Both Germany and the US follow an economic policy without enlightenment. Slight economic stimulation will not solve problems of mass unemployment and corporate welfare. Tax evasion of corporations, tax cuts for the super-rich and trillions for the banks lead to suffering and a revenue crisis. The financial sector must be shriveled and the public sector expanded.
No Enlightenment - Economic Policy on the Old Paths
By Study group on Alternative Economic Policy
[Since 1994 the Bremen study group on alternative economic policy has presented a memorandum every year. The short version of the 2014 memorandum published in April 2014 is translated abridged from the German on the Internet, www.alternative-wirtschaftspolitik.de.]
Germany after the Election
Old Political-economic Thinking, Old Economic Problems
Europe: More Aggressive Competition will End the Crisis
Free Trade Agreement with the US Will Increase Growth and Competition
Problems on the Financial Markets Not Solved
Slight Economic Stimulation in Germany does not Solve Problems
Program for an Alternative Way of Development
GERMANY AFTER THE ELECTION
In the fall of 2013, Germany faced a decision over its economic direction. The three opposition parties competed in the Bundestag election to ensure tax hikes for more public investments and to solve the pressing problems of the country through more regulation on the labor market. These problems cannot be ignored:
- The labor markets are still marked by mass unemployment and a dramatically high share of precarious employment.
- The public infrastructure decays - the investments are not adequate to maintain the public capital stock.
- The tax revenues increase in absolute numbers - but are not enough to break the investment backlog and push forward the prescribed debt reduction. The tax rate is still too low on the backdrop of the queued-up tasks (and expenses).
- Economic growth in Germany depends strongly on export surpluses. The domestic demand is too meager because of weak wage development.
- The energy turn as a core project of ecological renewal threatens to fall under the wheel.
- The care emergency will intensify in an aging society. Sufficient funds for a comprehensive solution are not provided.
- Deficits in education are not consistently tackled. The "education republic" is still a PR-spectacle.
- The distribution of assets is an unparalleled dislocation.
- The wage rate stagnates on a low level and poverty in the country increases.
These problems were trivialized or not recognized by the previous governments. Germany survived the crisis and is a model for Europe. That was the repeated message. A continuation of past policy was the logical consequence of this perspective. "More competition" was and remains the magic formula. Inadequate investments were regarded as a problem. While solution perspectives were not considered on account of the categorical refusal to raise taxes and the supposed necessity of reducing the allegedly excessive state indebtedness.
In addition, the agenda-policy on the labor markets made sure the number of unemployed decreased though work was not created any more. The work volume remained approximately the same. Under these conditions, more jobs were basically a result of the precarious redistribution of existing work. However all this was consistently faded out.
The direction of the decisions was ultimately in favor of the "status quo." The old policy continued in essential points after the election and the formation of a Great Coalition. Market-radical positions characterize economic policy despite different promises by the SPD in the election campaign. The envisioned measures of the coalition titled "Forming Germany's Future" can not fulfill this claim measured by the extraordinary social future expenditures in Germany and by the extensive catch-up need that arose after a long phase of economic- and social-political deregulation.
There are differences in the individual policy fields. In the labor market and pensions, several accents were set that isolated are completely inadequate but nevertheless represent a break with the neoliberal agenda course of the past years. The legal minimum wage that puts an effective stop to escalating low wages could be named here. Undermining the minimum wage or making it effective through numerous exceptions must now be prevented. Effective control mechanisms must be successfully installed against an avoidance of the minimum wage through an unpaid expansion of working hours. A rapid increase to the level of ten Euros an hour urged by the study group Alternative Economic Policy is necessary since the planned minimum wage in Germany of 8.50 Euros per hour is not enough for a dignified life even with full employment.
The announced partial re-regulation of subcontracted work will have positive effects for employees. A withdrawal of the Hartz laws and complete enforcement of the principle "equal pay for equal work" are vital.
The changes in the pension system - above all the possibility of retiring two years earlier without penalty after 45 years of employment - come nearer economic and social reality in that only a few are still working at 65. However the resolved chances do not fix the real causes of senior poverty. The gradual adjustment to the initial pension age of 67 and a pension formula that lowers the pension level to 43 percent of the last take-home pay are insignificant changes. The way into old age poverty remains pre-programed for millions of people, above all women. A reasonable old age provision is only still possible with an additional private pension scheme. Apart from the fact that receivers of low incomes cannot generally afford this, channeling ever more mone3y to the financial markets and organizing old age provisions through the financial markets in the form of an individualized capital-matching process and not a solidarity transfer process is the completely wrong way.
