YouTube video

Pt 2. Heiner Flassbeck [Director of the Division on Globalization and
Development Strategies of the United
Nations Conference on Trade and Development]: Governments must
 intervene with policy that pushes
wages up in line with productivity or global recession will deepen

Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

This is part two of our interview with Heiner Flassbeck. Heiner served since 2006 as the director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development. They’ve just issued their new report for 2012, and the basic thesis of this report is: this drive for, quote, competitiveness between countries—essentially, drive towards lower wages—is not really leading to competitiveness; it’s just leading to more transfer of wealth the top percentile and the sucking out of real demand across the globe.

And now we continue our interview [incompr.] talk a little more about why this is happening and what can be done about it. Thanks very much for joining us, Heiner.


JAY: So is part of what’s happening here—because it seems to me rather obvious that if one looks at Europe and one looks at, you know, Greece and Spain and Portugal, I mean, it doesn’t take a rocket scientist to see that these austerity measures are not creating, quote-unquote, competitiveness; they’re creating years of deep recession. But has simply finance capital decided, at least sections of it that are the most powerful, that there needs to be a sort of fundamental structural shift which essentially comes down to—. You know, in the post-World War II years, in the opinion of some of these people, you know, workers simply got too much because of the strength of the workers movements in Europe, partly because of the Cold War politics; but now is the time to kind of take advantage of this crisis and have a fundamental shift in where income goes and, in other words, break down the social safety net of Europe and North America, and even if you go through some pain, the truth is the top percentile’s not going to feel that pain.

FLASSBECK: Yeah, I don’t think that it’s true anymore. That was true 20, 30 years ago when this whole campaign started with Reagan and Thatcher, when they started to de-unionize, so to say, their economies and they tried to reduce the power of labor. It only went rather well. It went for a time rather well, and the profits were rising, because there were financial bubbles. But now the financial bubble economy’s more or less over.

So the financial bubbles created the illusion with private households—and even with workers’ households—that they could get rich without working, they could get rich by investing in financial markets. And so they went on spending, and they were relying on rising house prices and so on. So—but this is over. This illusion is dead now.

And we always knew once the point comes where private households start to save—and that is what I said before: they’re saving now a reasonable percentage of their income because there’s uncertainty and they see their incomes are not rising, their incomes are stuck, they’re stagnating—at this moment of time, the whole calculus doesn’t work anymore, because you don’t get—you need demand to get profits, and if you don’t have demand, if the economy is stagnating, the profit mechanism’s also dead. So I think we have reached, really, a critical point where this old model, even if it is in the heads of some people, will fail.

JAY: Well, I guess you could say that in an overall sense. But when you look at individual enterprises, they’re taking tremendous advantage of this situation. For example, a company like Harley Davidson and others—we looked at three companies in Wisconsin that in the last year negotiated these two-tier contracts that are similar to what happened at General Motors, where new employees are coming in at half the wages of existing employees. And that’s spreading across the country. The trade unions have never been weaker. I was talking to a trade union leader recently who was saying there was a—she was involved in a discussion with other leading national trade union leaders. They’re expecting to lose another half of their membership in 4 to 5 years, and they’re already, in the private sector, down to something like 6 or 7 percent unionization. You know, we could be looking at the end of organized labor in the United States by the end of this decade.

FLASSBECK: Yeah, but the result would be, as I said, that you would destroy your own—your clients, you destroy the ability of your clients to buy your goods, and that is not reasonable in the end. So even if this calculus is there, it’s wrong. We have seen it in Europe. Germany has done exactly that. Germany has cut wages dramatically, and the—for the low-skilled workers, they were cut by half or so in some areas and regions, which was a good idea, but only for the export front, for the exporting firms with [incompr.] absolutely fixed exchange rate, or the Monetary Union. Under these special conditions it was for them really a bonanza, but for all the others it was a disaster. And now it’s a disaster for the export firms as well, because, as I said before, we have made our clients go bankrupt, which is not a good idea.

So it’s over. And for the United States, it is anyway. There may be some spots—clearly, there are some spots where people can earn. And that is what is happening, that is what is destabilizing the economy, because all companies are now going for competition in cutting wages. So who’s the best cutter of wages is going to win the game. But for the economy as a whole, it’s a disaster, it’s leading into disaster, because it’s leading into deflation and depression. That is what we have in the ’30s last century, namely, that everybody was cutting wages. We have competitive wage cuts all around the economy. We have competitive depreciation of currencies. And this will lead into disaster very quickly. In two, three years’ time we will have deflation and depression, and nobody can get us out of that anymore.

JAY: And what do you think should be done?

