Toward a new economic policy paradigm?

Z. Journal Marxist Renewal

By Katharina Schramm

[This article published in Oct 2021 is translated from the German on the Internet, Auf dem Weg in ein neues wirtschaftspolitisches Paradigma? (Katharina Schramm) (Z. ZEITSCHRIFT MARXISTISCHE ERNEUERUNG) (zeitschrift-marxistische-erneuerung.de).]

Even after a year and a half, the Corona crisis is the dominant topic in all areas of society. The state repeatedly intervened massively in the economy, and not only to contain the pandemic. In addition to acute aid programs, the federal government also set up a stimulus program to boost economic growth. To finance these interventions, a large increase in national debt was accepted. These many government interventions gave rise to the question of whether they could be interpreted as signs of a slow end to the neoliberal economic course. This view was reinforced by a longer-term shift in the relationship between the state and the market that had already become apparent in recent years. There have long been trends toward a more active role for fiscal policy in the macroeconomic stance. At the latest since the economic cycle cooled significantly in Germany in 2019, there have been calls for more public investment, among other things. Even employers' associations and trade unions agreed that Germany urgently needs an investment offensive.[1] There has also been, at least in Germany, a weakening of neoliberal austerity in recent years and even some anti-neoliberal reforms such as the minimum wage. Crises can trigger and accelerate processes of social and political change. It therefore makes sense to examine developments before and during the Corona crisis in more detail using this line of inquiry. In the following, we discuss four issues relevant for this purpose.

1 Economic policy in the crisis

The discussion about a possible end to neoliberalism picked up steam in early 2020, when the first Corona aid packages were put together in Germany and the state even suspended the debt brake for this purpose. In addition to acute aid measures, stimulus programs were used to bring economic growth back to its pre-Corona path. Fiscal policy spending to contain the financial crisis reached a size of 3 percent of GDP in 2009. In the crisis years 2020/2021, they came to a much higher 11 percent. Programs in other European countries and the U.S. have also been much more comprehensive in the wake of the Corona pandemic than during the financial crisis.[2] China is an exception, spending less than it did during the financial crisis (Atlantic Council, 2021). The European Commission's ambitious €806.9 billion Next Generation EU stimulus package and Joe Biden's .9 trillion American Rescue Plan, along with the German stimulus package, are the most important examples of these recent stimulus programs. In Germany, there is a broad consensus on the need for government aid measures. Differences exist mainly in views on the social design and the necessary scope. Conservatives and liberals support the measures insofar as they would help "get the economy" over a difficult phase; otherwise, they call for a swift return to the principles of the market economy. Many on the left see the more active role of the state and the suspension of the debt brake as an opportunity for more scope for public investment and social reforms. However, it remains to be seen to what extent the state will act merely as a "crisis fire department,"[3] as it did during the 2008 financial crisis, or whether state interventionist tendencies will be further strengthened by the crisis.

The social imbalance of the federal government's Corona policy has been discussed several times in this journal.[4] The priorities became clear in the design of the containment measures. The bulk of the measures were aimed at reducing private contacts, while there were hardly any restrictions on work in factories and offices, especially from the second "lockdown light" in the fall of 2020. Home office and mandatory testing could only be enforced after a long political struggle and under great protest from companies. The federal government accepted a large psychosocial burden on the population, in addition to at times high death tolls, in order to restrict economic activity as little as possible. The economic measures included the 600 billion euro economic stabilization fund with loans and guarantees for large companies, as well as the bridging aid, which was extended several times. In addition, there was the expansion of KfW loans, emergency aid for the self-employed, freelancers and small businesses, various tax breaks and deferral measures. In addition, the expansion of short-time working allowances was particularly relevant for safeguarding jobs (BMF, Kampf gegen Corona, 2020). The €130 billion economic stimulus package adopted in June 2020 also included some social measures such as a child bonus and a temporary reduction in VAT. Part of it is also a future package, which is to provide 50 billion euros for investments in technologies such as artificial intelligence, hydrogen and electromobility (Bundesregierung, Konjunkturpaket, 2020). Based on the allocation of aid funds alone, a clear preference for the interests of large companies can be seen. Moreover, the aid measures for large companies were implemented very quickly and straightforwardly, while the aid for small companies and the self-employed was subject to delays that in some cases threatened their very existence. Even though the federal government's crisis policy as a whole managed to mitigate the consequences of the crisis for the population at large, there is a clear preference for capital interests. Low earners and young people in particular are among the crisis losers.

At the European level, a stimulus package of 2.018 trillion euros was agreed in December 2020 after lengthy disagreements. This consists of the regular EU budget 2021-2027 of 1.211 trillion euros and the special item NextGenerationEU with another 806.9 billion euros [5]. NextGenEU is a stimulus package to mitigate the economic consequences of Corona and promote long-term goals such as digitalization, climate protection and "crisis resilience".

Another goal is to strengthen the EU in competition with China and the U.S. for future technology leadership. At the heart of NextGenEU is the Recovery and Resilience Facility with available funds of up to €672.5 billion. Just over half of this will be in the form of loans and the remainder in the form of grants. To apply for the aid money, member states had to submit their investment plans to the EU Commission for approval by April 30, 2021. The member states' utilization plans must meet certain reform criteria. On the one hand, at least 37 percent of the money is to be spent on "green" projects and 20 percent on digitization. On the other hand, the country programs are also required to ensure that the use of the funds meets the country-specific requirements of the European Semester. So far, all plans have been approved, but the special allocation mechanism through the European Semester also creates a gateway for neoliberal structural reforms (Watkins, 2021). What is most remarkable about NextGenEU is that the EU Commission will raise the funds as a common EU bond on the capital market. This creates, for the first time, a dedicated fiscal budget of €800 billion, or roughly 5 percent of EU GDP. If this policy is sustained, it could lead to deeper integration of the European monetary union via a common fiscal policy. Broadly speaking, NextGenEU is a modernization program that, like the European Green Deal, aims for a green and, at least in rhetoric, more inclusive capitalism.

