Neo-liberals on bikes …

I had an interesting conversation with a lunch visitor today about Germany (he lived and studied there) and its role in the Eurozone crisis. Yes, we talk economics even at times of rest! We discussed some of the events leading up to the Euro crisis and the important role played by the so-called progressive political parties in Germany. The conservative Christian Democrats are sounding like lunatics at the moment with the “You will have austerity and enjoy it” mantras. The focus on their harsh and destructive stance supporting fiscal austerity has taken the spotlight off the real culprits – the SPD and the Greens. We should never forget the role that they played – over the period of the Gerhard Schröder’s federal government (1998-2005) – in creating the pre-conditions that have ensured the crisis will be long and very damaging. We should also remember that Green parties have developed a tendency to be “neo-liberals on bikes” as a means of gaining power. The problem is that once they are pedalling in that direction they lose the capacity to pursue truly green policies, which extend beyond the remit of having clean building codes and sound urban design.

There is a lot of political argy bargy in Australia at the moment as the governing Labor Party attempt to distinguish themselves from the Greens, who hold the balance of power in the Senate (upper house) and have one crucial vote in the House of Representatives (lower house). The Government is facing electoral oblivion in 2013 as they flounder around in denial despite being one of the most unpopular governments in our history. They seem to think associating with the Greens is bad for their neo-liberal image. Nothing could be further from the truth.

In 2009 I explained why I thought the Australian Greens had become infested by the neo-liberals. Please read this blog – Neo-liberals invade The Greens!.

That blog led to some strident defence from various Greens and a mini-debate ensued. Please read my blogs – A response to (green) critics … Part 1 and A response to (green) critics … Part 2 and A response to (green) critics – finale (for now)! – for the documentation of the discussion.

The basis of my critique is the policy platform that the Australian Greens stand on. For example, its Economic Principles say (among other things):

The Australian Greens believe that:

8. government finances must be sustainable over the long run; budget deficits and surpluses must balance each other over the business cycle.

9. long term government borrowing is the preferred mechanism for funding long term infrastructure investments.

….

I noted that an application of these fundamental principles would erode the capacity of the Government to achieve much of what The Greens aspire to by way of social and environmental policy.

I explained in detail why that would be the case. What the Greens do not understand is that the government balance is a mirror image of the non-government balance – $-for-$. The only way you can run a budget on balance equal to zero over the cycle is if you do not want the non-government sector to net save overall in the currency of issue on average over the cycle.

Given that current account deficits are also typical for Australia, the Greens policy is successfully implement would amount to the private domestic sector accumulating ever-increasing levels of debt as they run deficits equal to the external deficit (averaged over the cycle).

That scenario is not sustainable as a growth strategy, and The Greens have been critical of the credit-binges that preceded the crisis. We can only conclude that the policy makers haven’t tied all the pieces together and understood that their position is not only undesirable but also internally inconsistent.

Following the publication of that blog I was invited to address the National Conference of The Greens in Adelaide (the following year). It was an interesting experience and I spoke to the then leader Bob Brown (recently retired) about these matters. His view was that while I might be correct in the technical macroeconomic arguments the point was that the messages were too complicated for the public to absorb.

He said that in that context, it was better to go along with the orthodox view of budgets and macroeconomic constraints to avoid alienating the public and concentrate on the Green messages. I indicated at the time that I thought that was an inherently dishonest position for a political party to take and demonstrated a failure of leadership.

The point is that the Australian Greens perpetuate neo-liberal views and fail to understand that to full implement is broader social-ecological agenda there needs to be a fundamental change in the macroeconomic understandings that the public are provided with by our politicians.

But the problem is not confined to Australia and it is here that our lunchtime conversation becomes relevant.

The title for today’s blog comes from an article in Le Monde diplomatique – Germany goes for sustainable capitalism (October 2011). LMD is one of my favourite magazines.

The expression – “neoliberal party on bikes” – was coined by the co-founder of the German Greens – Jutta Ditfurth – “who left the party in 1991” in protest to the so-called “Realo-Flügels der Grünen” – a faction led by Joschka Fischer. The latter wanted to soften the Greens voice and ditch its left origins.

The article cited provides an excellent analytical history of the role that the Greens in Germany have played over the last few decades.

It begins by describing the excellent work that the Greens have done while in political office (as coalition partners in Hamburg city) in terms of urban design and building codes.

There is also talk of a “Green miracle” sweeping Germany as the political fortunes of the party increase in proportion to the loss of support for the Christian Democrats and the Social Democrat SPD.

The old “Red and Green” coalition (SPD and Greens) is now being referred to as the “Green and Red” as the political support for the “progressive” parties changes in Germany.

The article tells us that in the 1980s, when the Greens were first contesting elections they were dismissed as extremist – “supporting armed struggle and anti-constitutional ideas”.

But now Winfried Kretschmann, the new Green regional government head in Baden-Württemberg says he is:

… neither of the left nor the right” and has cordial relations with Erwin Teufel, the local CDU’s leading light, whose “moderate, centrist” orientation he says he shares …

We learn that ““Green fever is spreading to conservative circles. Entrepreneurs and the rich are making eyes at the Greens.”

The article notes that the Greens have already been a large part of the governmental landscape in Germany and was a coalition partner for “seven years as part of Gerhard Schröder’s federal government (1998-2005)”.

It notes that the 2008 Coalition with the CDU in the Hamburg government was exemplary for its “budgetary orthodoxy”:

When the financial crisis broke, Greens and Christian Democrats immediately agreed to rein in public spending, by raising nursery charges for example. They pumped €1.5bn into HSH Nordbank, rushed to aid the Hapag-Lloyd shipping group and took measures to cajole investors.