While there are at least cautious steps in the right direction in the labor market and pension policy though a fundamental change of course is not manifest, the Great Coalition persists in the old economic thinking in fiscal- and financial policy. The five billion Euros estimated for infrastructure modernization for the period to 2017 do not cover the necessities... Putting tax hikes under a taboo makes urgently necessary projects impossible.
The political-economic confusion of the new German government is clear when consolidation of the public budget is continued while growth impulses are also set... Any driving instructor who teaches his students that simultaneously pressing the brake and the gas pedal is the highest art of car-driving would lose his license.
OLD POLITICAL-ECONOMIC THINKING, OLD ECONOMIC PROBLEMS
The political "status quo" or "business as usual" in Germany fits in well in the constantly neoliberal economic debates. Many feel the great economic crisis is overcome. Forecasts like those of the IMF even see the world economy on a recovery course. The economic structures and economic policy that led to this catastrophe are still not conquered. The hope that neoliberal economic policy would be buried with the collapse of the financial markets in the fall of 2008 is not fulfilled.
During the international financial crisis, the demand for a stronger regulation of the financial sector found a broad response. An opened "window of opportunity" was often announced. More than five years have passed and no one speaks of a "window of opportunity" any more. Economic policy is business as usual. The financial markets have long returned to their old business practice. The financial sector is again used for redistribution. While the profits are privately appropriated, the crisis costs are socialized. The indebtedness of the public budgets of industrial nations has increased enormously in the wake of the crisis.
Worldwide capital streams bring great problems to whole economies. If investors invested mammoth amounts in threshold countries from 2007, the money was withdrawn again in the last months. Currencies come under tremendous devaluation pressure. Central banks (for example in Turkey or India) see themselves forced to raise interests and contain the capital outflow. The current explanatory model sees the reason of these turbulences in the exodus of the American Federal Reserve from its very expansive monetary policy. However this exodus was not the only influencing factor. Investors with great assets sought profitable investment opportunities for their assets. In 2007 and 2008, they expected these investment opportunities more in threshold countries because of the financial market turbulences starting from the US. The money streams were reversed when the growth and profit expectations gradually returned in the industrial countries. Such a development is only possible because the worldwide financial architecture still allows unbridled speculation streams (speculative trading with raw materials and food ensure dislocations).
The extremely unequal distribution of income and assets is still the background. For the massive assets in a few hands, there are no real investment opportunities because the demand of the broad population chronically falls behind production. Keynes described this process as "predatory savings." "Redistribution from bottom to top throttles consumption because persons with higher incomes spend a lower percentage for consumption than persons with low income. As a result, as long as nothing else happens, through an increase of investments or exports, the total demand in the economy lags behind the potential total supply. This leads to unemployment. In the 1990s, this was different with the bubble on the technology market. In the first decade of our century, there was the bubble on the housing market. Today only recourse to state spending remains" (Stiglitz 2012).
Redistribution occurs on the planes of primary distribution and secondary distribution. Primary distribution is the parceling of income between capital and labor. Too few wage hikes or even wage reductions and precariousness of working conditions lead to the wage sums falling behind capital income. The wage rate falls. Secondary distribution describes to what extent the state interferes in distribution with taxes and fees. The unequal distribution can be corrected with secondary distribution. That was hardly true in the past. The state corrects the distribution problems resulting from primary distribution less and less.
There has only been a reorientation in fiscal policy. If the economic importance of monetary policy was recognized in Anglo-Saxon economies in the past 20 years, the European Central Bank turned to an expansive monetary policy in the cr5isis. This step was right and necessary and contributed to the fast conquest of the 2009 economic collapse. But financial policy was expansively oriented in 2009/10 contrary to neoliberal doctrine and economic programs were drawn up worldwide. In that way, the dramatic collapse of the GDP was quickly stopped and overcome. Afterwards people returned to the old financial-political dogmas. Consolidation of state finances was at the top of the political agenda. Only monetary policy should support further economic development. However monetary policy alone is overstrained. Monetary policy cannot stimulate the economy without the complement of financial policy. It can improve the financing conditions for businesses through low interests (or provide the interbank market with liquidity) but cannot create any demand.