In the U.S., too, a massive stimulus program was launched earlier this year on the initiative of Joe Biden. Biden has not exactly been known for a progressive stance on economic policy issues. His economic policy agenda Build Back Better is essentially based on three pillars: the American Rescue Plan, which is the only one of the three to have been passed so far, the American Jobs Plan and the American Families Plan (WH.GOV). Biden's "Bidenomics" agenda is thereby compared to New Deal policies because of its content, but more importantly because of its historical scope, and is perceived as an economic policy paradigm shift. The .9 trillion American Rescue Plan, passed on March 11, includes measures to combat the Corona pandemic. Also central are the many relief measures for families and lower- and middle-income people. These include, for example, a one-time payment of 00, the extension of extended unemployment insurance payments that would otherwise have expired in March, tax credits for families with children, and credits and cash payments for particularly hard-hit regions (American Rescue Plan). The yet-to-be-passed industrial policy American Jobs Plan is expected to include up to trillion over the next decade. The Jobs Plan includes investments in climate and environmental protection as well as infrastructure and research for technology leadership (WH.GOV). The American Families Plan, also not yet enacted, primarily includes programs to promote education and tax relief for families (WH.GOV). Many of the social policy programs in the American Rescue Plan are significant in the U.S. context. However, when compared to European welfare state standards, they are more akin to catching up (Pisani-Ferry, 2021). Democrats are also reversing some neoliberal measures that they themselves had introduced under Bill Clinton, such as reforming social welfare programs (Noah, 2021). The introduction of a minimum wage, which was particularly important to progressive Democrats, had to be dropped from the bill due to opposition from more 'moderate' Democrats. The same happened to other items, such as the level of unemployment insurance payments.

Nevertheless, Biden's economic policy agenda is a break with the "trickle-down" ideology previously pursued for decades. According to its proponents, economic growth is to be strengthened by promoting supply-side factors such as tax breaks and labor market liberalization. The wealth thus created among the upper classes would also benefit the lower income classes through their consumption and the creation of jobs. In contrast, the American Rescue Plan shifts the focus to strengthening lower- and middle-income demand. The argument goes exactly the opposite way to the "trickle-down" effect: unlike the rich, the latter do not save their additional income but spend it, thereby increasing aggregate demand. The recurrence of this Keynesian line of reasoning is remarkable. Even if the rhetoric is friendlier and the interactions more orderly, Biden's foreign economic agenda remains broadly "America First." Tariffs and duties on Chinese trade goods imposed under Donald Trump will remain in place for now (tagesschau, 2020). Systemic competition with China is repeatedly cited as an important reason for the industrial policy offensive. Domestically, Joe Biden's policies have a much more social overtone compared to Donald Trump. The main reasons are likely to be the electoral and campaign successes of many progressive Democrats. The race for the presidential nomination against Bernie Sanders alone had forced Joe Biden to make significant concessions. Even if these are toned down again before they are implemented, Biden cannot afford to ignore them completely because of the new balance of power in his party. The fact that a significant part of the U.S. population now backs many of these demands certainly also plays a role.

Despite all the differences in the concrete design of the economic stimulus programs, there are important similarities. They all include measures to enable the longer-term transformation toward green capitalism. Social issues play a more or less important role, but are clearly subordinate to capital interests. Systemic competition with China is a prominent factor in the ambitiousness of the programs, especially on issues of technological sovereignty. Finally, they are all debt-financed. How this massively increased public debt is dealt with in the coming years will have a major impact on fiscal policy room for maneuver and will be discussed in the next section.

2 Dealing with public debt and the fiscal policy

framework for action in the coming years

As things stand at present, the Federal Republic will incur around EUR 650 billion in new debt from the federal, state and local governments by 2022. The temporarily suspended debt brake is to take effect again from 2023. The 20-year repayment schedule will then also begin. To comply with this plan, Germany would have to repay 24 billion euros a year (Beznoska, Hentze & Hüther, 2021). At the same time, in 2019 the German debt ratio fell just below the Maastricht criterion of 60 percent for the first time since 2002. In 2020 alone, however, it rose by 10.3 percentage points to 70 percent in relation to GDP. At 82.5 percent, it had reached its previous peak during the 2008 financial crisis (Bundesbank, 2021). In addition to positive economic and demographic developments, the sell-off of assets acquired to bail out banks was a key factor in bringing the debt ratio back below the 60 percent mark within 10 years. For the coming years, however, the most important German economic research institutes estimate that productivity potential growth will be weaker than in the past decade. Demographic developments are frequently cited as a key influencing factor (Joint Economic Forecast, 2021). The Cologne Institute for Economic Research (IW Köln), for example, estimates that economic growth could be halved by 2035 as a result of demographic change (Grömling, 2017). [6] It may therefore be more difficult after this crisis than before to "grow out" of the higher public debt ratio. Nevertheless, this path is largely consensual. If GDP grows while debt levels remain roughly constant, the government debt ratio automatically declines.