But a reflection on the federal years in coalition is also important.

It is clear that the EU elites and the individual national governments that went along with the creation of the monetary union went one step further than the rest of the advanced world in adopting neo-liberalism. The decision to impose the monetary union meant they also abandoned floating exchange rates and deliberately, under pressure from the dominant Germans, chose to eschew the creation of a federal-level fiscal authority.

So we had the nonsensical situation of a common currency effectively rendering the member-states as foreign-currency users without an exchange rate and without the prospect of federal redistribution assistance in the face of asymmetrical and negative aggregate demand shocks. States such as California would have been bankrupt years ago if the US federal system had have adopted such a monetary system design. Same for states in Australia, for example.

The Germans had cultivated their own brand of extreme neo-liberalism – known as ordoliberalism. The aim of the EMU designers was to firmly limit the capacity of the “state”. I wrote about the influence of ordoliberalisms in this blog – Rescue packages and iron boots.

It was obvious that during the Maastricht process the neo-liberal leanings of the designers were never going to allow a fully-fledged federal fiscal capacity to be created, which would have allowed the EMU to actually effectively meet the challenges of the asymmetric aggregate demand shocks that the crisis generated.

Instead they deliberately limited the fiscal capacity of the state in the false belief that a self-regulating private market place would deliver the best outcomes and be resilient enough to withstand cyclical events. The Germans, of-course, knew that by signing up to the EMU they would have to change the way they pursued their mercantilist ambitions.

Previously, the Bundesbank had manipulated the Deutsch mark parity to ensure the German export sector remained very competitive. That is one of the reasons they became an export powerhouse. It is the same strategy that the Chinese are now following and being criticised for by the Europeans and others.

Once the Germans lost control of the nominal exchange rate by signing up to the EMU they had to manipulate other “cost” variables to tilt the trade field in their favour. That is, they could still manipulate the real exchange rate by reducing domestic costs.

In this blog – The German model is not workable for the Eurozone – I discussed the so-called Hartz reforms that were imposed on the German workforce in the period prior to the crisis as a way to artificially tilt the EMU-playing field in favour of the Germans.

The Germans were aggressive in implementing their so-called “Hartz package of welfare reforms”. A few years ago we did a detailed study of the so-called Hartz reforms in the German labour market. One publicly available Working Paper is available describing some of that research.

The Hartz reforms had the effect of creating an unnatural economic environment for the Southern states to have to operate within and were a crucial determinant of the way the crisis manifested in Europe and why it has persisted for so long.

The Southern nations were doomed to fail no matter what, independent of their fiscal positions (noting that Spain was running budget surpluses in the lead up to the crisis and Greece budget deficits).

The Hartz reforms were the exemplar of the neo-liberal approach to labour market deregulation. They were an integral part of the German government’s Agenda 2010. They involved a set of recommendations about how the the German labour market should be changed and were the result of a 2002 commission, presided over and named after Peter Hartz, a key executive from German car manufacturer Volkswagen.

Which government endorsed these recommendations? Answer: No less than the red-green coalition government led by Gerhard Schröder.

The Hartz recommendations were fully endorsed by the Schröder coalition government and introduced in four tranches: Hartz I to IV. The reforms of Hartz I to Hartz III, took place in January 2003-2004, while Hartz IV began in January 2005. The reforms represent extremely far reaching in terms of the labour market policy that had been stable for several decades.

The Hartz process was broadly inline with reforms that have been pursued in other industrialised countries, following the OECD’s Job Study in 1994; a focus on supply side measures and privatisation of public employment agencies to reduce unemployment. The underlying claim was that unemployment was a supply-side problem rather than a systemic failure of the economy to produce enough jobs.

The reforms accelerated the casualisation of the labour market (so-called mini/midi jobs) and there was a sharp fall in regular employment after the introduction of the Hartz reforms.

The German approach had overtones of the old canard of a federal system – “smokestack chasing”. One of the problems that federal systems can encounter is disparate regional development (in states or sub-state regions). A typical issue that arose as countries engaged in the strong growth period after World War 2 was the tax and other concession that states in various countries offered business firms in return for location.

There is a large literature which shows how this practice not only undermines the welfare of other regions in the federal system but also compromise the position of the state doing the “chasing”.

But in the context of the EMU, the way in which the Germans pursued the Hartz reforms not only meant that they were undermining the welfare of the other EMU nations but also droving the living standards of German workers down.

The LMD article says that:

… the SPD-Green majority … in 2005 set up the harshest unemployment benefit system in Europe. Hartz IV forces those eligible to take “one-euro jobs”, move house if their accommodation is judged too costly and obey a long list of bureaucratic stipulations on pain of losing their allowance. “The most drastic cut in social security since 1949” was what the conservative Frankfurter Allgemeine Zeitung called it when it was presented (on 30 June 2004).

It also notes that:

But Hartz IV set a record that will be hard to beat: its architects fixed the single allowance at such a low level that the constitutional court in Karlsruhe partially outlawed it last October, judging that the families who received it could not meet their children’s basic needs.

The article also quotes a Hamburg Green spokesperson who claimed the that the reforms were a “good idea … to encourage people back to work”. That is a neo-liberal perspective par excellence.

In late 2010, the German parliament reacted to the Constitutional Court’s decision and attempted to come up with a “legal” policy change with respect to Hartz IV unemployment payments.

The constitutional court had earlier (February 2010) order the Federal government to make the rate applicable to children relate to their actual needs (for subsistence) rather than the immiserising formula that the government had previously adopted (a percentage of the adult standard rate).