FLASSBECK: Well, we need a balanced combination, as I said, of intervention in the labor market to allow this—to not allow these destabilizing forces to work and to continue to work. We need to avoid the fiscal cliff in the United States. We need the rebalancing of fiscal policy in Europe. That means that [incompr.] surplus country, in particular Germany, have to do more. They have to stimulate the economy. And thirdly, we need to go on with monetary policy. But monetary policy’s over. I mean, what can they do more? They cannot do much more all over the place.

And only—but the core of the thing is you have to stabilize the labor market. Look at Japan. The balance sheets [incompr.] in Japan, they have done all this deleveraging, and they had the balance sheet recession. But that is over a long time. But nevertheless, they’re not going out of the stagnation, because the income situation is such: the incomes are stagnating or falling. And as long as incomes are stagnating and falling, you do not get consumption, and without consumption, there is no way that the big developed countries can get out of recession. For Japan, Europe, and the United States together, consumption is something like 85 percent, and you cannot replace that by any other demand component.

JAY: Well, I mean, we know the story of the scorpion and the fox. You know, the scorpion tells the fox to take him across the river, and the fox says, I can’t, you’ll sting me, and the scorpion halfway across stings the fox, and they’re both about to drown, and the fox says, why did you do it? And the scorpion says, it’s in my nature. Is it not just in the nature of capital that they will let us drown because they can’t imagine creating conditions for wages go up?

FLASSBECK: Sure. That’s right. That’s why you need a competent government. There’s no way out. It’s very clear there is no self-stabilizing mechanism in the market. The market is killing itself. That’s absolute sure. That is what I mean by the experience of the Great Depression. That was not government-made; it was the destabilizing forces in the market itself. So you need a competent government. If we don’t get competent governments—and when I say get, I mean a number of big countries are voting in short time. If we don’t get competent governments who understand this logic of the market, the destabilizing logic of the market, then there is no way out. That’s for sure.

JAY: And we’re not seeing that in the American election.

FLASSBECK: Yeah, we look the American election. We have in Germany election in Autumn next year. So we had just election in France. Unfortunately, it has not worked out in a way that we get an opposing force in Europe. And in Japan, the political situation is as fragile as the economic situation. So there is not much hope. But the United States could really make the difference; a new administration could make the difference.

JAY: But the new—.

FLASSBECK: Administration—when I say administration, I do not mean it must be a new president.

JAY: Right, because based on the last four years—I mean, he had said—President Obama had several opportunities to sort of go in the path or direction you’re talking about. Auto industry certainly was one. The other was the Employment Free Choice Act, EFCA, if that was supposed to change labor legislation. He promised to pass this, and that would have made it easier to organize unions that one would think would have some upward effect on raising wages. But then they never passed it.

FLASSBECK: Yeah, that’s right. That would have been necessary to stabilize the situation. But still it can be done. It’s not yet too late. One should remember there is an interesting story in a new book that came out called The Assumptions Economists Make. The author shows that in 1948 there was a kind of Detroit consensus in the automobile industry which said that the workers should systematically get the productivity increase plus an inflation compensation. So the compensation should rise with inflation plus productivity. This was a good formula.

If you revise it a bit and say it should be a productivity trend, a four or five years’ productivity trend, should be extrapolated one year or two years, that should be reflected in nominal wages plus the inflation target of the economy, then you get a perfect formula to stabilize a growing economy and to get back into a growing economy. We have to relearn this lesson.

JAY: Well, one of the things about that time, though, 1946 was the year when more American workers were on strike in the history the country or ever since. There was a massive demand on the part of workers and soldiers coming back from the war. So there was a lot of pressure to create some kind of plan that would create jobs. You don’t see that in the workers movement now. The union movement has never been weaker.

FLASSBECK: Yeah, that’s right. The union movement is weak all over the place in the world. It has been dramatically weakened by the mainstream theory in economics and that was executed by politics. But—and this this is the big but—we have the chance to learn the lesson now. The evidence is absolutely obvious that we have to turn around, that we cannot go on like this. And I hope that we’re not learning it the hard way, as in the depression of the ’30s, but that we have at least some enlightened economists and politicians who change the course before it’s too late.

JAY: So it sounds like your message for ordinary workers that might be watching this is that they need to get organized and fight for higher wages, not just for themselves, but the actual global economy depends on it.

FLASSBECK: Yeah, absolutely, all over the place. And they should really look at the elections as a chance to get the right politicians at least to get the right direction and to have a chance to be back into normal business. And normal business means rising wages in the next few years.

JAY: Thanks for joining us, Heiner.

FLASSBECK: You’re welcome.

JAY: 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.