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The New World Ordoliberalism Part 3: About That Raise You Wanted…

Along with last week’s news of Germany’s record trade surplus, the opening of an EU investigation into Germany’s growing surpluses, and Europe’s other recent remarkable socioeconomic achievements, Angela Merkel made an announcement on Friday regarding her party’s plans for Germany’s economic policies that might actually be good news for Germany and the rest of Europe: She’s urging her fellow CDU member to compromise on an across-the-board 8.50 euro German minimum wage over the CDU’s long-standing position of no minimum wages and instead agreements negotiations by economic sectors and region (wage agreements that often aren’t adhered to). A big change to Germany’s minimum wage laws could be coming as the price of an SPD coalition with Merkel’s CDU. Better late than never:

Merkel ready to cede on minimum wage to secure coalition

BERLIN Sat Nov 16, 2013 9:43am EST

(Reuters) – German Chancellor Angela Merkel has signaled her readiness to accept the Social Democrats’ (SPD) demand for a legal minimum wage in order to secure their agreement to form a governing coalition, as negotiations enter the final stretch.

Merkel began preparing her conservatives for a compromise by telling a Christian Democrats (CDU) youth rally late on Friday that the 8.50 euros per hour pay floor which the SPD demands “will play a role” in future.

“It won’t be our vision of a minimum wage,” she added, conceding her party was unlikely to get its own way over the SPD on the issue.

Merkel wants to form a government by Christmas and talks on policy compromises should culminate in the next 10 days.

The SPD has given up its campaign promise to hike taxes on the rich but will not budge on the minimum wage. Nearly half a million SPD members will vote on the coalition deal by early December, injecting more uncertainty into the whole process.

The conservatives are in favor of setting minimum wages – but on a sector-by-sector basis, at levels agreed by employers and workers rather than decided centrally in Berlin. For the SPD, it is 8.50 euros across the board – or no coalition.

“Now you have to deliver, dear conservatives,” SPD Chairman Sigmar Gabriel told a party congress in Leipzig on Saturday.

Merkel’s parliamentary leader Volker Kauder also prepared for a compromise by telling the mass-circulation Bild am Sonntag paper, in comments released before publication, that “growth and employment must not suffer” from its introduction. Some business leaders are worried that it will undermine competitiveness.

Kauder said it might be wise to introduce the minimum wage more gradually in the former East Germany – where pay is lower and unemployment higher – to avoid putting jobs at risk. But trade unions who back the SPD might find that hard to accept.

No tax hikes on the rich but an across the board minimum wage: The joys of compromise! It also remains to be seen how permanent these changes will be if they’re implemented. As Merkel puts it, the minimum wage “floor” is not in the CDU’s “vision”. Is this going to be a temporary minimum wage “floor” that only lasts through the duration of the coalition? We’ll have to wait and see. But it’s good to see the SPD make an across the board minimum wage a basic demand for to joining the CDU in a coalition (East German workers should probablybreath an extra sigh of relief). 8.50 euros/hour is higher than in many EU countries and actually 45% higher than the minimum wage in the US (that’s not as impressive as it sounds). And if the views of Germany’s business leaders and chief economists are any indication of what we can expect from Germany’s economic establishment going forward, a national minimum wage is going be treated like national cancer:

Reuters The Great Debate

Will a minimum wage destroy German jobs?
By Peter Gumbel
November 7, 2013

Germany has once again become the world’s favorite whipping boy, roundly criticized over the past few days by the U.S. Treasury, a top International Monetary Fund official and the European Commission president, among others, for running record trade and current account surpluses that are supposedly detrimental to the European and global economy.

The arguments continue, with the Germans themselves saying that the surpluses are simply the happy result of the nation’s industrial competitiveness and don’t hurt anyone else. Lost in the debate, however, is what’s happening in Berlin right now. As Chancellor Angela Merkel seeks to form a new coalition government, she appears to be on the verge of throwing out some of the very policies that underpin the export boom of the past decade.

Most controversially, the new government to be formed is likely to introduce a minimum wage, a novelty for Germany, and a move that both symbolically and in reality would herald the end of the tough wage restraint that has characterized the past decade. A range of social policy changes, including a possible reduction in the retirement age, are also being discussed, as is higher government spending.

It’s not clear whether such shifts would provide the boost to domestic spending that the U.S. and Germany’s other critics are demanding. But their very prospect is sending chills down the spines of German business leaders. Ulrich Grillo, president of the Federation of German Industries, warns that “Germany can’t afford a grand coalition of election gifts,” and says that the politicians are acting as though Germany’s continuing prosperity is a given, rather than something that needs to be worked at.

Deutsche Bank says flatly in a research report that the proposed minimum wage is “the wrong policy choice.”

The shifts in economic policy are coming about as a result of political necessity. Merkel scored strongly in the September 22 parliamentary elections, but her Christian Democratic Union party didn’t win enough votes to govern alone. The party’s top officials have spent the past few weeks locked in negotiations with the opposition Social Democrats over the shape of a coalition government, and they have already given way on a number of points, including the introduction of a minimum wage of 8.5 euros per hour (about $11.50 at current exchange rates).

Germany is unusual in that it doesn’t currently have a national minimum wage; pay scales for different industries are traditionally fixed by management and union organizations, in regular rounds of negotiations. Two elements of the planned minimum wage are notable. The first is the level being proposed, which is 45 percent above the U.S. minimum wage — considerably higher than that in some other European countries such as Spain, although below France and the Netherlands. The Hans Böckler Stiftung’s Institute of Economic and Social Research has a handy guide to minimum wage rates around the world here.

The second notable element is its expected broad application, across the whole of Germany, East and West, and including new entrants to the job market. This amounts to a rollback of the stringent policies put in place by Merkel’s predecessor Gerhard Schröder, starting in 2002, at a time when the German economy was struggling to digest the impact of reunification after the fall of the Berlin Wall.

Schröder, a Social Democrat, worked together with the former head of human resources at Volkswagen, Peter Hartz, to devise policies that created jobs, in part through the introduction of low-paid “mini jobs” that were exempt from social security charges. These were designed to get hard-to-employ people back into the workforce. The result has been spectacular: Germany’s current unemployment rate, of just over 5 percent, is half what it was a decade ago, and far below the 12.2 percent average jobless rate in the euro zone. And German productivity gains since then have far outstripped the modest rise in unit labor costs, propelling the current export boom.

Currently, about 12 percent of workers in Western Germany earn below 8.5 euros per hour, while in the eastern part, the figure is about one in four, according to research by the IWH institute in Halle.

Deutsche Bank is now predicting that the planned minimum wage would reverse some of the beneficial effect of the Hartz reforms and would likely increase labor costs generally, because the 8.5 euro level would be close to the median wage. The bank estimates that between 450,000 and one million jobs will be lost as a result.

In theory, the minimum wage would boost overall purchasing power, going some way to address the international criticism. But Hans-Werner Sinn, head of the IFO Institute for Economic Research in Munich, argues that it would merely push up the price of German goods and make them less competitive, without leading to a significant increase in consumption of imports. “There will be a bitter sobering up,” he warns.

For their part, advocates of the minimum wage argue that similarly dire gloom-and-doom scenario predicted in Britain back in 1998, when the government of Tony Blair introduced one, have failed to materialize. The British minimum wage is the equivalent of $10 per hour, below the planned German level. However, the British one is scaled so that apprentices and those under 21 receive substantially lower amounts.

With 12% of workers in the west and 25% of workers in the East currently making less than 8.50 euro/hour it’s going to be very interesting to see what impact this could have on local economies. Especially those in the east filled with low-wage “mini-jobs”. This could be a pretty exciting experiment to watch!

Common wisdom can be depressing
Still, it’s hard to see how this will be a permanent change. At least not without some sort of EU mandate. As Hans-Werner Sinn reminds us, Germany’s establishment tends to follow a distinct Ordoliberal market-worshipping form of utopianism. The inability to set really low wages is an unacceptable distortion of the market according to common wisdom:

‘Five Wise Men’ warn Germany not to relax

AFP | 13 Nov 2013, 10:47
Germany must not ease up or back track on economic reforms, the government’s panel of economic advisors said on Wednesday as the European Commission placed the country under scrutiny for its large trade surplus.

In their annual report presented to Chancellor Angela Merkel, the German Council of Economic Experts, or so-called “Five Wise Men”, warned that Europe’s biggest economy must not rest on its laurels.

Their report comes against a background of some criticism from abroad that Germany is too successful in building up a huge trade surplus and should do more to stimulate consumption at home and so draw in imports, notably from the rest of Europe.

“The present economic situation and Germany’s healthy position compared to the euro area’s crisis countries seem to have obstructed many politicians’ view of the major future challenges,” the report said.

Following the general election on September 22nd, Merkel’s conservative CDU and CSU parties have been holding talks on a possible “grand coalition” with the Social Democrat SPD.

Among a range of different measures under discussion are possible exemptions to the new retirement age of 67, minimum wages and tax increases.

“Future challenges will be far more difficult to overcome if the Agenda 2010 reforms become diluted or reversed in some cases,” the experts warned.

“The same holds for measures which hurt growth and job creation, such as minimum wages and tax increases.”

In the eurozone’s long and debilitating crisis, Germany has fared much better than its European neighbours thanks to deep and painful structural measures, known as Agenda 2010, initiated by the previous SPD administration.

Merkel has consistently argued that other countries should follow Germany’s example and get their economies in order.

But the panel believed that Germany is still facing considerable challenges of its own.

“The German government should not give the impression that it expects – or even demands — painful adjustment processes from other countries, but shies away from unpopular measures for Germany,” the report said.

Notice that, according to the highly influential Five “Wise” Men, the “major future challenges” for Germany all seem to only be surmountable with ongoing austerity and a refusal to let up on the “painful adjustments” and “deep and painful structural measures” of Germany’s “Agenda 2010” austerity policies. It’s a reminder that the advocates of austerity policies might hint of them being just temporary measures but they aren’t actually meant to be temporary. Little known fact: The race to the bottom has no finish line.


The European Commission on Wednesday also placed Germany under scrutiny for its international trade surplus, seen as an obstacle to recovery across the rest Europe.

“The issue is whether Germany … could do more to help rebalance the European economy,” Commission President Jose Manuel Barroso said after placing 15 other countries under scrutiny for failing to meet EU economic targets.

Barroso was speaking as the Commission also ordered “decisive policy action” from deficit-struggler France, Italy and Hungary.

Between now and May, the Commission using new powers is to scrutinize the economic programmes of the 16 countries to ensure that they are in line with overall coherent economic management of the eurozone and European Union economies.

The head of the EU executive said the focus also had to include countries with surpluses considered excessive, after years of concentrated efforts to organize bailouts and drive down public deficits.

“This is not about the EU running economies in place of national governments,” Barroso said. It is about “ensuring that what is good for individual states is good also for the EU,” he stressed, opening a new phase of what he called “bolder” cross-border economic policy-making.

“Liberalising” Germany the service sector: the obvious solution?
As the above article points out at the end, the decision of the “Five Wise Men” to oppose a German minimum wage as part of the CDU’s coalition-building compromise is taking place right when Germany has come under investigation by the European Commission over whether or not Germany’s extremely high current account surplus (its high savings/export-driven economy) is harming the European economy by fostering endemic destabilizing trade imbalances that force deflation and austerity as the only remaining option for rebalanced eurozone members.

The basic solutions are either for the ailing Southern European economies to export more to Germany or for them to continue down the path of “internal devaluation”. The first option is the desirable choice if one wants to avoid a “lost generation”. The second option is the one to pursue when when one believes that a generation must be lost in order to make up for past sins. So what does European Commissioner Jose Manuel Barroso have in mind to stimulate Germany domestic demand of their neighbor’s services? More the former or something closer to the latter? Considering Mr. Barroso’s recent history with austerity policies one might fear he’s leaning towards the latter. Especially since his plans for Germany’s rebalancing with the rest of Europe appear to center around “liberalizing” Germany’s service sector:

Financial Times
Last updated: November 13, 2013 1:08 pm
Brussels launches inquiry into Germany’s current account surplus
By Peter Spiegel in Brussels and Stefan Wagstyl in Berlin

José Manuel Barroso has launched an inquiry into whether Germany’s large current account surplus is harming the European economy, drawing Brussels into a heated debate over Berlin’s role in global economic health.

The European Commission president took pains to emphasise on Wednesday that the commission’s “in-depth review”, was part of its annual examination of eurozone economies and was not intended to criticise the competitiveness of German industry or its broader economy.

But he said there were parts of the German economy, particularly the service sector, that should be liberalised, and other EU officials called on Berlin to increase infrastructure investment to stimulate demand.

“We would like to have more Germanys in Europe,” Mr Barroso said. “Our problem could never be German competitiveness but whether Germany, the EU’s economic powerhouse, could do more to help the rebalancing of the EU economy.”

In Berlin, there was cross-party rejection of Brussels’ concerns. Hermann Gröhe, secretary-general of Chancellor Angela Merkel’s Christian Democrats, said exports were “a cornerstone of our prosperity”. Alexander Dobrindt, head of the CDU’s Bavarian sister party, said: “You cannot strengthen Europe by weakening Germany.”

Social Democratic and Green party leaders were similarly critical and Jens Weidmann, president of the Bundesbank, said crisis-hit eurozone countries would not profit much from more expansive fiscal policy in Germany.

“The positive knock-on effects would be limited,” Mr Weidmann said, adding that the answer to Germany’s surplus could not be to lower the competitiveness of German companies.

When the term “liberalise” is used by eurocrats like Mr. Barroso, it almost always translates into “lower pay, fewer regulations, and fewer worker protections”. Is there any reason to assume that isn’t part of the planned reform package? Sure, suppressing German wages wouldn’t actually help stimulate the eurozone or increase German domestic spending, but what proposals put forward to date really have been helpful? Mario Draghi’s occasional emergency declarations from the ECB? What else?

More importantly in the long-run, is this focus on “liberising” Germany’s service sector a sign that the European Commission and Berlin are going to use the need for changes to the German economy as an excuse to being imposing more “structural reforms” (wage suppression and union-busting) in Germany now too? The minimum wage might be rising, at least temporarily, but they could fall for better paid workers. Is Germany’s own “internal devaluation” going to be solution to the problem? Because what’s going to happen when Germany liberalizes its service sector and the benefits to the rest of the EU don’t materialize? Or it’s helpful, but to the countries that need it most. What then? Well, they can always “liberalise” the German service sector even more. That’s how the EU works, right? Just keep applying liberisation and/or austerity policies until some yet-to-be determined state of in harmonized market nirvana is reach, right? Or maybe a whole bunch of EU countries could all liberalise their service sectors at the same time to create some sort of new harmonized market synergy that will boost exports from the P.I.I.G.S.?