The response by the German government was disgraceful. They deliberately manipulated the benchmark (comparison group) income levels downward to suppress any major changes in the adult or child rate. The lowest quintile in the German income distribution have been severely disadvantaged by the Hartz reforms.

More than 20 per cent of the German workforce are now employed in the low-wage sector and many rely on Government benefits for basic food requirements. Many of these workers are employed full-time.

Poverty rates have risen sharply in Germany since 2001. The DESTATIS – the German Statistics Office (Statistiches Bundesamt) reported a 15.6 per cent “At-risk-of-poverty rate after social transfers” in 2010, up from 11 per cent in 2001. The figure was 24.2 per cent in 2010 before transfers.

For specific segments of the population though the figure is much higher. For example, 43.0 per cent of single parents were classified as being “At-risk-of-poverty rate after social transfers” in 2010 up from 35.9 per cent in 2008.

In the political debates in late 2010 and 2011 as the Government was consolidating these mean-spirited changes there was no protest from the SPD or the German Greens, the architects of the sorry system in the first place.

Conclusion

It is clear that in the period leading up to the crisis, the German “industrial powerhouse” attacked the welfare of their own population and made it virtually impossible for the other member states to enjoy enduring success once they had surrendered their currency sovereignty and the capacity to adjust to trade imbalances via exchange rate variations.

By suppressing domestic demand and reducing the real living standards of significant proportions of their population, the German government then relied on export growth to maintain overall real GDP growth.

But export growth – especially in a union where the majority of trade is intra – requires other nations to run substantial external deficits. The spending by the Southern European states, for example, allowed the German economy to grow in the pre-crisis period.

If the German trading partners within the monetary union had have followed Germany’s SPD-Green lead and set about impoverishing their own nations then the crisis would have come to Europe much earlier than it did and Germany would have been wallowing in a very deep recession with a large increase in its budget balance.

It was obvious that with “fixed exchange rates” imposed on member nations, there would be wide imbalances emerging in real exchange rates (measures of external competitiveness that take into account local productivity, price movements and nominal exchange rates) across the Eurozone.

It was obvious – and it was the German design – that nations such as Italy and Greece and the other nations that didn’t harshly repress the growth in living standards of their citizens – would become increasingly non-competitive. The “German Model” guaranteed that and the German growth was driven by that.

The fact that it was an unsustainable strategy appeared to escape the attention of the Euro elites, who to this day remain in denial.

But more worrying is that the focus on the blind ideology spouted by Dr Merkel and her CDU cronies allows the real political culprits in Germany – the Greens and the SPD – to remain under the radar.

My view is that unless the Greens reject neo-liberalism and admit that the Hartz reforms have been a disaster then they will remain a destructive force in German politics.

I am less harsh with respect to the Australian Greens but that might just be because they have never been in power yet. The worry is that with the macroeconomic policy they preach as core principle, it is hard to see why they would behave any differently to the German greens.

Total Aside

I have been getting a lot of hostile E-mail lately suggesting that MMT is losing the plot because it advocates extreme positions such as a Job Guarantee. This is sort of the parallel universe sort of point. I am astounded that anyone would think that it is extreme for a society to seek to ensure everyone can work if they want to and in doing so contribute to that society, and avoid poverty and social alienation.

It beggars belief really.

Then, apparently, many think that MMT also requires bank nationalisation in order to have a Job Guarantee and they cite my blog – Nationalising the banks – as proof of that.

First, I am not really going to get into a personal slanging match about any of that with anyone. I don’t find those sorts of dialogues to be at all productive. I have been called the full gamut of insults in my career (by other economists) and as the expression goes – Water off a duck’s back!

Second, in the cited blog on banking you will read – early on – the following:

So this blog is about banking. Not a complete story … but an account of what I think should happen to banks and banking. Note that this account is interpretative rather than a statement of MMT principles. It reflects my preferences based on my understanding of those principles. But equally, someone with a similar understanding might choose a different policy path.

That should tell anyone that bank nationalisation is my opinion and not a fundamental part of MMT theory. End of story on that one.

Third, in last week’s blog – On strategy and compromise – I mentioned a textbook – The Elements of Economics – by Lorie Tarshis (1947), which was the first American book to explicate the work on Keynes. I noted how it had been attacked by the conservatives and accused of being Communist propaganda, which effectively destroyed its sales.

In that book, you will read this section (page 347):

A word must be said, before we begin our analysis, about the political implications of the Keynesian theory. This is necessary because there is so much misinformation on the subject. The truth is simple. The Keynesian theory no more supports the New Deal stand or the Republican stand than do the newest data on atomic fusion. This does not mean that the Keynesian theory cannot be used by supporters of either political party; for it can be, and if it is properly used, it should be. The theory of employment we are going to study is simply an attempt to account for variations in the level of employment in a capitalist economy. It is possible, as we shall see later, to frame the Republican or the Democratic economic dogma in terms of the theory. After all, both good Republicans and good Democrats can analyze the causes of mental illness or of faulty timing in an automobile engine. And so the following chapters are neither an attack upon, nor a defense of, the beliefs of individual political parties. Rather, they are intended to show how a good many modern economists analyze this primary economic problem.

That is a lovely way of saying it. The same goes for Modern Monetary Theory (MMT). There is some strange notion that MMT is a new set of policy options waiting to be tried.

In fact, it is an explanation of the way the modern monetary system operates on a daily basis, under any policy regime (conservative, free market, Keynesian, democratic socialist, whatever). We live MMT every day.

Neo-liberalism operates with a MMT framework.

