Heiner Flassbeck on the global economy: the problem of Europe

In the video below from the Real News Network, former economist at UNCTAD, Heiner Flassbeck, discusses some of the problems besetting today’s global economy and claims that they have deep historical roots. Germany may be heading for a recession due to shrinking exports linked to the ongoing US-China trade war and weak demand in Europe.

Flassbeck argues that the cause of sluggish global demand lies in the weakness of corporate investment compared to corporate saving alongside stagnant wages and the insufficient response of governments in Europe to counter this with more expansionary fiscal policy.

This has been brewing since the 1970s. The US under Reagan, Bush junior and most recently Trump has on a number of occasions responded to sluggish growth with higher fiscal deficits. The exception came under Clinton, when a booming economy and fiscal tightening produced several years of budget surpluses, which ultimately proved unsustainable.

In contrast, many European economies have remained wedded to tighter fiscal policies and austerity in the run-up to the creation of the euro. Since 2000 Germany has relied on foreign demand to drive growth, and now runs, in absolute terms, the largest current account surplus in the world.

Corporate surpluses are also excessively large in Japan, but the government continues to run a moderately large budget deficit which absorbs some of these savings and sustains aggregate demand to a degree. The German government is now running a budget surplus, which withdraws demand from the economy, leaving net exports as the driver of growth.

Ideally, corporations would use more of their retained earnings for investment, rather than running up surpluses as they are doing at the moment, particularly in Germany. This would increase spending on the demand side, and the capital stock on the supply side, boosting growth in output and some combination of employment and productivity.

In the absence of strong corporate investment growth, sufficient demand to support economic growth has to come from household consumption, net exports, or from the government. With insufficient household income growth, Germany has relied excessively on growth in exports enabled by sluggish wage increases for twenty years. In a weakening global economy, it is now suffering again and could be on the brink of recession.

A more sustainable return to healthy economic growth and fuller employment with rising living standards would see household incomes rising for the majority through significant wage increases, stimulating consumption and providing greater incentives for companies to increase investment in new capacity and employment. Also needed is some degree of fiscal expansion which includes public investment in necessary infrastructure and support for those on the lowest incomes.

The corporate sector surplus (the excess of savings over investment) in a number of large economies needs to shrink as wages and household incomes rise alongside corporate investment. This would lessen the need to rely on large and persistent fiscal deficits, which have supported demand in Japan on and off for well over two decades but have not by themselves created the conditions for a return to more balanced economic growth over the longer term. It would also lessen the need for consumption to be excessively dependent on rising debt, as in the UK and US.

More balanced global growth and reduced inequality within countries which have seen the latter soar since the end of the 1970s can be achieved together.

Flassbeck does not really discuss the reasons behind excessive corporate savings relative to investment, aside from a brief reference to neoliberalism, and he ignores the problem of private debt in China, but the interview is interesting and worth a watch.

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Fighting Inequality Can Strengthen the US Economy

A one-pager free download from the Levy Institute on how higher taxes on the wealthiest Americans coupled with a comparable increase in public spending can not only redress political but also economic inequality while boosting consumption and aggregate demand in a sustainable fashion and reducing the dependence of these factors on rising debt levels. A brief summary below:

“Senators Elizabeth Warren and Bernie Sanders, along with Representative Alexandria Ocasio-Cortez, recently proposed to increase the rate of taxation on very high incomes and net worth. One of the primary justifications for such policies is that reducing inequality would help safeguard political equality. However, Dimitri B. Papadimitriou, Michalis Nikiforos, and Gennaro Zezza show how these tax policies, if matched by comparable increases in government spending, have the potential to boost aggregate demand while helping reform the unstable structure of the US economy.”

Austerity: 12 Myths Exposed

Social Europe has produced a booklet attacking many of the myths surrounding austerity. It is free to download here. Below is a short extract from the preface:

Austerity: 12 Myths Exposed debunks commonly held beliefs in support of austerity as a solution to addressing stagnation and economic crisis. Austerity staples like ‘live within your means’, ‘Swabian housewife economics’, ‘public spending hampers private investment’ and the new authority of alleged maximum debt and deficit levels, such as the Maastricht criteria governing the eurozone, are tackled and taken apart. While this booklet does not provide a full recipe for the end of austerity, those who are looking for alternatives will find a range of arguments needed to clear the pathway towards paradigm change. One thing is clear: austerity is a tool of national and international financial interests – not a solution to the problems caused by them.”

 

Wholes and parts: economics in the spirit of Keynes

A nice little post at the link below from Lars P. Syll quoting John Maynard Keynes on what he calls ‘organic unity’. Another way of putting it is that the whole can be more than the sum of its parts. This is the basis for the discipline of macroeconomics as distinct from microeconomics. Modern mainstream macroeconomics insists on ‘microfoundations’ and neglects the concept of organic wholes, which runs against the spirit of Keynes and his wish to establish a distinct macroeconomics.