These are the kinds of questions that raise a larger question regarding the future of the EU’s people: How long can the current “rich country/notably poorer country” paradigm continue in the EU while market integration – like service sector liberalisation and integration – is just a built in assumption going forward? Isn’t all the “internal devaluation” of the P.I.I.G.S.’s economies going to start bleeding right back into the wealthier EU members now that these economies are in an unstoppable march towards a single market? The EU right-wing has dreamed of turning Europe in to one giant permanently “competitive” zone for years so some sort of German “internal devaluation” as part of the EU’s rebalancing act shouldn’t be considered an impossibility. Especially in the medium-term. As the “Five Wise Men” warned us above, Germany’s success in overcoming its long-term challenges hinges on its ability to maintain its self-impose austerity policies. When that’s the long-term prognostication and somewhere between 1/8 and 1/4 of workers are already earning less than the proposed new minimum wage of 8.50 euro/hour austerity is a permanent policy. Policies that buttress and further the existing wage suppression and general “liberalisation” of the economy are just a matter of time:

Low wages, the flip-side to Germany’s economic miracle

Agence France-Presse
2:12 pm | Sunday, September 15th, 2013

BERLIN – Chancellor Angela Merkel often boasts during the campaign for September 22 elections that Germany has one of Europe’s lowest jobless rates – at around 6.8 percent. But it comes at a price.

As many as three million people in Europe’s top economy earn less than six euros ($7.90) per hour, meaning Germany has one of the biggest shares of low wages in Europe, a fact that Merkel’s critics have jumped on in the campaign.

“We’ve become a country of low wages,” sighs charity worker Renate Stark, who everyday confronts the struggle of workers paid too little to make ends meet, despite Germany’s booming economy.

From pizza deliverers earning an hourly six euros, to young journalists on less than 750 euros a month, the 55-year old social assistant for the Catholic Caritas organization in Berlin can reel off many such examples.

Like hundreds of others, Stark said, he mostly scrapes by thanks to certain welfare benefits, but when that’s not enough, “when the washing machine breaks down or an electricity bill arrives unexpectedly,” he turns to charities.

“I experience it here daily,” she told AFP. “I began this job 21 years ago and it wasn’t like that. The situation has become really serious in the past five or six years. It’s very clear.”

To be sure, many of those employed by Germany’s mighty industrial giants, for example in the automobile sector, enjoy enviable conditions. But unlike most of its European partners, Germany has no national minimum wage.

According to figures compiled by the IAQ Institute for Work, Skills and Training, more than one in five employees, or nearly seven million people, earned less than 8.50 euros per hour in 2011.

By comparison, the minimum wage in France is just under 9.50 euros per hour.

Furthermore, the boom in low-wage jobs has been accompanied by a corresponding rise in “precarious” work, such as part-time or temporary work.

There are also so-called “mini-jobs” where employees are paid a maximum of 450 euros a month and are exempt from paying social or welfare contributions.

Nearly eight million people were in such low-pay or mini-job forms of employment in 2012, almost twice as many as 20 years ago, according to data by the federal statistics office Destatis.

“Germany is the EU country where the proportion of low-wage jobs is highest behind Hungary and the United Kingdom,” said the OECD’s German expert, Andreas Kappeler, pointing to a 2010 study.

“Between 1985 and 2008, the wage gap between high and low pay has widened in Germany much faster than in the other OECD countries,” he said.

Women and all Germans in the much poorer have been the most affected by rising impoverishment since sweeping reforms were pushed through under the former Social Democrat (SPD) chancellor, Gerhard Schroeder, between 2003 and 2005.

Steinbrueck has promised to introduce a general minimum wage of 8.50 euros as one of his first moves if he is elected chancellor.

For her part, Merkel has said she wants to compel unions and employers to agree minimum wage deals by sector and region.

The process has already begun. Giant service sector union Verdi, for example, recently negotiated a minimum wage of 8.50 euros for hairdressers by 2015, the thirteenth such sector-wide agreement.

While Merkel occasionally denounces some “unacceptable” salaries, she has rejected a nationwide minimum wage which, she sees as the root of Europe’s high levels of unemployment.

Keep in mind that if Angela Merkel truly views nationwide minimum wage laws as the root of Europe’s high levels of unemployment (and there’s no reason to assume she doesn’t) then really really low wages for lots of Europeans is the plan. The existence of a minimum wage that helps to drag people out of poverty wouldn’t be a big deal if leaders weren’t planning on having a large number of people make very little money. And if large number of Europeans working at or near the minimum wage is part of the plan the Berlin and Frankfurt have in mind, that means Europe as a whole is going to turn wage deflation into one of its long-term global exports. It was a fear of “a deflationary bias for the euro area, as well as for the world economy” that prompted the US Treasury and IMF to criticize Germany’s policy-makers. Those fears expressed by the US Treasury and the IMF are frighteningly appropriate if ideas like liberalising the service-sector are the kinds of stimulative policies we can expect from the EU’s leaders going forward.

Say hellow to EU-wide deflation: “Europe should copy, not criticize surplus”
Still, the fact that Angela Merkel is openly telling the CDU that its going to have to accept a nation-wide minimum wage is a potentially great turn of events. Not only is it potentially great news in the short-run as a means of stoking real German domestic demand and imports but also in the long-run. As former Bundesbank chief Alex Weber recently argued, the best way for Germany to help lift its neighbors out of the eurozone crisis isn’t for Germany to make changes that increase domestic imports of their eurozone neighbor’s products. No, the best policy is for those neighbors to adopt Germany’s policies…plus more deflation in ‘periphery’:

German business: Europe should copy, not criticize surplus
Published: Tuesday, 12 Nov 2013 | 12:47 AM ET
By: Reported by Carolin Roth, written by Catherine Boyle

Axel Weber, chairman of Swiss bank UBS and former head of Germany’s central bank, has told CNBC that Germany’s surplus is not a policy problem and any international criticism of the country’s economic policy was unwarranted.

Weber joined the German voices defending the country’s economic policy in the face of international criticism. The European Commission, the 28-country European Union’s executive arm, is set to scrutinize the country’s current account surplus and whether it is negatively affecting the rest of the region.

“Studying why Germany is so successful internationally is always warranted,” Weber said. “There are a lot of lessons that many countries in Europe, particularly in the periphery, can learn from that.”

“To look at is a policy problem is in my view unwarranted…There is very little that Germany does to manipulate any of that success,” Weber added.

Germany has faced criticism from elsewhere in Europe and even the U.S. Treasury over its dependence on exports. Last week, it emerged that its foreign trade balance – the amount by which exports outstrip imports – hit a record high in September.

Critics argue that this means that Germany should be encouraging its people to spend more on foreign imports and help stimulate growth in the rest of Europe.

“A rise in domestic demand in Germany should help to reduce upward pressure on the euro exchange rate, easing access to global markets for exporters in the periphery,” Olli Rehn, EU economic and monetary affairs commissioner, argued in a blog post Monday.

Joaquin Almunia, the EU competition commissioner, told CNBC on Tuesday that at its weekly competition review meeting on Wednesday, the commission would be looking at Germany’s trade surplus.

“We need to take stock, we need to analyse the reasons why this surplus is above the threshold and what are the consequences, and what are the remedies if the consequences are negative. Tomorrow, we’ll just take stock [of the situation] we won’t issue recommendations,” he said.

“I’m not talking about punishment, I’m talking about analyzing a situation — the size of a current accounts surplus and what this means –that the savings rate is much higher than the investment rate in a country and this deserves a careful analysis.”

However, the very fact that the European Commission was investigating Germany’s economy drew criticism and disbelief from the country’s CEOs.

“It’s like you get punished if you get good grades,” Kaspar Rorsted, chief executive of consumer goods company Henkel, told CNBC.

“Europe’s biggest competitor is not within Europe, it’s outside.”

“The German economy definitely still depends on strong exports,” Frank Appel, chief executive of Deutsche Post DHL, told CNBC.

“Europe has been in recession for six quarters. Coming out of a recession happens in a very different way (for core and periphery). It’s difficult to come up with a single monetary policy,” Weber said.

“Prices and wages have to come down in the periphery.”

Turning to the recovery from the five-year global financial crisis, Weber added that the “normalization” of the global economy is continuing but risks remained. “We are in a phase of normalization. The road ahead is long, there is positive momentum but there are risks,” Weber told CNBC Tuesday.

Yes, the attitude amongst German business elites is apparently that “the road ahead is long”, and that road appears to involve prices and wages coming down in the periphery. Coming down more than they already have. It’s all part of the process of “normalization”. The EU’s road to New Normalcy is a long, crappy road. Especially when everybody’s economy has to simultaneously be based on high exports and low domestic consumption:

Irish Examiner
Future bleak for those on eurozone periphery

Saturday, November 16, 2013

The eurozone is at an inflection point. The crisis may have abated compared with the daily whirlwind that convulsed both markets and governments up to the middle of last year.

COMMENT: John Walsh

A calmness of sorts was restored in July 2012 when ECB chief Mario Draghi pledged to do “whatever it takes to save the euro”.

Right now the only thing keeping the eurozone together is the ECB. But the resolve shown by Mr Draghi is not going down well in Berlin. A narrative has taken hold in the eurozone’s largest economy that divides the region into the virtuous and the sinners.

In the virtuous corner are the Germans and a few northern European states. From this perspective, the cause of the crisis is a lack of competitiveness in southern European countries. These countries must restore competitiveness through internal devaluation. And only when these countries become more like Germany, can the eurozone grow and prosper.

There are a number of problems with this narrative, not least is that internal devaluation means slashing and burning wages, which further depresses consumption and causes a nosedive in living conditions and general social cohesion.

A less Berlincentric view of the crisis would show that the causes are much more complex and the culpability is more widespread.

The eurozone is a monetary union. The German economic model is based on exports and low domestic consumption. During the first decade of the single currency, recycled German savings made their way to the periphery which fuelled a massive credit bubble. This bubble burst with disastrous consequences in 2008.

The German economy is running a current account surplus of 6%. Yet the main political party, the CDU, and most prominent German economists, are hostile to the idea that this has any damaging consequences for other eurozone members.

Furthermore, the country has done very little to liberalise its services sector — a move that would greatly boost growth across the region. There has also been a chronic shortage of public and private investment in Germany’s infrastructure, which, if addressed, would do wonders for the eurozone. But instead, apparently, everybody should follow the German lead.

But if all eurozone states are busy saving and all wealth creation is set to come from exports, where exactly are the markets that will soak up eurozone exports? Surely, such a ‘beggar my neighbour’ policy would prompt a trade war.

Ms Merkel’s popularity at home is based on unyielding commitment to protect German taxpayers at all costs. Under no circumstances will there be any transfer union or a banking union that enabled the recapitalisation of banks using public funds, even though any economic textbook will say it is impossible to have a monetary union without some sort of fiscal union.

Unless there is a pauline conversion by the new government in Berlin when it takes office next month, it will proceed with the Germanification of the eurozone. It is likely just enough will be done to keep the single currency together. But for those on the periphery, the future will be bleak with a possible debt deflationary spiral looming large.

The preceding essay raises a lot of the critical questions that need to be asked right now in EU policy-making circles. And it’s entirely understandable that the author is calling for Germany to liberalise its services sector and allow the rest of the EU to compete in those markets. If Germany isn’t interested in buying the goods of its EU neighbors the services are going to be the only thing left to trade. There is the remaining question, though: How can Germany avoid falling into its own deflationary spiral when all those service jobs open up to competition with the nations that just saw their wages gutted by austerity? There’s a big difference between Germany stimulating imports from the EU by spending some of its record high savings on domestic investments and new infracture vs Germany stoking EU imports by opening up its service sector to EU competition. Both of these scenarios will potentially help out Germany’s EU neighbors and add some much needed EU inflationary pressures. But only one of those scenarios has the potential to unleash more deflation Germany.

Adding to all of this is the fact that a growing “lost generation” of European youth are moving from their broken economies to Germany in search of jobs. It’s a predictable consequence of the EU’s austerity policies that are predicated on destroying economies to achieve “internal devaluation” and become more “export-friendly” like Germany. Thus far the primary growth in exports has been in deflation and unemployed youth and Germany’s low-wage economy has been the destination for many of those youth exports. And there’s no indication this dynamic is going to change any time soon. Because all indications are that the “internal devaluation” of the P.I.I.G.S. is a deliberate, conscious policy. So more “internal devaluation” is what’s on the agenda and that translates into more exported youths traveling to Germany and rest of the remaining non-ailing eurozone. It’s great when a young person leaves home to experience life in a new country but it’s a lot less great when they’re forced to do so due to appallingly high youth unemployment rates.

And then say hello to global deflation.
As long the model of high trade surpluses and maximal economic “competitiveness” is the dominant policy framework for the EU, the threat of deflation and suppressed domestic demand is probably here to stay in the EU. And the longer the EU, and especially the eurozone, finds itself exporting deflation, the more that deflation becomes a global problem:

First Post
Is eurozone trying to become a bigger Germany?
by Vivek Kaul Nov 15, 2013

The US Department of Treasury publishes a semi-annual currency report. The latest report released on 30 October, 2013, makes a scathing attack on Germany. “Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany’s nominal current account surplus was larger than that of China. Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy,” the report points out.

So what does this mean in simple English? Germany has been the export powerhouse of the world. It exports considerably more than it imports. This is the formula it has been trying to force onto other countries of the Eurozone as well. Eurozone is a term used for 17 countries which have adopted euro as their currency.

As Albert Edwards of Societe Generale writes in a report titled Prepare for the next phase of global currency war – should we blame Germany? dated 14 November, 2013, “In the run-up to the crisis they all promoted an inappropriately loose monetary policy that caused a credit and housing bubble, runaway domestic demand growth, ostensibly sound government finances and burgeoning current account deficits, all financed by a surplus nation…predominately Germany.”

Countries like Portugal, Spain, Italy, Greece, Ireland etc went on a borrowing spree, which ultimately led to a housing bubble. When the bubble burst the banking system in these countries was in a mess. They had to be bailed out by the European Central Bank(ECB). At the same time countries were forced to follow austerity measures to control government expenditure. These measures have led to an extremely high level of unemployment in these countries. As Ambrose Evans-Pritchard of The Daily Telegraph pointed out in a recent column “unemployment is 27.8% in Greece, 26.3% in Spain, 17.3% in Cyprus, and 16.5% in Portugal.. it would be far worse had it not been for a mass exodus of EMU refugees….Greek youth unemployment is 62.9%.”

This has led to a situation where internal demand in these countries fell dramatically. A fall in internal demand has meant lower imports. And this in turn has led to exports being greater than imports, and hence a trade surplus( a situation where exports of a country are greater than its imports). The eurozone trade surplus in August 2013 was at $9.5 billion.

Interestingly, the collapse of demand within these countries has also led to a situation where German exports within the Eurozone have fallen. “It is that actually Germany’s trade surplus within the Eurozone has collapsed to almost zero as the GIIPS (Greece, Italy, Ireland, Portugal and Spain)have plunged into depression,” writes Edwards.

