October 14, 2012

Low wages and high unemployment are paralyzing the global economy

Heiner Flassbeck [Director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development]: The drive to be more "competitive" is pushing the world economy into deep recession; the best that quantitative easing can do is create another bubble
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Dr. Heiner Flassbeck graduated in April 1976 in economics from Saarland University, Germany, concentrating on money and credit, business cycle theory and general philosophy of science; obtained a Ph.D. in Economics from the Free University, Berlin, Germany in July 1987. 2005 he was appointed honorary professor at the University of Hamburg.

Employment started at the German Council of Economic Experts, Wiesbaden between 1976 and 1980, followed by the Federal Ministry of Economics, Bonn until January 1986; chief macroeconomist in the German Institute for Economic Research (DIW) in Berlin between 1988 and 1998, and State Secretary (Vice Minister) from October 1998 to April 1999 at the Federal Ministry of Finance, Bonn, responsible for international affairs, the EU and IMF.

Worked at UNCTAD since 2000; from 2003 to December 2012 he was Director of the Division on Globalisation and Development Strategies. He was the principal author of the team preparing UNCTAD's Trade and Development Report, with specialization in macroeconomics, exchange rate policies, and international finance. Since January 2013 he is Director of Flassbeck-Economics, a consultancy for global macroeconomic questions ( Co-authored ACT NOW! The Global Manifesto for Economic Policy published in 2013 in Germany.


Low wages and high unemployment are paralyzing the global economyPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

In the United States, the strategy for recovery seems to be: get more competitive. What does that mean? It means more lowering wages. And if you get more lower wages, you can have more of an export economy. President Obama advocates that, candidate Romney advocates that. The problem is: what if every country's lowering wages—then what?

Now joining us to talk about the effects of all of this and the increasing global recession is Heiner Flassbeck. Heiner serves as the director of the division on globalization and development strategies since 2006 for the United Nations Conference on Trade and Development. He was the vice minister from October '98 to '99 at the Federal Ministry of Finance in Bonn, in Germany, and he was responsible for international affairs in the IMF. He joins us now from Geneva. Thanks very much for joining us, Heiner.


JAY: So you just issued your annual report for 2012, and essentially it's a report about inequality. But it's not just that inequality's not fair. The point of your report is this supposed drive to competitiveness and lower wages is actually at the root cause of the problem of the global recession. It's not just that it's not—that it's unjust. So talk about why you think this is the case.

FLASSBECK: Well, we have the situation that we have falling wage share in most of the developed economies in the last 20 years. It was, so to say, the recipe to deal with all the shocks that we had, with the oil shocks. Everybody said all the time to make your labor markets more flexible. And more flexibility clearly means, if you have high unemployment, cutting wages, and cutting wages in relation to profits and cutting wages in relation to productivity. So this was the recipe of the Washington consensus and all international institutions. And this has led to a situation that—where we are in now, where, so to say, the world economy is stuck and does not have the economic policy instruments anymore to get back into a recovery.

Let me explain that briefly. Take the United States. In the United States, which has also very low—everybody talks about high degree of inequality in the United States. But at the same time, unemployment has jumped. But it has jumped not due to high wages before, but it has jumped due to the financial crisis. But now you have high unemployment that puts pressure on wages, because the power is in the market, in the labor market, such that wage earners have nothing to negotiate for, and so they put pressure on wages. If wages fall, incomes fall for the average American household, and if incomes fall, consumption will fall. If consumption falls, investment falls, and the economy will not get out of recovery but deeper into recession.

So this is obviously a big problem with the market economies, because every good economist would say, well, if you have unemployment, then there should be pressure on wages, but if wages have never risen before and there's nevertheless unemployment, then you're in trouble somehow. And that is why the president and others will have big, big difficulties to get out of the slump. And that is why monetary policy does so desperate things as they're doing now.

