Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
I had an interesting conversation with a lunch visitor today about Germany (he lived and studied there) and its role in the Eurozone crisis. Yes, we talk economics even at times of rest! We discussed some of the events leading up to the Euro crisis and the important role played by the so-called progressive political parties in Germany. The conservative Christian Democrats are sounding like lunatics at the moment with the “You will have austerity and enjoy it” mantras. The focus on their harsh and destructive stance supporting fiscal austerity has taken the spotlight off the real culprits – the SPD and the Greens. We should never forget the role that they played – over the period of the Gerhard Schröder’s federal government (1998-2005) – in creating the pre-conditions that have ensured the crisis will be long and very damaging. We should also remember that Green parties have developed a tendency to be “neo-liberals on bikes” as a means of gaining power. The problem is that once they are pedalling in that direction they lose the capacity to pursue truly green policies, which extend beyond the remit of having clean building codes and sound urban design.
There is a lot of political argy bargy in Australia at the moment as the governing Labor Party attempt to distinguish themselves from the Greens, who hold the balance of power in the Senate (upper house) and have one crucial vote in the House of Representatives (lower house). The Government is facing electoral oblivion in 2013 as they flounder around in denial despite being one of the most unpopular governments in our history. They seem to think associating with the Greens is bad for their neo-liberal image. Nothing could be further from the truth.
In 2009 I explained why I thought the Australian Greens had become infested by the neo-liberals. Please read this blog – Neo-liberals invade The Greens!.
That blog led to some strident defence from various Greens and a mini-debate ensued. Please read my blogs – A response to (green) critics … Part 1 and A response to (green) critics … Part 2 and A response to (green) critics – finale (for now)! – for the documentation of the discussion.
The basis of my critique is the policy platform that the Australian Greens stand on. For example, its Economic Principles say (among other things):
The Australian Greens believe that:
8. government finances must be sustainable over the long run; budget deficits and surpluses must balance each other over the business cycle.
9. long term government borrowing is the preferred mechanism for funding long term infrastructure investments.
I noted that an application of these fundamental principles would erode the capacity of the Government to achieve much of what The Greens aspire to by way of social and environmental policy.
I explained in detail why that would be the case. What the Greens do not understand is that the government balance is a mirror image of the non-government balance – $-for-$. The only way you can run a budget on balance equal to zero over the cycle is if you do not want the non-government sector to net save overall in the currency of issue on average over the cycle.
Given that current account deficits are also typical for Australia, the Greens policy is successfully implement would amount to the private domestic sector accumulating ever-increasing levels of debt as they run deficits equal to the external deficit (averaged over the cycle).
That scenario is not sustainable as a growth strategy, and The Greens have been critical of the credit-binges that preceded the crisis. We can only conclude that the policy makers haven’t tied all the pieces together and understood that their position is not only undesirable but also internally inconsistent.
Following the publication of that blog I was invited to address the National Conference of The Greens in Adelaide (the following year). It was an interesting experience and I spoke to the then leader Bob Brown (recently retired) about these matters. His view was that while I might be correct in the technical macroeconomic arguments the point was that the messages were too complicated for the public to absorb.
He said that in that context, it was better to go along with the orthodox view of budgets and macroeconomic constraints to avoid alienating the public and concentrate on the Green messages. I indicated at the time that I thought that was an inherently dishonest position for a political party to take and demonstrated a failure of leadership.
The point is that the Australian Greens perpetuate neo-liberal views and fail to understand that to full implement is broader social-ecological agenda there needs to be a fundamental change in the macroeconomic understandings that the public are provided with by our politicians.
But the problem is not confined to Australia and it is here that our lunchtime conversation becomes relevant.
The title for today’s blog comes from an article in Le Monde diplomatique – Germany goes for sustainable capitalism (October 2011). LMD is one of my favourite magazines.
The expression – “neoliberal party on bikes” – was coined by the co-founder of the German Greens – Jutta Ditfurth – “who left the party in 1991” in protest to the so-called “Realo-Flügels der Grünen” – a faction led by Joschka Fischer. The latter wanted to soften the Greens voice and ditch its left origins.
The article cited provides an excellent analytical history of the role that the Greens in Germany have played over the last few decades.
It begins by describing the excellent work that the Greens have done while in political office (as coalition partners in Hamburg city) in terms of urban design and building codes.
There is also talk of a “Green miracle” sweeping Germany as the political fortunes of the party increase in proportion to the loss of support for the Christian Democrats and the Social Democrat SPD.
The old “Red and Green” coalition (SPD and Greens) is now being referred to as the “Green and Red” as the political support for the “progressive” parties changes in Germany.
