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Rethinking Economic Policy!

by Till van Treeck, Fabian Lindner and others Wednesday, Jan. 25, 2017 at 9:11 PM

The economic crisis calls for social-democratic answers. The fading mass purchasing power (in Germany) is due to the increasing inequality of income and wealth. Deregulation promotes social problems like precariousness and greater income inequality.


Perspectives for a Socio-Democratic Economic Policy

[This study published on January 29, 2010, is translated abridged from the German on the Internet.]

The Most Important Points

The economic crisis calls for social-democratic answers. Therefore we write as social democrats or economists near social democracy to show Germany's most important economic and social problems and feasible alternatives. The areas are financial market policy, the increasing division of society in poor and rich, labor market policy, fiscal policy and pension policy.

In the first part, we discuss financial market policy. The teamwork of liberalizing the financial markets, global imbalances of streams of capital and trade and the increasing dwindling of mass purchasing power caused the momentary financial- and economic crisis. We propose concrete measures to regulate the financial sector and urge a greater political debate about the role of financial markets in Germany and Europe.

In the second part, we show the fading mass purchasing power in Germany is due to the increasing inequality of income and wealth. More than relative inequality has increased. The poor have become absolutely poorer – they have lost real purchasing power. That seems to us Germany's central social and economic problem.

In the third part, we turn to labor market policy. In agreement with internationally-renowned economists, we see unemployment as determined by the total economic demand. So unemployment was lowered by the strong foreign demand and not by the deregulation of the last years. This will turn out much less in the near future on account of the economic crisis of the last years. Deregulation promotes social problems like precariousness and greater income inequality. Therefore we urge introducing a nationwide minimum wage and a public employment sector. In addition, total demand must be promoted more intensely.

In the fourth part, we analyze financial policy. The state lost important revenues through the tax cuts of the last years while investments and education spending were cut in savings or austerity efforts. This led to an increasing deregulation in important future areas. We propose raising income- and business taxes to close the financing gaps and investing in future-friendly areas.

In the fifth part, we show how the changeover of pensions to capital-transfer processes increased inequality in the pension system and in the risk of the pension. We propose a solidarity civil insurance in pensions that are based on the transfer-system. In that way, non-wage labor costs, inequality, and the pension risk would be greatly lowered.


A progressive economic policy must give people hope and accept their needs, emergencies, and anxieties. It must prevent the division of society and organize solidarity so people develop in freedom. Social democracy must become a credible advocate of the interests of the majority again.

We social democrats expected too much that markets and private enterprise would improve everything and that the democratic state should keep out of the economy. The democratic state should appropriate the methods of private enterprise since these are seemingly superior in all realms. The financial crises and the increasing division of society in poor and rich showed that policy has wreaked much havoc.

The time demands real social-democratic answers. We must do our utmost and fight for our social-democratic answers and solutions – against conservative editorials and other fault-finders. We may no longer approach democratic policy as an automatic reaction to alleged practical constraints that seem to prescribe the "laws of the market" or globalization. We will only win the trust of people if we gain interpretations sovereignty and bring together an economic dynamic and social balance.

In the following, we young economists describe economic and social problems as social democrats or near social democracy. We want to show that false analyses lead to a policy that often worsens these problems.

This criticism in the social-democratic economic policy of the last years is bitter but must be offered. We can only regain trust and political responsibility when we admit we have made mistakes with the perverted interpretation-sovereignty of the neoliberals. This criticism is different than fault-finding. We hope it will have a liberating effect and open up new perspectives to social democracy.

Concrete policies should be shown in the financial market, in the labor market, with the revenue and expenditures of the state and with pension policy on how economic dynamic and solidarity can be combined. Social solidarity is the foundation of industrial development and doesn't come in conflict with the development of individuals…


Deregulated financial markets and unequal income distribution are damaging in macro-economics!

The financial market crisis highlights the problems of the Anglo-American growth model. Since the middle of the 1990s, the Anglo-American countries have posted a relatively high growth and a favorable jobs development. In Germany, many believed high growth and low unemployment could be achieved with deregulated financial- and labor markets and a policy-oriented in the capital markets. In the crisis, it was clear the Anglo-American model was primarily based on massive indebtedness. Only this indebtedness ensured the continued consumerism of private households because the wages of the middle-class stagnated since the 1980s. This led to an enormous inequality of incomes and wealth. Many simple Brits and Americans after the crisis after the crisis are indebted, impoverished and often without a pension. This model cannot be an example for Germany.

German businesses profited for years from the debt-financed Anglo-American growth. The hunger for imports of Anglo-American economies made possible German exports and drove German growth from 2005 to 2008. Export-driven growth has several negative aggregate economic consequences although employment rose through exports.

The competitiveness behind the rise of exports was gained through a wage-stagnation for years that was unique in the OECD world. Falling real-wage incomes, particularly in the lower income realm, have led to a stagnation of private consumption and thus robbed the economy of its substantial growth. In addition, the one-sided focus on exports as a growth motor massively intensifies the dependence of the German economy on the ups and downs of the world market. The share of exports in the gross domestic product that was around a quarter in 1991 increased to nearly a half by 2008. Therefore Germany had the strongest growth collapse after Japan among the industrial countries.

