YouTube video

Dr. Heiner Flassbeck: If wages don’t rise and the “pathological” power of finance is not pushed back, we will face a deep depression

Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. The European leaders have met, and they have come up with an agreement, but it’s rather dubious, most people think, whether they’ve actually solved anything. Now joining us to talk further about the roots of the crisis in Europe and what solutions might be possible is Heiner Flassbeck. Mr. Flassbeck serves since 2006 as director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development, and he was the vice minister from October 1998 to April 1999 at the Federal Ministry of Finance in Bonn, responsible for international affairs, the European Union, and IMF. Heiner’s joining us from Geneva. Thanks for joining us. In a recent talk you gave at the University of Texas, you were saying when you were talking about the euro crisis that it’s not fundamentally a struggle or a fight between countries, it’s not fundamentally a struggle between North and South, that it’s really a struggle between capital and labor. And people don’t talk about that very much and use that kind of language anymore. What did you mean by that?

DR. HEINER FLASSBECK, DIRECTOR, DIVISION ON GLOBALIZATION AND DEVELOPMENT STRATEGIES, UNCTAD: Well, what I meant is the redistribution of income that we have seen in the last 20 years and that was over–papered over only for a time, for a short time, by some strange hopes of getting wealthy through nothing, by speculating in some markets and the stock market and so on. But now it comes to the real question: are we willing to have everyone in the economy participating in the success of the economy, which is expressed in productivity increases mostly, or not? And I think if we do not answer the question affirmatively, we will see that the kind of market economy that we have now will reach a limit, will hit a wall, because look at the United States, look at Europe, look at Japan. If you do not give people reasonable expectations for income growth, you will not grow at all. As I said, it can be papered over for a time by some illusionary effects, but in the end you have to pay them reasonable wages, you have to pay them decent wages. And if you don’t do that, the whole economic model will stall and will not be able to solve our problems.

JAY: So define what you mean by reasonable wages. I mean, you’ve talked before about that wages should be linked to productivity. What’s the evidence that they’re not linked–so linked?

FLASSBECK: Well, what we have is a fall in wage share, which means that real wages are not following productivity anymore. The two successful decades after the Second World War that we had were in particular decades where real wages were strictly following, even overshooting productivity sometime. So this was a sound, sustainable model. What we have seen afterwards is–was first due to the shock of unemployment, then to the changing powers between labor and capital. We saw a permanent decrease of wage shares in many, many countries. And this, as I said, has come to a limit now. We may go on–as you see in Japan, we may go on with falling or stagnating wages all the time, but then the overall economy will stagnate. You will end up in deflation and stagnation. This is the model we are heading for. And now is still the time to change it, to turn it around. But at the moment I do not see the political leaders who could do it and I do not see my colleague economists, so to say, question the model of wage flexibility, question the model of more flexibility in the whole of the labor market. That was clearly the mainstream of the last 20 years. We should remember that in particular American colleagues were all the time, all the time asking Europeans to become more flexible. Then Germany became more flexible, but with disastrous results not only for the eurozone but for Europe as a whole.

JAY: One of the arguments you hear from corporate leaders, finance leaders privately–they don’t say this publicly very often, but they say that for Europe and North America to compete with China and India and Brazil, they actually have to lower wages in Europe and North America, that that’s actually the object of all of this, and that these–we just have to go through this catharsis to become competitive. What do you make of that argument?

FLASSBECK: This is in my view wrong from two sides. If you look at Japan, Europe, and the United States together, then the share of consumption and GDP is something like 80 percent or more than 80 percent. So forget about exports and forget about investment; if you do not revive consumption in these three big regions, then you will end up nowhere. And it would be a joke, it would be just a wrong way round if these big three regions which make up for something like 65, 70 percent of global GDP would try to reach China from the top, so to say, instead of letting China come from the bottom. And if–and on the other hand, it’s wrong because if you look at China, China is successful because wages are rising. Wages are rising now for ten years. Real wages are rising by something like 7, 8, 9 percent in China. And that makes China successful, not only the export and the competition through exports.