Without adequate demand, reason for investments is lacking even with the most favorable financing conditions... Even worse, an expansive monetary policy threatens to promote bubbles on the property markets without the complement of an expansive fiscal policy.
The basic problem of this kind of policy is that textbook economics always describes unequal distribution as conducive for economic development. This is not tenable theoretically or empirically. Empirical experiences in many countries show that a higher degree of inequality indirectly lowers prosperity and also limits economic development in the long-term. In contrast, a more egalitarian distribution encourages prosperity and development. An unreflected growth is not helpful since the ecological crisis does not lose any urgency through the economic crisis.
There is still no realistic picture of the effects of state indebtedness. Its supposedly harmful effect is derived theoretically from monetarism. Accordingly every state activity would be obstructive for the free development of the markets. An important empirical foundation for this occurred in the statement that economics shrivel with an indebtedness of 90 percent of economic output and a severe recession intrudes. This discovery goes back to the study "Growth in a Time of Debt" by Rogoff and Reinhart (2010). Detailed material from 66 countries and eight centuries was cited as comprehensive empirical evidence for the central neoliberal and monetarist thesis of the harmfulness of state interventions. The authors were embarrassed when the numbers turned out to be false in a re-calculation. The weightings or assessments were wrong. With the correct calculation of the material, there is no 90-percent threshold and no unequivocal statements can be derived from that...
The political recommendations are still not corrected. The demystification of the most influential economic texts of the past years has not had consequences for the economic debates. For politics, it is embarrassing that the governments in Germany and the EU hold fast to their positions as though nothing happened.
EUROPE: MORE AGGRESSIVE COMPETITION SHOULD END THE CRISIS
A harsh austerity policy was forced on European crisis countries in the framework of the bailout packages. Falling wages, reduced social services and privatization of public institutions should lower piece-labor costs in these countries and restore or increase the capacity for competitiveness. The measures of the German agenda policy were models. Part of the logic of this strategy is that domestic markets were and are massively weakened. Recession in the Euro zone is the result.
With such a policy, growth effects can only come from foreign trade. In the medium term, competitively pressure will be enormously increased within Europe. More competitive pressure means above all: pressure on wages and social benefits, not on profits. However an economic development can hardly be realized with this supply-oriented policy since the successes of one are always the losses of others. Only through additional exports to third states can this lead to success - and again to burdens. This competition of the nations is strengthened by the change in course in France. If there was the hope that France could pull out of the austerity policy and go its own way, the supply conditions for capital are now improved according to the German model.
This strategy is risky and dangerous. On one side, there is the weakened domestic demand. On the other side, Europe's growing export strength could lead to a currency war in which all sides lose.
FREE TRADE AGREEMENT WITH THE US SHOULD STRENGTHEN GROWTH AND COMPETITION
The planned free trade agreement with the US is an important building block of the economic policy oriented in competition... Discussions on a Transatlantic Trade and Investment Partnership (TTIP) began in July 2013 and should be concluded by the end of 2014. With the signing of this agreement, the liberalization of world trade will be given another disastrous push. The planned agreement is an expression of a great trust in the steering of deregulated markets that should lead to an efficient use of labor and capital.
The advantages of a liberalized international trade were described by the classical economists. The well-being of the countries participating in trade should increase. The underlying mechanism is simple. Unhindered trade leads to products manufactured in those countries where they can be produced most cheaply. Absolute (Adam Smith, 1776) or comparative cost advantages (David Ricardo, 1817) are possible. Specialization effects can occur. Thus the prosperity of the specializing countries involved in trade would increase altogether. These theories had their justification under early capitalist conditions. However present-day world trade is marked by intra-industrial exchange organized by big corporations. Instead of developing comparative advantages, the competition of businesses around location conditions means a race for low wages, low taxes, innovative potentials and an efficient infrastructure.
A worldwide free trade was originally carried out under the auspices of the World Trade Organization (WTO). This process broke down after many years and several rounds of negotiation. Since then, bilateral free trade agreements are signed more and more. With the planned agreement between the EU and the US, tariff and non-tariff trade barriers (technical norms and standards, import licenses, packaging- and labeling-regulations etc) should be removed. Tariffs do not represent great obstacles today. The average tariff rate for industrial goods is 2.8 percent and is equally high for American and European imports. The non-tariff trade barriers are much more important...
