. Wealth is distributed far more unequally in Germany than previously assumed. The richest 1% of the population possesses 30% of the total wealth. The richest 0.1% (a thousandth of the population) has 14 to 17% of the total wealth…
2.4 NO ECONOMIC DEVELOPMEHNT WITHOUT ADEQUATE INVESTMENTS
Domestic demand in Germany is curbed by trifling investment activity and by weak mass income. The share of investments in the economic output fell enormously up to 2005 and since then has persisted at a low level. While the share still amounted to 25% at the beginning of the 1990s, it was only 20% in 2014… Public investments declined intensely in the long term. If they amounted to 4.7% of the GDP in 1970, they were 1.6% in 2013. What is an even worse, public net investment (gross investments minus deductions) are negative since 2003. The public capital stock decays. Investments do not cover the maintenance of the public infrastructure. Even the private equipment investments of businesses (machines and plants) have not reached the pre-crisis level.
A noticeable expansion of public investments breaks down in its financing. The rich German society has enough financing resources. The German society can use part of this money for public investments… The financing problem for the state is not solved; it is only postponed to the future and intensified… The question of public control over investments is raised.
Two ways are offered to use domestic savings for public investments. The first would make money available to the state through higher taxes. The Alternative Economic Policy study group favors this way. But greater borrowing would also be possible…
Although the German government is aware of the problematic of deficient public investments, the financial possibilities have not been thrashed out. The ideology of the “black hole” is important. Private capital could be mobilized for financing public investments…
3. AN ALTERNATIVE ECONOMIC POLICY IS POSSIBLE AND NECESSARY
3.1 FOR AN INVESTMENT-, REDISTRIBUTION- AND SPENDING PROGRAM
The logic of the traditional austerity policy must be broken. Investments whose necessity is not seriously denied by anyone could actually be carried out. Therefore a comprehensive investment-, redistribution- and spending program is at the center of the demands of the Alternative Economic Policy study group. Limiting the funds for investments in the narrow sense is not sensible because social needs can often only be satisfied with additional public expenditures. For example, building a new school would be senseless if no teachers were hired.
The Alternative Economic Policy study group urges an investment- and spending program of an additional 100 billion euros annually. The funds should be increased in a graduated plan over five years. These funds would be allocated to education (25 billion euros), transportation infrastructure (10 billion euros), local community expenditures (10 billion euros), revitalizing buildings (5 billion euros), local health care infrastructure (20 billion euros) and additional labor market spending (30 billion euros). Uncovered social needs not satisfied by the market are the starting point for such investment- and spending programs. These needs are derived from the legitimate desires for more and qualitatively better education, for lower energy- and resource consumption, for better measures of vital necessities and better provision of public services. At the same time this program aims at increasing employment and mass income, that is reducing unemployment and improving the material situation for large parts of the population. This program is described in detail in Memorandum 2014…
Another tax policy is necessary to finance this program. The Alternative Economic Policy study group urges conversion to a tax concept in which the revenue for higher spending is ensured on one side and secondary distribution is shifted to the burden of the rich and propertied on the other side…
The unpaid caring work done mostly by women must be upgraded on one side by building qualitatively well-paid public services like child care and geriatric care which presupposes a transition from unpaid to paid work. On the other side, reduced working hours is necessary for men and women so paid labor and the private realm can be joined together. The gradual introduction of the 30-hour week of normal working conditions with full wage compensation would contribute to that. All this must be supported by a changed fiscal and social policy.
3.2 A NEW PERSPECTIVE FOR EUROPE
Free trade agreements are a part of the neoliberal agenda. They should lead to more competition through market opening. Labor-, health- and consumer protection threaten to fall by the wayside. New profit sources are opened up at the expense of the general public when corporations can sue states before private arbitration courts without appeal possibilities for allegedly lost profits because labor-, environmental- or social standards do not suit them. The nation-state power imbalance between capital and labor is intensified through this new international plane. The so-called regulatory cooperation threatens to restrict the action options of democratic governments. On the other side, the advocates of such agreements only see trifling additional growth perspectives.
In Europe, three free trade agreements are in the political process. CETA, the agreement with Canada, is negotiated and should be ratified. TTIP, the agreement with the US, is in the negotiation process like TISA that earmarks dismantling trade barriers in the area of public services between the EU, the US and 20 other states. The Alternative Economic Policy study group rejects all three agreements. The European Commission is called to break off the negotiations.
The crisis cannot be overcome in a solidarity Europe out of market processes. Democratic political formation on all planes is vital. The Alternative Economic Policy study group emphasizes an alternative cohesion-, regional- and industrial policy for Europe that intervenes in European economic development and steers that development toward convergence. This occurred from the 1970s to the 1990s – even if with only limited success. The dramatically increased problems require a much higher budget than at that time…
With the exception of Germany, the countries of the Eurozone increasingly drop out of the race in industrial development and with economic growth. European states have clearly lost shares in industrial value-creation and in world trade. This is reflected in the frighteningly high unemployment within the European economic and monetary zone. It is high time to open up the fallow development potential of the European domestic market and begin a social-ecological reorganization. To that end, a political change and radical breach with the neoliberal structural reforms are necessary. An EU-wide industrial policy can help in such a development…
Direct public goods like knowledge, quality of life and environment, social integration and territorial cohesion could be produced. A new EU-wide industrial policy could become a central instrument for tackling Europe’s ecological transformation that reduces the use of non-renewable resources, develops, protects eco-systems, landscapes and the bio-diversity and reduces the emission of carbon dioxide, other greenhouse gases and waste products.
An end of austerity policy and an end of privatization policy are crucial prerequisites. The Alternative Economic Policy study group sees the following essential elements of a new European industrial policy:
• EU-wide strengthening of manufacturing enterprises not only in the traditional industrial centers.
• Curbing inner-European imbalances including trade imbalances.
• Democratization of decision-making on macro- and micro-economic planes. The participating actors on the company, regional and national planes must be included in conceiving and converting EU initiatives.
• Creation of new unlimited work from which people can live independently and free of poverty.
• Upgrading the factor labor through extensive retraining possibilities for youth.
• Ecological sustainability, particularly in the areas of energy- and resource-efficiency.
• Development of research programs and technologies that encourage productive transformation in Europe independent of the exigencies of financial profitability.
• Provision of credits and mobilization of investments benefiting a sustainable industrial policy on European, national and regional planes.
Europe must regain the trust of citizens instead of preparing for stagnation, unemployment and futurelessness, particularly of young persons.
The neoliberal agenda marks politics and large parts of the academic debate. However the ice on which it moves has become thinner. Resistance against this policy grows; its inadequacies are becoming clearer and clearer. Now we must persevere in showing alternatives.
RELATED LINKS:
MEMORANDUM 2014: SHORT VERSION
http://portland.indymedia.org/en/2014/07/427686.shtml MEMORANDUM 2008: SHORT VERSION
Redistributing Income, Work and Power: Alternatives to Serving the Upper Class
http://portland.indymedia.org/en/2008/12/384036.shtml MEMORANDUM 2008 – CRISIS UNDERRATED
Without increasing internal demand, the upswing based on replacement-investments and exports cannot continue. Without reduced working hours, adequate jobs will not be created in a world of reduced work volumes, rationalization and information technology.
http://portland.indymedia.org/en/2008/12/383481.shtml