The LEFT is still the only one of the parties represented in the Bundestag to call for the debt brake to be abolished. In the bourgeois-liberal camp, the point of contention is whether, after the end of the acute crisis situation, the debt brake should be retained in its current form or modified to include an investment rule. As recently as January of this year, Helge Braun, the head of the Chancellor's Office from the CDU, of all people, had fanned a debate about a longer-term suspension of the debt brake. He called for an amendment to the Basic Law that would allow the focus to shift to economic recovery in the coming years. Braun, however, earned opposition and skepticism for his proposal from within his own ranks. Some CDU/CSU politicians, on the other hand, had called for a balanced budget as early as 2022 (tagesschau, 2021). In its election program tailored to chancellor candidate Olaf Scholz, the SPD promises investments in various areas, but wants to stick to the debt brake in its current form. Ultimately, as finance minister, Scholz is largely responsible for the strict repayment schedule from 2023 (tagesschau, 2021). In their election program, the Greens call for a "contemporary design" of the debt brake. This means that net public investments - i.e. investments that increase public assets - should be exempted from the debt brake. This would be in line with the above-mentioned "golden rule" for investments. Although they remain unspecific in this regard, their demands amount to a constitutional amendment and, consequently, an amendment to the European Stability and Growth Pact (Priewe, 2021). Despite all the developments, political resistance to this is likely to remain strong. In all government constellations with CDU/CSU participation, i.e. also under black-green coalition, such a constitutional amendment currently seems rather unrealistic.

This debate is also currently taking place in academia. Proponents of a modified debt brake come, for example, from the employer-oriented Institut der deutschen Wirtschaft (Beznoska, Hentze, & Hüther, 2021) and the Deutsches Institut für Wirtschaftsforschung (Kriwoluzky, 2021). Clemens Fuest, chairman of the rather conservative Ifo Institute, is against a modification of the debt brake. He echoes a frequently used argument: the debt brake created the fiscal space that enabled Germany to respond so ambitiously to the crisis (Fuest, 2021). However, this argument ignores the damage that several decades of austerity policies have left behind, for example in the health infrastructure. A recent study by the University of Mainz also shows that people in precarious circumstances have a particularly high risk of infection (Klein, 2021). Both are examples of how neoliberal policies have worsened the conditions for coping with the pandemic. Meanwhile, the dismantling of further hospitals is already being discussed again (ntv, 2021). However, Germany actually benefits from the "confidence of the markets" as a fiscal safe haven through low interest rates and high demand for government bonds. The structural dependence of the scope for economic policy action on the financial markets is inherent in the system. However, given the massive need for investment, combined with large potential "crowding in"[7] effects of public investment under current conditions (IMF 2020), it would be irrational not to exploit this room for maneuver, regardless of political views. Moreover, it can be assumed that this fiscal space is much larger than the dimension in which Germany is currently operating (Ubide, 2016).

In the debate on the debt brake, an important contradiction between neoliberal ideology and capital interests comes to light. Over the years, the institutionally enshrined budget discipline has created a considerable investment backlog. Important investments in infrastructure, education and climate protection have not taken place, and this is increasingly becoming a problem for Germany as a business location. What has not yet been fully understood by politicians in some cases is increasingly being addressed by industry. The Federation of German Industries (BDI), for example, recently voiced criticism of the CDU's election platform and called for more scope for investment. Instead of relying on the black zero, Germany could only grow out of the crisis through an investment offensive (Creutzburg, 2021). The investment offensive already called for by the BDI and DGB in 2019 was mentioned at the beginning. It is not unlikely that voices from industry will increasingly turn against the debt brake in the coming years. The outcome will depend on whether, or rather when, economic pragmatism will prevail over an increasingly unhelpful ideology.

However, the debate traced here highlights another aspect very clearly. If the debt brake is modified or even abolished under these circumstances, it will not be in the interest of the working population. Certainly, public investments in infrastructure or education also benefit the general public. But as long as there is no broad social movement against the debt brake that focuses on social demands, these will only be given secondary consideration, if at all. The situation will be similar with investments in climate and environmental protection. The debt brake remains a major obstacle to social policies, and the struggle to abolish it could be an important common point of reference for left-wing mobilizations in the coming years.

Although the fiscal space for the coming years is still being explored, it is likely that the industrial policy ambitions of recent years will continue.

3 Revival of industrial policy - location factors and

international competition

Since about the beginning of the 1990s, public gross fixed capital formation has declined relative to economic output. Net fixed capital formation was at a very low level from the late 1990s and at times in negative territory. It was not until around 2017 that there was a slight turnaround (Bardt, Dullien, Hüther & Rietzler, 2019). But so far, this has not been sufficient to reverse the deficits of the past decades. In a 2018 survey, for example, 68 percent of the companies surveyed reported that their business had been regularly impaired by infrastructure deficiencies. They felt a particularly high level of stress and deterioration in the areas of road transport and communication networks compared with the last survey in 2013 (Gromling & Puls, 2018). The fact that poor infrastructure investment is now a real problem for the economy was partially acknowledged even before Corona. This is also one of the reasons why the topic of industrial policy has found its way back into economic policy practice in recent years. The Corona crisis also demonstrated the fragility of international supply chains and reinforced the view that "critical" industrial production should once again increasingly take place in Germany and the EU. In this respect, the Corona crisis accelerates processes that were already underway.

But the infrastructure issue is not the only reason for the revival of industrial policy efforts. German industry faces long-term challenges in defending its position on the world market. On the one hand, the automotive sector in particular, but also other energy- and resource-intensive sectors such as the steel, chemical and electrical industries, face major modernization requirements. These result on the one hand from the requirements for statutory climate and environmental protection measures. Added to this is the high need for investment due to accelerated technological change and increasing competition in the areas of digitalization, Industry 4.0 and artificial intelligence. The challenges here are both financial and personnel-related. The areas of research and development are also central. These processes are accompanied by capital devaluation and high investment requirements if, for example, plants with outdated production and environmental standards can no longer be used. Raising the EU climate target by 2030 alone is estimated to require up to 215 billion in additional investment annually (European Commission, 2020). A third important issue for industrial policy efforts is changes in the international economic order. On the one hand, China's active industrial policy, combined with a growing focus on its own domestic market, poses new challenges for German export-dependent capital in important areas such as plant and mechanical engineering. On the other hand, German industry is also bemoaning the increasing protectionism in US economic policy. These developments particularly affect German export-dependent capital fractions, such as the automotive sector, mechanical and plant engineering and the chemical industry. The fact that this issue is also repeatedly at the center of the economic stimulus packages shows its great importance.