The article tells us that in the 1980s, when the Greens were first contesting elections they were dismissed as extremist – “supporting armed struggle and anti-constitutional ideas”.
But now Winfried Kretschmann, the new Green regional government head in Baden-Württemberg says he is:
… neither of the left nor the right” and has cordial relations with Erwin Teufel, the local CDU’s leading light, whose “moderate, centrist” orientation he says he shares …
We learn that “”Green fever is spreading to conservative circles. Entrepreneurs and the rich are making eyes at the Greens.”
The article notes that the Greens have already been a large part of the governmental landscape in Germany and was a coalition partner for “seven years as part of Gerhard Schröder’s federal government (1998-2005)”.
It notes that the 2008 Coalition with the CDU in the Hamburg government was exemplary for its “budgetary orthodoxy”:
When the financial crisis broke, Greens and Christian Democrats immediately agreed to rein in public spending, by raising nursery charges for example. They pumped €1.5bn into HSH Nordbank, rushed to aid the Hapag-Lloyd shipping group and took measures to cajole investors.
But a reflection on the federal years in coalition is also important.
It is clear that the EU elites and the individual national governments that went along with the creation of the monetary union went one step further than the rest of the advanced world in adopting neo-liberalism. The decision to impose the monetary union meant they also abandoned floating exchange rates and deliberately, under pressure from the dominant Germans, chose to eschew the creation of a federal-level fiscal authority.
So we had the nonsensical situation of a common currency effectively rendering the member-states as foreign-currency users without an exchange rate and without the prospect of federal redistribution assistance in the face of asymmetrical and negative aggregate demand shocks. States such as California would have been bankrupt years ago if the US federal system had have adopted such a monetary system design. Same for states in Australia, for example.
The Germans had cultivated their own brand of extreme neo-liberalism – known as ordoliberalism. The aim of the EMU designers was to firmly limit the capacity of the “state”. I wrote about the influence of ordoliberalisms in this blog – Rescue packages and iron boots.
It was obvious that during the Maastricht process the neo-liberal leanings of the designers were never going to allow a fully-fledged federal fiscal capacity to be created, which would have allowed the EMU to actually effectively meet the challenges of the asymmetric aggregate demand shocks that the crisis generated.
Instead they deliberately limited the fiscal capacity of the state in the false belief that a self-regulating private market place would deliver the best outcomes and be resilient enough to withstand cyclical events. The Germans, of-course, knew that by signing up to the EMU they would have to change the way they pursued their mercantilist ambitions.
Previously, the Bundesbank had manipulated the Deutsch mark parity to ensure the German export sector remained very competitive. That is one of the reasons they became an export powerhouse. It is the same strategy that the Chinese are now following and being criticised for by the Europeans and others.
Once the Germans lost control of the nominal exchange rate by signing up to the EMU they had to manipulate other “cost” variables to tilt the trade field in their favour. That is, they could still manipulate the real exchange rate by reducing domestic costs.
In this blog – The German model is not workable for the Eurozone – I discussed the so-called Hartz reforms that were imposed on the German workforce in the period prior to the crisis as a way to artificially tilt the EMU-playing field in favour of the Germans.
The Germans were aggressive in implementing their so-called “Hartz package of welfare reforms”. A few years ago we did a detailed study of the so-called Hartz reforms in the German labour market. One publicly available Working Paper is available describing some of that research.
The Hartz reforms had the effect of creating an unnatural economic environment for the Southern states to have to operate within and were a crucial determinant of the way the crisis manifested in Europe and why it has persisted for so long.
The Southern nations were doomed to fail no matter what, independent of their fiscal positions (noting that Spain was running budget surpluses in the lead up to the crisis and Greece budget deficits).
The Hartz reforms were the exemplar of the neo-liberal approach to labour market deregulation. They were an integral part of the German government’s Agenda 2010. They involved a set of recommendations about how the the German labour market should be changed and were the result of a 2002 commission, presided over and named after Peter Hartz, a key executive from German car manufacturer Volkswagen.
Which government endorsed these recommendations? Answer: No less than the red-green coalition government led by Gerhard Schröder.
The Hartz recommendations were fully endorsed by the Schröder coalition government and introduced in four tranches: Hartz I to IV. The reforms of Hartz I to Hartz III, took place in January 2003-2004, while Hartz IV began in January 2005. The reforms represent extremely far reaching in terms of the labour market policy that had been stable for several decades.
The Hartz process was broadly inline with reforms that have been pursued in other industrialised countries, following the OECD’s Job Study in 1994; a focus on supply side measures and privatisation of public employment agencies to reduce unemployment. The underlying claim was that unemployment was a supply-side problem rather than a systemic failure of the economy to produce enough jobs.
