German Wage Repression: Getting to the Roots of the Eurozone Crisis 

Originally published in the September/October Annual Labor Issue of Dollars & Sense.

John Miller, Guest Blogger

Germany has been insistent that the so-called peripheral countries increase their competitiveness through slower wages rises or even wage cuts. Wage increases in Germany are an equally important, and symmetrical, part of this necessary adjustment process.
The wage increases are steps in the right direction, but relatively small steps. More gains for German workers in the future would be both warranted and a win-win proposition for Germany and its trade partners.
— Ben Bernanke, “German wage hikes: A small step in the right direction,” Brookings Institution, April 13, 2015.

Ben Bernanke not only supports recent German wage increases, he also thinks further wage increases for German workers are “warranted and a win-win proposition for Germany and its trade partners”?

Now that’s a jaw-dropper. Has the former head of the Federal Reserve Board—the guardian of “price stability,” which makes policy designed to keep U.S. wages in check—switched sides in the class war, now that he is retired?

Hardly. Rather, it’s that catering to the demands of German high finance and other elites has been so disastrous that even the former chair of the Fed cannot deny the undeniable: unless Germany changes course and boosts workers’ wages, the euro crisis will only worsen.

Let’s look more closely at just how German wage repression and currency manipulation pushed the eurozone into crisis, ignited a conflict between northern and southern eurozone countries (with Germany as the enforcer of austerity), and left Greece teetering on the edge of collapse.

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From “Development” to “Poverty Alleviation”: What Have We Lost?

Jayati Ghosh

There was a time when economists were inevitably concerned with development. Early economists of the 16th and 17th centuries to those of the mid 20th century were all essentially concerned with understanding the processes of economic growth and structural change: how and why they occurred, what forms they took, what prevented or constrained them, and to what extent they actually led to greater material prosperity and more general human progress. And it was this broader set of “macro” questions which in turn defined both their focus and their approach to more specific issues relating to the functioning of capitalist economies.

It is true that the marginalist revolution of the late 19th century led economists away from these larger evolutionary questions towards particularist investigations into the current, sans history. Nevertheless it might be fair to say that trying to understand the processes of growth and development have remained the basic motivating forces for the study of economics. To that extent, it would be misleading to treat it even as a branch of the subject, since the questions raised touch at the core of the discipline itself.

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As QE Wanes, Real Costs of Employment Subsidies Surface

Erinç Yeldan

Global finance centers have been holding their breath for almost a year by now: will the U.S. Federal Reserve (the “Fed”) finally start “tapering” off from its monetary expansion programs, known as quantitative easing (QE)?  By way of three QE operations, the Fed had amassed a total of $3 trillion worth of assets from the financial markets over a course of less than four years. This was equal to roughly 20% of U.S. GDP. In turn, interest rates fell all around the globe to virtually zero.  While short-term low-risk interest rates in the United States fell to zero, interest rates in some countries remained much higher, so large interest rate spreads emerged between the United States and other countries. Notable “carry trade” emerged, for this reason, between the U.S. and Brazil; and yet, unemployment only slowly fell back to the pre-recession period, despite the fact that the labor force participation rate declined sharply to its 1970s level.

Now, seeing the expansion of the monetary base barely made a dent in stimulating real productive activity (see my January 2015 Triple Crisis blog post), the Fed declared in early Spring that “from now on it will be patiently waiting to start raising its policy interest rate and quitting QE operations.” This means bad news for global finance capital, which was drugged with the inflow of cheap liquidity, with zero credit costs.

Now that the financial smoke is clearing, we are in a better position to see the real costs of public programs aimed of stimulating employment and real activity.

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The GM Labeling Law to End All Labeling Laws

As the vitriol intensifies in what passes for debate over the safety of genetically modified foods, scientific inquiry, thankfully, continues. A Tufts researcher, Sheldon Krimsky, recently published his assessment of the last seven years of peer-reviewed evidence, finding 26 studies that “reported adverse effects or uncertainties of GMOs fed to animals.”
If recent history is any indication, Sheldon Krimsky should expect to be slammed as a “science denier.”
The current vehemence is the product of a well-funded campaign to “depolarize” the GMO debate through “improved agricultural biotechnology communication,” in the words of the Gates Foundation-funded Cornell Alliance for Science. And it is reaching a crescendo because of the march of the Orwellian “Safe and Accurate Food Labeling Act of 2015” (code-named “SAFE” for easy and confusing reference) through the U.S. House of Representatives on July 23 on its way to a Senate showdown in the fall.
In an April New York Times op-ed, Alliance for Science affiliate Mark Lynas follows the party line, accusing environmentalists of “undermining public understanding of science,” even more than climate deniers and vaccine opponents. Slate’s William Saletan goes further in his July feature, calling those who want GM labeling “an army of quacks and pseudo-environmentalists waging a leftist war on science.”
Who would have known that depolarization could feel so polarizing—and so stifling of scientific inquiry.
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China’s Clean Energy Plans—Enough to Stave Off Climate Change?

Sara Hsu

I have written previously on China’s environmental status and the creation of “green” jobs, noting that more must be done to win Premier Li Keqiang’s “war on pollution.” More news has come out, including the statement that China is set to spend $2.5 trillion in the coming 15 years on clean energy, according to Rae Kwon Chung, principal advisor on climate change for the UN Secretary-General. The statement was made at the China Summit on Caring for Climate, a UN Global Compact Network event. China intends to cut carbon dioxide emissions and increase the supply of renewable energy, in an attempt to reach its goal of obtaining 20% of its power from renewables and nuclear power by 2030. Will this be enough to stave off climate change?