This basically means that Germany is importing as much from other countries in the Eurozone as it is exporting to them, leading to a trade surplus of almost zero. But it has more than made up for this by running a higher trade surplus with other parts of the world, primarily United States and large parts of Asia.

Hence, it isn’t surprising that the United States has a problem with Germany. While Germany is exporting goods and services to the United States, it isn’t importing the same amount back from the United States or other parts of the world, for that matter. This means that businesses in the United States and other parts of the world are not exporting enough, which in turn has an impact on economic growth.

This formula of running a trade surplus by exporting more and limiting imports has worked very well for Germany. But the question is will it work for the Euro Zone as a whole? Martin Wolf of The Financial Times feels that the strategy may not work for two reasons. “First, the eurozone is far too big to achieve export-led growth, as Germany has done; and, second, the currency is likely to appreciate still further, thereby squeezing the less competitive economies all over again.”

The euro is likely to appreciate in the days to come given that both Japan and United States are printing money big time in the hope of devaluing their currencies. Also, this formula will have political complications as well, given that, exports can only happen if someone else is importing. Every country cannot be an exporter at the same time. Someone has to import as well.

And who will that importer be? Sanjeev Sanyal of Deutsche Bank Markets Research writes in a report titled Bretton Woods III and the Global Savings Glut dated October 8, 2013 “Reinterpreted to present conditions, the next round of global economic expansion may require the US to revert to its role as the ultimate sink of global demand.”

“Reinterpreted to present conditions, the next round of global economic expansion may require the US to revert to its role as the ultimate sink of global demand.” At least according to Deutsche Bank analysts. And they’re probably correct. There is simply no way for the entire eurozone and the larger EU to persistently run net trade surpluses without the entire world running persistent reciprocal deficits with the EU. Some forms of economic reciprocity can’t be avoided. The EU’s leaders, and the leadership in Berlin especially, have made it very clear in recent pronouncement that wage suppression is a central component of their long-term vision for the eurozone and “internal devaluation” is set to be the default long-term strategy for EU nations. When one EU member falls on hard times they should not expect help in the form of increased trade surpluses from the rest of their member nations. Internal devaluation and deflation is the predetermined response.

So we should probably applaud the SPD for their insistence on a nation-wide minimum wage. This really is good news! If nothing else, a national minimum wage could help avoid the exploitation of the growing number of low-wage young EU migrant workers and put a break on the EU’s overall deflationary forces. It also might provide some real protections for the most vulnerable German workers once the service sector opens up to competition with Germany’s austerity-ravaged neighbors.

But it’s very unclear if this is a permanent change or a temporary concession. What is becoming increasingly clear is that the high-export/high-savings model that Germany has been following since the 1950’s is the plan for the entire eurozone going forward and eventually the entire EU. And that means a wage floor in Germany may not do much to prevent wages across the rest of the Germany economy from succumbing to the deflationary pressures sweeping the continent. Having Europe adopt the Germany model is a policy that can only result in trade conflicts and greater global imbalances in the long run because there aren’t very many options for avoiding long-term global wage deflation when wage deflation is central to the long term growth strategies of one of the wealthiest continents on the planet. There are ways to avoid such a global scenario, but they mostly involve finding alien civilizations to trade with. Sure, such aliens might be out there, but after watching us mindlessly induce self-reinforcing deflationary socioeconomic death spirals the aliens might not want to play our silly games. Solutions that might actually solve the problem of global wage deflation are required.


20 comments for “The New World Ordoliberalism Part 3: About That Raise You Wanted…”

  1. Deflation? What deflation?

    Weidmann and Draghi go head to head on ECB policy

    Draghi, Asmussen and Weidmann lay out their views on the right direction for eurozone monetary policy; Bundesbank president accused by Paul Krugman of ‘sadomonetarism’

    Author: Central Banking Newsdesk

    Source: Central Banking | 21 Nov 2013

    Three men at the heart of European monetary policy today gave differing assessments of the policy conducted by the European Central Bank (ECB) to date and where it should go in the future, in impassioned speeches examining the proper role of central banks during a financial and economic crisis.

    Mario Draghi, president of the ECB, and Jens Weidmann, his opposite number at the Eurosystem’s biggest central bank, the Deutsche Bundesbank, took turns addressing a conference in the German capital of Berlin this afternoon.

    Draghi set out to explain the ECB’s recent cut in interest rates as a response to “disinflation in slow motion” which has been in train “for several months now”.

    Describing German reservations over what low interest rates would do for savers – Germany continues to boast the eurozone’s biggest economic surplus – as understandable, Draghi said raising interest rates would “only depress the economy further”, hitting savers who would see returns on assets fall, or even lose their jobs.

    Moreover, he said, targeting inflation of below but close to 2% per annum provides a “safety margin against deflationary risks” for “countries experiencing inflation rates well below the euro area average as part of their adjustment processes”.

    If those countries were to experience deflation, their economic adjustment programmes could run into “major headwinds as demand suffers and real debt burdens rise”, Draghi said.

    As for using tight monetary conditions to encourage fiscal and structural adjustment in eurozone countries, Draghi said such decisions are “ultimately the task of political authorities, not monetary authorities”.

    ECB ‘at the limits of its mandate’

    Jörg Asmussen, the German member of the ECB’s executive board, told an audience in New York today that Japan-style deflationary pressures are “not a scenario that we foresee for the euro area”. Inflation expectations, he said, “are firmly anchored and we see no risks of deflation in the medium-term”.

    Continuing in an optimistic vein, he said he was confident the current decade in the eurozone is not “lost” – rather, he said “it is being used well”, particularly with the efforts being made on banking union and so-called reform contracts to support structural reform.

    Monetary policy, said Asmussen, “is clearly not the solution to structural problems. Yet maintaining price stability through a period of adjustment is essential.”

    He also told his American audience that the popular view of Europe’s current account surplus as a ‘beggar-thy-neighbour’ policy is both “contradictory” and “short-term”. “Europe’s contribution to global demand in the years before the crisis came largely through governments, firms and households taking on too much debt”, he said. “This had to change,” Asmussen added.

    Phew! At least there aren’t any risk of Japan-style deflation facing the eurozone in the medium-term because that’s a recipe for disaster, especially for heavily indebted countries. And, as Jörg Asmussen, it’s not like a decade of a horrible economy and record youth unemployment would really be a lost decade. After all, think of all the awesome “structural reforms” that will have taken place? So what’s everyone worried about? Sounds like a win-win situation is unfolding!

    Notice, however, that Mr. Asmussen didn’t say anything about a lack of deflation in the short-term. Maybe there’s a reason for that:

    ECB’s Praet warns of deflationary pressures in euro zone

    By Ingrid Melander and Paul Carrel

    PARIS/FRANKFURT Fri Nov 22, 2013 7:53am EST

    (Reuters) – The European Central Bank’s chief economist said on Friday the euro zone faces deflationary pressures, and the bank’s president stressed that interest rates must remain low “because the economy is weak”.

    With euro zone inflation running at 0.7 percent, well below its target of just under 2 percent, a raft of ECB speakers this week have said it is open to taking fresh measures to support the economy.

    Vice-President Vitor Constancio said on Tuesday “everything is possible” and both he and economics chief Peter Praet have said asset buying – or quantitative easing (QE) – is an option after years in which the bank’s policymakers have ruled it out.

    But the more conservative minority at the bank, who voted against this month’s surprise cut in interest rates and are led by its German members, still seem dead set against any such move.

    Praet, who sits on the ECB’s six-strong Executive Board, said the financial crisis had saddled the euro zone with a debt burden unique in Europe’s post-war history because it has created a more deflationary environment.

    “This is a very different context for the correction of expectations (about income), which is more of a debt overhang,” he told a conference at the Bank of France.

    “It has more signs of a balance-sheet recession, which is a priori more of a deflationary environment than what we had in the 1960s.”

    Another ECB policymaker, Austria’s Ewald Nowotny, told reporters in Paris the euro zone was not in deflation, adding: “I do not see a perspective of deflation.

    Nowotny is known to have sided with the ECB’s hawks in the past and all of this week’s sounding off still added up for economists to a solid divide between the factions.

    “They stand ready to act as the November cut proves but they don’t yet see a genuine risk of deflation which demands throwing the kitchen sink (at the problem),” said RBS economist Richard Barwell. “A lot of the chatter is just reminding markets that they still have a sink to throw if they need to.”


    The economic case for moving was not aided by an above-forecast Ifo sentiment survey out of Germany – one of the month’s most watched indicators. It suggested the euro zone’s largest economy continues to recover slowly but has also had a habit of looking more positive than the hard, state-published data on output over the past few months.

    The OECD threw its weight behind the QE idea this week but, in a telling sign of the fierce resistance such an option would face from ECB hawks, Bundesbank chief Jens Weidmann said printing money is not the way out of the euro zone crisis.

    Berlin’s finance minister Wolfgang Schaeuble also said bluntly on Thursday that the bank should not offer “false monetary stimulus” – a reflection of the long-standing concern in Germany with money-printing and its inflationary risks.

    For the moment, the ECB is more likely to conduct another long-term liquidity injection, or LTRO, like the operations which funneled over one trillion euros in 3-year loans to banks in late 2011 and early 2012 at an interest rate tied to its main refinancing rate. A Reuters poll of money market traders pointed to that happening in the first quarter.

    But even an LTRO could meet resistance from some Council members. Weidmann said on Thursday the ECB must ensure its lending operations do not become too generous.

    “Everything is on the table and will be discussed, with liquidity measures the most likely option,” said Berenberg bank economist Christian Schulz.

    “But given the sharp reaction in the German media after the rate cut and the firm opposition to any further step in the central European caucus in the ECB, I think Draghi will not force more right now,” he added.

    Posted by Pterrafractyl | November 22, 2013, 2:32 pm
  2. Here’s a survey that indicates just how necessary a national minimum wage really is in Germany: According to the survey, 9 out of 10 Europeans do not feel their national governments actually control their nation’s finances, 4 in 10 Greeks have to borrow money to pay their bills, and 1 in 3 Germans cannot fulfill their financial obligations with their current income:

    Greek Reporter
    4 of 10 Greeks Borrow Money to Pay Bills
    By Abed Alloush on November 20, 2013

    The tough reality that hundreds of Greek households have to face due to the Greek Economic Crisis is depicted in a survey that was carried out by Trendbox, a Dutch independent research company. In this survey we can see how hard it is for a European household to make ends meet as well as fulfilling all financial obligations.

    Thirty-nine percent of Greeks, state that in order to pay the bills, they must borrow money either from a member of their family, or a friend, while others have no other option than to overcharge their credit cards. Fifty-seven percent of Greek people, admit that its tough for everyone nowadays to keep their heads above water. Meanwhile 4 out of 10 Greeks that participated in the survey admit that their income does not ensure a decent way of living.

    What is interesting, are the findings of the research concerning the faith that Europeans show in the way their governments and the EU’s institutions handle the financial affairs. In fact, the vast majority of the Europeans–9 out of 10–according to Trendbox, believe that their governments and the EU do not actually have any authority over the financial affairs.

    Last but not least, the survey shows that 1 out of 3 Germans cannot afford to fulfill their financial obligations with their current income. From this fact, we can conclude that even the countries that are not at the centre of the European economic crisis, are still affected by it.

    Posted by Pterrafractyl | November 23, 2013, 6:54 pm
  3. Well, hopefully stories like this coming out of Germany should be ending soon…

    The Local Germany Edition
    Poverty rises despite more people in work
    As figures show an increase in poverty despite record employment rates, and the potential new government argues about a universal minimum wage, German job centres are suing employers for paying less than €2 an hour.
    DPA/The Local
    Published: 26 Nov 2013 14:08 CET

    When businesses take on people who have been unemployed, the state will top up low wages via job centres to help them into work, but this has led to many cases where employers are clearly taking advantage of the situation.

    Next month a lawyer from Brandenburg will appear in Senftenberg labour court for paying his two office workers an hourly rate of €1.70 – meaning that although they were working, they were almost fully supported by the state.

    Last month the same court ordered a firm in Lünnenau to pay a salesman €1,560 in back pay after employing him for just €2.84 an hour. The court said he should have received twice as much. A pizza delivery firm was sued by the Uckermark job centre for paying its workers €1.59, €1.65 and €2.72 an hour.

    There are no numbers to show how many people are being paid such pathetic wages, which effectively condemns them to remain dependent on subsistence-level government top-ups, but Berlin and Brandenburg state governments are setting up a working group on the matter.

    Such wages, along with part-time jobs and shift-work are some of the reasons why statistics show that although there are more jobs in Germany than ever, the risk of being poor here has risen slightly.

    The ‘Data Report 2013’ issued by the National Statistics Office, shows that last year 41.6 million people in Germany had a job – more than ever before, the Süddeutsche newspaper reported on Tuesday.

    But at the same time the risk of being poor was rising – 16.1 percent of people in Germany were officially classified as ‘poverty endangered’ – a rise of 0.9 percent on the figure from 2007. Those who had less than €980 a month were considered poor.

    Those most at risk were people between 18 and 24, as they were most likely to be in education or training – and people between 55 and 64. Women were also significantly more likely to be poor than men, the numbers showed.

    Unfortunately, stories like this may not be ending soon enough. That’s because the agreement between the SPD and the CDU allows for businesses to delay implementation of the new minimum wage until 2017:

    Paris pushes EU-wide minimum wage in crusade against social dumping
    Published 02 December 2013

    The newly agreed minimum wage in Germany may not be implemented before 2017. Yet it is crucial for limiting social dumping, according to the French government, which announced a new offensive against low-cost workers ahead of next year’s European Parliament elections.

    Six months before the European Parliament elections, French concerns about employment issues and social dumping were higher than ever.

    On Wednesday (27 November), the government announced that a new plan to fight the abuse of “posted workers” who are sent by their employers to another EU country on a temporary basis, often at a lower cost.

    In France, as in other European countries, the EU’s posted worker’s directive, which regulates such practices, is being increasingly bypassed, the French government said in a report. Sophisticated fraudulent arrangements flourish all over the French territory,including in the construction sector and many others, it claims.

    This unfair competition coming from European enterprises which operate in France in breach of the posted workers directive amounts to genuine “social dumping”, claims the report from the French Council of Ministers.

    The French government will try to convince other countries by the December summit of EU leaders, including Poland. The aim is to amend the directive on posted workers by qualified majority voting, which is feasible at ministerial level. If not, the procedure would be much longer.

    “Strenghtening co-operation between labour inspection authorities is also necessary and has yet to be built. Besides, introducing a minimum wage in each member state would be a way to fight against unfair social competition,” the French government assures.

    Meat production, construction, agriculture

    Imposing a minimum wage, specific to each country is one of the demands of many sectors of the French economy.