That is why I try to indicate when some specific policy recommendation is my opinion (reflecting my values, aims etc) and one of a number of policy options that could be pursued for a particular topic/area.

I prefer bank nationalisation and a serious reduction in the scope of banks to operate. But the veracity of MMT is not dependent on that preference. It would just be one way of organising the banking sector in a modern monetary economy.

The other point is that once we achieve an understanding of how the modern monetary economy actually works and why things happen the way they do – it lifts the public debate onto another plane (of sophistication). The myth merchants then cannot advocate austerity which deliberately causes unemployment and poverty by lying to the population.

Everyone would know that such a government and its supporter were preferring this sort of social and economic wreckage as a “cost” for maintaining their ideological purity. They could no longer say TINA – the government has no money. At that point, I suspect the policy debate would change dramatically and the austerity proponents would be expelled from office forthwith and the opposition parties would have more scope to develop a better range of alternatives rather than hide out as “neo-liberals on bikes”.

The JG is a somewhat different issue (in relation to preferences). As a policy choice it arises when we consider the best way of maintaining full employment and price stability. As I have indicated often, policy makers have to choose between two broad buffer stocks in a modern monetary economy. They can maintain price stability using unemployment buffers (the current choice) or via employment buffers (the JG approach). That is a reality rather than my opinion or preference.

Then ask yourself – in cost-benefit terms – which is the “best” buffer stock. We have argued – based on logic and empirical argument – that employment buffers are the superior choice.

So for a government intent on maximising welfare and avoiding waste as best they can – the unemployment buffer stock approach is inferior. That is the basis of the JG proposal. It is not necessarily my personal preference. It arises from taking the best choice of buffer stocks.

Please read my blogs – MMT is biased towards anti-crony and Whatever – its either employment or unemployment buffer stocks – for more discussion on this point.

That is enough for today!

(c) Copyright 2012 Bill Mitchell. All Rights Reserved.

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    21 Responses to Neo-liberals on bikes …

    1. BruceMcF says:

      “Neoliberals on bikes” is right: the German Greens have a brilliant eye for chasing the wrong target. If they were a team in the tour, tomorrow they’d be attacking on the slopes of the Col d’Izoard.

    2. Neil Wilson says:

      There is another way of looking at JG and that’s to delegate parts of it to the operational parts of government.

      The central bank has infinite capacity to maintain the price on any element of the economy denominated in its own liabilities. That’s what the NGDP targetting mob rely on. Well if it has to buy something then why not the spare labour in the economy at a price to a set amount?

      That swaps spare labour for cash and maintains basic aggregate demand. The central bank then gives that spare labour to Treasury and the government Executive to deploy as it sees fit.

      The Executive could throw it away (which makes it an income guarantee), or follow the ‘efficient’ buffer stock advice and allow the spare labour to be engaged as public projects, as volunteers for charities or any number of other activities (including the famous digging holes and filling them back up again if the creativity levels in government are sufficiently poor).

      Or even just hand it over to the private sector (which makes it a Universal pension).

      So there is lots of debate about what to do with the manpower, but there should be no debate about people requiring an income to live.

    3. Andrew says:

      I like the way Bill says MMT works for neo-liberals too. If they let go of their budget surplus ambitions and hyperinflation fears, they could benefit immensely without compromising their ideology. I hang to the left myself, but if I were to put on another pair of trousers this is how it would go:

      Serious tax cuts for the rich with a few coppers thrown in for the proles.
      Dole out plenty of cash to my pals in the banks to fix their balance sheets.
      Full steam ahead with privatisation. Spend on PFI and PPP’s. Get my mates set up in lucrative businesses.
      Plenty of targetted infrastructure spending so we can get products to market more efficiently.
      Big R&D spend for businesses to leverage off.
      Maintain the NAIRU policy (might even tighten it a bit to 5%).

      The neo-liberal elites would benefit materially immensely and they could throw enough crumbs to manage the expectations of the little people. I have a few ideas for the reasons they resist this approach.

      1. There are plenty of neo-liberal dupes or true believers who are not flourishing the way they believe they should. There is much tension in in the ranks because of income inequality. This causes a stalemate and an “if I’m going to suffer everyone else should suffer attitude.”

      2. They dare not open the fiscal stimulus door for fear the socialist left will seize the opportunity to develop social programs, re-nationalise schools, banks, utilities and other monopolies.

      3. They really do believe their own BS and haven’t a clue what to do.

    4. Stephan says:

      Winfried Kretschmann? Don’t get me started on this guy. In his election campaign the most prominent topic was “education”. Today he announced he must eliminate 11.600 teacher jobs in BW because he wants to amend the BW constitution with a copy of the federal debt break.

    5. Jo says:

      You are blog are always wonderful, learned and intelligent and I wish really to thank you a lot for your unique and extremelly valuable contribution in this world wide web but I do not well understand why you constantly support so called JG.
      Why not using fiscal policy to create normal, valuable employement and reach full employement? For exemple by increasing social security benefits or reducing taxes. What is wonderful with that is that it can fit every political agenda and adapt to the political forces in power.
      I have nothing against the idea of creating normal qualified and well pay public job or using state-owned compagnies to create valuble job when it’s usefull but your idea of JG seem to be one of such scheme intend to punish the unemployed . In practise it would mean wasting ressource to humiliate them. It would likely break their morals and turn them anti social. This kind of policies seem to stem from the extreme hatred of unemployed people instilted by your governement in Australia. You don’t have to understand macroeconomics to advocate it.
      Do you realise than in most countries forced labor has been abolished even for the criminals? If nothing can be done to create real full employement ,it is certainly beter for the unemployed and society in general to rely on unemployement benefit like now. There is no problem with that and it is much more in line whith public welfare and human rights.