The German government has already initiated measures in recent years to shape the necessary transformation processes in the interests of German capital. These include the Industrial Strategy 2030 presented by Economics Minister Peter Altmeier in November 2019 (BMWI Industrial Strategy, 2030). It is based on three pillars: first, the industrial framework conditions of Germany as an industrial location are to be improved. Deregulation and liberalization measures - combined with an infrastructure program - are called for here. In the name of competitiveness, for example, the corporate tax burden is to be reduced, social security contributions stabilized at below 40 percent and the labor market made more flexible. But also in the name of competitiveness, investments are to be made in traffic, transport and digital infrastructure (Energy, 2019). A similar approach can be found in the German government's SME strategy published in October 2019 (Federal Ministry for Economic Affairs and Energy, 2019). The second pillar of the Industrial Strategy 2030 focuses on promoting German industry in the areas of so-called "game changer technologies" such as AI or Industry 4.0. In terms of climate and environmental protection, the focus is on promoting the necessary restructuring of industry as an opportunity to expand or restore German technological leadership. To this end, the burden on German capital, for example through electricity costs, must be kept as low as possible. In addition to the introduction of a national emissions trading system in the areas of heat and transport, the promotion of new technologies in the areas of e-mobility, hydrogen, bioeconomy and carbon capture technologies is particularly worth mentioning (Energie, 2019). On the one hand, these technologies are relevant for the economic future of companies due to their large value creation potential. On the other hand, they are symbolic of the attempt to combat climate change in the most growth-friendly way possible and with technical solutions. The topic of hydrogen seems to be of particular interest to the German government. A national hydrogen strategy published in June 2020 describes detailed measures for building up a national and promoting an international hydrogen industry. The topic of hydrogen technologies also plays an important role at the European level in the NextGenEU reconstruction program. It is hoped that the use of "green" hydrogen, i.e. hydrogen produced from renewable energies, will replace fossil fuels in areas where, for example, electric drives or other forms of energy use are not (yet) technologically possible (Federal Ministry for Economic Affairs and Energy, 2020). The steel and chemical industries in particular, but also the automotive industry, are likely to benefit from a hydrogen offensive. To justify state intervention, the creation of a level playing field for German capital vis-à-vis international competition from China, but also from the USA, is repeatedly emphasized. The EU is also to be positioned as an autonomous and independent economic and technology location. The third pillar is based on the premise of ensuring Germany's technological sovereignty, for example by better protecting technology transfer.

4 Monetary Policy at the Limit - Fiscal Policy under the

Conditions of the Zero Lower Bound

There is another reason why fiscal policy has been coming back into focus as a policy option for some time. The current constellation of very low interest rates and "too low" inflation[8] differs substantially from the conditions when many of the current fiscal policy regularities were created. This period, called Great Moderation, from about the mid-1980s to the 2008 financial crisis, was characterized by inflation hovering around central banks' inflation target and positive interest rates (Ubide, 2019). In the current constellation with interest rates around zero, i.e., around the Zero Lower Bound (ZLB), the monetary policy of central banks is severely limited in its effectiveness. Yet monetary policy has already been extremely expansionary for some time. Under Great Moderation conditions, monetary policy was supposed to stabilize the business cycle, while fiscal policy was supposed to focus on long-term public debt stabilization and distributional issues (Ubide, 2019). This approach was institutionalized through debt rules. In the meantime, however, the voices of prominent economists are increasing who no longer see the functionality of these rules under the conditions of the ZLB. Among them are the former chief economist of the International Monetary Fund, Oliver Blanchard, and the former advisor to Presidents Clinton and Obama, Larry Summers. Accordingly, if monetary policy is constrained by the ZLB, the government should pursue expansionary fiscal policy (Blanchard & Summers, 2019). Under these circumstances, this policy could have a high multiplier effect, for example, through public investment. Rising money demand could also cause interest rates to rise again, giving monetary policy more room to maneuver in the long run (Ubide, 2016). As early as last fall, the International Monetary Fund emphasized the positive effects of public investment, especially in uncertain times such as today (IMF 2020).[9] The IMF is thus forced to pave the theoretical way for a new economic and economic policy reality (Sandbu, 2020). To be sure, there are still very different views on the relationship between monetary and fiscal policy, even in mainstream economics. The negative effects of government debt are also highly controversial. However, the aforementioned views seem to be becoming increasingly widespread in institutions such as the IMF or the ECB, among others. Moreover, it is considered likely that an environment of low interest rates will persist in the longer term. At an estimated 2.4 percent, inflation expectations will be higher next year than at any time in the past 13 years due to a number of special effects (Joint Economic Forecast, 2021). However, the ECB has already announced that it will allow deviations from the inflation target for some time, as it has been too low in recent years (European Central Bank, 2021). It is possible that a change is taking place in the priorities of central banks, whose primary objective has been price stability. Due to the increasing problem of secular stagnation, the focus is shifting to promoting economic growth.

