We cannot repay the Corona debt
By Heiner Flassbeck
[This article published on 5/14/2020 is translated from the German on the Internet, https://makroskop.eu/2020/05/wir-koennen-die-corona-schulden-nicht-zurueckzahlen/.]
The great intellectual battle over the question of how to deal with the new government debt is now beginning. It is all the more important to say exactly what can and cannot be done.
An economist who holds a chair at a German university and writes that the state debts will not burden future generations because future generations will also inherit the claims against the state is unique. One such unique person is Jens Südekum, professor in Düsseldorf, who wrote an article in the Handelsblatt with the almost unheard-of title: "We must not repay the Corona debts". Bravo! In my little enumeration of the list of problems that are almost impossible for German economists to solve, he has easily passed the first stage.
He also easily climbs the second step, the insight into the special role of the state in reviving a market economy that is lying on the ground. He advocates economic stimulus programs and wants to simply pass on the government's debt, which will then rise again, into the future, because it will not disappear with higher growth, but will be relativized. Just right.
But then things get bumpy.
Are low interest rates good luck?
"The critical factor in this shifting game," he writes, "is the development of interest rates. But here we have luck in misfortune. The Corona pandemic is hitting the world economy in a pronounced phase of low interest rates. And the crisis is likely to exacerbate this trend." However, just a few sentences further on, it says: "The structural reasons for low interest rates, high propensity to save and low investment dynamics, do not simply disappear".
This is a contradiction. If there is a high propensity to save and a low investment dynamic and this keeps interest rates low, then low interest rates are not lucky, but the result of a very unfortunate constellation that is not easy for the state to overcome either.
This again shows that a consistent analysis of the current situation requires an explicit discussion of the net lending/borrowing of all sectors and, in addition, the inclusion of the general income dynamics of an economy. Why is the propensity to save so high and the propensity to invest so low? And furthermore, whose propensity to save is at stake here? The savings ratio of private households has hardly changed for twenty years; at 10 percent of disposable income, it is even below the level of the distant past, when people in Germany and Europe spoke of an economic miracle.
A closer look at net lending/borrowing in Germany shows, as we have discussed very often, that corporate behavior has changed fundamentally since the beginning of the century (see chart). Companies as a group have become net savers in Germany, but also in many other countries in the developed world. They are thus worsening their own situation because every saving reduces the overall profits of the companies.
The low interest rates are an expression of this constellation because the central bank, which has both short-term and long-term interest rates largely under control, can only react to the resulting low investment dynamics by lowering interest rates. If deflationary tendencies are added, it is easy to understand why interest rates remain at zero for many years.
In this crisis, too, it will be the same as in 2009, namely that the government balance will shoot far into negative territory (i.e. down). This is because in a crisis, companies get even less debt than they already have, so the balance of the corporate sector (the red line) will move up almost vertically.
It is obvious that with or without corona there can only be one answer to the global phenomenon of saving companies: The state must fill the demand gap that has been torn open by the two private sectors (companies and households). Yes, the state is in fact the only actor that remains because there are no foreign countries in the world that could run current account deficits and get into debt. The German solution - reducing wages, increasing competitiveness and thus making others debtors - cannot be generalized.
Why does the market economy no longer work?
However, this still does not answer the question of why the investment dynamic is so weak and why companies are so reluctant to go into debt. Here we have to drill much deeper to come up with viable answers. As I have recently shown here (and in the following two parts), the explanation can be approached with a changed economic policy constellation (ratio of interest rate to growth rate). What is decisive, however, is that the neo-liberal revolution since the beginning of the 1980s has decisively weakened the income dynamics or wage dynamics of Western economies.
Because people began to believe again in the micro-logic of the labor market, i.e. that falling (or less rising) wages increase employment and reduce unemployment, pressure has been put on wages. This initially stifled demand growth by reducing real wage growth and, after a while, pushed the world economy into a deflationary position to such an extent that the classic instrument of interest rate cuts was increasingly being squandered. With the dwindling demand dynamics, neoliberalism also stalled the investment dynamics of companies - and this despite various "relief measures" such as tax cuts, which were on the liberal agenda.
Now there are exactly two ways to revive the economy. The first and best option is to push back the neo-liberal agenda, strengthen the trade unions and ensure that the marked rise in wages and unit labor costs leads to an inflationary dynamic rather than deflationary stagnation. This certainly includes tax increases for companies, so that they are under pressure to go into debt in order to make profits. Anyone who does not believe they can do this must choose the second option: The state must be asked to join the ring as a debt-maker - and forever.
Because this is inevitable, the title of Jens Südekum's contribution is wrong. It should read: "We cannot repay the Corona debt" or more precisely "We cannot repay the Corona debt or any other debt". If we do not succeed in pushing companies back into the role of debtors, the economy cannot function without ever new state debts.
This is not possible, many people groan, this is no longer a market economy. That may be so, but it does not change the compelling logic. If we now take the bait of charlatans who (like the ifo Institute on behalf of INSM) carelessly blather about precautions for future crises and even about the effects of growth through saving, we will see that the market economy has finally run down.