A mutual acknowledgment of norms always means a lowering of standards... As a result, this means lower standards in environmental- and consumer protection, employee rights and state regulations. The US has only signed two of the eight core labor norms of the International Labor Organization (ILO). Central rights of employees threaten to be undermined with this free trade agreement. Whether higher productivity will lead to lower manufacturing costs, lower prices and increased sales is open. As a consequence, higher profits can only be expected with export-oriented businesses.
The negotiation process is a central problem. Complete secrecy is arranged among the persons authorized for the negotiations. The texts are unknown both to the general public and parliamentarians. Therefore whether and how far problems can be solved by which regulations cannot be judged. The whole process is non-transparent and contradicts fundamental democratic rules.
Another problem is the investment-protection agreement that should be resolved in the scope of the TTIP Free Trade agreement. In 1994 similar investment protection rules were nearly introduced internationally with the Multilateral Agreement on Investments (MAI). This was prevented in 1998 through massive public resistance. Now these extensive protection rules for private international investors are coming back on the political stage in bilateral free trade agreements. Typically it is always the capital side whose (profit-claims) should be protected. The right to good work at a proper wage is not protected in any international agreement. Investment protection agreements really came from trade practice with countries bereft of a functioning legal system. Special arbitration courts were created because investors cannot sue against discriminations in regular courts.
With functioning systems of justice, such institutions amount to elimination of democratic decision-making processes by private courts. As a consequence of such investment protection agreements, investors could sue states when their profit expectations and goals are frustrated by governmental energy- and environmental policy measures (for example the "energy turn": Vattenfall against the Federal Republic of Germany). The democratic rule of law and ultimately legal certainty are annulled. The sovereign rights of states are ignored.
The macro-economic effects claimed by advocates of the planned Free Trade agreement are very dubious. Different studies come to different conclusions. The very optimistic assessment of the Ifo-Institute predicts a minimum increase of jobs of 0.06 percent. A much noticed study of the Center for Economic Policy Research (CEPR) mandated by the EU Commission expects a minimum annual growth of 0.04 percent generated by the agreement in the EU and the US. That agrees with the estimate of the IMK [Hans Boeckler foundation) that appreciable short-term aggregate economic impulses should not be expected from the agreement.
Like many market-radical political initiatives, the Free Trade agreement altogether nurtures vague hopes for rising economic prosperity. Considerable risks must be faced. Employees threaten to become losers through the loss of social rights, consumers through the cancellation of protective regulations, the environment through falling environmental standards and the public sector through new allocation guidelines that do not include social criteria any more. Therefore the Alternative Economic Policy study group rejects the free trade agreement of the EU with the US since guaranteeing and improving private profits is uppermost, not improving the living conditions of people. Changes that may be adopted in the course of the negotiations will not change this basic orientation.
PROBLEMS ON THE FINANCIAL MARKETS NOT SOLVED
The situation on the financial markets in the Euro zone is reassuring. Ireland could return to the capital markets in the beginning of 2014. Portugal plans the same step in 2014. Spanish and Italian state bonds have interest rates of less than four percent. Keeping out speculators accomplished by political actions is the main reason for the current calm. Betting on the collapse of states is not possible or rewarding any more... in September 2012 the president of the European Central Bank, Mario Draghi, announced he would defend the Euro unrestrictedly against massive speculations by buying state bonds from the crisis countries.
Nevertheless the calm is deceptive. For a long while, there was only buying time. The systemic trouble-spots are not removed. The present crisis of the Euro system is denied by trend-setting politicians... Concentration on an excessive "homemade" indebtedness in the crisis countries dependent on financial aid and austerity policy has greatly worsened the economic situation.
The Euro zone has awoken from the economic coma but lies in the intensive care unit. The GDP of the Euro-countries will first reach its pre-crisis level in 2015 according to estimates of the IMF. Unemployment has risen from a pre-crisis level of 7.5 percent to the record level of 12.1 percent. A return to conditions before the crisis is not expected.
The European Union plans many regulations for 2014. Valuable time has passed by. There has long been massive speculation on the financial markets. Neoliberal concepts are still on the agenda.