5 A New Paradigm?

Can we already speak of a paradigm shift in economic policy on the basis of the developments described above? Are we witnessing the end of neoliberalism? On the basis of the areas discussed, it is clear that the state is no longer merely "on the sidelines of economic activity," as called for in the neoliberal agenda, but is intervening more actively. Public investment, stimulus and industrial policy will most likely play a more important role in the coming years. The discussed reasons for this upheaval are manifold. The austerity policies of the past decades have left massive deficits in infrastructure. In addition, German industry is facing comprehensive technological transformation processes, not least due to unavoidable climate protection requirements. The importance of climate change will continue to grow in the future, when extreme weather events will occur even more frequently than in recent years. The growing system competition with China has a special role to play and will become even more important in the future. There is also a change in thinking in parts of the economic community and efforts to adapt to the new economic reality. One reason for this is permanently low interest rates, which curtail the effectiveness of monetary policy instruments. Finally, the Corona pandemic poses long-term challenges to the economy and society. What is missing from this list, however, are social issues. Social issues hardly play a role in industrial policy programs. On the contrary, further labor market liberalization and tax cuts for companies are demanded in the name of competitiveness. The crisis policy of the German government also showed a clear preference for capital interests. Only Biden's economic policy agenda includes some social concessions relevant in the U.S. context. The reason is likely to be the pressure emanating from the successes of progressive Democrats and the struggle for Trump supporters. The current balance of political power in Germany is such that social demands cannot be effectively articulated and enforced. The relative weakness of left-wing forces critical of capitalism was further exacerbated during the Corona crisis. As long as there is no sufficient social pressure, the upcoming economic transformation processes will proceed unchecked in favor of capital. Whether a break with neoliberalism is actually taking place at present cannot yet be conclusively answered. There are some tendencies to revive Keynesian methods. Equally significant is the turning away from multilateralism through intensified, state-flanked competition on the world market. The extent to which the Chinese economic model points the way remains to be seen. In any case, it is clear that as long as there is no clear shift in the balance of power between capital and labor, a more active state economic policy will not be of much use to the majority of the population.

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Priewe, J. (May 21, 2021). The Greens and the debt brake: A clear intention - but many unanswered questions. MACRONOM.

Sandbu, M. (October 11, 2020). Dawn breaks on a new age of economic thinking. Financial Times. Von https://www.ft.com/content/70e3fd73-6fb8-4363-8530-dee01665d978?63bac0e6-3d28-36b1-7417-423982f60790 abgerufen

TAGESSCHAU. (December 2, 2020). Biden stands firm on China tariffs. Retrieved July 27, 2021, from tagesschau: https://www.tagesschau.de/wirtschaft/usa-sonderzoelle-china-biden-101.html

tagesschau. (January 26, 2021). Brown wants to suspend debt brake. Retrieved July 7, 2021, from tagesschau: https://www.tagesschau.de/inland/braun-schuldenbremse-101.html

tagesschau. (May 12, 2021). Scholz wants to comply with debt brake from 2023. Retrieved July 7, 2021, from tagesschau: https://www.tagesschau.de/wirtschaft/scholz-schuldenbremse-101.html

Ubide, Á. (October 11, 2016). The case for an active fiscal policy. VOX CEPR. Retrieved from https://voxeu.org/article/case-active-fiscal-policy

Ubide, Á. (2019). Fiscal policy at the zero lower bound. Intereconomics - Review of European Policy, 54(5), pp. 279-285. Retrieved from https://www.intereconomics.eu/contents/ year/2019/number/5/article/fiscal-policy-at-the-zero-lower-bound.html#footnote-021

Watkins, S. (March/April 2021). Paradigm Shifts. New Left Review (128), pp. 5-12.

[1] See the joint publication of the BDI and the DGB (Bardt, Dullien, Hüther, & Rietzler, 2019).

[2] The ECB also reacted more quickly and decisively than during the financial crisis with a massive expansion of its bond purchases (PEPP) to the worst stock market collapse to date in March 2020. This was one of the reasons why the financial markets were quickly calmed and a possible financial crisis was prevented ahead of time. The ECB was often criticized for its hesitant response to the 2008/9 financial crisis.

[3] Cf. Huffschmid, Jörg (2009). After the crisis: the end of financial market capitalism? Z. Journal Marxistische Erneuerung No. 78.

[4] On economic and social aspects of Corona politics, see e.g. Z 123 "Corona Crisis, Capital and Politics in the Federal Republic" and Z 124 "Corona Crisis - Second Wave: Economic Perspectives and Social Burdens."

[5] The figure of 750 billion euros most often cited in the media is calculated in 2018 prices. The figures mentioned here refer to current prices.

[6] In order to consolidate public finances, a further increase in the retirement age is proposed in the DG. The debate on the sustainability of the state pension will very likely play an important role in the coming years. This could be a gateway for further pension privatization efforts. In its election program, the CDU proposes standard private pension provision as a supplement. Here, the state would pay monthly into a pension fund and the pension would later be financed by returns generated on the stock market. However, the plans are still vague. In principle, the connection between demographic development and productivity development is not as clear-cut as is often postulated. In Germany, for example, there is still underemployment. Thus, a decline in the birth rate does not translate directly and proportionally into a decline in the labor force.

[7] What is meant by this is that public investments attract further private investments and thus have an economic multiplier effect. The term "crowding out" refers to the opposite, namely that public investment crowds out private investment and thus tends to hurt growth.

[8] Inflation that is too low, as in the current constellation, means that real inflation is below the level set by the central bank, i.e. two percent on average.

[9] IMF estimates indicate that a one percent increase in public investment relative to GDP could result in a 2.7 percent increase in the same. They also estimate that private investment could increase by up to 10 percent and employment by 1.2 percent.

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The Economy of the Federal Republic of Germany in the Neoliberal Phase of Development

POLITICAL ECONOMY In Crisis Mode

By Jörg Goldberg

[This article published on 8/27/2021 is translated from the German on the Internet, 27.08.2021: Im Krisenmodus (Tageszeitung junge Welt).]

World export champion: economic dependence on high current account surpluses is a special "German" crisis moment (container ships in the port of Hamburg, June 2021)

Jörg Goldberg last wrote about undead neoliberalism in this space on July 27, 2021.