    According to the national union of meat producers, social dumping by Germany creates big competitive distortions, as the cost of labour in France is three times higher than in Germany.

    The union further calculated that the cost of temporary labour in Germany is €7 per hour, while it is €20 in France for a minimum wage with social contributions, and €30 in Denmark.

    For these professions, 80% of the added value is related to the cost of labour.

    The issue was also raised in the construction sector.

    “The use of posted workers via European interim agencies or construction companies too often means very low wages, breach of the working time and security rules, social contributions paid in a different country”, laments Dider Ridoret, president of the federation of the construction sector.

    A minimum wage in Germany in 2017

    The newly formed German coalition committed to impose a minimum wage in the country at around €8.50 per hour. But the government is obviously not in a hurry to implement the measure.

    According to the coalition agreement adopted on 27 November, companies can delay the application of the minimum wage until 2017. But the €8.50 figure may no longer make sense by that time if inflation is taken into account. And the temporary work sector, which poses the biggest problem for the competitiveness of French slaughterhouses, will not have to adopt the minimum wage until that date.

    So the German minimum wage might not be arriving in time to really make a difference in the eurozone’s ongoing fight against deflation, but at least a national minimum wage is coming eventually. And now we’re even seeing calls from France for an EU-wide minimum wage. It’s progress! Much needed progress:

    Greek Reporter
    Drop in Greek Minimum Wage Predicted for 2013
    By Abed Alloush on November 30, 2013 in Economy, Labor, Law, Statistics, Survey

    According to the Organization for Economic Co-operation and Development’s (OECD) (released by Kathimerini), there is a large decrease in the net salary of the Greeks.

    OECD’s data shows that the net salaries of the Greeks has decreased by 1.7 percent compared to those of 2000. Those who work in the private sector have lower net salaries than bank clerks and those working in the Public Sector.

    The employees at the Hellenic State-owned Enterprise (DEKO), are the only ones whose net salaries are actually higher than they were back in 2000.

    In detail, OECD’s report shows:

    Net salaries of all employees have increased by 23.2 percent during the period 2000-2009. In the next four years, the net remuneration has dropped by 20.2 percent. Thus, the total loss for the period 2000-2012 stands at 1.7 percent
    Public servants have suffered a smaller decrease in their net remuneration due to the significant raise in their wages during the period 2000-2009.
    Bank employees have managed to get a raise of 17.1 percent during the period 2000-2009. Due to the economic recession, there was a decrease of 17.2 percent. Through the years 2000 to 2012, their net salaries were decreased to 3.1, in comparison to those of 2000.
    Self-employed individuals have seen their wages raised by 24.4 percent during the period 2000-2009, while over the following four years suffered pay cuts up to 21.2 percent. This resulted in a decrease in their net salaries by 2 percent.
    Last but not least, minimum wage has dropped to the lowest level from 2000 to 2012 due to recent changes in the law. The current minimum wage, as it is set by law, is 10 percent lower than that of 2000.

    Posted by Pterrafractyl | December 2, 2013, 12:51 pm
  4. Oh look, Wolfgang Schaeuble is reflecting back on the period a decade ago when France and Germany were exceeding the 3% GDP national debt guidelines. He concluded it was all a grave mistake that should not be repeated, which raises the question: since this period of deficit spending immediately preceded Germany’s “Agenda 2010” of planned wage suppression and austerity starting in 2005, how well does Germany Finance minister think the German economy would have performed if that deficit spending hadn’t preceded the period of austerity? And what if the rest of Europe had simultaneously decided to follow Germany’s lead and slashed their wages in order to gain a competitive advantage and, in turn, slashed their German imports? How would that have turned out for all parties involved?

    Schaeuble Says Franco-German Debt-Rule Break Was Grave Mistake
    By Rainer Buergin and Patrick Donahue Apr 8, 2014 7:18 AM CT

    German Finance Minister Wolfgang Schaeuble said the violation of deficit rules by previous governments in Germany and France was a “grave mistake” and urged all euro-region countries to stick to the regulations.

    His comments to lawmakers in the lower house of parliament in Berlin today come a week after President Francois Hollande signaled that France will seek another delay to its deficit-cutting commitments in an effort to bolster growth.

    “It was a grave mistake that Germany, together with France, were the first to break the stability pact,” Schaeuble told lawmakers, prompting applause from the ranks of his Christian Union bloc. “And we’re drawing the lessons from exactly that.”

    Schaeuble’s reference to the past reflects the challenge Germany faces in reminding France of its current obligations for euro region financial stability without alienating leaders of the region’s second-biggest economy. Both Germany and France violated the bloc’s deficit limit of 3 percent of gross domestic product in 2004.

    At a joint press conference yesterday with his French counterpart, Michel Sapin, Schaeuble refrained from criticizing French policies, saying “there are times when it’s easier for some and somewhat harder for others” to obey the rules.

    Germany trusts that France will fulfill its obligations under the revamped Stability and Growth Pact and is aware of its commitments and its responsibilities for the functioning of the accord that’s to safeguard budget discipline, Steffen Seibert, Chancellor Angela Merkel’s spokesman, said April 4.

    France’s deadline for reaching the 3 percent-of-GDP rule, enforced by the European Commission, has already been postponed twice, most recently in September. Hollande signaled last week he may seek another extension.

    Relax Targets

    The commission, the European Union’s executive arm, must decide whether to relax targets introduced over the past three years under rules demanded by Merkel’s government. The limits are intended to stop governments running up the kind of debt that forced Greece to ask for two bailouts since 2010 and fueled turmoil across the region.

    “We will not foster confidence in Europe if the rules we’ve given ourselves, which we’ve solemnly confirmed time and again, if me make these rules and at the same time have the intention not to adhere to them,” Schaeuble told lawmakers.

    Also, what would have happened if the Agenda 2010 levels of austerity were really comparable in terms of unemployment to what’s being demanded of the rest of the Europe these days and hadn’t simply fallen heavily on Germany’s working poor? Would Schaeuble still be the finance Minister if his helpful advice was being followed by Europe this whole time? Who knows, but in a bit a good news, Germany’s new minimum is coming into force. It’s something Schaeuble’s party has been adamantly opposed to all along, possibly because it might actually help:

    The Local France
    Is Germany’s minimum wage good for France?

    Published: 07 Apr 2014 12:16 GMT+02:00
    Updated: 07 Apr 2014 12:16 GMT+02:00

    French finance ministers have long complained that Germany’s lack of a minimum wage meant ‘unfair’ competition for the French economy. But with Berlin agreeing last week to finally introduce one, does the wobbling French economy stand to gain much?

    Speaking on a visit to an eyewear factory last year, the then French consumer affairs minister, Benoît Hamon, made it clear how France felt about Germany’s continued lack of a minimum wage.

    “Some countries in Europe are getting around employment directives and underpaying their workers,” Hamon said.

    He then went further, saying: “I want Germany to have a social policy where competitiveness doesn’t rely on jobs paying €400 a month. I want [Germany] to play fair with an economic model that isn’t based on a competition for who can pay workers the least,” he said.

    Last week the German cabinet took a major step towards granting Hamon his wish when it agreed to a national minimum wage of €8.50 ($11.75) per hour – a flagship project for the Social Democrats (SPD) who share power with Angela Merkel’s conservatives.

    That wage level is still below France’s own minimum salary which currently stands at €9.53 an hour or €1,445 a month, but it will no doubt be welcomed in Paris, where a newly installed government is tasked with revitalizing an economy burdened by debt, record high unemployment and minimal growth.

    Economist Tomasz Michalski from HEC business school in Paris said Berlin’s move would help France, but not to the extent ministers like Hamon suggest.

    “There’s no doubt a German minimum wage will help the French economy, both directly and indirectly,” Michalski tells The Local.

    It will have a huge impact on those earning low wages, for example in the service industry, manufacturing, or agriculture where it will help French competitiveness, because Germany had relied on workers from Eastern Europe, who were paid peanuts.

    “For example the meat packing industry in Brittany has suffered in recent years due to the fact that Germany has developed its own huge industry that was built on low wages. In Brittany they just couldn’t compete. So now having a minimum wage in Germany will help,” Michalski says.

    But he says the benefits of redressing the balance will be limited.

    “There will not be the same effect for example in the car industry where workers earn more than the minimum wage and the salaries are similar between the two countries,” he says.

    Economist Thomas Klau from the European Council on Foreign Relations (ECFR) in Paris, says the introduction of a minimum wage in Germany may actually put pressure on the French government to adjust its own.

    “With Germany’s minimum wage being lower than France’s there may be pressure on Paris from Europe to bring down or at least not raise its own level of minimum wage,” Klau told The Local. “The fact Germany’s is lower may add to the impression that the French have a welfare state that they can’t afford.”

    Klau does however accept that the higher cost of living in France compared to Germany accounts for the discrepancy.

    The minimum wage, which dates back to 1950 in France, is considered a sacred part of the country’s welfare state, but with unemployment levels breaking records each month, there have been murmurings recently that something drastic needs to be done.

    French economist Pascal Lamy, the former director general of the World Trade Organisation, offered up a controversial solution to the unemployment crisis by suggesting some temporary jobs could be paid below the minimum wage.

    “A small job is better than no job,” he told LCP media. “I wouldn’t have said this 10 or 20 years ago, but with this level of unemployment…”

    HEC’s Michalski doubts a left-wing French government would ever push through a lowering of the minimum wage or the measure put forward by Lamy, but he says “the tide is turning”.

    “I think the country is ready for it, but perhaps not this government. Maybe the next one,” he said.

    Hooray! Germany now has a minimum wage. Now let’s create a super-low wage sector in France! Two steps forward, one step back. It’s the socioeconomic Sisyphean Shuffle, humanity’s favorite dance.

    Posted by Pterrafractyl | April 8, 2014, 8:32 am
  5. The US had better watch out when it tries to cross that bridge to a future of fairer wages and shared prosperity. There’s a concern troll guarding it:

    Behind Janet Yellen’s inflation dilemma
    Steve Liesman | @steveliesman

    In 1996, Fed Chairman Alan Greenspan made a bold and still unsung call. With labor markets tight, unemployment low and inflation concerns simmering, he resisted pressure to hike interest rates because he felt that the incipient technological revolution would keep a lid on prices.

    Arguing against him during that time was a Fed governor only in her second year on the board. Janet Yellen, transcripts of the Fed meeting from that year show, was concerned that the economy was “operating in an inflationary danger zone.”

    Fast forward to 2014 where Yellen now as Fed chair will face her own challenge to make a bold call and either resist or go along with conventional wisdom and hold the line on interest rates.

    Once again, the pressing issue is labor markets and the possibility that they could ignite inflation in the U.S. economy. Increasingly, there are concerns that, despite high unemployment, the jobs market may actually be tighter than it appears. And any whiff of a rise in wages prompts almost panic-level pronouncements in bond markets that inflation will reignite.

    A chart from Deutsche Bank’s chief international economist, Torsten Slok, on Tuesday was headlined: “Wage Inflation Now Above Pre-Crisis Levels.” It noted that median weekly wage gains at around 3 percent year over year had for the first time since the end of the recession topped the pre-crisis average. “It should be obvious to everyone by now that there is wage pressure in the pipeline and that the Fed will turn more hawkish later this year,” Slok said.

    Yellen appears to be trying to resist what is so obvious to Slok and others. So far, she has indicated a willingness to accept stronger wage gains. And she has not embraced a theory from Alan Krueger, the former head of the Council of Economic Advisors, a position Yellen once held, that there may be considerably less slack in the labor market than some believe.

    With Fed interest rates at zero and its balance sheet now topping $4 trillion, there is no more significant issue in economics today than whether tight labor markets will lead us into and beyond the inflationary danger zone. The worry is that the Fed has put so much fuel into the economy that any spark could ignite an inflation firestorm.

    Notice what’s being said so far: A Deutsche Bank economist issues a study finding that year over year wage gains topped the pre-crisis average for the first time since the 2008 financial crisis, and now “there is no more significant issue in economics today than whether tight labor markets will lead us into and beyond the inflationary danger zone”. This is the kind fun thought process that takes place when inflation becomes a proxy for socioeconomic health.


    At her first press conference in March, Yellen gave her first indication of her views on the issue. “Most measures of wage increase are running at very low levels,” she said.

    Yellen went on to provide insight into her thinking on how high is too high for wages. “In fact, with the productivity growth we have and 2 percent inflation, one would probably expect to see, on an ongoing basis, something between—perhaps 3 and 4 percent wage inflation would be normal.”

    Average hourly earnings are about 2.1 percent annually, compared with 3.4 percent in the year before the recession. Factoring in inflation, wages have risen just a half point in the past year. That measure is well below the productivity gains of 1.3 percent, so workers continue not to be compensated for their growing efficiency. Put another way, wages are not rising anywhere near the level of inflation plus productivity.

    Even if wage growth sparked some inflation, Yellen would have reason not to panic. In fact, the Fed wants some inflation, says economist Jared Bernstein. It’s preferred inflation measure, the price index of personal consumption expenditures, is running just 0.9 percent over the year-ago level. The Fed wants 2 percent inflation. So at least a touch of wage-induced inflation would appear to be welcome by the Fed.

    But Deutsche’s Slok worries about such a development. He said if the Fed stays at zero interest rates with a large balance sheet, and wages tick up to even the desired 3 percent to 4 percent level, that the Fed will be substantially behind the curve if wages or inflation rise any higher.

    “For monetary policy to hold wages down, you need to be above the neutral rate,” Slok said. “If you wait until wage inflation is 3.5 percent and then she says now we need to do something, it’s already too late.”

    Jim O’Sullivan, chief U.S. economist from High Frequency Economics, argued that the still-large Fed balance sheet “will continue to provide net stimulus for years.” That will further complicate Yellen’s ability to rein in wage-induced inflation, should it come.

    Yellen’s choice is further complicated by an argument from someone who should be more ideologically sympathetic: Princeton economist Krueger. A recent paper by Krueger has become the flash point for debate over Fed policy because it relates directly to the issue of potential wage inflation.

    Krueger argues that the long-term unemployed, of which there are 3.7 million, are unlikely to come back into the workforce. As a result, his argument goes, they do not exercise downward pressure on wages. His work has prompted some to take out this group when trying to gauge actual labor slack in the economy by looking at the unemployment rate.

    The result: the unemployment rate for the short-term unemployed is about back to where it was before the recession. The conclusion (although this is not necessarily Krueger’s) is that workers will soon have the ability to negotiate higher wage gains that could cause inflation.

    Asked about the theory surrounding Krueger’s work at a recent speech, Yellen said, politely, “it is conceivable.”

    But she went on to counter it: “I think it’s premature, frankly, to jump to the conclusion that that argument is correct. And I’ve made some arguments in other remarks that I’ve given about why I think that the long-term unemployed are likely to move back more actively into the labor force and into the job market and exert pressure on wages and prices as the labor markets strengthened.”