The reforms accelerated the casualisation of the labour market (so-called mini/midi jobs) and there was a sharp fall in regular employment after the introduction of the Hartz reforms.
The German approach had overtones of the old canard of a federal system – “smokestack chasing”. One of the problems that federal systems can encounter is disparate regional development (in states or sub-state regions). A typical issue that arose as countries engaged in the strong growth period after World War 2 was the tax and other concession that states in various countries offered business firms in return for location.
There is a large literature which shows how this practice not only undermines the welfare of other regions in the federal system but also compromise the position of the state doing the “chasing”.
But in the context of the EMU, the way in which the Germans pursued the Hartz reforms not only meant that they were undermining the welfare of the other EMU nations but also droving the living standards of German workers down.
The LMD article says that:
… the SPD-Green majority … in 2005 set up the harshest unemployment benefit system in Europe. Hartz IV forces those eligible to take “one-euro jobs”, move house if their accommodation is judged too costly and obey a long list of bureaucratic stipulations on pain of losing their allowance. “The most drastic cut in social security since 1949” was what the conservative Frankfurter Allgemeine Zeitung called it when it was presented (on 30 June 2004).
It also notes that:
But Hartz IV set a record that will be hard to beat: its architects fixed the single allowance at such a low level that the constitutional court in Karlsruhe partially outlawed it last October, judging that the families who received it could not meet their children’s basic needs.
The article also quotes a Hamburg Green spokesperson who claimed the that the reforms were a “good idea … to encourage people back to work”. That is a neo-liberal perspective par excellence.
In late 2010, the German parliament reacted to the Constitutional Court’s decision and attempted to come up with a “legal” policy change with respect to Hartz IV unemployment payments.
The constitutional court had earlier (February 2010) order the Federal government to make the rate applicable to children relate to their actual needs (for subsistence) rather than the immiserising formula that the government had previously adopted (a percentage of the adult standard rate).
The response by the German government was disgraceful. They deliberately manipulated the benchmark (comparison group) income levels downward to suppress any major changes in the adult or child rate. The lowest quintile in the German income distribution have been severely disadvantaged by the Hartz reforms.
More than 20 per cent of the German workforce are now employed in the low-wage sector and many rely on Government benefits for basic food requirements. Many of these workers are employed full-time.
Poverty rates have risen sharply in Germany since 2001. The DESTATIS – the German Statistics Office (Statistiches Bundesamt) reported a 15.6 per cent “At-risk-of-poverty rate after social transfers” in 2010, up from 11 per cent in 2001. The figure was 24.2 per cent in 2010 before transfers.
For specific segments of the population though the figure is much higher. For example, 43.0 per cent of single parents were classified as being “At-risk-of-poverty rate after social transfers” in 2010 up from 35.9 per cent in 2008.
In the political debates in late 2010 and 2011 as the Government was consolidating these mean-spirited changes there was no protest from the SPD or the German Greens, the architects of the sorry system in the first place.
It is clear that in the period leading up to the crisis, the German “industrial powerhouse” attacked the welfare of their own population and made it virtually impossible for the other member states to enjoy enduring success once they had surrendered their currency sovereignty and the capacity to adjust to trade imbalances via exchange rate variations.
By suppressing domestic demand and reducing the real living standards of significant proportions of their population, the German government then relied on export growth to maintain overall real GDP growth.
But export growth – especially in a union where the majority of trade is intra – requires other nations to run substantial external deficits. The spending by the Southern European states, for example, allowed the German economy to grow in the pre-crisis period.
If the German trading partners within the monetary union had have followed Germany’s SPD-Green lead and set about impoverishing their own nations then the crisis would have come to Europe much earlier than it did and Germany would have been wallowing in a very deep recession with a large increase in its budget balance.
It was obvious that with “fixed exchange rates” imposed on member nations, there would be wide imbalances emerging in real exchange rates (measures of external competitiveness that take into account local productivity, price movements and nominal exchange rates) across the Eurozone.
It was obvious – and it was the German design – that nations such as Italy and Greece and the other nations that didn’t harshly repress the growth in living standards of their citizens – would become increasingly non-competitive. The “German Model” guaranteed that and the German growth was driven by that.
The fact that it was an unsustainable strategy appeared to escape the attention of the Euro elites, who to this day remain in denial.
But more worrying is that the focus on the blind ideology spouted by Dr Merkel and her CDU cronies allows the real political culprits in Germany – the Greens and the SPD – to remain under the radar.
My view is that unless the Greens reject neo-liberalism and admit that the Hartz reforms have been a disaster then they will remain a destructive force in German politics.