The period between the 2008 financial market crisis and the 2020 corona crisis in Germany was characterized by the continuation and modification of a development phase for which the term "neoliberalism" has become established. This designation essentially refers to a specific economic policy and its ideological justification and is thus no more exhaustive than that of "Keynesianism" for the period between 1949 and 1975, at the end of which was the "small world economic crisis" (Werner Abelshauser) of 1973-1975. A distinction must be made between neoliberalism as a political ideology on the one hand and economic policy practice on the other: With its contempt for the welfare state and its idolization of the market and individual competition, neoliberalism as an ideology is a powerful ideological bulwark behind which capital can entrench itself in the distribution struggle and pass off its profit interests as the interests of society as a whole. The fact that political ideology and economic policy practice can diverge, that the "free" market is preached and state interventionism is practiced, is nothing new and unproblematic for the rulers in the private sector and the state as long as there is no politically effective alternative that could replace neoliberal ideology.

What needs to be problematized is the widespread but imprecise term state interventionism, which seems to refer to discretionary, case-by-case state intervention in the economy. In fact, the relationship between the state and the economy is about more than that: since the end of the 1930s at the latest (in Germany since 1933), the state has been a component of the capitalist reproduction process in a certain sense. However, this relationship can take different forms. Thus, a distinction must be made between direct state involvement in the reproduction process, as in the "Keynesian" period (e.g., through public enterprises), and more indirect interventions via subsidies, capital-friendly laws and monetary policy, which have dominated since the 1980s.

Cyclical movement of output

The transition from the welfare-state Keynesian to the neoliberal phase of development has not changed a basic form of capitalist development, the business cycle and the crisis cycle. This is important because major crises, which as crises of capitalism mark a change of capitalist development phases, have historically always been characterized by the intertwining of cyclical with structural crises. Since the founding of the Federal Republic of Germany (as well as before), this form has been characterized by regular fluctuations in overall economic production, forming a growth cycle of usually eight to ten years. Taking the crisis years 1947/48 of the immediate post-war period as a starting point, eight business cycles can be delineated for the period 1948-2019 on the basis of overall economic production. Their length varied between six and eleven years, with "external" factors such as the oil crises of 1973 and 1979, the "reunification boom" of 1989/91 and the outbreak of the financial market crisis in the USA accelerating or delaying, but not preventing, the onset of cyclical crises. The corona pandemic also modified the cycle and prolonged the crisis.

In determining crises, the question of whether or not output has declined in absolute terms is secondary. What is decisive is the movement of the internal contradictions that determine the cycle: It is this, in essence, the contradiction between production and the realization of profit, i.e., the overproduction of commodities. Cyclical crises are overproduction crises. Against this background, the years 1958, 1967, 1975, 1982, 1993, 2003, 2009 and 2020 can be determined as main crisis years in the history of the Federal Republic of Germany, with overall economic production not declining only in the "economic miracle year" 1958. With production declines of five percent each, the years 2009 and 2020 stand out.

If we take the crisis years - with Marx - as the starting point of a cycle, the transition from the Keynesian to the neoliberal phase of development can be said to have begun in 1975, starting with the "minor world economic crisis" as the major crisis of the Keynesian phase of development, which was linked to the cyclical crisis of 1973-75. A look at developments since then shows that the stated goal of the neoliberal "reforms," the renewed acceleration of economic momentum, has not been achieved.

The figures, calculated for West Germany until 1991 and for the enlarged Germany from 1992 onward, show the peculiarity of the fifth cycle, which was prolonged and reinforced by the incorporation of the GDR: The years 1989 to 1991 are characterized by a "reunification boom" in which West Germany's domestic product grew by an average of five percent annually. The collapse of the GDR economy, which had made the West German boom possible in the first place, is excluded from this analysis. The method of calculation alone makes it clear that the West German perspective dominates. For the inhabitants of the former GDR, 1989/91 were certainly not boom years.

The period between the mid-1980s and 2007 is often referred to internationally as the "Great Moderation," primarily because the volatility of the economy had declined. This qualification is controversial; at any rate, it does not apply to the development of the Federal Republic of Germany. It was the period in which neoliberal economic policy had its greatest impact: falling real wages, a drop in the wage share of almost ten percent, high and rising unemployment until 2006, stagnating employment, the establishment of a large low-wage sector. By around 2011, the share of low-wage workers in the number of dependent employees had increased from 16 percent in the 1990s to almost 24 percent and has remained at this level ever since.

This points to the core of neoliberalism, the change in the social balance of power in favor of capital and the redistribution of income and wealth. If, on the other hand, one takes seriously the main content of the posters, i.e., the reduction of the share of the state that "crushes" entrepreneurial dynamism (Ronald Reagan: "The state is not the solution, but the problem"), then one would have to conclude that there has been a glaring failure to achieve the goal: The government's share of GDP declined only minimally between 1985 (45.2 percent) and 2007 (43.4 percent). In 2019, it was back at 44.2 percent, and in 2020 at a record 51.1 percent. The stability of the government share is all the more remarkable given the decline in public investment. Neoliberalism is not simply about the relationship between the state and the market, but primarily about the relationship between labor and capital. Other elements, such as forms of regulation, intensity of intervention in market processes, importance of state forms of production, are subordinate to this.

Accumulation Weakness

The financial market crisis of 2008 and the cyclical crisis of 2008/2009 linked to it have eliminated the widespread illusion that the neoliberal "reforms," especially monetary policy and austerity policy, had led to a stabilization and increased crisis resilience of the capitalist economy, without seriously damaging neoliberalism as an ideology. The following key points should be recalled:

- The economic recovery after the deep crisis of 2008/2009 was weak, but it lasted relatively long.

- Employment increased from 41 to 45 million, with the low-wage and precarious employment sector remaining stable, i.e. not growing proportionally. The volume of work (hours worked) increased significantly again for the first time.

- The number of unemployed and underemployed fell from around five to 3.2 million.

- Labor income increased again in real terms for the first time since the 1980s (by one to one and a half percent annually). The wage share rose again.

- Social austerity policies were not further tightened in most areas; one important concession was the introduction of the minimum wage in 2014.