The division between member countries has deepened economically and politically. More is involved than conflicts of interests between the countries that guarantee financial aid and those empowered by that aid. The increase of political tensions between and within the Euro-states replaces a necessary stronger measure of cooperation and integration. The drastic social cuts in the crisis states drive people to despair and undermine their trust in European integration and democracy. A dangerous crisis of democracy is increasingly emerging out of the economic crisis of the EU. This crisis threatens to burst open the whole European integration.
Still the crisis of the Euro zone cannot be solved with a further de-democratization. This will even aggravate the crisis. Integration already suffers under the great democracy deficits. In the impacted countries, the work of the Troika from the EU Commission, the European Central Bank and the IMF is seen as a dictation beyond all democratic legitimation. This Troika was actually installed by democratic institutions but its work is not subject to any democratic control. Submitting to the judgments of the Troika was arranged through considerable political and economic pressure on the vulnerable states. National possibilities of elected parliaments hardly exist in the countries under the supervision of the Troika.
An inquiry report of the European Parliament comes to a disastrous conclusion: the effects of the austerity measures were often wrongly estimated and a fair distribution of the reform- and austerity burdens was not carried out. The European Board for Human Rights was even called to investigate possible breaches of the law.
The Troika's low spending policy in wages and public expenditures and narrowing policy to increasing competitiveness do not help solve the problems. A consistent democratization of European institutions, a stronger communalization of economic and financial policy and a large-scale investment initiative are necessary. The goals of such an initiative must be a re-industrialization and a socio-ecological reorganization. Initiatives for sustainable social and ecological solutions in food, mobility, construction, energy, water and waste removal, as formulated in the 2014 Euro Memorandum (www.euromemo.eu) should be supported.
Exiting from the present Euro system would not be a solution. The advantages from prevention of exchange rate speculations within the Euro zone would be lost.. The Euro must be defended to avoid a relapse into highly volatile speculative currency betting.
SLIGHT ECONOMIC STIMULATION IN GERMANY DOES NOT SOLVE ANY PROBLEMS
In 2012 and 2013 the economic development in Germany was rather stagnant with growth rates of 0.7 and 0.4 percent. Forecasts assume a noticeable economic recovery in 2014. Independent of that, many problems of the German economy are not solved... More than a third of the unemployed are long-term unemployed. They hardly have a chance for transitioning to a regular job...
The German banking sector has temporarily recovered from the crisis... In the crisis, cooperative banks and savings banks proved to be stabilizing elements. Central problems of the German financial sector are still unsolved; the big banks are under pressure. The trifling capital-holding rate remains the Achilles-heel of the banking sector. New trouble spots are likely. A democratic control and a permanent stabilization of the financial sector are still a long way off.
The German government, business associations, neoliberal economists and the media point to increasing state revenues. Therefore the state has a spending problem, not a revenue problem. This is an ideological debate when the absolute sum is underlined in the higher tax revenues. That absolute tax revenues rise is the obvious normal case with a growing national economy and rising prices...
The tax rate must rise. The expenditures accomplished in the past through new indebtedness must now be tax-financed. The current tax rate is too low.
Additional public investments of 37 billion Euros are needed every year to reach the typical public investment level in Europe before the crisis and in Germany at the beginning of this millennium. This will not dissolve the investment-backlog of the past decades since that buildup amounts to over 300 billion Euros. These investment needs oriented in the earlier development path and merely in maintaining the public infrastructure cannot be financed with the present tax system under the conditions of the tax brake. We face great challenges that extend far beyond this past development path and pure investment expenditures in the narrow sense...
PROGRAM FOR AN ALTERNATIVE WAY OF DEVELOPMENT
INVESTMENTS TO COVER SOCIAL NEEDS
... For years the Alternative Economic Policy study group has urged an extensive investment program for a social-ecological conversion. These conceptions were smiled at condescendingly for a long time both in academic debates and in the general public. The knowledge that an enormous investment-backlog exists has practically become part of our common heritage. The Institute of the German Economy (2014) recently published a study in which additional investments in the infrastructure of 120 billion Euros in ten years are demanded...
