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Dr. Heiner Flassbeck: Targeting low inflation will deepen crisis; government must pass laws and intervene to facilitate a general rise in wages

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Baltimore. And we’re continuing our interview with Heiner Flassbeck, who now joins us from France, just outside of Geneva.­

Heiner served as director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development, known as UNCTAD. He also was vice minister at the Federal Ministry of Finance in Bonn in Germany from October 1998 to April 1999. And he’s now a professor of economics at Hamburg University.

Thanks for joining us again, Heiner.


JAY: We’re just going to pick up our discussion from part one. So if you haven’t seen that, I suggest you go watch it and then come back and watch this, part two. But what we’re going to talk about in this segment is the whole issue of inflation.

If you look at the arguments coming from the right, their principal argument against higher wages is that it’s inflationary. Their principal argument against stimulus is that it’s inflationary because it might cause higher wages. And they’re also—they don’t like stimulus ’cause it will increase the deficit and the debt, they say, and that could result in lack of confidence in the U.S. dollar and could also increase the money supply, and thus that’s also inflationary. And in the final analysis, they see inflation as the principal, you could say, enemy of the global economy. And Mr. Flassbeck, I don’t think you agree with that. What’s your take, first of all, on what’s their theory and what you make of it?

FLASSBECK: Well, first of all, we have two reliable theories of inflation. One is cost-push, the other is demand-pull. Cost-push would be indeed the wages-induced inflation, which doesn’t exist in the whole world, because what we have is falling wage shares and we have stagnating unit labor costs. The most important determinant, indeed, of inflation is unit labor cost, but unit labor cost means nominal wages, so to say, minus productivity. Nowhere in the world nominal wages exceed productivity by a huge margin.

And what we’re asking for, what the reasonable people, reasonable economists in this world are asking for is that unit labor costs should increase like the inflation target. So we do not want to have overshooting over the target, but we just say like the inflation target. But that implies that the real wage rises like productivity. And this is the crucial point. Everybody misses in this debate or tries to dismiss the point of productivity. Productivity is the core.

JAY: So, Heiner, let me ask you a question. If that formula was applied to wages in North America or Europe, where would wages be now? How much of a rise in wages would we see?

FLASSBECK: In nominal terms, in nominal terms it would be a wage rise, say, in United States of something like 4 percent, something like 3.5 percent in Europe. That’s it. That’s—not more. There’s nothing inflationary in that. That would be just—and that would just—you see, the crucial point is we’re talking about income distribution. We’re talking about inequality.

What I’m asking for, what we have been asking for in UNCTAD is only the stabilization of the wage share at this very low level. What I say: if you apply this formula, the unit labor costs follow inflation target, real wages follow productivity, then you just stabilize the very low wage share, so that the huge share of profits of the capital side is even conserved, which is a big thing, a big challenge politically and needs further redistribution from the government side.

But from the wage side what you should do is clearly—what you need definitely for a recovery in the whole world is this formula, to apply this formula—which was a famous formula in the United States, by the way, a long time ago. It was the famous formula on which Japan and Germany had based their success stories in the past. And we have to come back to that. We have to relearn that story. Without that, it will never work.

JAY: And what kind of government policy could achieve that?

FLASSBECK: Well, what you do, you do—it’s different from country to country, but the United States, I’m not quite sure about the power of the unions at this moment of time, but it’s very clear that the unions are weak. So what you need is a strengthening of the union power of the labor side from the government. So put together a kind of roundtable discussion between employers or unions, or strengthen the right of the unions to fight for such a wage formula.

And there are many other ways. And one of the most important signals is clearly that the government for its own employees applies such a formula, and plus you apply such a formula to the minimum wage. That’s why the whole discussion about the minimum wage is a bit beside the point. To raise once the minimum wage is a good thing but is not sufficient. You have to dynamize, you have to make it dynamic, you have to move the minimum wage year by year with the productivity and the inflation. This is what would make the difference and would give a signal to all the other employees that they have the same right and would give a signal to the employers that they have to give their people what the people on the minimum wage get.

JAY: So, Heiner, what then do you make of the economic theory of the Obama administration? ‘Cause he seems to be a million miles away from what you’re talking about. When he first ran in 2008, he was talking a lot about the Employee Free Choice Act and the importance of trade unions and such, and in a sense, by implication, higher wages. But since then we’ve heard very little of that. And in the last State of the Union and more recently, the words EFCA and that reform to labor law are not even spoken. As I said in the opening to part one of this interview, President Obama seems to be arguing with the Republicans not about cuts, but about how much cuts, in terms of he does buy into the basic logic of austerity, he just doesn’t want it to be quite so extreme as the Republicans do.

FLASSBECK: Yeah. That’s—but we will have to learn it then the hard way, you see. There is no way out. I don’t see how should a recovery come about without a new stimulus on the consumption side. If you take Europe, Japan, and the United States, you have such a huge share of consumption that you cannot expect a recovery coming from anywhere but from consumption. And consumption doesn’t come from just jumping employment, suddenly having employment growth. No. Never in history it was like that. But the first thing always was that the people got back in their jobs, they got in their jobs higher wages, because there was a normalization of the labor market.