JAY: So what would be the consequences on China if you have this kind of decade of recession in Europe and North America?

FLASSBECK: If you look at China, China has changed its strategy, China is changing the strategy. Right now they have understood that wages have to rise. They give strong signals through minimum wages, for example, to the companies. They have supported strong wage increases in many firms. And I think this is a clear signal that they know that they need the participation of the mass of the people and they cannot keep them out and they cannot allow too much inequality inside the country to make it politically–to keep it politically stable.

JAY: You said earlier in our interviews that this lost decade is virtually inevitable unless there’s radical measures taken. What kind of measures would you like to see?

FLASSBECK: Well, I think to overcome such stagnation and deflation, you need very strong fiscal stimulus, on the one hand. But Japan has shown–Japan has tried several times to overcome it by fiscal stimulus. It’s very difficult politically, and we know the blockades in Europe and in United States concerning fiscal–more fiscal stimulus. So you need–in addition you need policies that directly address the wage problem. Japan has never done that. Japan has tried monetary policy for ten years, then fiscal policy for ten years, but they never tried to tackle the wage problem at the root, so to say, by talking to employers and by strengthening unions so that you get a consensus. And we have forged consensuses of that kind, many in the past after the Second World War, to forge a consensus that leads everybody to understand that without wages rising in line with productivity, real wages rising in line with productivity, plus a premium for nominal wages to keep inflation in check, it will never work. You will lose the model, the successful model of market economy that we’re used to.

JAY: The global finance sector, which has so much power not just in the economy but in the politics of just about every country on earth, is not going to be very interested in the kind of policy that you’re suggesting. So, assuming they don’t get some kind of brain transplant or a heart transplant, what are we likely to see over the next period?

FLASSBECK: Yeah, that’s a very good question, because what I’m talking about is really the real economy is not so much the finance sector, but we have to cut it down anyway. We have to understand that what has been happening in the finance sector was a pathological development in the last 20 years, that they have not created social wealth, that they have not contributed to productivity, but they have appropriated a very high share, much higher in U.S. than in Europe, of our overall income that everybody has been contributing to. So this has to change anyway, and I think we are discussing it a bit. You have your vDodd-Frank Act. In Europe we’re coming now up with something like financial regulation. But this has to be strengthened. It is another part, so to say, of the same story that you have to weaken the financial sector and strengthen the real sector of the economy. But the real sector cannot be strengthened without a reasonable wage regime.

JAY: Well, even Dodd-Frank, which was pretty weak to begin with after so much pressure brought on Congress by Wall Street, what it did have, for example, what the regulations that were supposed to be enacted by the Commodity Futures Trading Commission, as an example, on position limits, the rules they come up with are so weak after so much further lobbying by Wall Street that they’re unlikely to be very effective. So this ability to actually regulate this sector seems negligible. And if that doesn’t change, then what?

FLASSBECK: Yeah, but there is no climate now as was at the beginning of the century. There was a climate, a general climate of euphoria about finance that is no longer there. On the other hand, as I said, you had some illusionary effects on the side of households that were consuming by reducing the savings rate. That is over now. People have understood that this is not a feasible model. So the overall global climate is not there for new bubbles to be inflated. So the financial sector is not as strong as it was some years ago. But, nevertheless, it’s very clear we need political leaders who are able to fight and withstand the lobby, the very strong lobbying of the sector. But if we don’t do that, then you I would forecast it getting worse than just stagnation and deflation. Then we will end up, maybe, in a full-fledged recession. And only we’ll find then, hopefully, as was after the Great Depression, the political strength to push back the financial sector.

JAY: Thanks very much for joining us.

FLASSBECK: You’re welcome.

JAY: And thank you for joining us on The Real News Network. And don’t forget the donate button over here, because if you don’t do that, we can’t do this.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.

Creative Commons License

Republish our articles for free, online or in print, under a Creative Commons license.

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.