Such a program would make a considerable contribution to reducing existing unemployment and simultaneously generating tax revenues. The starting points for such an investment- and expenditure program are uncovered social needs that cannot be satisfied through the market. These needs are derived from the legitimate desires for more and qualitatively better education, for lower energy- and resource-consumption, and for a better supply of public ser4vices. At the same time this program aims at increasing employment and mass income, reducing unemployment and improving the material situation of large parts of the population.
The Alternative Economic Policy study group demands an expansion of education spending of 25 billion Euros annually...
The Alternative Economic Policy study group urges an additional five billion Euros per year for energetic building revitalization. One percent of the housing stock is - energetically - revitalized annually... The care system in Germany needs considerably more funds to overcome the care emergency and make possible a reasonable pay for those working in care...
An expansion of new indebtedness is practically excluded with the debt-brake anchored in the German Basic Law by dominant policy and the effective international law agreement on the EU-wide fiscal pact...
TAX POLICY TO FINANCE PUBLIC EXPENDITURES AND FOR ANOTHER DISTRIBUTION
The following fiscal benchmarks are necessary for financing such a concept:
• Introduction of a wealth tax over ten years on the super-rich. This wealth tax would benefit the federal budget and help reduce the debt...
• Capital incomes must be taxed at the personal income tax rate instead of at a lower 25 percent rate...
PUBLIC BUDGETS; SOLIDARITY EQUALIZATION INSTEAD OF COMPETITION LOGIC
OVERCOMING DIVISION ON THE LABOR MARKET
The investment- and spending programs and the public employment sector create jobs. Additional steps for reducing working hours are necessary to overcome mass unemployment. These steps are impossible under precarious conditions like the Agenda reforms. The gradual transition to an average across-the board 30-hour week as a normal work week (with full wage compensation) would contribute to that. Otherwise work pressure and work strain threaten to increase again.
A new standardization of working hours must go along with a fundamental gain in time sovereignty for employees. Better rules on the compatibility of free time, family and occupation, caring times, strain reductions, extended vacations, sabbaticals, an earlier exit from gainful life and senior part-time are needed among other changes. The recent proposals of the IG Metal union for a temporary 30-hour week for families are a step in the right direction.
That reduced working hours has a positive effect on employment was recently demonstrated in connection with measures against the current crisis. In 2009 short-time work was introduced in industry to cushion the consequences of crisis on the labor market. Employment was safeguarded and businesses could keep skilled workers. That considerably eased the economic recovery after the outbreak of the crisis. An adjustment of "male" and "female" models of working hours is possible with the organization of working time. While men often want to work shorter hours, women who frequently work part-time desire longer working hours. This is an EU-wide trend.
Long-term unemployed have not been successfully and permanently integrated in the first labor market ten years after the announcement of Agenda 2010. The policy of the current government aggravates this development - through cuts in labor market- and employment promotion and through the so-called "reform" of labor market instruments. Some possibilities for integration- and training measures were cancelled and are inadequate quantitatively or qualitatively today. The chances of the long-term unemployed for gaining a living wage job become less and less.
To stop this development, a paradigm shift in labor market- and employment policy is urgently necessary. In the 1994 Memorandum, the Alternative Economic Policy study group urged a publically-supported labor market and concretized this in the following years. At the same time the civil society can be strengthened and socially meaningful work organized - for example with city centers, associations, initiatives and social, cultural and participative projects. Such a social labor market needs a permanent nationwide financing. The Alternative Economic Policy study group urges making available 10 billion Euros annually for this.
The material guaranteeing of ALG-II welfare recipients is completely inadequate. The rules do not allow any participation in social life. They are degrading and keep the impacted in poverty. The most recent increases have not compensated the current price increases. The Alternative Economic Policy study group recommends raising benefit levels to 500 Euros a month. In the long-term, the material provision of all unemployed must be organized to prevent poverty. 20 billion Euros are necessary for increasing benefit levels.
The economic challenges facing us are enormous. They did not first arise in the last years. In their memoranda, the Alternative Economic Policy study group has been a lonely voice crying in the wilderness for many years. In the meantime many see the deficient regulation of the financial markets, the investment backlog and the precariousness of labor markets. For many years the program for an alternative way of development was excluded from serious debates. Now even the employer-friendly Institute of the German Economy demands an investment program in the billions. It took a long while for this knowledge to prevail. This wakens the hope that the conversion or realization of alternative policy can be carried out beyond current policy.
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