If we are not able to bring about the normalization of the balance of power in the labor market due to normal economic policy instruments, then we have to use unnormal, you would have to use heterodox or unorthodox measures to get back to a normal recovery. Otherwise, I do not see where [incompr.] this whole system is going to go. If the system is going to stagnate for the next 20 years, as in Japan—we have two lost decades—where will it go politically? Politically that would be a disaster. We will have extremists on the right and the left everywhere fighting each other like hell, and we will never get back to a normal growth trajectory as we had in the past.

JAY: So when I read the business pages this morning and the talk about sequestration and these $85 billion worth of cuts, they seem unconcerned. In fact, one of the articles specifically talked about how unconcerned Wall Street and corporate America are about the sequestration cuts. And I wonder—you know, leads me to think that perhaps in fact the objective here is a period of more recession, because it is lowering wages.

And what corporate America and Wall Street perhaps want out of this period is a fundamental restructuring of what a normal wage is in the United States. And while that might make sense in terms of an individual enterprise, which can then pay their workers less and in theory they make more profit, I don’t get why they can’t think systemically, that if all the enterprises are doing this, they’re generally lowering demand and they’re going to continue this paralysis, and then you don’t actually see how the recession ends.

FLASSBECK: No, I think their microeconomic calculus, it makes sense. They’re sitting on high profits. They’re sitting on an enormous amount of cash. Look at Apple and other companies. They’re sitting on so much cash they don’t know what to do with it. So they’re feeling comfortable for the moment.

Well, they do not understand that very much of the profits that they made in the last years was clearly based on government spending, on nothing else. The whole company sector can only benefit from deficit spending, so to say, of one sector, either of itself—when the company sector is investing and is taking on credit, that increases indeed the profits of the company sector. But if they don’t do it (and they really don’t do it at the moment of time) and if the government does nothing, the government is saving and the households are saving, and they don’t get initial demand from other countries, then they’re stuck, then they’re sitting on the cash. But how long can you sit on the cash? Sooner or later the cash is gone, and then they will get a wake-up call, and it will be not a very nice one.

This is what the government has to understand. And that is why government cannot just be happy with happy companies with their shortsighted view of the world.

JAY: So, Heiner, you were head of UNCTAD. You were in Geneva. You were meeting senior politicians and businessmen, both European and American. You were meeting with leading economists, conservative economists. I don’t get how they answer your logic, your argument. I mean, it seems—unless I’m missing something, what you’re saying is rather obvious and true, and it’s clear if you look at austerity policy in Europe that Greece and Italy are in chaos and the other countries are showing rather clearly that austerity does not lead to growth. I mean, what do they say to you? How do they argue with you?

FLASSBECK: One argument is we need structural reforms, what they call structural reforms. Nobody knows exactly what it is, but in principle it’s always—in the end it’s wage cuts. And they say—which ends up with the same thing: they say we have to improve competitiveness.

But that is all nonsense. Not the whole world can improve its competitiveness. If everybody cuts wages, it doesn’t help anyone. And these are macroeconomic logic that they don’t understand. You see, these are what economists sometimes call fallacies of composition: the thing that is right for the single entity is not right for the economy as a whole.

And here we are lacking brave economists that would really have an insight into these things and speak about it. They don’t do—even the most progressive economists shy away, as I said in the beginning, shy away from addressing the labor market instability. They’re not willing to say, oh, wages can be too low. That’s very difficult to say, for an economist to say the wage is too low. I’m saying that, but they’re shying away from saying that. And so they’re always back into the trap that they tried to do what all the other guys do, and then they end up in chaos.

You see, in Europe they have done all this exercise. What is now happening, they are giving the impression as if this was all natural [incompr.] Greece GDP dropped by 30 percent, and it was natural, it was given, so to say. It was not the result of wrong policies; it was given due to the structural problems in that country. And this is the kind of language, the kind of narrative with which they try to get away without acknowledging that they were totally wrong.

JAY: It makes me think of pre-World War I days, where there were many people that saw the world was headed towards this disastrous global war, but none of the elites, none of the leaders of any of the countries would really do anything to stop it. And, in fact, there was almost an appetite for it. And now, with the current economy heading what seems to be towards deeper recession—again, one of the—a lost decade you’ve talked about, and others have. I mean, it’s like the Titanic is heading towards the iceberg and it’s too late to turn, but except they’re not just not turning these days; they’re actually putting coal on the fire to go faster. But I guess part of it is that, you know, there’s people that know how to make money out of the current situation, they know how to make money out of recession, they know how to make money out of deeper crisis, and they’re very powerful.

FLASSBECK: That’s right. That’s right. And if you don’t have one political leader who would really take the lead, who would, so to say, claim leadership among the others and tell them this is not the way to do it, so we have to change our direction, so where would you end? Imagine Roosevelt would not have been Roosevelt. What would have happened in the United States? It would not have been a recovery. It would have gone deeper into depression. And surely some people are always gaining, even by a Depression, but in the end it destabilizes the whole society. What you see in Italy last Sunday and Monday, the election, shows that the people are uncertain, the people are scared, the people are voting for this and that without knowing where to go. And this is really dangerous. This is dangerous not only for the economy; this is dangerous, extremely dangerous for our societies and for democracy.

JAY: Thanks for joining us, Heiner.

FLASSBECK: Okay. Thank you.

JAY: And thank you for joining us on The Real News Network.


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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.