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.