    6. Andrei says:

      Bill,

      It is clear that the EU elites and the individual national governments that went along with the creation of the monetary union went one step further than the rest of the advanced world in adopting neo-liberalism. The decision to impose the monetary union meant they also abandoned floating exchange rates and deliberately, under pressure from the dominant Germans, chose to eschew the creation of a federal-level fiscal authority.

      I am not sure why you are repeating this lie, but sticking the head in the sand and screaming “lalalaladominantgermans” won’t change history – the creation of the Euro was a French project, and the Euro was the concession that Kohl had to accept in order for the french to accept the re-unification of the BDR and the DDR. See for instance Die Woche, 19.9.1997 or Spiegel-Special Nr. 2/1998 for first hand reports on the way Mitterand blackmailed Kohl in this respect.

      Also, you have it the wrong way around: it was the germans who wanted a political union as well, to accompany the development of the economic union. Kohl saw that as his “prestige” project and himself as the potential unifier of not only Germany, but Europe as well. What can one say, he was a big man – at least literally, if not intellectually.

      Not only that, but once the Euro projects were laid down in detail, it was again the German government that was pushing for a fiscal authority to supervise the convergence & stability criteria, and for automatic sanctions to be applied in case member states violated them. And it was again the French who blocked this, and forced the germans to accept the mellowed-down version which left wide-open doors for countries to break those rules (like both the french and the germans did, soon after). Not to mention it was the French again who insisted that there will not be an Euro without Italy and Spain, whereas the Germans were hoping for a more gradual extension of the Eurozone, based on actually fulfilling the required criteria.

      And to the main topic, I know it must annoy you to no end, but the “neo-liberal” Hartz IV reforms, as flawed as they might be (and they are) have nonetheless worked in ensuring Germany remained competitive – not only against other EU states, but most importantly against newcomers to the globalised market, including the East European block and the BRICs, especially China. And they ensured that Germany now has historical low unemployment (even if you count out the effects of the creative statistics of the government) and historically high employment. And that in a period of what can only be described as a prolongued crisis – maybe it will not survive in this relatively good state for much longer, under the pressure of the rest of the Eurozone, but so far its performance has been pretty remarkable.

    7. Dear Bill
      Before the euro, the mark was a hard currency, that had appreciated enormously relative to the dollar after the end of Bretton Woods. Price stability, not export promotion was the supreme goal of the Bundesbank.
      Since the introduction of the euro, Germany became an export powerhouse because of wage moderation. Nominal wages in Germany rose much more slowly than inflation. The Lohnstückkosten (wage costs per unit) in Germany went down considerable since 1999 compared to the rest of the eurozone.
      To many Greens, austerity must sound like music. Greens are convinced that we consume too much, and no Green can believe that economic growth can go on forever.
      Let’s not blame everything on the Germans. If Spain, for instance, had stopped its real estate boom, it wouldn’t be in trouble today. The same can be said of Ireland. The greeks didn’t do everythng right either.
      A country that runs a trade surplus must become a capital exporter, but it wasn’t foreordained that German capital would be exported to other eurozone countries. It could have gone outside the eurozone. By the way, Sweden also runs trade surpluses.
      As Heiner Flassbeck said, “Der Süden hat inflationär gesündigt aber Deutschland hat deflationär gesündigt”.
      The eurozone, and the entire EU, is like a marriage between between incompatible people. To look for culprits isn’t very useful. The marriage should never have occurred in the first place.

      Regards. James

    8. Neil Wilson says:

      “And to the main topic, I know it must annoy you to no end, but the “neo-liberal” Hartz IV reforms, as flawed as they might be (and they are) have nonetheless worked in ensuring Germany remained competitive”

      Anybody can remain competitive by cutting wages and then using mercantalism to steal off other nations.

      Worked for the British Empire for ages – until it didn’t.

    9. Andrei says:

      Anybody can remain competitive by cutting wages and then using mercantalism to steal off other nations.

      Wait, what? I thought Bill’s narrative is that a country running an external trade surpluss is effectively exporting their wealth (raw materials & manufactured goods) and is therefor a net loser, whereas countries running trade deficits are effectively increasing their wealth (using more raw materials and manufactured goods than they can produce), and are therefore net winners.

    10. Tristan Lanfrey says:

      @Andrei

      I think the point is that an exporting nation’s people as a whole looses from a macro perspective, but the capitalist cronies are making huge financial profits from it due to the fact that they are more competitive.

    11. pebird says:

      Andrei:

      Exporters are real losers and nominal winners. Austerity is a game played with money – nominal values. You know better.

    12. Benedict@Large says:

      Neo-liberalism operates with a MMT framework.

      Brilliant !!!

      Here’s another one in the same spirit:

      There is no such thing as hard money. There are only people trying to make soft money hard.

      And almost always with varying degrees of disasters resulting. In fact, it’s probably this single misunderstanding of what money is that ruins the work of most macroeconomists.

      As to the JG being a central part of MMT as opposed to just a political appendage, I had difficulty with this for a time also. The “employment buffer” vs. “unemployment buffer” helped a bit, but not completely. The way I eventually resolved this might be helpful to others.

      When we view the MMT model, the first split is between the currency issuer and the currency users. This is pretty obvious, as the two have quite distinguishing characteristics, and so this split is foundational to MMT. Quite a lot can be understood from this about how money operates in the macro sense.