Another negative consequence of the export surplus was that many German banks wrongly invested money gained from exports. They made this money available for financial speculation abroad instead of for domestic investments in physical assets. Because of Germany's growth weakness, the yields from domestic investments seem trifling while the yields on the capital markets of Great Britain, the US or Spain promised much more.

Consequently, the bursting of the real estate bubbles and the global financial- and economic crises struck banks and many domestic savers and borrowers hard and not only impacted German businesses dependent on export success. At the end, taxpayers and employees had to pay the costs of the crises. Citizens had to pay for the bailout of the banks and other businesses with their taxes and employees with their jobs.

Although we now see the Anglo-American model was not sustainable, we social democrats were very inspired by it. This was demonstrated in the liberalization of the labor- and financial markets (later more on the labor markets). The approval of hedge-funds and the tax breaks of capital gains in Germany led to dissolving Germany Inc. The linkage of big businesses and banks with international investors assumes ever more control of the businesses. That did not have to be a problem. These investors are often only searching for short-term profits and are not interested in the long-term success and support of businesses.

This also led to an increase of the "shareholder-value" mentality according to which the most important challenge of the board of directors is raising the share's value in the short-term through all possible measures of cost-reduction. However legitimate interests of employees for good wages and stable long-term employment conditions and the readiness of businesses for sensible long-term investments came under pressure through this logic. These factors were the basis of the increased know-how and quality of German products that contribute substantially to its world-market leadership. The short-term orientation to quarterly results and stock prices endangers the growth chances of the German economy in the long-term.

The "financial innovations" of the last decades only led to greater indebtedness and veiling risks. The US billionaire Warren Buffet described them as "financial weapons of mass destruction. The actors on the financial markets who are in possession of such weapons must be strongly monitored and regulated.

Enclosing financial management and putting it in the service of the whole economy and society must be on the political agenda. Therefore the SPD urges the following measures:

Limit the indebtedness of the banks and raise the capital-holding requirements. It should be harder for banks to speculate on financial markets with borrowed money…

The banks could become greatly indebted in an upswing and finance over-capacities. But they must suddenly reduce their credits in a downswing. This leads to the danger of a credit crunch,

A financial TUV consumer agency must be established that examines the risks of new financial instruments for banks and investors. All kinds of financial derivatives which are only a kind of insurance must be put to the test. The bankruptcy law must be changed so the orderly dissolution of a bank can be carried out. Important and less important banks must be distinguished. Systemically –relevant banks must hold much more of their own capital and be more strongly regulated or simply shattered and divided up into smaller institutes.

Banks should concentrate on their core businesses: making available credits and the payment system. An EU-wide separation of commercial and investment banks as now discussed in the US seems sensible. The big banks should be treated like providers and strictly regulated to ensure the deposits of customers and the credits of businesses. Investment banks could have greater freedoms but should not be bailed out in the case of speculative losses. The institution of conduits or structured investment vehicles without capital-holding requirements must be prohibited.

Dealing on its own account (proprietary trading) with financial instruments must be regulated more strongly. Transactions that serve purely speculative intentions must be legally prevented. An international financial transactions tax must be levied to make short-term speculations unattractive on the international financial markets. If that cannot be carried out internationally, it must at least be levied in the European Union – and the revenue of the Union could be multiplied.

The international coordination of financial market regulation must become stronger, particularly within the European Union.

To that end, a public-legal European rating agency should be created. Local and regional territorial authorities, pension funds, insurances etc. must only accept financial products in its portfolios that have a certain minimum rating from the EU rating agency.

Beyond these technical regulations, the SPD hopes to encourage a discussion about the role banks and financial markets should play in our society. What advantages are there? How can risks be avoided? What should be the influence of the finance system? To what extent can the profit claims of capital be tolerated? The SPD must pose the basic question how can the common revenue of capital and labor be shared?

This basic question is raised with regard to the financial markets and in the developments between poor and rich in Germany. An excessive income inequality is dysfunctional in macro-economics and should be rejected for reasons of social justice. Therefore the 2009 SPD Bundestag party conference in Dresden urged "analyzing the effects of the falling wage rate and foreign trade imbalances on the financial crisis and developing counter-strategies." Countering the increasing division of society must be the real task of the SPD. We devote the next part to this.


The first decade of the new century was a period of deepened social division. The inequality of incomes and wealth has increased. The labor market has fallen apart between "normal working conditions," accelerated precarious employment and the expanding social-spatial polarization in the cities.

The relative income poverty rose forty percent between 1998 and 2008 alone. This means more than three million people fell into poverty. Altogether more than eleven million persons in Germany had an income below the poverty threshold in 2008. Children, single parents, and young adults are found there. The poverty rate of seniors has also increased again in the last years.

The poorest have lost income absolutely and not only relatively. Between 2000 and 2008, the poorest fifth of the population lost more than eight percent of its income. The middle-class has also lost disposable income. In contrast, the richest tenth increased its income 15%. The gulf between poor and rich in society is diverging again.