    Yellen has also pointed out that 7 million Americans are working part time for economic reasons. By increasing their hours, they could provide substantial more labor to the economy. Those available hours, theoretically, should put downward pressure on wages.

    You have to love it: Despite the fact that wages are rising no where near as much as productivity, Deutsche Bank’s chief international economist, Torsten Slok, is really concerned that wages might rise at an even faster pace in the future unless the Fed preemptively tries to suppress them now (as Slok said, “For monetary policy to hold wages down, you need to be above the neutral rate”). And even though a faster rise in wages would still be justified given the wage-to-productivity gap, the Deutsche Bank researchers continue to be concerned that the Fed might not have a big enough cushion in the future, where the cushion is the wages-to-productivity gap. And one of the justifications the Slok used is a new study that found that the long-term unemployed may not be acting as an anchor on wages because they’re effectively locked out of the job market.

    In other words, prudent monetary policy, according to Deutsche Bank, requires the central bank to try to get wage inflation to systematically fall behind productivity as an anti-inflationary economic safety measure. And we should also just forget about trying to create the kind of job market that might actually create demand for the long-term unemployed. Instead, let’s just rely on creating a big enough wage-to-productivity gap that no one ever becomes concerned about inflation and then wait for low-inflation fairy dust to work its magic. How’s that going to turn out?

    Posted by Pterrafractyl | April 23, 2014, 8:59 am
  6. What’s scarier than torches and pitchforks in an era of globalization? Piketty populism. Why? Because when an economic Dark Age goes on long enough, a sudden examination of pervasive and growing wealth gap can be rather shocking. And when there’s really nothing the defenders of the status quo can really say to refute Piketty’s ideas, popular shock translates into elite panic:

    The New York Times
    The Piketty Panic
    Paul Krugman
    APRIL 24, 2014

    “Capital in the Twenty-First Century,” the new book by the French economist Thomas Piketty, is a bona fide phenomenon. Other books on economics have been best sellers, but Mr. Piketty’s contribution is serious, discourse-changing scholarship in a way most best sellers aren’t. And conservatives are terrified. Thus James Pethokoukis of the American Enterprise Institute warns in National Review that Mr. Piketty’s work must be refuted, because otherwise it “will spread among the clerisy and reshape the political economic landscape on which all future policy battles will be waged.”
    Well, good luck with that. The really striking thing about the debate so far is that the right seems unable to mount any kind of substantive counterattack to Mr. Piketty’s thesis. Instead, the response has been all about name-calling — in particular, claims that Mr. Piketty is a Marxist, and so is anyone who considers inequality of income and wealth an important issue.

    Oh dear God, we’ll be like Sweden and Norway! The horror!

    I’ll come back to the name-calling in a moment. First, let’s talk about why “Capital” is having such an impact.

    Mr. Piketty is hardly the first economist to point out that we are experiencing a sharp rise in inequality, or even to emphasize the contrast between slow income growth for most of the population and soaring incomes at the top. It’s true that Mr. Piketty and his colleagues have added a great deal of historical depth to our knowledge, demonstrating that we really are living in a new Gilded Age. But we’ve known that for a while.

    No, what’s really new about “Capital” is the way it demolishes that most cherished of conservative myths, the insistence that we’re living in a meritocracy in which great wealth is earned and deserved.

    For the past couple of decades, the conservative response to attempts to make soaring incomes at the top into a political issue has involved two lines of defense: first, denial that the rich are actually doing as well and the rest as badly as they are, but when denial fails, claims that those soaring incomes at the top are a justified reward for services rendered. Don’t call them the 1 percent, or the wealthy; call them “job creators.”

    But how do you make that defense if the rich derive much of their income not from the work they do but from the assets they own? And what if great wealth comes increasingly not from enterprise but from inheritance?

    What Mr. Piketty shows is that these are not idle questions. Western societies before World War I were indeed dominated by an oligarchy of inherited wealth — and his book makes a compelling case that we’re well on our way back toward that state.

    Still, it has been amazing to watch conservatives, one after another, denounce Mr. Piketty as a Marxist. Even Mr. Pethokoukis, who is more sophisticated than the rest, calls “Capital” a work of “soft Marxism,” which only makes sense if the mere mention of unequal wealth makes you a Marxist. (And maybe that’s how they see it: recently former Senator Rick Santorum denounced the term “middle class” as “Marxism talk,” because, you see, we don’t have classes in America.)

    Now, the fact that apologists for America’s oligarchs are evidently at a loss for coherent arguments doesn’t mean that they are on the run politically. Money still talks — indeed, thanks in part to the Roberts court, it talks louder than ever. Still, ideas matter too, shaping both how we talk about society and, eventually, what we do. And the Piketty panic shows that the right has run out of ideas.

    Part of what makes the Piketty phenomena so timely and so panic-inducing to the global oligarchy is that we’re already well along the transition out of the era of unfairly shared collective prosperity and into the era of unfairly shared sacrifice. Once humanity and climate change blows through enough of the biosphere and other non-renewables some of the ultra-rich will get richer but what about everyone else? Economic systems structured around endless growth assumptions and unfairly shared prosperity can’t go on forever. Endless growth might work with a flat earth (the non-edged kind), but it’s not a planet-friendly economic paradigm, especially with a stillgrowing yet graying global population, ongoing endemic poverty and extreme inequality all remaining part of the equation.

    And yet, as Piketty points out in Capitalism, one of the biggest historical driving factors of per-capita wealth has been the overall net growth wealth that comes from a growing population. Population growth is historically intertwined with rises in the wealth of average individuals and also spreading of wealth around out of the hands of the “old money” and into a larger “new money” economy. But populations can’t keep growing forever, with the global population forecast to level off by 2100 and declining some countries already a reality. And this is all happening when real resource constraints and the obsolescence of many types of workers are also in the forecast. So how is the global economy supposed to function when growing forever remains an impossibility (or disaster) but ending the endless growth also leads to disaster and an even greater concentration of wealth? That’s very unclear:

    The One Chart That Explains Our Grim Economic Future
    The Huffington Post | by Mark Gongloff

    Posted: 04/23/2014 12:07 pm EDT Updated: 04/23/2014 12:59 pm EDT

    If you’re looking for somebody to blame for rising inequality, blame babies. Or, rather, the fact that there soon won’t be enough of them.

    A drop-off in population growth is a big reason why global economic growth is going to slow down in the decades ahead, French economist Thomas Piketty points out in his new book, Capital in the 21st Century. The top-selling book on Amazon.com is getting a lot of attention for its predictions of soaring wealth concentration and inequality and its call for a massive global tax on the wealthy.

    But a key component of Piketty’s rising-inequality forecast is a slowdown in economic growth, which theoretically means labor income will slow, too. If returns on investment stay higher than economic growth, as they typically have been, then voilà, you’ve got a growing gap between the rich (who own all the investments) and the poor (who get paid for their labor).

    And the slower-growth future Piketty foresees will be at least partially the result of slowing population growth. Typically, population growth drives about half of all economic growth. Here is a very, very long-term chart by Piketty that shows what population growth has done since the birth of Christ, along with forecasts of what it is going to do for the rest of this century:
    [see chart]

    As you can see from the chart, the world’s population grew verrrrry slowly between the year 0 and 1700. And then it absolutely exploded between 1700 and 1970, led first by Europe and the United States and then by Africa and Asia. The Industrial Revolution, improvements in health care and a bunch of other stuff contributed to this growth. But it can’t go on forever. Growth rates have already peaked and are starting to fall.

    “So what? Who cares?” you might be asking. Slower population growth could mean rising living standards and higher incomes in the very, very long run, as a stable population shares in the spoils of rising economic output, notes Mark Weisbrot of the Center for Economic and Policy Research. A slowdown in population growth is also great news if you’re worried about climate change and resource scarcity, as you definitely should be.

    The problem is that, historically at least, population growth and economic growth have gone hand-in-hand, with output per person roughly matching population growth. Per-capita output has been a little higher than population growth since the Industrial Revolution, thanks to productivity gains, but not by all that much.

    Slower economic growth is not all good news for the wealthy, either, as it could cut their returns on capital and their investment income. But as long as returns on capital stay higher than the economic growth rate, the wealthy will keep pulling ahead of workers.

    Meanwhile, middling population growth also makes inherited wealth more important, according to Piketty. When population is growing rapidly, the “old money” is spread thinner. Faster economic growth also means there’s more “new money” flying around, which makes old wealth less valuable. In Piketty’s view, the reversal of these trends is one reason why, in the next century, “inherited wealth will make a comeback,” leaving the 21st century looking a lot like the 18th and 19 centuries.

    Note the important distinction made between the short-term and long-term consequences of a falling population: In the long run, a falling population is beneficial simply because it allows more resources to be shared amongst fewer people and it also might be vital to dealing with the impact of climate change and resource depletion. But in the short and medium-term, falling populations end up messing up economies that are simply not structured around an assumption of falling populations. So we can expect the underlying inequality to continue getting worse as global populations rise and then it potentially gets even worse.

    These are the some reasons why Piketty-panic is very real amongst the global oligarchy: the economic paradigms that have sustained and fueled the global oligarchy might also be leading to a “damned if you do, damned if you don’t situation” in terms of policy-responses to the mega-challenges of tomorrow. The current economic paradigm is rooted in the idea that we need to keep the oligarchy safe and secure in order obtain prosperity for all (trickle-down prosperity). But if Piketty is correct, the economic paradigms that systematically create and sustain an oligarchy might simultaneously doom society. Especially now, when the prospect of “peak-people” is on the horizon. “Peak-people” should be considered a momentous achievement if it’s required to avoid cannibalizing the biosphere because humanity will might finally achieve sustainability. Maybe some technological breakthrough will solve major looming resource issues, but if not, “Peak-people” is both needed and what’s expected. It could be a great achievement. But it could also become some sort of socioeconomic death-trap and a best-selling book just pointed this out in a very high-profile way. That can be a pretty Piketty-panic-inducing elite experience.

    Posted by Pterrafractyl | April 26, 2014, 6:40 pm
  7. One nation, under “the market”, indivisible with an interstate race to the bottom for all:

    TPM Livewire
    Tom Coburn: I Don’t Believe There Should Be A National Minimum Wage

    Catherine Thompson – May 1, 2014, 8:00 AM EDT

    Sen. Tom Coburn (R-OK) said Thursday that he doesn’t believe there should be a national minimum wage.

    Senate Republicans voted Wednesday to block debate on legislation to raise the federal minimum wage to $10.10. In an appearance on MSNBC’s “Morning Joe,” Coburn was asked whether he thought the current minimum wage of $7.25 was sufficient.

    I don’t believe you ought to interfere in the market. My theory is if Oklahomans want a minimum wage, we ought to have it,” he said. “I don’t believe there ought to be a national minimum wage.”

    Coburn said Democrats’ argument that not raising the minimum wage does an injustice to hard-working Americans is “malarkey.”

    “The fact is if you look at the OMB studies and you look at the good economic models, the benefit is small. The cost of lost jobs is great,” he added. “It goes against the free market principle … We don’t know what the minimum wage should be. How’d they pick $10.10? Why not $22? Why not $100?”

    One of the interesting things about the debate over the minimum wage is that you often hear worries about the minimum wage sliding up a slippery slope up, up, and away to infinity! And yet, folks like Coburn that would clearly like to see the minumum wage done away with entirely don’t seem too concerned about actual wages dropping to $3.50 or $2. Why? After all, what’s to stop employers that are currently paying undocumented immigrant workers poverty wages from just passing that wage structure to legal workers? Aren’t the substantially lower wages wages paid to illegal workers evidence that “the market” would immediately send legal wages plunging? And then there’s the upcoming robot revolution…

    Sure, there’s always the argument that if wages drop other government programs like food stamps will kick in, sort of like a poor-man’s version of Germany’s old system. But there’s also the argument from Coburn’s GOP colleagues that food stamps should be slashed dramatically and that’s the argument tends to win in DC.

    So if the national minimum wage is dumped and “the market”, robots and all, gets to start determining the lowest wages (the part of the labor market that systematically deprive workers of any real market clout) in states like Oklahoma and the GOP continues to succeed in gutting the welfare system, why wouldn’t “the market” create a socioeconomic status somewhere between that of present day illegal workers and a robot? And what’s that also going to do to the rest of society?

    Posted by Pterrafractyl | May 1, 2014, 7:52 am
  8. What if the caution of the ‘super rich’ ebbs and they start spending their record cash hoards? Presumably the rich will get richer because that always seems to happen. And maybe the global economy will improve too:

    What if the caution of the ‘super rich’ ebbs?

    By Mike Dolan

    LONDON Wed Jun 11, 2014 12:21pm BST

    (Reuters) – Canny caution or bumbling oversight, the world’s richest people have retained huge stockpiles of zero-yielding cash throughout the recent surge in financial asset prices.

    Their persistence may have, counter-intuitively, prolonged the buoyancy of those very assets in the process – helping to inflate the outsize wealth of the super-rich further.

    With the debate about rising inequality re-invigorated this year by French economist Thomas Piketty’s best-selling book on ballooning wealth gaps, the spending and savings behaviour of the so-called “plutonomists” has rarely seen more scrutiny or had more influence on the economy and markets.

    Political clamour for redress through greater taxation of asset incomes, rents, gifts and inheritances may well build. But few expect much change in the rising wealth of the richest 1 percent of households or the 0.1 percent deemed ‘high net-worth individuals.’

    Yet as stock markets barreled to record highs – with the MSCI’s all-country index up almost 30 percent over the past 18 months – investment advisors estimate up to 40 percent of their money remains un-invested and is still parked in deposits.

    As the latest equity market surge began early last year, a benchmark survey by CapGemeni and RBC Wealth Management had average cash or deposit holdings among those global wealth investors at almost 28 percent – more than the 26 percent held in equity or some 20 percent in real estate.

    Defining the richest 12 million savers as those with more than $1 million in investible assets – excluding their primary residences and collectibles – the survey’s high cash holdings may simply reflect a preference for banking large slices of wealth rather than risking it in volatile markets.

    And, to be sure, returns on the 70 percent of other investments would have paid handsomely enough anyway.

    The richest have always tended to hold relatively high levels of cash. Liquid holdings are preferred for wealth protection, tax-avoiding mobility, inheritances or gifts.

    Yet the survey’s cash levels are more than twice the levels registered in the equivalent survey from the height of the pre-crisis go-go years in 2006 and 2007.

    And with near-zero interest rates meaning deposits are losing money adjusted for inflation and with broad market volatility at multi-year lows, the caution is remarkable.

    What’s more, other surveys and anecdotal evidence suggest cash holdings remain elevated or have actually risen over the past year.