      But what about the second split between domestic users and foreign users? Why is this made? Why not a split between, say, the 99% and the 1%? Or multinationals and the rest of use? (I actually use these as a third split with a little surplus value applied to get some very interesting results on the intractability of inequality.) What is the purpose of the split between domestic users and foreign users?

      To me, this split is only justified if we make the political assumption that it is the purpose of the issuer to best advance the interests of all of its members over the interests of foreigners. Now, this might be an obvious assumption, as most advanced economies are democratic and are ostensibly created with this purpose in mind, but it is hardly a trivial assumption. It does not have to be this way. It can be otherwise, even if it is not commonly otherwise.

      Now, once this “political” split is made, the question must become how best this might be accomplished, and certainly the maximization of employment for those wishing such has to be central, at least in any discussion of macroeconomics. So the assumption that economies exist to serve their members, which justifies the second split in the MMT model, leads to a conclusion that employment is central, which almost gets us to the JG, but not quite.

      What finally gets us to the JG as central to MMT is the fact that the unemployment buffer is central to mainstream macroeconomic thinking, and is considered by this group to be the only way to maximize employment while restraining the dilution of the currency. And if the unemployment buffer is central to the mainstream, which it is, how can this same issue be thought of as non-central to MMT? Why can’t MMT speak to the same goals that the mainstream addresses, especially when MMT clearly shows that the unemployment buffer is not the only way to address the employment issue? An employment buffer (the JG by another name) better utilizes the resources available to the economy, which is after all what economics is supposed to be about.

      At this point, a baby step backwards. Bill’s particular vision of the JG is an instance of how an employment buffer could operate. Though I’ve not seen any others that have the potential that his displays, there might possibly be others. If there is, bring them on. I’m sure all of us, Bill included, would be quite interested. But this doesn’t take away from the employment buffer being central to MMT. Once that second split is made in the MMT model, that is, once the economy is viewed as the servant of its members, employment maximization is on the table, and the MMT answer, which is only possible in an MMT world, is far superior to the answer offered by the mainstream.

      A concluding question. The mainstream had it’s “Great Moderation”, its now-vanquished vision of its own success and justification. What would this vision look like in a “full MMT” world? (What would we call it?) Would there be the same “smoothing” of the peaks and troughs that the Great Moderation claimed but never achieved? What does our vision look like to the common person if it is realized?

      This is not just an abstract question. MMT is offering something, and MMTers see it, but others, most particularly the common people, don’t. How do we fill in this vision in a fashion that others can embrace it, even if they lack the time or the skills to fully understand every detail of how it works? Not everyone can be even a “couch MMTer”, but until the people start asking for, indeed, demanding, MMT, MMT will remain at best a curiosity to most, and they will not demand it until they can embrace our vision.

      What is our vision?

    13. MamMoTh says:

      Anybody can remain competitive by cutting wages and then using mercantalism to steal off other nations.

      Stealing? Give me a break. Aren’t imports a benefit and exports a cost?

    14. MamMoTh says:

      So there is lots of debate about what to do with the manpower, but there should be no debate about people requiring an income to live.

      The problem is the CB cannot guarantee anything about real incomes, and people don’t eat paper or numbers in a spreadsheet.

    15. F. Beard says:

      I am astounded that anyone would think that it is extreme for a society to seek to ensure everyone can work if they want to and in doing so contribute to that society, and avoid poverty and social alienation. Bill Mitchell

      A JG is besides the point. What the economy needs is MONEY, right? To payoff excessive private debt? To what is essentially a government enforced/backed counterfeiting cartel? So why drag in jobs? Because people should work before they receive money? But people shouldn’t have to work for just restitution!

      Of course we should have generous infrastructure and social spending for the needy. But beyond that, why create make-work if more money is needed? Just hand it out! Call it a “Social Dividend” or more accurately “Restitution for Theft by Banking.”

    16. Benedict@Large says:

      @Bill
      My (rather substantial) comments earlier are of course in regard to your opening of “Total Aside”. I’ve just finished re-reading the body of the post for about the third time.

      I’ve been going a bit crazy of late everytime I hear someone on the left fete the “German Miracle”. Oh, they have employees (!!!) on their corporate boards, and German auto workers make $65/hour, don’t you know (a figure I can’t duplicate), so isn’t that all Great! “Neo-liberals on bikes” indeed.

      This blog post calms my crazy soul. :-) It is without comparison the best demolition of the “German Miracle” I’ve read, and probably one of your best posts ever. I’ll be keeping it handy to shove into the face of the next liberal I hear touting Germany as the answer we’ve been waiting for. Germany is simply the latest elite plot to grind labor into destitution, and I look forward to the day when average Germans figure this out.

      P.S. I’m also getting sick and tired of hearing about the “Mondragon Miracle”. Here too you have one group (the co-op members) cannibalizing another (the non-members) for its own benefits. For all the good that Mondragon attempts, it still exists within the neoliberal paradigm, and as such, it must eventually employ an unemployment bufferstock. It cannot escape the macro within which it exists. That it spreads benefits a bit better is not the point. That it still (unnecessarily) takes some of these benefits from those excluded is.

    17. BigRed says:

      Dear Jo:
      you might have misunderstood some things. You write:

      Why not using fiscal policy to create normal, valuable employement and reach full employement? For exemple by increasing social security benefits or reducing taxes. What is wonderful with that is that it can fit every political agenda and adapt to the political forces in power.