I am less harsh with respect to the Australian Greens but that might just be because they have never been in power yet. The worry is that with the macroeconomic policy they preach as core principle, it is hard to see why they would behave any differently to the German greens.
I have been getting a lot of hostile E-mail lately suggesting that MMT is losing the plot because it advocates extreme positions such as a Job Guarantee. This is sort of the parallel universe sort of point. I am astounded that anyone would think that it is extreme for a society to seek to ensure everyone can work if they want to and in doing so contribute to that society, and avoid poverty and social alienation.
It beggars belief really.
Then, apparently, many think that MMT also requires bank nationalisation in order to have a Job Guarantee and they cite my blog – Nationalising the banks – as proof of that.
First, I am not really going to get into a personal slanging match about any of that with anyone. I don’t find those sorts of dialogues to be at all productive. I have been called the full gamut of insults in my career (by other economists) and as the expression goes – Water off a duck’s back!
Second, in the cited blog on banking you will read – early on – the following:
So this blog is about banking. Not a complete story … but an account of what I think should happen to banks and banking. Note that this account is interpretative rather than a statement of MMT principles. It reflects my preferences based on my understanding of those principles. But equally, someone with a similar understanding might choose a different policy path.
That should tell anyone that bank nationalisation is my opinion and not a fundamental part of MMT theory. End of story on that one.
Third, in last week’s blog – On strategy and compromise – I mentioned a textbook – The Elements of Economics – by Lorie Tarshis (1947), which was the first American book to explicate the work on Keynes. I noted how it had been attacked by the conservatives and accused of being Communist propaganda, which effectively destroyed its sales.
In that book, you will read this section (page 347):
A word must be said, before we begin our analysis, about the political implications of the Keynesian theory. This is necessary because there is so much misinformation on the subject. The truth is simple. The Keynesian theory no more supports the New Deal stand or the Republican stand than do the newest data on atomic fusion. This does not mean that the Keynesian theory cannot be used by supporters of either political party; for it can be, and if it is properly used, it should be. The theory of employment we are going to study is simply an attempt to account for variations in the level of employment in a capitalist economy. It is possible, as we shall see later, to frame the Republican or the Democratic economic dogma in terms of the theory. After all, both good Republicans and good Democrats can analyze the causes of mental illness or of faulty timing in an automobile engine. And so the following chapters are neither an attack upon, nor a defense of, the beliefs of individual political parties. Rather, they are intended to show how a good many modern economists analyze this primary economic problem.
That is a lovely way of saying it. The same goes for Modern Monetary Theory (MMT). There is some strange notion that MMT is a new set of policy options waiting to be tried.
In fact, it is an explanation of the way the modern monetary system operates on a daily basis, under any policy regime (conservative, free market, Keynesian, democratic socialist, whatever). We live MMT every day.
Neo-liberalism operates with a MMT framework.
That is why I try to indicate when some specific policy recommendation is my opinion (reflecting my values, aims etc) and one of a number of policy options that could be pursued for a particular topic/area.
I prefer bank nationalisation and a serious reduction in the scope of banks to operate. But the veracity of MMT is not dependent on that preference. It would just be one way of organising the banking sector in a modern monetary economy.
The other point is that once we achieve an understanding of how the modern monetary economy actually works and why things happen the way they do – it lifts the public debate onto another plane (of sophistication). The myth merchants then cannot advocate austerity which deliberately causes unemployment and poverty by lying to the population.
Everyone would know that such a government and its supporter were preferring this sort of social and economic wreckage as a “cost” for maintaining their ideological purity. They could no longer say TINA – the government has no money. At that point, I suspect the policy debate would change dramatically and the austerity proponents would be expelled from office forthwith and the opposition parties would have more scope to develop a better range of alternatives rather than hide out as “neo-liberals on bikes”.
The JG is a somewhat different issue (in relation to preferences). As a policy choice it arises when we consider the best way of maintaining full employment and price stability. As I have indicated often, policy makers have to choose between two broad buffer stocks in a modern monetary economy. They can maintain price stability using unemployment buffers (the current choice) or via employment buffers (the JG approach). That is a reality rather than my opinion or preference.
Then ask yourself – in cost-benefit terms – which is the “best” buffer stock. We have argued – based on logic and empirical argument – that employment buffers are the superior choice.
So for a government intent on maximising welfare and avoiding waste as best they can – the unemployment buffer stock approach is inferior. That is the basis of the JG proposal. It is not necessarily my personal preference. It arises from taking the best choice of buffer stocks.
Please read my blogs – MMT is biased towards anti-crony and Whatever – its either employment or unemployment buffer stocks – for more discussion on this point.
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.