JAY: Well, when President Obama was dealing with the crisis back in '08, '09, and now in his campaign, the sort of jewel in his crown is what he said was the saving of the American auto industry. But to a large extent that saving was based on lower wages. And starting workers get $13, $14 an hour—I'm hearing even as low as $9 an hour in sectors of the auto industry—where they used to make $25, $26, $27 an hour. And they're trumpeting this as the model for recovery.

FLASSBECK: Yeah. But if—the problem is only—the small problem, to be ironic, is that if you have an economy with an export share of 10 percent, by cutting wages you can get more competitive. But you really have a situation where the tail is wagging the dog and you get more losses inside the economy then you can gain outside.

And in addition, not everybody can improve its competitiveness in this world, because competitiveness is a relative concept and not an absolute concept. So everybody can increase productivity, but not everybody can increase competitiveness.

So there's a big misunderstanding all around the place. In Europe it's exactly the same. And you have examples now in Europe where countries have cut already their wages by 20 percent but nevertheless their economy is collapsing. Take the Southern European countries. There the export share is 25 percent. But if you kill 75 percent of your economy to save the 25, it's not a good bargain.

JAY: And the point you're making in the report is that, as you say, competitiveness is relative. So if all your competitors are doing the exact same thing you're doing, lowering wages, then it's—you're not really gaining an advantage. But what you are doing is sucking even more demand out of the global economy.

FLASSBECK: That's right. And there are only very few exceptions. If you took—take my own country, Germany. Germany was successful—so people say, up to now it was successful because it cut wages. But it's only under the historic, unique circumstances of the Monetary Union, where all the other countries did not retaliate, that it was a successful policy for some time. But now, unfortunately, Germany's clients are all bankrupt. And if you have policies that make your clients bankrupt, it's not a good idea.

JAY: Now, the other argument that's heard here is that the real root cause is not anything to do with demand in wages; it has to do with the deficit and debt. You say that's not true.

FLASSBECK: Yeah. [incompr.] government debt. We have to look a bit again at the overall economy, at the macro picture. And the macro picture is that you have—in many countries now you have private households saving because they are uncertain about their future, because they have no wage increases. So they're saving for precautious reasons. The companies sector is making still quite a bit of profit, so they're saving also, and the government tries to save also.

So, what is happening in an economy where everybody tries to save and nobody's going to spend? Well, the answer's very simple: this economy is going to collapse in a very short time or you find someone for the global economy, you find the Venus or Mars we can trade with. That's the only way out. But if that is not feasible, then we're stuck.

And that is where we are. We're stuck. Monetary policy has run out of instruments and of weapons, so to say, to fight the slump. Fiscal policy is blocked politically, and in wages, in terms of wages, and the labor market was going in the wrong direction. So there's no surprise that we cannot get out of recovery. Unfortunately—and this is a big problem that we have—most of my colleague economists still stick to the idea of a self-regulating, self-stabilizing labor market. As long as they do, we will not understand what is really going on.

JAY: And what's wrong with that idea?

FLASSBECK: Well, as I said, it's wrong—if you have a jump in unemployment at the lowest level of wages that we ever had, then the idea is definitely wrong, because the idea is based on the theory that if wages rise, unemployment rises. But if wages are low and wages are falling and unemployment rises, then this idea is wrong. And then the power of the employers in the market is going in the wrong direction, namely, in wage cuts, which destabilizes the economy, that destabilize the economy downwards. So we're getting in a downward spiral that nobody can stop anymore, even monetary policy cannot stop.

Look at the discussion that they had in Jackson Hole, the central bankers of the world. And some people have understood it. Donald Kohn, a former vice chairman of the Fed, said there must be something deeper that is going on in the market. And he's right: something deeper. The something deeper is that we have a distribution of income between labor and capital that's going in the wrong direction for 20 years, and now it's at the point of reckoning, so to say, where we have to understand this or we go into a Japanese-like stagnation for the next 20 years.