Organic wholes can be seen as emergent from, but irreducible to their constituent and interacting parts. Thus while one can still pay attention to microfoundations (the parts), the behaviour of a larger whole can be very different from that deduced from simply adding the behaviour of the parts together.

In economics, the parts might be individuals, firms or households, while the larger wholes might be an economy at the national or global level. Of course, one could think of these concepts in ways which reach beyond the discipline of economics, which conflate wholes and parts and provide useful insights: an individual can be thought of as a ‘whole’ rather than a ‘part’, with the parts defined biologically, such as organs, cells etc, with the whole human being and its functioning as emergent from but irreducible to its constituent parts.

Returning to economics, a national economy can be analysed as a part of the global economy, leading to the possibility of certain macroeconomic paradoxes. So an economy can be seen as both a whole and a part, depending on how we look at it.

The unpopularity of the principle of organic unities shows very clearly how great is the danger of the assumption of unproved additive formulas. The fallacy, of which ignorance of organic unity is a particular instance, may perhaps be mathematically represented thus: suppose f(x) is the goodness of x and f(y) is the goodness of y. […]

via Additivity — a dangerous assumption — LARS P. SYLL

Inequality, saving and growth: Germany’s role in global rebalancing

Coat_of_arms_of_Germany.svgThe IMF recently published its Economic Outlook for Germany. The report itself is quite long but a brief description of the key points can be found here. I have written before on the problems caused by Germany’s supposedly ‘prudent’ saving behaviour and export prowess, and the IMF covers this issue quite well, although as a report focused on one country, it does not consider the global implications. Here I want to focus on one aspect of the report: the financial imbalances of Germany’s economy and their relationship to both inequality and future growth prospects, both domestically and in the rest of the world.

In macroeconomics, one can consider the financial balances (net borrowing or net lending) of the three main sectors in the economy as a whole: the private sector (firms and households together), the public sector (government) and the foreign sector (the rest of the world). Together these balances can be used to analyse the total flows of expenditure and income between the three sectors, both within that economy and between that economy and the rest of the world.

If a sector runs a financial surplus over a particular period, its income for that period will exceed its expenditure and it will either be accumulating financial assets from another sector or paying down debt owed to another sector. For example, if the government runs a surplus, then revenue from taxation will exceed public spending and it will be able to pay down government debt held by the private sector, either domestically or abroad. Continue reading

Michael Hudson: debts that can’t be paid, won’t be

JisforJunkEconAnother excerpt in this occasional series from Michael Hudson’s heterodox ‘dictionary’ J is for Junk Economics (2017, p.72):

“Debts that can’t be paid, won’t be”: Over time, debts mount up in excess of the ability of wide swathes of the economy to pay, except by transferring personal and public property to creditors.

The volume of debt owed by businesses, families and governments typically is as large as gross domestic product (GDP) – that is 100%. If the average interest rate to carry this debt is 5%, the economy must grow by 5% each year just to pay the interest charges. But economies are not growing at this rate. Hence, debt service paid to the financial sector is eating into economies, leaving less for labor and industry, that is, for production and consumption.

Greece’s debt has soared to about 180% of GDP. To pay 5% interest means that its economy must pay 9% of GDP each year to bondholders and bankers. To calculate the amount that an economy must pay in interest (not including the FIRE* sector as a whole), multiply the rate of interest (5%) by the ratio of debt to GDP (180%). The answer is 9% of GDP absorbed by interest charges. If an economy grows at 1% or 2% – today’s norm for the United States and eurozone – then any higher interest rate will eat into the economy.

Paying so much leaves less income to be spent in domestic markets. This shrinks employment and hence new investment, blocking the economy from growing. Debts cannot be paid except by making the economy poorer, until ultimately it is able to pay only by selling off public assets to rent extractors. But privatization raises the economy’s cost of living and doing business, impairing its competitiveness. This process is not sustainable.

The political issue erupts when debts cannot be paid. The debt crisis requires nations to decide whether to save the creditors’ claims for payment (by foreclosure) or save the economy. After 2008 the Obama administration saved the banks and bondholders, leaving the economy to limp along in a state of debt deflation. Economic shrinkage must continue until the debts are written down.

*Finance, Insurance and Real Estate

The debt we don’t talk about

Private debt. Richard Vague, who used to be in the business of consumer credit, now researches such things. Here he talks to INET, which supports a network of mainly progressive economists, from leading thinkers to students.

When Vague started his research into trends in private debt across a number of major economies, he found that it was difficult to find a lot of the necessary data, from the nineteenth century through the roaring twenties to 1980s Japan.

He also touches on the need for debt restructuring after a major crisis such as the Great Recession, perhaps in the form of a ‘debt jubilee’. As he puts it, we saved the banks, but we did much less for ordinary households.

Worth watching.