      First of, I assume that you misunderstand the jobs the JG would offer if you contrast them with “normal, valuable” employment. The JG is supposed to offer jobs that go towards infrastructure construction/maintenance, environmental cleanup/maintenance, health care, support of the elderly/disabled etc. All of those are “normal”, all of those are definitely very valuable. I am not firm enough on the topic of how effective increasing unemployment support substantially (although it needs to be increased in quite a few countries, Germany one of them) or lower taxes would be. I *do* know, however, that the lowering taxes paradigm has been tried in the US recently and that that period went hand-in-hand with the debt explosion so it doesn’t seem to have solved the problem. And of course, each of the proposed approaches fits at most one political approach.

      …your idea of JG seem to be one of such scheme intend to punish the unemployed . In practise it would mean wasting ressource to humiliate them. It would likely break their morals and turn them anti social…Do you realise than in most countries forced labor has been abolished even for the criminals? If nothing can be done to create real full employement ,it is certainly beter for the unemployed and society in general to rely on unemployement benefit like now. There is no problem with that and it is much more in line whith public welfare and human rights.

      I’ve no idea at all where you read this from Prof Mitchell’s blogs. 1) The JG is supposed to be entirely voluntary. 2) There’s research that shows that unemployment, even with decent unemployment support, leaves psychological damage since our societal make-up include a belief that to be a useful member of society one has to work. One can consider this misguided – I recommend “In praise of idleness” in this regard – but as long as the underlying belief hasn’t been changed, it is better for public welfare (which would be helped by the work done in JG jobs) and individual welfare to get unemployed into productive work instead of having them sit at home while being paid unemployment support. And finally, as Prof Mitchell pointed out, the UN considers the right to work a human right.

    18. BigRed says:

      @Andrei,

      I am not sure whether this is your first time reading or whether you overlooked it but regarding your statement:

      Not only that, but once the Euro projects were laid down in detail, it was again the German government that was pushing for a fiscal authority to supervise the convergence & stability criteria, and for automatic sanctions to be applied in case member states violated them.

      Prof Mitchell has repeatedly pointed out that there is neither empirical nor theoretical support for the 60%/3% criteria of the SGP, and that making either rigid would have left the eurozone even less able to deal with the demand shock than it turns out to be.
      (On a personal note, I’ve never understood the reasoning behind forcing a fine on a government that is more than 3% in deficit anyway – wouldn’t this just worsen the deficit?)
      The eurozone-wide fiscal authority Prof Mitchell has in mind would have been the exact opposite of what you claim the Kohl government pushed for: one that unconditionally could and would have underwritten public debt and allowed deficit spending whenever needed.

      And to the main topic, I know it must annoy you to no end, but the “neo-liberal” Hartz IV reforms, as flawed as they might be (and they are) have nonetheless worked in ensuring Germany remained competitive – not only against other EU states, but most importantly against newcomers to the globalised market, including the East European block and the BRICs, especially China.

      Real income in Germany has fallen since 2000, Spiegel just reported on an OECD study (http://www.spiegel.de/wirtschaft/soziales/deutscher-arbeitsmarkt-einkommensschere-oeffnet-sich-immer-weiter-a-843599.html, not sure whether there’s an English version) that points out that the number of wage-earners in precarious (mini-) jobs has risen, the proportion of wages in GDP has fallen from 67% beginning of the nineties to 62%, and as Prof Mitchell in this very blog post points out, poverty risk has gone up:

      Poverty rates have risen sharply in Germany since 2001. The DESTATIS – the German Statistics Office (Statistiches Bundesamt) reported a 15.6 per cent “At-risk-of-poverty rate after social transfers” in 2010, up from 11 per cent in 2001. The figure was 24.2 per cent in 2010 before transfers.

      So German “competitiveness” means increasing profits at the cost of impoverishing wage earners? One can have this as a political goal but one shouldn’t try and pass this off as being in the interest of the population. Now, all this relative “competitiveness” is w.r.t. low-wage countries, and countries with lower standards of living, so the inevitable outcome to me seems to be a lowering of standard of living in Germany as well – once again not the behavior of a government that has its population’s best interest at heart (let alone a left-wing government).

      Furthermore:

      And they ensured that Germany now has historical low unemployment (even if you count out the effects of the creative statistics of the government) and historically high employment. And that in a period of what can only be described as a prolongued crisis – maybe it will not survive in this relatively good state for much longer, under the pressure of the rest of the Eurozone, but so far its performance has been pretty remarkable.

      Once again, the cost of this “low unemployment” is precarious jobs, “historically low” unemployment support, half the current unemployed in long-term unemployment (many more than two years) according to the same Spiegel article, a U6 unemployment rate that I’ve last seen reported as about 15%, and of course the aforementioned fallen real wages. Not to mention increasing health care contributions, deteriorating social infrastructure etc.

      Finally, regarding your claim of “historically low unemployment”, Wikipedia at least claims unemployment rates below 2% in the 1960s and below 5% in the 1970s – below the current rate and aligning quite nicely with the time before “full employment abandoned”.

    19. F. Beard says:

      The problem is the CB cannot guarantee anything about real incomes, and people don’t eat paper or numbers in a spreadsheet. MamMoTh

      True. The best way to ensure that would be ethical money creation. Usury for stolen purchasing power (“credit creation”) has produced a lot of wealth but has not distributed it properly. Common stock as private money is also asset-backed but is ethically created unlike bank credit.

    20. F. Beard says:

      And finally, as Prof Mitchell pointed out, the UN considers the right to work a human right. BigRed

      People can always work if they have sufficient resources such as land, tools, etc. Heck, a big yard is enough to keep most people pretty busy. The question then is why they don’t have such things? Could it be because of a government backed/enforced usury for stolen purchasing power cartel, the banking system? I would bet on it.