JAY: So the answer from Ben Bernanke and the central bankers, the American, the Canadian, particularly the Europeans, the Japanese, they're all saying, okay, then we need one form of quantitative easing or another. The banks are simply going to inject—the central banks will inject more liquidity into the banking system, and that's supposed to give rise to growth.

FLASSBECK: No. That's—the only thing that that would do is, if they're lucky, then they will pump up another bubble. And a bubble may help because it gives the people the illusion that they're getting rich. But this would be the same game that we have 10 years before, and I think we should not repeat it.

But even this is very improbable at this moment of time, because we are now—Europe, the United States, and Japan—being in exactly the same situation, namely, close to stagnation, are going into recession, and we see that quantitative easing hasn't been helping, not all. Up to now it has not been helping, and even the very unorthodox measures of the Fed that I welcome very much, because the Fed does what it can. But it cannot do enough. That's absolutely clear. And if the fiscal cliff comes now at the—what is called the fiscal cliff—at the beginning of January in the United States, then you're really in trouble. And I think Ben Bernanke understands quite well that he cannot compensate for the fiscal cliff.

JAY: The theory you hear from supporters of austerity, especially in North America and Europe, is that the real markets are going to be in the developing world, and what has to happen is that the production has to get more competitive in Europe and North America, not so much necessarily vis-à-vis each other, but vis-à-vis the developing world, so that they can take advantage of that growth, and that's where the savior of the system is going to come from.

FLASSBECK: Yeah, but then the global tail is wagging the global dog. Again, it's the developing countries altogether are much too small to be the engine of growth for, as I said, Japan, the United States, and Europe as a whole. This is something like 65 percent or so of the world economy. So you cannot expect countries like China or even India to move the world out of recession. It's absolutely impossible. It's—and this fight will lead to nothing if we cut wages, as I said. The first thing that we do, we kill our domestic market, and when we have killed our domestic market, even if we would get a little effect from exports, it would not help us or our economies.

We're doing this experiment. This experiment is running at this moment of time in Southern Europe, and it's badly failing. You see, since three years, the countries in Southern Europe are cutting wages. Greece has cut by 20 percent, Spain is cutting by 10 percent, Italy is on the path to cut. But where they have cut, this has never worked, because as I said, if you have 75 percent domestic market that is destroyed by the wage cut and this is the immediate effect of the wage cut, the people stop consuming. Then whenever you reach, after three, four years' time, the level of competitiveness in Europe vis-à-vis Germany, your system is destroyed and your political economy is destroyed, and your democracy maybe is destroyed.

JAY: I did a little experiment at the Toronto G-20. I went through the final declaration and I tried to find the word wages. I couldn't find the word once in the whole declaration, which was supposed to be this vision for the decade on how to get out of the crisis. This isn't even on the agenda of the policymakers, that wages should go up, except maybe they hint at it occasionally that the Chinese should have wages go up, but certainly not in their own countries. What are you finding when you talk to policymakers about this?

FLASSBECK: Well, it's difficult to talk to policymakers, no doubt because—and we have just experienced here in Geneva—it's very difficult to make them understand what's going on, because they're all grown up with the idea the labor market is a market, is a normal market. But if you explain to them that it's not a normal market, then they are shocked. And that is what all good economists, as I said, tell them all the time, that the labor market is a market, and if unemployment goes up, there has to be pressure on wages. It's clearly wrong this time, but it's very difficult to emancipate from this old idea that's been engraved, so to say, in the brains of economists for 100 years that the labor market is instable, it's terribly instable. And this is what we have to understand. The government has to do something about it.

But if the government blocks its own instruments, fiscal policy and monetary policy, then there's only direct intervention into the labor markets, call it incomes policy or whatever, how the government can stabilize the economy. Otherwise, it would go into deeper recession, I would say, and stagnation, as I said.

JAY: Okay. In the next part of our interview, we'll talk more about why this is happening and what can be done about it. Please join us for part two of our interview with Heiner Flassbeck.


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