    A survey of more than 4,000 rich investors – those with more than $200,000 to invest – conducted at the turn of this year for asset managers Legg Mason showed 26.5 percent held in cash. An estimate by Wells Fargo puts cash holdings among the wealthiest clients as high as 40 percent.


    Piketty’s book envisages soaring inequality and wealth gaps as returns on assets outstrip economic growth to such an extent that the ratio of private wealth to national income rises to 1910 peaks of 500 percent by 2030 from about 440 percent now.

    To the extent that asset inflation has been stoked by the easy-money policies designed to stabilize the world economy after the crash, central banks find themselves squarely in the firing line for fueling inequality for the sake of job creation.

    The cash-hoarding behaviour of the rich tends to blunt that accusation. Yet, how central bank policies in turn affect that behaviour may still have far-reaching consequences.

    For a start, a headlong dash by wealthy investors to pumped- up markets at this juncture could well create the sort of bubble they and central banks may have good reason to fear.

    Already the top 0.1 percent of the U.S. spectrum own some 23 percent of U.S. wealth – the equivalent of bottom 90 percent put together. According to the U.S. Labour Department, the top 20 percent of the income bracket has the average pre-tax income equal to the sum of the bottom four quintiles together and average expenditures of the bottom 60 percent combined.

    Bank of America Merrill Lynch strategist Ajay Kapur coined the term ‘plutonomy’ in 2005 when he was at Citi and describing economies dominated by a growing but small cohort of super rich. He reckons any easing of post-crisis caution among the plutonomists could have a profound effect on the world economy.

    “If plutonomists get over the shock of the global financial crisis, take comfort in their vastly expanded wealth from QE-driven asset inflation – and reduce their saving rate that doubled to 38.2 percent after … 2008 – the U.S. current account deficit could expand again – a big positive for emerging markets.”

    When you read things like:

    Already the top 0.1 percent of the U.S. spectrum own some 23 percent of U.S. wealth – the equivalent of bottom 90 percent put together” and “If plutonomists get over the shock of the global financial crisis, take comfort in their vastly expanded wealth from QE-driven asset inflation – and reduce their saving rate that doubled to 38.2 percent after … 2008 – the U.S. current account deficit could expand again – a big positive for emerging markets.

    you might be tempted to think “on good, now that there’s clearly been a ‘trickle up to the top’ phase we can finally watch the wealth trickle down!”. After all, every ‘trickle down’ plan always seems to involve an initial ‘trickle up to the top’ phase, so the massive ‘trickling up’ that’s taken place globally since the start of the 2008 crisis must mean that the world is poised for a massive wave of ‘trickle down’ prosperity, right? LOL.

    No, the global ultra wealthy probably aren’t going to be trickling down much of that wealth any time soon although there is going to be some trickling down. It’s the same thing that’s been trickling down for years: living standards. Those should keep falling. Corporate taxes might also fall, especially in the EU. The trickle down policies will end someday, but some sort of ‘rock bottom’ needs to be found first:

    Bloomberg Businessweek
    Renzi Should Mimic Schroeder in Cutting Taxes, Berger Says
    By Elisa Martinuzzi June 15, 2014

    Italian Prime Minister Matteo Renzi, who cut taxes for lower-income workers, should sharpen economic reforms and follow former German Chancellor Gerhard Schroeder’s example in reducing the fiscal burden, said Roland Berger.

    “Renzi should use the popular support he gained in the European elections to make his reform program a bit tougher,” Berger, 76, founder of Roland Berger Strategy Consultants, said in a June 13 interview in Venice, Italy. “The tax system needs to become more transparent and investment-friendly, corporate taxes need to come down. Look at what Schroeder did.”

    Berger, an adviser to Chancellor Angela Merkel and former adviser to Schroeder, said some economies in peripheral Europe are “very weak,” with public debt and youth unemployment weighing on the region. While the economy of the euro area exited recession last year and is predicted to expand 1.1 percent in 2014, some of the bloc’s largest economies such as France and Italy are still struggling.

    In Italy, “in particular, things have been developing much more slowly,” said Berger, a member of the board of Italian publisher RCS MediaGroup SpA. “Everyone is waiting for the promised reforms, domestic demand is still weak and the tax burden and bureaucracy still weigh.”

    Schroeder’s Agenda 2010 package unveiled in 2003 cut taxes, made it easier to fire staff, forced those out of work for more than a year to accept any reasonable job offer and reduced long-term benefits. The efforts helped German businesses turn around.

    “Schroeder’s Agenda 2010 package unveiled in 2003 cut taxes, made it easier to fire staff, forced those out of work for more than a year to accept any reasonable job offer and reduced long-term benefits. The efforts helped German businesses turn around.”

    You know what else “helped German businesses turn around” follow the implementation of Germany’s “Agenda 2010” model of austerity under Gerhard Schroeder’s Agenda (Roland Berger was a close advisor to Schoeder too): Not implementing Germany’s austerity agenda in the middle of a global recession. That really helped. Also, having the rest of the EU not go nuts and demand even more austerity for years while Germany was breaching the EU budget rules also helped. So if Italy can just somehow reverse the global downturn and convince the rest of the EU to cut it some slack, Mr. Berger’s plan should do wonders.


    Record Unemployment

    The Italian economy shrank 0.1 percent in the first quarter before industrial production returned to growth in April, the national statistics agency said June 10. Renzi’s been contending with near-record unemployment at 12.6 percent in April, and a steady decline in bank lending to private-sector businesses.

    Renzi isn’t afraid of conflict and should take away the privileges of those who are in long-term jobs,” said Berger. “He has to eliminate the divide of the labor market.”

    You have to love the sentiment at the end: “Renzi isn’t afraid of conflict and should take away the privileges of those who are in long-term jobs…He has to eliminate the divide of the labor market”. Because when there’s an income gap, the appropriate solution is apparently to ensure that everyone is screwed (except the folks at the top). That’s the ‘trickle down’ way and it’s how economic harmonization is supposed take to the new EU: trickling down living standards, trickling down taxes on the rich, and trickling down regulatory and labor protections until prosperity takes hold. Forever.

    Posted by Pterrafractyl | June 16, 2014, 6:12 pm
  9. Watch out for falling pigs. Some of them may have started flying:

    Financial Times

    July 21, 2014 6:05 pm
    Bundesbank shifts stance and backs unions’ push for big pay rises

    By Claire Jones in Frankfurt

    The Bundesbank has backed the push by Germany’s trade unions for inflation-busting wage settlements, in a remarkable shift in stance from a central bank famed for its tough approach to keeping prices in check.

    Jens Ulbrich, the Bundesbank’s chief economist, told Spiegel, a German weekly, that recently agreed pay rises of more than 3 per cent were welcome, despite being above the European Central Bank’s inflation target of below but close to 2 per cent.

    In an article published on Sunday, Mr Ulbrich said that recent wage trends were “moderate” given Germany’s relative economic strength and low levels of unemployment. His comments echo the views of Jens Weidmann, Bundesbank president, according to a senior central bank official.

    The push for higher pay underlines the heightened concern among even the most hawkish members of the ECB’s governing council over the eurozone’s low inflation and signs that the region’s fledgling recovery is stalling. On Monday, the Bundesbank acknowledged the German economy was unlikely to have grown at all over the three months to June.

    The calls for higher wages by Germany’s central bank highlight one of the most puzzling conundrums to befall the eurozone’s economic powerhouse: why, despite record low unemployment, the average German worker’s wage has hardly risen over the past decade. The problem is important for the region as a whole, as economists view a pick-up in spending by Germans as a prerequisite of the eurozone’s economy returning to full strength.

    Ursula Engelen-Kefer, a lecturer at Hochschule der Bundesagentur für Arbeit university and former deputy chair of DGB, Germany’s confederation of trade unions, said she was “flabbergasted” by Mr Ulbrich’s remarks.

    “It goes to prove that even the central bank recognises that we can’t improve internal economic growth without wages,” she added.

    Stefan Körzell, a member of the DGB’s board said, while the confederation was “pleased” by the Bundesbank’s move, trade unions had done well without the central bank’s advice in the past and would continue to do so in the future.

    While German wage settlements this year were encouragingly strong, the central bank signalled the trend must continue if consumers in the eurozone’s largest economy are to provide the lift to demand that is so desperately needed.

    Until now, the German central bank has backed only the most modest rises in pay, and has often objected to measures to improve workers’ rights, including the planned introduction of a minimum wage and proposals to lower the retirement age for employees with more than 45 years in the labour market.

    The Bundesbank’s support for faster wage growth in Germany is also the latest in a series of moves towards the mainstream of ECB thinking. Mr Weidmann has in the past found himself in a minority of one on the governing council, including when the ECB pledged to buy government bonds of troubled countries. In June, however, the Bundesbank president backed the package of exceptional measures which the ECB unveiled to stave off the threat of deflation.

    At 0.5 per cent,, inflation remains little more than a quarter of the ECB’s target.

    The weakness in price pressures in the eurozone is partly a positive development: it reflects an improvement in the competitiveness of workers in the bloc’s periphery, where productivity has traditionally lagged behind levels seen in economies such as Germany’s. However, even in the region’s strongest economies inflation is below target, with German prices rising by just 1 per cent in the year to June.

    You have to love how the article points out at the end how “The weakness in price pressures in the eurozone is partly a positive development: it reflects an improvement in the competitiveness of workers in the bloc’s periphery”, in an article about how a decade of lagging wage gains for German workers and was holding back economic growth across the eurozone. Still, this is certainly a step in the right direction. It’s been clear for some time that the only real catalyst for an improvement in the eurozone policies is, perversely, a decline in Germany’s economic performance that forced the Bundesbank to support stimulative measures for the ECB as a whole that would otherwise be protested by Berlin. And now, with the German economy facing low growth and near deflation, new policies are finally on the way. Granted, this new policy is just targeting German workers, but raising German wages and consumption was always going to have to be part of the solution under the New Normal of a currency union. So it’s a start. A much needed start:

    The Huffington Post

    Founder and chairman, Berggruen Holdings
    Germany Has the Most Unequal Distribution of Wealth in the Eurozone

    Nicolas Berggruen
    Posted: 07/28/2014 1:14 pm EDT

    As a new European Commission prepares to settle into Brussels after the European Parliamentary elections, a new opportunity arises to address once again the central issue: Europe will only work for its citizens, and thus recover the legitimacy of its grand project, if there is economic growth.

    This means three things:

    Above all, Europe needs to finance its currency with a common fiscal policy. No common currency has ever survived without fiscal integration. The euro is no different.

    It also needs to invest in its future and not just dwell forever in the doldrums of austerity. Simply, if one country grows at the expense of others, Europe will not work. Conversely, any weak member will undermine all others.

    Finally, the biggest economy, Germany, needs to consume more. For the average German household to improve its standard of living, Germany cannot go on like China, just working hard, exporting and saving.

    What does this imply practically?

    – Germany needs to boost domestic consumption, for the good of its own citizens as well as Europe as a whole.

    As Paul De Grauwe and Yuemei Ji point out in a recent study of the European Central Bank’s household wealth survey, Germany has the most unequal distribution of wealth in the eurozone. They report that the median household in the top 20 percent of the income class has 74 times more wealth than the bottom 20 percent.

    That same ECB survey showed that the net median wealth of German households was less than that of Belgium, Spain, Italy and France, among others. Yet wealth per capita of GDP in Germany is higher than any other European country than the Netherlands.

    This gap points out a key issue that is rarely discussed despite its immense implications. As the De Grauwe/Ji study documents, a large part of German wealth is not held by households, but by the corporate sector or the government.

    In this sense, Germany faces the same challenge as China: a high-export and saving economy which needs to rebalance through policies that create a greater flow of wealth to households, thus spurring greater consumption. This, in turn, can create demand for imports from Germany’s European neighbors.

    If Germany stands behind a new European Commission that presses the agenda outlined above, it will benefit all Europeans — including ordinary Germans. Only then will the European Union begin to earn the legitimacy it so sorely lacks today.

    Yes, Germany, the export-centric model country that the rest of the eurozone is currently tasked with emulating, has an economy increasingly facing the same challenges as China. Is that the model the eurozone really wants?

    Posted by Pterrafractyl | July 28, 2014, 12:12 pm
  10. Just in case anyone forgot who runs the eurozone, here’s a reminder:

    UPDATE 1-France urges ECB, Germany, to do more on growth and deflation risk

    Aug 4 (Reuters) – The European Central Bank and Germany must do more to boost growth and fight a “real deflationary risk” in Europe, French President Francois Hollande told Le Monde daily in an interview.

    Stepping up recent French warnings that weak growth could make it difficult for the government to meet EU fiscal targets next year, Hollande said weak inflation made it all the harder for France.

    “Weak inflation too has negative fiscal consequences on revenues as well as on debt. A lot will depend on the level of the euro, which has weakened over the past few days but not enough,” Hollande said. “The ECB must take all necessary measures to inject liquidity in the economy.”

    France has already received a two-year reprieve to bring its public deficit under 3 percent of GDP next year but the European Commission, the IMF and economists polled by Reuters all forecast that it will miss the target again next year.

    The government has so far insisted it would fulfill EU commitments but has had the same time repeatedly called its EU peers for “flexibility,” warning that it would not go beyond its 50 billion-euro public spending cut plan for 2015-2017.

    Prime Minister Manuel Valls said on Friday the government would give an update on the state of the economy “without hiding anything” after second quarter GDP data is published on Aug. 14.

    “We are not asking for any leniency from Germany but we are asking it to do more to boost growth,” Hollande told Le Monde.

    “Its trade surplus and its financial situation allow it to invest more. That would be the best thing it could do for France and Europe.”

    Euro zone inflation fell in July to its lowest level since the height of the financial crisis nearly five years ago, data showed on Thursday, highlighting deflation risks on the European Central Bank’s radar.

    “We are not asking for any leniency from Germany but we are asking it to do more to boost growth,” Hollande told Le Monde. It looks like France is learning its place. Fortunately for France and the rest of the eurozone, the recent calls by the ECB and Bundesbank for higher German wages might contribute to the overall eurozone economy and give the kind of much needed boost to the overall inflation rate that Hollande was begging for above. Of course, that assumes German businesses actually agree with the call for higher German wages and, of course, they don’t:

    German businesses rail against central bank higher wage calls

    August 4th, 2014 06:03:45 GMT by Ryan Littlestone

    A report from Germany newspaper Handelsblatt says that a Forsa survey of 502 business executives shows an overwhelming majority against higher wagesk.

    62% of execs said that higher wage settlements in Germany are not appropriate and 54% say that higher wages would bring them greater difficulties. 83% also said that the Bundesbank and ECB shouldn’t comment of wage policies and collective bargaining agreements.

    Germany has very low unemployment with some areas having a jobless rate as low as 2.3%. In contrast to other European countries people can afford to pick and choose jobs.