      So now if you want people to have jobs then just distribute enough aggregate demand to them and the jobs should appear – meaningful jobs. It’s called “just restitution.”

    21. Andrei says:

      @BigRed:

      Prof Mitchell has repeatedly pointed out that there is neither empirical nor theoretical support for the 60%/3% criteria of the SGP, and that making either rigid would have left the eurozone even less able to deal with the demand shock than it turns out to be. […] The eurozone-wide fiscal authority Prof Mitchell has in mind would have been the exact opposite of what you claim the Kohl government pushed for: one that unconditionally could and would have underwritten public debt and allowed deficit spending whenever needed.

      I am not sure if you actually bothered to read the particular section I was reffering to, or how much you know about the early stages of the Euro negotiations, but Bill’s assertions are simply false. It is true that Germany never wanted a simple redistribution union in terms of fiscal policy, where there would be no rules and no limits, but Kohl was most certainly an advocate of both rigid fiscal controls and sanctions within the rules agreed upon in terms of deficits (and this is apropos Bill’s blind pointing out of how Germany broke those rules in the early ’00s) as well as a far more integrated economic policy, including the creation of a Eurozone economy minstery that would coordinate both the budgeting as well as the general policy directions. Not only would such an instition have had the potential (the potential, mind you) to react earlier to the imbalances that have been exposed in the wake of the global financial crisis, but it might have prevented them in occuring at all, and over time it might have even evolved in a federal redistribution system like Bill wished. The potential was there, in the early stages of the Euro conception, and it was France, with the help of Italy that killed that idea.

      Real income in Germany has fallen since 2000, Spiegel just reported on an OECD study (http://www.spiegel.de/wirtschaft/soziales/deutscher-arbeitsmarkt-einkommensschere-oeffnet-sich-immer-weiter-a-843599.html, not sure whether there’s an English version) that points out that the number of wage-earners in precarious (mini-) jobs has risen, the proportion of wages in GDP has fallen from 67% beginning of the nineties to 62%

      Real income (at least for the full-time employed) has been rising in the last two years, and that is before the effects of some of the major tariff renegotiations take effect in 2012. I doubt the trend will be reversed this year, in fact I expect this rise to accelerate. And given the fact that real wages have mostly stagnated in Germany in the 2000-2008 period, and have been growing rather rapidly in the 2010-2011 timeframe, I even question the idea that they are lower now than in 2000. I would like to see some primary statistic work in this respect, since the little I have found online suggests either stagnation or very timid growth over the 2000-2011 interval.

      Regarding the OECD Study, the same report specifically calls out Germany as a spectacular example within the industrialized nations in terms of reduction in unemployment within the last few years.

      And, as the last short report from DeStatis shows, the reduction in unemployment is actually accompanied by a growth in employment, and not just in the mini-job sector, but in the normal sector as well, including even full-time employment. Full-time employment might still not be in absolute numbers at the level from 2001, but it has been growing ever since 2006, and has accelerated in 2011, so obviously the Hartz IV reforms have not destroyed the normal employment market, far from it. In fact, as DeStatis notes, the transition between the normal and atypical employment or freelancing largely happened in 90s, whereas in the last decade the ratio between the two is more stable that people think.

      Now, all this relative “competitiveness” is w.r.t. low-wage countries, and countries with lower standards of living, so the inevitable outcome to me seems to be a lowering of standard of living in Germany as well – once again not the behavior of a government that has its population’s best interest at heart (let alone a left-wing government).

      Well, yes, that would be the effect of increased competitiveness on the global market – it is quite possible that the result is a choice for the developed countries between relatively constant employment but with stagnation or reduction in the standards of living (say, Germany) or periods of high wage growth followed by crashes and periods of mass-unemployment (say, Spain). I am not sure one can reasonably argue that the second option is the better one for the population. Sure, ideally we would have stable low unemployment combined with constant real wage growth, but I don’t think anybody believes in perpetual global growth anymore, except perhaps some fringe macro-economists.

      I’ll skip a bit ahead, since it makes more sense this way:

      Finally, regarding your claim of “historically low unemployment”, Wikipedia at least claims unemployment rates below 2% in the 1960s and below 5% in the 1970s – below the current rate and aligning quite nicely with the time before “full employment abandoned”.

      “Historical” can of course only be in the context of the history of current Germany, i.e. since 1990. Otherwise one might be inclined to draw stupid comparisons between unemployment today and the more-or-less literal full employment in the DDR – what a step back, right?

      That’s how it is, Germany was raised out of two very different economies, and that had to be rebalanced, a process that obviously took more than two decades, and is not even over today – if you really want, what you can at most do is look at the unemployment numbers in the west states, and you will see that on average we are still talking there today of unemployment numbers in the <6% range, whereas the east states still have an average unemployment of over 10%. And when you average that, of course you can't beat the numbers of the 70s, but it's a faulty comparison.

      Once again, the cost of this “low unemployment” is precarious jobs, “historically low” unemployment support, half the current unemployed in long-term unemployment (many more than two years) according to the same Spiegel article, a U6 unemployment rate that I’ve last seen reported as about 15%, and of course the aforementioned fallen real wages. Not to mention increasing health care contributions, deteriorating social infrastructure etc.

      Heh, or one could look at the rise in real wages in the last years, the increase in full-time employment, the overfilled money coffers of the public health insurance companies and of the pension fund, which will result in reduction of the contributions needed, or the plans for guaranteed places in day care across the country, and so on and so forth. I am not sure many Germans appreciate that they are actually doing pretty ok, all things considered. But that’s human nature, and in the end it’s not wrong to always want more than you have – alas, that question will end up being answered by physics, not by economy.

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