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Retreat of Foreign Investment from Africa Means Less Looting

Gaming, naming and shaming “licit financial flows”

Patrick Bond

“Foreign Direct Investment (FDI) is always prefaced with the two words ‘much needed,’” my colleague Sarah Bracking insisted last week at a Zimbabwe NGO conference. “Have you ever heard FDI referenced without those two words?” We all shook our heads.

The meeting in Harare was dedicated to fighting illegal capital flight from across the African continent. But would some of the region’s sharpest economic-justice NGOs take the next step and also consider fighting legal financial outflows—in the form of profits and dividends sent to TransNational Corporate (TNC) headquarters, profits drawn from minerals and oil ripped from the African soil?

In other words, in this neoliberal era, can a more general case be made against TNCs based on their excessive profiteering and distortion of African economies? If so, are exchange controls the easiest antidote, prior to nationalization and socialization?

To do the latter requires a profound social revolution, with the current leaders of all Africa’s present governments swept away. Meantime, the question is whether enforcing patriotism on the business elite is possible using policies like exchange controls. That less intimidating challenge was mine to argue.

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Turbulence and Stability in Financial Markets: China in Recent Times

Sunanda Sen, Guest Blogger

Sunanda Sen is a former Professor of Economics at Jawaharlal Nehru University, New Delhi.

Liberalisation of financial markets, as observed in different parts of the world economy, has never contributed to stability—avoiding unforeseen and unbridled movements in prices and quantities—in those markets. Discontinuation of state-level restraints, in deregulated markets, always generates an atmosphere of uncertainty, which itself has been instrumental in generating turbulence, and then leading to crises. Crises in different financial markets across the world are usually preceded by booms, fed by destabilising financial activities in opened-up markets.

The current downslide in China’s stock markets has followed this familiar pattern, with the crash that took place between June and July 2015 foreshowed by an unprecedented boom which came with the fast pace of liberalisation in the financial sector.

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Women’s Participation in the Indian Labor Market: Explaining the Decline

Sirisha C. Naidu, Guest Blogger

Between 2005 and 2012, nearly 25 million women—roughly the total population of Australia—withdrew from the Indian wage-labor market. Imagine the frenzied reaction of news media, researchers, and policymakers if the entire population of Australia pulled out of the labor market in less than a decade! This decline in Indian women’s labor force participation rate—which counts women who are employed in regular or casual wage work, self-employed or working in family-owned businesses, plus those who are seeking work, as a percentage of all working-age women—is part of a longer-term trend. The labor force participation rate for rural women declined from 42.5% in 1988 to 18% in 2012, and for urban women from 24.5% to 13.4% over the same span.

Development scholars and policymakers often assume that economic growth is a panacea that will unshackle women from the confines of the domestic sphere, increase their social status, and allow them to participate in economic and political decision-making as equals. It is puzzling, then, that the decline in the women’s participation in the labor market has continued into the current period during which India has experienced robust economic growth—the World Bank expects India to overtake China as the world’s fastest-growing economy by 2017.

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Mr Osborne Meets Mr Micawber

Philip Arestis and Malcolm Sawyer

In his budget speech of July 10, following an earlier announcement in a speech at the Mansion House, London, on June 10, UK Chancellor of the Exchequer George Osborne announced his intention to put into place a “budget surplus” rule, which would require a  surplus in “normal times.” Although a more extreme version, this new rule follows the pattern established by the European Fiscal Compact and the change to the German constitution in 2006 to require a balance in the “structural budget.” It appears without any economic rationale as to why a budget balance or surplus would be desirable or achievable.

In Charles Dickens’ David Copperfield, Mr Micawber considers that “Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” The rationale for a “budget surplus” would appear to run along these lines.

But Mr Micawber did not have to consider the implications of his dictum. The excess of income over expenditure may bring him happiness, but is there someone to whom he can lend his sixpence?  In other words, he may wish to save but there has to be someone willing to borrow from him. He does not have to consider the effects his actions have on employment through his failure to spend. He does not have to consider whether he would have been well advised to spend more on investing for the future. The government should, of course, take into account such considerations. It should take into account the impact its spending and tax decisions have for the economy.

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China’s Stock Market Collapse

Jayati Ghosh

The recent rout in the Chinese stock market – and the Chinese authorities’ increasingly panicky responses to it that temporarily halted the decline – may not seem all that important to some observers. Indeed, there are analysts who have said that this is just the typical behaviour of a still immature stock market that is still “froth” in the wider scheme of things, and not so significant for real economic processes in China. After all, the Chinese economy is still much more state-controlled than most, the main banks are still state-owned and stock market capitalization relative to GDP is still small compared to most western countries, with less than 15 per cent of household savings invested in stocks. Most of all, there is the perception that a state sitting on around nearly $4 trillion in foreign exchange reserves should be rich enough to handle any such exigency without feeling the pain or letting others feel it.

But this relatively benign approach misses some crucial points about how the Chinese economy has changed over the past few years, as well as the dynamics of this meltdown and its impact in the wider Asian region. Since the Global Recession, which China weathered rather well, there have been changes in the orientation of the Chinese government and further moves towards financial liberalization, which were rather muted before then. And these resulted in big changes in borrowing patterns as well greater exposure to the still nascent stock market, in what have turned out to be clearly unsustainable rates.

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