- Poverty, which is particularly widespread in Germany, has not increased any further since 2010 - if one believes the sixth Poverty and Wealth Report of 2020 - but there was no easing either, despite the economic improvement.

However, this "relative stabilization" did not resolve any of the structural contradictions of the neoliberal development phase that the 2008 crisis had exposed. The crisis of 2019/2020, exacerbated by the corona pandemic, has made this abundantly clear. These contradictions are predominantly global phenomena that affect all developed capitalist countries. Some, however, are either specific to the Federal Republic of Germany or have a particular manifestation in it.

Over the entire neoliberal development phase, investment activity, the accumulation of fixed capital, has tended to weaken in the developed capitalist countries. In the G7 countries, the investment ratio, the share of gross fixed capital formation in gross domestic product (GDP), fell from about 25 percent in the 1980s to 21 percent in the post-2010 period. Germany was particularly affected by the investment decline, as shown in an October 2014 analysis by the German Institute for Economic Research (DIW), which highlights private investment activity: "The analysis shows that private investment activity is relatively low, both in historical and international comparison."

Thus, the "relative stabilization" of the economy after 2010 did not affect investment activity, which remained subdued. The net investment ratio, i.e. after deducting depreciation and amortization, halved from around eight to four percent during this period. Public investment played an important role in this: its share of GDP, which had still been almost five percent in the early 1970s, fell from around three to 1.9 percent between 1980 and 2007, and from 2003 onward net public investment was even negative for longer periods. It is only since 2016 that the public investment ratio has been rising again, partly due to a change in the statistical definition: since 2014, acquisitions of weapons systems and spending on research and development have been counted as investments. If anything, the weakness of the "real" accumulation process has been somewhat more pronounced in Germany than on average among the G7 countries.

Financialization

The slowdown in the accumulation of "real capital" was matched by an acceleration in the accumulation of money capital, i.e., the financialization of the capitalist accumulation process. Indicators are the growing indebtedness of the economy as a whole in relation to GDP, the growing importance of the financial sector, and the larger share of profits appropriated in the financial markets. A 2020 Deutsche Bank study highlights the unprecedentedly high profits on securities in the period since the 1980s by historical standards, owing less to interest income and dividends than to price gains realized when securities are bought and sold.

Financialization is an eminently globalized process, which is why a national view is of limited value. Measured in terms of the overall economic importance of the financial sector, the process has been less pronounced in Germany than in Great Britain and the U.S., where the most important international financial centers are located, namely London and New York. However, with its high current account surpluses, Germany has driven the European and global financialization process. One example is the "symbiosis between countries like Germany and Spain, (...) where the current account surpluses generated in Germany were invested, among others, in countries like Spain"¹ and drove the real estate boom there.

All indicators show that the disproportions between financial markets and the "real economy" have continued to grow in the post-2010 period, accelerated once again by the cyclical slowdown and the 2019/2020 Corona crisis. In this context, the Global Debt Monitor of the Institute of International Finance (IIF) speaks of a "debt tsunami" (November 2020). In order to avoid further financial crises and not to endanger the fragile economy, central banks have increasingly flooded the economy with central bank money, as they did after 2008. The programs to combat the corona crisis in Germany were above the European average at around 11 percent of GDP, in addition to government equity investments, loans and other support measures amounting to almost 28 percent of GDP, although these have not yet been fully utilized. State monetary policy, the core of neoliberal economic policy, has thus lost its effectiveness; it has become the slave of the financial markets. Currently, this is underlined by the revision of the monetary policy strategy on the part of the European Central Bank (ECB), completed in July 2021, which formulates: "To the extent that this is possible without compromising the price stability objective (which was relativized at the same time, J. G.), the euro system supports the general economic policy in the Union. (...) These objectives include balanced economic growth and a highly competitive social market economy."² Crisis fighting becomes the main objective of European monetary policy.

Special role of foreign trade

From the beginning, the FRG economy followed an export model; with the exception of a few years, West Germany always had a surplus in its current account. This was matched by rising capital exports and growing foreign exchange reserves. Dependence on the world market increased sharply after 2000, especially in the decade following the financial market crisis, and the introduction of the euro has been helpful. One indicator is the net exports ratio (difference between exports and imports of goods and services) calculated by the Federal Statistical Office, which indicates "what proportion of gross domestic product is not used for consumer spending or investment (...)" (definition by German Federal Statistical Office). Although the ratio had historically almost always been in positive territory, it has again risen markedly since the early 2000s and has been at a level of over six percent of GDP since 2010, which the EU Commission regularly criticizes as an "imbalance" that endangers economic stability in Europe. Peaks of more than seven percent were reached in 2015 to 2017. In view of the increasing international debates since 2015 about a stagnation in the globalization process or "deglobalization," doubts about the country's one-sided export orientation are also growing louder in Germany.

The Corona crisis, which had briefly led to a disruption of international supply chains and triggered a debate in many countries about the dangers of too much dependence on foreign trade and about "renationalization," had to be seen as a warning signal, especially in Germany: There was talk of export dependency as a "German drug." Developments in China, Germany's main trading partner, are also causing concern: China, with its huge domestic market, is in the process of limiting its dependence on the world market, precisely for those products that make up an important part of Germany's export success: Cars and machinery are increasingly being produced in China. "Germany's export record is no cause for celebration," headlined Handelsblatt even before "Corona" (Aug. 21, 2018), emphasizing, "In addition to its competitive strength, Germany's trade surpluses also represent investment weakness at home." This is also seen internationally in the same way. The International Monetary Fund (IMF), otherwise esteemed in this country, strongly criticizes the chronic German surplus: "Germany is (...) the only major country in the world that has been running an excessive current account surplus for years without signs of an adjustment process."³.