    Recently the Bundesbank surprisingly said it would be happy if wage inflation was to grow with president Jens Weidmann saying;

    “It is to be welcomed that wages and salaries are rising more strongly than in the days when the German economy was in much poorer shape. We have close to full employment in a number of sectors and regions. and are seeing more and more reports of labour shortages”

    It’s one avenue the Bundesbank are looking at to give inflation a lift and they, and the ECB, would like to see it spread across the Eurozone in part to help tackle low inflation.

    Posted by Pterrafractyl | August 4, 2014, 12:21 pm
  11. Given the calls for endless austerity out of Berlin, one of the big questions of the day is how long unions will be allowed to survive as a major force in the German economy. While only time will tell the fate of Germany’s unions, here’s an article that strongly suggests time isn’t on their side:

    Bloomberg News
    Germany scrutinized for sidestepping unions, payrolls in hiring workers
    By Birgit Jennen and Dorothee Tschampa, Bloomberg

    October 24,2014, 11:20 PM

    BERLIN — Daimler is among German companies that have found a way to cut personnel costs in the high-wage country: Buy labor as if it were paper clips.

    By purchasing certain tasks such as logistics services from subcontractors, businesses can legally keep these workers off the payroll and outside of wage agreements with unions. That’s led to growing ranks of contract workers who help boost profit at German companies by lowering labor costs.

    The downside is abuse of the system, which leaves some workers unprotected and even unpaid. That’s caught the attention of Labor Minister Andrea Nahles, who’s promising a crackdown, and forcing Germany Inc. to defend the practice.

    “We can’t pay everyone the high wage” in union deals, Wilfried Porth, Daimler’s personnel chief, said in an e-mail to Bloomberg News. “Our cost situation has deteriorated compared to the competition. We can’t afford that.”

    Proponents argue hiring subcontractors to provide services keeps Germany, where labor costs in the auto industry are the highest in the world, competitive. Opponents say the widespread practice in industries that include shipbuilding, retail, logistics and construction undermines the German labor model of a partnership between employers and workers.

    Every third employee in the German auto industry is working either for a subcontractor or as a temporary laborer, according to a poll by IG Metall union published last November. Doing so has helped keep in check already high personnel costs, which amount to 48.40 euros ($61.27) per hour on average, according to the Berlin-based VDA auto industry group. This compares to 4.81 euros in Romania and 25.63 euros in the U.S.

    What on the one hand helps retain German jobs and maintain international competitiveness, can also lead to the misuse of workers, who have little recourse to protect themselves. Take the case of Ertzment Tsilingir from Greece, who this past summer worked at a shipyard close to Wismar in eastern Germany.

    Tsilingir said he worked 10 hours a day, seven days a week, as a contract worker and that, after nearly two months living in a run-down shack, there was still no paycheck coming in.

    “We weren’t paid, we had hardly anything to eat and nobody seemed to care,” Tsilingir said in a telephone interview. He worked for a subcontractor of a subcontractor.

    Examples like Tsilingir’s have stirred a wider debate in Germany about jobs being outsourced into lower paid contracts that often have less generous overtime pay and fewer provisions against firing. Such agreements also bypass the protections employees have where they are represented by a works council, which has seats on the company’s supervisory board.

    “We see a trend toward a two-class labor force” dividing permanent and contract jobs, said Karl Brenke, a labor-market expert from Berlin-based research institute DIW. “A growing number of contract jobs dissolves the model of employee participation, which secured the social peace between companies and employees, and is a pillar of the German economy.”

    Nahles, whose Social Democratic Party is the junior partner in Chancellor Angela Merkel’s coalition government, has pledged to tighten rules regarding outsourced workers. Doing so is part of the agreement that brought the Social Democrats into the government.

    “We will address contract-work relations next year,” Nahles said. “It’s difficult to gather reliable data,” which shows “transparency should be key.”

    The Christian Social Union, the Bavarian sister party of Merkel’s CDU, is calling for putting off any changes for the time being to avoid adding an extra burden for industry as Europe’s largest economy flirts with recession.

    “We need to question whether our coalition agreement, with regard to contract and temporary work relations, is really urgently needed now,” Gerda Hasselfeldt, caucus leader of the CSU parliamentary group, told reporters this month.

    Precise numbers on contract work are not available because it’s paid for through purchasing budgets in the same way that metal supplies are bought or a production hall is built. Therefore, contract workers don’t appear in a company’s personnel statistics. The Federation of German Trade Unions estimates that such positions comprise 20 percent of the workforce in some companies.

    “Contract work is often used to undermine pay agreements and working hours, as well as social-security standards,” said Reiner Hoffmann, the trade union federation’s chairman.

    Gesamtmetall — the employer organization for metal and electronic industries whose members include Daimler, Siemens AG, Bayerische Motoren Werke AG and ThyssenKrupp AG — says contract work helps secure jobs in a sector of the economy that employs 3.7 million people. Germany shouldn’t throw out this flexibility because of a few bad eggs, the group says.

    “It’s wrong to say that contract work per se means that the working conditions for the employees at the contracted firm are worse,” said Oliver Zander, Gesamtmetall’s chief. “There might be some black sheep, but there are very few. In light of the hundreds of thousands of contracts that are arranged every day, we don’t see any need for action.”

    Well, it was pretty much inevitable that Germany’s unions were going to shrink given Berlin’s unending austerity-onomics so we probably shouldn’t be surprised to see statements like this:

    “We see a trend toward a two-class labor force” dividing permanent and contract jobs, said Karl Brenke, a labor-market expert from Berlin-based research institute DIW. “A growing number of contract jobs dissolves the model of employee participation, which secured the social peace between companies and employees, and is a pillar of the German economy.”

    And neither should we be surprised by the enthusiasm of Germany’s major employers for non-union contract employees or statements like, “it’s wrong to say that contract work per se means that the working conditions for the employees at the contracted firm are worse”. LOL!

    What might be somewhat surprising, given the strong public support for unions, is the fact that union-busting isn’t just something on the minds of German employers. Politicians are starting to feel like these unions are getting a little too powerful for comfort, especially the smaller unions which have been calling a number of strikes of late. So the politicians have a plan for dealing with these pesky smaller unions: restrict the smaller unions from negotiating their own wage deals with employers:

    Bloomberg News
    Merkel Proposes Curbing Unions as Strikes Cripple Germany
    By Richard Weiss, Birgit Jennen and Brian Parkin Oct 30, 2014 3:27 AM CT

    German Chancellor Angela Merkel is proposing curbs to union power following walkouts in recent months that have crippled the country’s transport network.

    Strikes this year by Deutsche Lufthansa AG (LHA) pilots have led to the cancellation of 5,800 flights, while a series of walkouts by Deutsche Bahn AG engineers have brought trains to a standstill. Now, Merkel’s government, in a proposal released this week, is pushing to limit the role of smaller labor groups in wage negotiations.

    “We are observing a tendency for strikes by small unions with big consequences that result in many, many people suffering,” Merkel told reporters. “We’ve made the decision” to change the law to limit collective-bargaining power to one party per business, she said.

    Even before this year’s strikes, which include walkouts by Amazon.com Inc. (AMZN) workers, labor unrest in the country has been rising. The number of companies hit by industrial action soared in 2013 to 1,384, the highest in two decades, according to data published by the Federal Labor Agency. While unions say they’re pushing for pay gains to make up for stagnating household incomes, companies argue they can’t afford higher wages as Europe’s biggest economy flirts with recession.

    The strikes are “not helpful given the economic weakness,” said Thomas Harjes, senior European economist at Barclays Plc in Frankfurt. Germany is “at a crossroads,” and the right to strike must be exercised with proportionality and fairness, he said.

    Limiting Involvement

    The bill — drafted by Labor Minister Andrea Nahles, a Social Democrat and IG Metall union member — wouldn’t directly curtail strikes as such. Instead, her proposal would limit future wage talks to the biggest union for each group of employees, potentially curbing the role of smaller organizations. The plan would also give courts more power to intervene in labor disputes.

    “This is an intervention against the right to strike and as such is unconstitutional,” Vereinigung Cockpit, which represents Lufthansa pilots, said this week of the proposed law. This is about “breaking the power of smaller unions.”

    Smaller labor groups have increased their influence in recent years following a 2010 court ruling allowing them to negotiate outside the industrywide agreements that have characterized Germany’s wage deals.

    The GDL union, which is threatening more walkouts at the national railway, is locked in a battle with competitor EVG to negotiate for train drivers. Both claim to be their main representative.

    Abusing Rights

    The GDL is abusing strike rights by putting “its own interests above the interests of all working staff at the railway,” said Kerstin Griese, a Social Democrat and chairwoman of parliament’s labor committee. The GDL “is not striking for pay but competing for power with a rival union.”

    The Ver.di service union — which has staged a series of walkouts at Amazon’s distribution centers, including one this week, to push for higher wages and a collective bargaining agreement — has also come out against the proposal saying that it “indirectly restricts” a union’s right to strike.

    The number of German workers participating in walkouts in 2013 stood at the highest in five years, while working days lost were the most in six years, according to Federal Labor Agency data. Unions argue raises are necessary because wages have been flat. Adjusted for inflation, household income has not risen between 2006 and 2012, according to the Hans-Boeckler-Foundation, a labor-affiliated organization.

    Profit Hit

    Lufthansa calls the government’s proposed changes a first step in the right direction. The airline has been hit with a number of disruptions in the past three years, including from strikes by air traffic controllers, security staff, fire fighters, apron staff and baggage handlers.

    So a lagging economy is now being used as an excuse to knee cap unions’ ability to negotiate higher wages in Germany. How convenient.

    Posted by Pterrafractyl | October 31, 2014, 11:49 am
  12. Josh Marshall has a piece that contains a lot of food for thought regarding how to the challenges facing poor and middle-class Americans are, to a large extent, tied to trends in globalization that the US can’t really change on its own: rising productivity tied to stagnant wages, global competition, and changing technology that, taken together, places an unrelenting pressure on the American worker and workers all over the globle in one giant economically-disempowering race to the bottom. And, as Marshall points out, neither the the Democrats nor Republicans have really demonstrated a vision for addressing the growing strains of globalization and yet the two parties aren’t equally at risk. Why? Because no one really expects the Republicans to come up with solutions that help the middle class. The GOP’s brand is more of an ‘angry venting’ party than a ‘solutions’ party. So, as Marshall puts it, one of the real long term problems facing the democrats isn’t just GOP obstruction but also developing a real, viable model that doesn’t leave the middle class an increasingly disempowered and shrinking demographic in a changing world and neither party has put forth real substantive solutions to these socioeconomic mega-meta-problems:

    TPM Editor’s Blog
    Forget the Chatter, This is the Democrats’ Real Problem
    By Josh Marshall
    Published November 10, 2014, 10:05 AM EST

    When a party suffers a major setback, everyone comes forward with their diagnosis of the problem. And in most cases their diagnosis of the problem tells us that the solution is what the diagnoser wanted to do more of in the first place. This is just human nature. We see the evidence before us as confirmation of what we already thought. When I’m asked these kinds of questions, what I always say is that we should be highly skeptical of anything that suggests the answer is obvious or simple to execute. Because for all the groupthink and folly and insular thinking of political professionals, they’re generally fairly bright and they have huge personal and professional incentives to win. If it were really that obvious, someone would have tried it already.

    I tend to agree that Democrats should have run more clearly on their economic record, though I do not think it would have been a game changing move. And there are various other supposed errors that I agree were errors. But here are my two basic takes on what happened.

    All of these things fit into the mix and others too. But I want to focus on something that I don’t hear much talk about and which I think is a big central issue for Democrats going forward.

    Democrats have toyed (and I use that term advisedly) with the issue of rising inequality for the last two elections. But let me suggest that as a political matter inequality is a loser. What is driving the politics of the country to a mammoth degree is that the vast majority of people in the country no longer have a rising standard of living. And Democrats don’t have a policy prescription to make that change.

    Here is a chart we’ve probably all seen some version of. The gist is that while productivity growth has been relatively consistent through the post-war period, productivity became unchained from wages in the early 1970s. Despite a modest bump up in the 90s and another small one in the aughts it’s really never come back.
    [see chart]

    Then there’s this chart (courtesy of The Upshot) showing the slow but nonetheless steady decline of unemployment since what was one of the greatest economic crises of the last hundred-plus years.

    My first chart only goes through 2010. But the gist is that wage growth has basically flat-lined since the crisis and Friday’s latest job numbers show no signs of that changing. Again, if you follow macro-economics you know all this stuff like the back of your hand. And when I say that this is the issue rather than ‘economic inequality’, this is obviously one side of the equation which is driving rising inequality. You might even say this is the same thing, only expressed in a different way. But it’s a critical difference.

    Fundamentally, most people don’t care particularly how astronomically wealthy people are living their lives. It is a distant reality on many levels. They care a great deal about their own economic circumstances. And if you are not doing any better than you were 5 years ago or a decade ago or – at least in the sense of the hypothetical median wage earner – 40 years ago, that’s going to really have your attention and shape a great deal of your worldview and political outlook.

    So, let me sign up with those who are saying that it was a mistake not to run more clearly on the President’s (and the Democrats’) economic record. Unemployment is back down to something like normal levels (under 6%); the deficit has fallen consistently and is now back to pre-crash levels judged as a percentage of GDP (which is the only meaningful way to judge it); the stock market has done incredibly well. Yes, totally.

    But here’s the thing: As long as most voters are still just treading water in their own economic lives, Republicans can say, “Oh yeah, they say the economy’s doing great with all their fancy numbers. But that’s not what I see!” To an extent that will just be another Republican paean to innumeracy. But it will resonate because rising employment is not leading to rising wages. And that’s the core economic experience of wage earners who make up the overwhelming number of people in the country. In a critical sense, it is true.

    So yes, run on the record. And at least at the margins, make the argument that in Europe they went down the austerity path Republicans have pushed for and it’s been a disaster. No one really questions that anymore. But also recognize that the unchaining of wage growth from economic growth means the record isn’t really that good, even though it could have and Republicans tried really hard to make it much worse.

    Now, many Democrats look at all this and say this is way the party needs to embrace economic populism whether of the Elizabeth Warren or Bernie Sanders variety or whoever else might be espousing it in more or less watered down ways. But I think this misses the point. The great political reality of our time is that Democrats don’t know (and nobody else does either) how to get wage growth and productivity growth or economic growth lines back into sync.

    We know a fair amount about why they got out of sync. Decreased bargaining power resulting from the steep decline in the labor movement, a whole series of vast structural changes in the economy we put under the heading of ‘globalization’, rapid changes in technology which play a big role in the first two transformations in my list and a bunch of other things. What complicates the question is that at a certain point economic trends that concentrate wealth at the top magnify themselves as the winners use the political power derived from that wealth to lock down and expand their gains.