The inequality has also accelerated between West- and East-Germany. East Germans had an income 82% of the West German level at the beginning of the decade; this relation fell to less than 78% in the following years.

The inequality of private assets in Germany also skyrocketed parallel to these developments in income.

For a social state, social mobility or whether individual engagement is still rewarding is important, not only the development of incomes and wealth. A growing disparity appears between poor and rich. Fewer and fewer people in Germany succeeded in escaping poverty in the last decade. On the other hand, well-to-do persons persist at the top edge of the income hierarchy. Social ascent becomes harder and harder.

Only a minority still profits from the social prosperity. The middle-class shriveled as a result of this development. The edges of society gain more significance.

The changes on the labor market and especially the erosion of normal working conditions are crucial for the increasing polarization of society. Atypical employment (solo-independence, marginal employment, part-time work, subcontracted labor and temporary work) develops to a new standard. The low-wage sector expands with that. More than every fifth dependent employee is affected: more than six million gainful workers. Changes in labor market policy are imperative…


Thinking Labor Market Policy in a Macro-Economic Way…

The most important element here is the introduction of a minimum wage to prevent the spread of poverty wages. Minimum wages are economically sensible and do not need to be justified by morality or fairness…


The continuation of deregulation is pre-programmed by the "debt brake" and the Black-Yellow Tax Cuts.

The political economy of this dismantling or deconstruction of the state is easy to see. If the revenue of the state falls away, the state budget deficit mounts up. Cuts in spending are without alternative when budget consolidation is declared the highest political goal. That was the model of the Red-Green tax reforms at the beginning of the 2000s…

Did tax- and spending cuts have a positive effect on investments? No, rather much too little was invested in buildings and facilities in the private and public sectors. The private investment volumes shriveled dramatically in the last decade although profits exploded and the tax burden was lowered enormously by Red-Greed.

The governments drove back the volumes of state investments. Public investments are always cut in hard fiscal times as the most flexible kind of spending… So public net investments have been largely negative since 2003. The public infrastructure decays. This pattern will continue with the Black-Yellow government…

The state urgently needs an improved financing basis to fulfill its economic and social-political challenges.

The dismantling of the state was damaging because the tax cuts and the then necessary spending cuts led to a very weak anti-cyclical and partly even pro-cyclical financial policy. So economic trends like the growth weakness of the 2000s continue and unemployment has long been at a high level. The withdrawal of the state was especially problematic on account of the decline of the state investment rate… While Germany's education level is relatively high, the trend is downward. Germany has lost considerable ground. Tax hikes could be carried out economically problem-free.

An expansion of the state revenue base should be organized on account of demand-side effects so the top-income groups are more strongly burdened. This would involve the taxation of wealth- and capital income and an increase of the income tax. Such tax increases as part of a macro-economic financial strategy are unproblematic…

Mistakes were made in the social system in the last years that must be corrected to counter the division of society.


A progressive pension-policy could prevent the division of society and take the fear of old age from all people. Solidarity must be organized so people can develop individually in freedom and look with confidence to the future. The solidarity citizen pension can accomplish this.

The present mass unemployment, the wage stagnation of the last fifteen years and the increased precarious employment are the real financing problems of the legal pension, not the age distribution in 2050. The legal pension (GRV) in Germany is based on the inter-generative transfer process in which the current pension payments are financed by the current contributions of employees paying into social security. But so-called "normal working conditions" are increasingly rare. Breaches in gainful phases, changed work routines and norms along with increased precarious employment conditions endanger the income stream and undermine our old age security system. The majority of the population in Germany desires an old age provision that enables a dignified life in retirement free from poverty…

A new pension concept must fulfill the following criteria in our view: the pension must finance a life in old age and in invalidity and avoid old age poverty through greater distribution justice in the system. The "solidarity citizen pension" will satisfy these criteria and react to the demographic development and the social change… This integrated basic pension is an old age security system that avoids poverty and faces the demographic challenges.


If we do all we can to support the social cohesion, we can regain the lost trust both of our voters and our members. This also means we conquer broad sections for a solidarity society and strengthen consciousness for a more human society. This decides over the concrete policy for which we contend:

with the subordination of the financial markets to the interests of society and the total economy

with the consistent combating of the increasing inequality that is connected with great macro-economic risks and is not only socially unjust

with the introduction of a minimum wage and the creation of a public employment sector

with the creation of public services, upgrading our education and the renewal of the infrastructure

with a solidarity tax reform so the well-to-do contribute more to financing the community

with a solidarity citizen pension that protects all people in this country and relieves the social budgets

We must have the self-confidence to fight for the majority of the people – and orient our economic policy for them and not for the interests of a few. Only in that way can we gain trust and majorities again.

Berlin, January 29, 2010

Markus M. Grabka

Cansel Kizlitepe

Erik Klaer

Fabian Lindner

Camille Lugeay

Till van Treeck

Achim Truger

Dieter Vesper

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