The latter is confirmed by recent developments. The projected recovery in 2021/22 after the corona-induced slump in 2020 will be driven to a considerable extent by foreign trade. In particular, the 3.7 percent GDP growth predicted for 2021 is strongly driven by exports, which are expected to increase by almost 12 percent in 2021 according to the spring 2021 forecast of the "Joint Report". Accordingly, the current account balance would reach a new record level of 285 billion euros or 8.3 percent of GDP. Against the backdrop of increasing hegemonic conflicts accompanied by a politicization of foreign trade, the economic dependence on high current account surpluses is a particularly "German" crisis moment: Although the political partnership with the USA and the "West" is invoked, the trade policy consequences of an open conflict with China would hardly be economically sustainable for Germany.

Crisis period 2008-2020

On the one hand, historical comparisons are always skewed, but on the other hand they can certainly contribute to understanding the present. This also applies to the comparison of the crisis of 1929-32 and the subsequent "depression of a special kind" (Eugen Varga) with the crisis of 2008/2009 and the subsequent economic revival. Most observers agree that the historical uniqueness of the 1929-32 crisis is related to the fact that there was no resounding revival after 1932. This was caused by economic policy, i.e. the abandonment of any constructive fiscal and monetary policy to combat the crisis. After 2008, things were completely different: Huge programs were launched to stimulate the economy, major bank and corporate collapses were prevented - after the Lehman disaster - with the help of government cash injections or equity investments, and government monetary policy remains extremely expansionary to this day and follows the primacy of fighting the crisis. Thus, the crisis was cut short after 2008 and a depression was prevented, but this helped to mask the causes of the crash and block effective reforms. "After 2008, it may not have been possible to continue as before, but it was so similar," concludes Barry Eichengreen in his comparison of the great crashes of 1929 and 2008.⁴

Jörg Huffschmid had already predicted in the spring of 2009, in the midst of the crisis, that things would continue "in a similar way" after 2009: If the crisis did not change the prevailing political constellations - which was the case - then in the medium term there would be a "slightly modified (...) continuation of neoliberal policies."⁵ That has come to pass. In a sense, things initially repeated themselves after the 2019/2020 crisis exacerbated by the corona pandemic: huge stimulus and stabilization programs were launched, without regard for government debt and market liberalism. Government monetary policy has intensified and prolonged its expansionary orientation, and fear of new financial crises has become the determining factor: "The obvious lesson from the Great Financial Crisis (...) is that financial crises are likely to come back," former IMF chief economist Olivier Blanchard and Obama advisor Lawrence Summers formulated in 2017.⁶

The fact that the economic revival in 2010/2018 - as described - did not eliminate any of the structural instabilities, that the financial markets with their tendency toward "informalization" (shadow banks, over-the-counter trading, new financial market players) are ultimately more fragile today than in 2008, that the weakness of real accumulation has rather intensified, that (for Germany) the dependence on the external economy has further increased - underlines, unlike after 2009, the need for a fundamental reorientation.

Added to this is the climate crisis as a new factor. It requires a fundamental economic restructuring, combined with extensive capital devaluations in certain sectors. In addition, the corona pandemic and its aftermath are also likely to entail economic adjustment processes. Just like accelerated digitization, these are moments that place major and new demands on economic state functions. Probably "a state interventionism will gain profile in the future (...). No matter whether it is about the reorganization of value chains, (...) the (...) infrastructure for e-mobility, about digitalization or precautions against new health risks - the state will get involved, otherwise there is a threat of defeat in the imperial rivalry."⁷

Notes

1 Financialization as a core problem of a social Europe, in: WSI-Mitteilungen 1/2016, p. 41.

2 ECB: Governing Council Decisions (excluding interest rate decisions) of July 23, 2021, Monetary Policy Strategy Statement.

3 IMF: External sector report. The dynamics of external adjustment. Washington, D. C., July 2019; Jan Behringer/Till van Treeck/Achim Truger: The German Model. How can the current account surplus be reduced?, in: Wirtschaftsdienst, October 2020, issue 10, 754.

4 Barry Eichengreen: The great crashes of 1929 and 2008. why history repeats itself. Munich 2015, p. 305

5 Jörg Huffschmid: After the Crisis. The End of Financial Market Capitalism?, in: Z. Zeitschrift Marxistische Erneuerung, No.78, June 2009, p. 49.

6 Olivier J. Blanchard/Lawrence H. Summers: Rethinking Stabilization Policy. Evolution or Revolution. National Bureau of Economic Research, Cambridge, December 2017.

7 Klaus Dörre: The Corona Pandemic - A Catastrophe with Explosive Power, in: Berlin Journal of Sociology, November 2020, p. 18.

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Show answers of all letters to the editor

Letter to the editor by Istvan Hidy ( September 7, 2021 at 11:59 am)

The article clearly shows that something is rotten in the state of Germany! Germany was the world export champion for many years and is now second behind China, although the German current account surplus has decreased to 232 billion euros in 2020. But surplus remains surplus! Despite all this, or perhaps because of it, in the period described above, during which neoliberal economic policy had its greatest impact, the following was observed: "Falling real wages, a drop in the wage share of almost ten percent, high and, by 2006, rising unemployment, stagnating employment, the establishment of a large low-wage sector" are facts. The data clearly prove that neoliberalism is primarily about the direct relationship between labor and capital. Profits are privatized, losses and debts are generalized. Throughout the neoliberal phase, compared to the ever-increasing profits, investment activity in Germany has tended to weaken and living standards have declined downward from the middle of society. Even private investment activity is very low, both in historical and international comparison. Who benefits: more money in fewer hands makes more money in even fewer hands pointless and useless? A sad balance sheet.

These developments can be traced back to the fact that the state does not levy taxes on the export surplus of international corporations, nor on "money transactions" on the stock exchange (only in the case of me as a small pensioner), and thus limits itself in its future task of investing in education and research, road construction and the rail network, as well as making certain compulsory market-regulating investments for a "welfare state," as would be necessary, for example, in social housing construction.