Obama and GOP Shared Austerity Vision Will Deepen Recession

Obama and GOP Shared Austerity Vision Will Deepen Recession

Dr. Heiner Flassbeck: The massive sequester cuts to government spending are a disaster - what's needed is a wage led recovery -   March 1, 2013
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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 (www.flassbeck-economics.de). Co-authored ACT NOW! The Global Manifesto for Economic Policy published in 2013 in Germany.


Obama and GOP Shared Austerity Vision Will Deepen RecessionPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

On Friday, the so-called sequester hits $85 billion of cuts. As we do the interview, it looks like there will be no last-minute reprieve. And if there is, it won't really change what we're about to talk about, because both sides of the sequester debate—Democratic Party leadership and the Republican Party leadership—both are arguing, in our opinion, more or less the same point: there's a need for austerity, for cuts. The debate on those parties' part seems to be only about how much. Well, our next guest thinks it's completely the wrong debate altogether.

Now joining us from just outside Geneva, in France, is Heiner Flassbeck. He served as director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development, known as UNCTAD. He's also—was the vice minister at the Federal Ministry of Finance in Bonn in Germany from October 1998 to April 1999. And he also is now teaching at Hamburg University, where he's a professor of economics.

Thanks very much for joining us again, Heiner.


JAY: So, first of all, what do you make of this political fight that's happening in the United States over sequester, and also, of course, the whole debate around austerity and cuts here?

FLASSBECK: Well, I think, to be mild, it's going to end in a disaster, because in the U.S., the recession is not over. It's not a recovery, as everybody expected a couple of years ago. It is a standstill, it's a stagnation of the economy.

And this situation, where everybody is uncertain about the future, in particular the workers uncertain about their jobs, about their wages, as the president acknowledged in his nation speech some weeks ago, so how can you, in this situation, cut in this way and in this dimension from the government side? It will end up in a deeper recession, in not only slowdown but an absolute fall of GDP, possibly for the whole year.

And this adds up for the whole world—take Europe, which is in a deep recession, and developing countries that are shaken by the development in the developed world, and Japan, that is still very fragile. So this is the global picture. And in this global picture, any further cut is a disaster.

JAY: Now, in the president's State of the Union speech, I was actually wondering whether he would even mention the word wages. And he did, but he did two things which I think sort of missed the point. Number one, he didn't tie wages and lack of demand to the recession. He just talked about how it's not a good thing that wages have been stagnant. But he didn't have any suggestion what to do about it. And the idea of raising minimum wages to $9, I guess it's something, but it doesn't alleviate families in poverty, which he said it was going to do. He said no American family should live in poverty, and I think every study shows a $9 minimum wage isn't going to solve that. But he also did nothing about the issue of a general rise in wages because of lack of demand.

FLASSBECK: Yeah, that's the point, you see, where we have still a taboo in most economists' brains, so to say. You have a cut where you're not allowed to go beyond because this violates the holy laws of economics in the past.

But we have to understand that this cannot go on. We are in a situation where we have high unemployment, extremely high unemployment all over the industrialized world. That puts pressure on wages, but on wages that are already low. We have the lowest wage share in developed countries for decades, and putting pressure on this very low wage share doesn't make sense. It's against the market rules, so to say, that this should happen, but it happened due to the financial crisis.

And here comes the point of make and break, where the president indeed didn't go far enough, namely, by saying we have to intervene, we have to intervene into the labor market to make sure that the people get a fair share and to make sure that we get out of this destabilization that comes from the labor market and prevents us from going into a normal recovery.

JAY: Well, the argument coming from, you could say, the right or the conservative faction of all of this is that a stimulus will be inflationary, a rise in wages will be inflationary; if the debt continues at this rate/level, it will be inflationary. And they seem to be far more concerned about that than unemployment.

FLASSBECK: Yeah. But the point is we are living in a period of deflationary danger. Look at what happened in Japan. We do not have to mention that anymore. Now we have a Japanese government that has at least understood that something has to be done, and on the wage front also. Mr. Abe, the new prime minister in Japan, mentioned wages several times and said we have to go beyond just having a certain minimum wage.

What is necessary is an intervention into the market, because the balance of power has shifted so dramatically. It has shifted anyway in the last decade towards the side of the employers, but now, with the rise in unemployment after the financial crisis, has shifted one more time. And this imbalance of power cannot go on. And there the government is needed to intervene and to make sure that the people come back not with inflationary income expectations, but with normal income expectations, income expectations that reflect the productivity increase. Nobody's talking about productivity increases, but we have productivity increases all over the industrialized countries, and that has to be reflected in wages.

And it's not just about setting a new minimum wage; it's about setting a reasonable minimum wage and making it a dynamic minimum wage, a minimum wage that increases with productivity and the inflation target. So in nominal terms what you need to get is the expectation that your wage in real terms rises like productivity and in nominal terms rises like productivity plus the inflation target of the central bank.

JAY: But isn't that at the heart of what you could say the struggle is about, that all that value, that wealth that's been created by this increase of productivity—when you look at wages and then you look at productivity, productivity has over the last ten, 15 years gone up like a rocket, and wages have not. But that wealth has gone into, you know, a very few hands, whether it's the 1 percent or it's spread out even more into the 5 or 10 percent, whatever. It's at the very top end, who has captured the value of that rise in productivity, and they don't want to give it up.

FLASSBECK: Yeah, sure. But that is why we need a government. And if there's a democratic government in the United States, they should take it up. If there's a president in his final term, he should take it up and should make the point.

But he has to go beyond where he has gone up to now. He has to go to the point, as I said, to intervene, to say, this is against the market, it's not even market, you know, it's destabilizing, it's a destabilizing market. And whenever we have destabilizing markets—take it in financial markets, whatever you take—then the government has to intervene, because there is no solution. The market cannot produce a solution. And you cannot hope for another round, as was in the first decade of this century, that the people are reducing their savings rate to zero. That will not happen again. And so there is no way out. The United States will be stuck in stagnation and high unemployment for the next ten years. Imagine. That would be really a disaster. So this has to be overcome.

And one instrument, surely, is fiscal policy, would be a huge stimulus program for fiscal policy. But if this is blocked, if this is blocked and you block political also, the intervention into the labor market, negotiations between employers and employees that make sure that the people get a fair share, then you're gone. Monetary policy has no instrument at all anymore. They have done what they could. They have no powder anymore. So the only way out is incomes policy, is intervention in the labor market, because we see, we see it absolutely clearly in the whole Western world that the labor market is destabilizing our economies.

JAY: Okay. In the next segment of our interview, we're going to dig into this further, because of course those people who have gathered all the fruit of this gain in productivity and don't want to give it up, they don't say that's the problem. They say the problem is something that's a problem for the whole economy. In other words, it's everybody's problem. So they have a theory of inflation. They have a theory on labor market. And, of course, it's not about rich not wanting to give up their wealth; it's about, oh, they're very concerned about the whole economy. So Mr. Flassbeck, I think, disagrees with their theories, and we're going to dig into those in the next segments to come.

Please join us on The Real News Network.


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