    The key point for this discussion is that these are not only changes that are global in nature (happening almost everywhere at once) they are also changes that seem to a significant degree to be tied to the accelerating integration of global economies. As you can see in the chart below, increasing concentration of wealth at the top has happened across the board in all industrialized countries. But nowhere has the concentration been more extreme than in the United States, though notably, the top rivals are the UK and Canada which most closely mimic the US’s laissez-faire economic policies.

    [see chart]

    But what are the policies that would change this corrosive trend? And how do you run on them as a party if you don’t know what they are? Minimum wage increases help those at the very bottom of the income scale and they have a lifting effect up the wage scale as the floor gets pushed up. But it is at best a small part of the puzzle. Clamping down on tax dodges by the extremely wealthy claws back some resources for the treasury and sends an important message, as might some restrictions on ridiculously high CEO pay. But again, these are important changes at the margins that do not fundamentally change the equation. Economic populism or another comparable politics with a different tonality won’t get you very far if you can get beyond beating up on the winners to providing concrete improvements to those losing out in today’s economy.

    Again, a stark reality: Democrats don’t have a set of policies to turn around this trend. Republicans don’t either, of course. But they don’t need to. Not in the same way. As a party they are basically indifferent to middle class wages. And their policies stand to make the situation even worse.

    I’m basically a semi-knowledgable outsider to public policy discussions. And I know a bunch of people will come forward to say, wait there are a whole bunch of policies we can and should be following. And before this seems like a total counsel of despair, I’m sure there are. But a few cautions. First, I don’t know many knowledgable people who have a lot of confidence that public policy in the US can arrest or reverse changes that appear to be structural and global in nature. The right approach may be germinating in a think tank somewhere. But which one?

    Second, policies don’t exist in a vacuum. They need a politics to sustain them. Tax cuts as an elixir for every problem in the American body politic may be running out of steam. But it wasn’t so potent because of its policy merits, which haven’t made much sense for decades. It was potent because a generation of activists and politically minded people were reared on the idea and a vast political coalition was built around them. So find the policies, if there are any, build a political coalition around them. And then, don’t forget: the spiraling rates of wealth concentration have created a political economy in which organized wealth is extremely well positioned to beat back any challenges to its gains.

    Believe it or not, I’m not a pessimist on all this stuff. But you cannot make middle class wage growth and wealth inequality the center of your politics unless you have a set of policies which credibly claims some real shot at addressing the problem. At least not for long.

    As Marshall suggests, while income inequality is certainly an issue worth talking about, it’s really the fact employee wages have been so stagnant for so long that that’s really going to motivate voters. The same dynamics that create the immense income inequality may also be suppressing wages, but it’s the wage suppression, and not the towering CEO pay, that’s fundamentally creating the simmering anger in the electorate. This is something to keep in mind with 2016 now on the horizon: whoever becomes the next president of the United States is going to have to make a successful pitch to the American public for why they, as president, will end the race bottom. And if the Democrats can’t successfully make that pitch, the GOP’s ‘angry venting’ brand appeal only increases.

    That’s all definitely something to keep in mind with the GOP now anxious to give President Obama free trade “fast track” negotiation authority: no one really expects the GOP to come up with solutions for the middle class. That’s on the Democrat’s shoulders. And if the Democrats can’t come up with viable solutions the electorate will vote GOP just out of spite. And no one knows what those viable solutions are that the Democrats can get behind. Yet. And if voters still don’t know what those viable solutions are in 2016 the Democratic party and the whole nation could have a major headache.

    With all that in mind, also note this figure above showing the percent of income earned by the top 1% for a basket of developed nations. While the US is still clearly at the top of the pile in terms of handing the most income over to the top 1%. But notice what the black line for Germany does in that chart: starting in 2005 the share of income going to Germany’s top 1% spikes from ~9% to almost 13% in just a few years. And that’s not a surprise since 2005 was the start of Germany’s much vaunted “Agenda 2010” austerity agenda that so many credit for Germany’s economic successes (somehow the artificially devalued currency via the euro always gets ignored). That sharp spike in income going to the top 1% is something that needs to be recognized because it’s the model for what the rest of Europe and other economies around the globe are supposed to do if everyone follows the German austerity model to success: everyone gives the top 1% a big chunk of their paycheck in exchange for the promise of greater economic prosperity. That model is being pushed across Europe and it’s the model the GOP clearly adheres to: A global rat race to the bottom driven by giving the richest people on the planet even more money as part of an economic protection racket that doesn’t even offer protection. That austerity model is now a global force that workers everywhere need to deal with. And it’s the model Democrats increasingly need to out compete going forward. You wouldn’t think it would be all that hard to find a fair alternative to an abusive global protection racket pyramid scheme but it’s clearly a real problem.

    Posted by Pterrafractyl | November 11, 2014, 10:41 am
  13. When reading the following article, keep in mind that Angela Merkel’s CDU opposed the new German minimum wage and it only became law after the SPD demanded it. So the number of German workers living in poverty is probably lower than the hardline economists in Merkel government(and its ideological allies) would prefer. And this is in Europe’s model economy:

    Millions of German workers in poverty

    More than three million Germans can barely make ends meet despite being in work, according to a German newspaper. Growing numbers of struggling workers are cutting back on heating and food.

    Date 24.01.2015
    se/sb (AFP, epd)

    About 3.1 million wage and salary earners in Germany had an income below the poverty threshold, according to Saturday’s edition of the Saarbrücker Zeitung newspaper.

    The paper cited an overview from Germany’s Federal Statistical Office showing the most recent available data, which covered the year 2013. It also showed the numbers of workers struggling to make ends meet jumped from about 2.5 million in 2008 – an increase of 25 percent in five years.

    Data, based on household surveys, showed that those living on low wages were cutting back on food and heating, among other things, to save money. According to a special analysis by the statisticians, in 2013 some 538,000 low-wage workers were eating a full meal only every second day in an effort to save money on food. About 417,000 were going without adequate heating and almost 380,000 people could not afford to pay their rent on time.

    Every second low wage worker, some 1.5 million Germans, would not be able to pay for a one-week holiday per year outside their own four walls. About 600,000 workers were forgoing having their own car because they could not afford it.

    In the survey, to be considered as having an income below the poverty threshold, a person had to earn a total take-home pay, including state benefits like housing or child subsidies, of less than 60 percent of the median wage. In the year 2013, this threshold was a monthly take-home amount of 979 euros (about $1100) for an individual.

    “The number of workers who earn scarcely or marginally more than the government unemployment benefits (Hartz IV) is alarmingly high,” the president of the social association VdK (VdK Sozialverband) Ulrike Mascher told the Saarbrücker Zeitung.

    Remember kids, you can’t have sustainable prosperity without the poverty required to support it. Otherwise wages would spiral into oblivion and everyone would become poor.

    In other news, Greece just elected Syriza into power on an anti-austerity platform, a day after ECB president Mario Draghi made it quite clear that the new ECB QE program is going to require a lot more “structural reform” (more working poor) if QE has any chance of working and that means a lot more austerity:

    Draghi says euro zone governments need to redouble reform efforts

    BERLIN Sat Jan 24, 2015 3:44am EST

    (Reuters) – National governments in the euro zone need to redouble their reform efforts to create a “genuine” economic union, ECB Mario Draghi wrote in a German magazine published on Saturday after the European Central Bank’s bond-buying programme was unveiled.

    In an advance text of a contribution for the WirtschaftsWoche magazine, Draghi wrote the euro zone’s political union needs to be deepened. He said reforms were needed to raise competition, cut bureaucracy and improve labour market flexibility.

    “By requiring governments in an economic union to undertake structural reforms, they give credibility (to the idea) that they can actually overcome their debts through growth,” Draghi wrote.

    The ECB took launched a government bond-buying programme on Thursday that will pump hundreds of billions in new money into a sagging euro zone economy. The ECB will buy sovereign debt, despite opposition from the Bundesbank and concerns in Berlin it could let spendthrift countries to slacken economic reforms.

    “By requiring governments in an economic union to undertake structural reforms, they give credibility (to the idea) that they can actually overcome their debts through growth”. Yes, just days after the ECB’s QE announcement we get Draghi still pushing the ‘expansionary austerity’ meme using a ‘confidence fairy’ justification. It lives. Or at least moves. Still.

    So Remember kids: if the most easily filled jobs in society, where workers have the least empowerment, don’t come with the threat of poverty, your whole wage structure will be hopelessly distorted. People will stop working and society might collapse. Hopefully it won’t be that bad, but societal collapse could totally happen at any moment if workers aren’t in a perpetual race to the bottom. Don’t change horses in midstream.

    Posted by Pterrafractyl | January 25, 2015, 10:09 pm
  14. Oh great: So it looks like the SPD has already given up any hope of winning in 2017, with the CDU now leading the party by 17 points in recent polls. Even worse, it’s feared by many in the SPD that the party leaders’ plans for solving this ‘identity crisis’ is to make the SPD even more right-wing. So the SPD’s Dr. Jekyll might be going on a LONG sabbatical. The time for Mr. Hyde is here:

    The Irish Times
    Identity crisis grips Germany’s SPD as party gives up on 2017 victory
    Social Democrats’ internal study warns of ‘grave image problem’

    Derek Skally

    First published: Sat, Mar 14, 2015, 00:01

    Germany doesn’t go to the polls until 2017 but Social Democrat (SPD) leader Sigmar Gabriel has already given up hope of beating Angela Merkel.

    At a “depressing” parliamentary party meeting Mr Gabriel, economics minister in Berlin’s grand coalition, warned it would be a “long time” before Germany had another SPD chancellor.

    “Between [Merkel’s] Christian Democrats, the [opposition] Greens and Linke, that leaves us with a potential of 27 per cent,” Mr Gabriel said, according to Der Spiegel.

    Since returning to office in December 2013, the SPD has pushed through a minimum wage of €8.50; lowered the retirement age for workers after 40 years; and, last week, established a binding 30 per cent quota for women in boardrooms.

    But delivering on its manifesto hasn’t halted a five-point drop on its 2013 election result to just 24 per cent – 17 points behind the CDU. Now the party is gripped by an identity crisis.

    After five years at the helm, Mr Gabriel is the longest-serving SPD leader since the still venerated Willy Brandt. But he remains indecisive over the party’s core identity.

    He got his party back into power with a left-wing programme in 2013, but SPD left-wingers fear he plans to return to the Schröder-era niche in the political centre – now occupied by Dr Merkel’s CDU.

    “We have to be the alternative to the CDU, not just a nicer version,” said Ralf Stegner, a leading SPD left-winger.

    Image problem

    An internal study warned of a “grave image problem” and recommended more friction with its coalition partner to improve its profile. Not everyone thinks picking rows with the CDU will be enough.

    “The SPD lacks a concept for now and for the future,” said Dr Gero Neugebauer, political scientist at Berlin’s Free University. “Nor can it offer voters the promise of security from the consequences of globalisation.”

    The SPD has always ruled out working with the successors to East Germany’s ruling SED, though that could change with the departure of hard-line figures such as Die Linke deputy leader Sahra Wagenknecht.

    But her leaving did nothing to address another problem, said Dr Neugebauer: “German society is shifting right.”

    So that was awful to read. Let’s at least hope Dr. Jekyll does some reading while he’s away. Maybe he could develop some ideas for the future of the SPD that are actually helpful.

    Ending the Creditor’s Paradise

    What would you tell six hundred leading German social democrats about their party’s handling of the Eurocrisis?
    by Mark Blyth


    Mark Blyth is the Eastman professor of political economy at Brown University and the author of Austerity: The History of a Dangerous Idea .

    What would you tell six hundred leading German social democrats about their party’s handling of the Eurocrisis?
    by Mark Blyth

    As I sat in my office at Brown University on December 16, 2014, an email popped into my inbox with the title “Herzlichen Glückwunsch – Sie sind der 1. Preisträger des Hans-Matthöfer-Preises für wirtschaftspublizistik.” This was the award given by the Friedrich Ebert Stiftung (FES), the research foundation closest to the German Social Democratic Party (SPD), and the Hans-Matthöfer Stiftung for the best economics publication in German in 2014. I was, to say the least, surprised.

    My 2013 Oxford University Press book, Austerity: The History of a Dangerous Idea, had recently been translated into German by the publishing arm of the FES. Indeed, I had been there a month earlier, in Berlin, to do a book launch, which was very well attended. Since then the book has been reviewed, positively, in the German press, with Suddeutsche Zeitung giving it a rather glowing review. Something odd was going on.

    Clearly, despite the impression we get in the US, there was movement away from the “austerity is the only way” approach to thinking about the eurozone crisis in Berlin, at least among the social democrats — but how much movement?

    Consider that during the negotiations to form the current coalition with German Chancellor Angela Merkel’s Christian Democratic Union, the SPD could have made an issue out of how the policies designed to heal Europe were causing great harm, a fact acknowledged even by the International Monetary Fund by 2012. But they chose not to do so.

    True, as German (and French) politicians know only too well, there are no votes in talking about Europe, only costs, so not speaking up is locally rational. But not speaking up when such inappropriate policies are being applied to Germany’s European partners is collectively disastrous. Indeed, what is so tragic in this crisis is how the center-left throughout Europe have not just accepted, but in many cases actively supported, policies that have done nothing but hurt their supposed core constituencies.

    So I was awarded the prize at a ceremony in Berlin for “thinking differently” about economics. Martin Schultz, the head of the European Parliament, gave the introduction. Peter Bofinger, the voice of macroeconomic reason on the German equivalent to the US Council of Economic Advisors, gave a speech praising the book. I had ten minutes to say something useful at the end of the event. But what should I say that would be of use to the six hundred social democrats gathered in the room?

    I had just been there a month before, giving the message of the book, and I didn’t want to do that again. I wanted to be useful, and supportive of this shift in thinking. But I also wanted to remind the SPD of who they are supposed to be and whom they are supposed to defend. I hope this was how the following was received.

    It is both an honor and an irony to stand here today and receive the 2014 Hans-Matthöfer-Preis für Wirtschaftspublizistik. The honor is to be recognized at all, given the competition. To name but a few of my fellow contenders, Thomas Piketty may be my favorite economist, and Wolfgang Munchau may be my favorite journalist, so to be recognized amongst them is an honor.

    But it is also somewhat ironic to be so recognized in the one country that seems, at least at the elite level, utterly impervious to the message of the book that you are recognizing this evening. Perhaps at least in this room, and among social democrats, that message is gaining strength.

    Austerity as economic policy simply doesn’t work. In the cases where it looked like it worked, something else was really doing the work, usually the devaluation of a sovereign currency at the same time as the expansion of a much larger trading partner gave exports a short-term boost. Budgets were cut as exports expanded, but it wasn’t the cuts that mattered, it was the expansion.

    But I have stood here before and spoken about Austerity, so let’s take the few minutes we have here today to look forward rather than backwards.

    All eyes are on Greece and the possibility of default or “Grexit” Indeed, it’s an impossible position for all sides. The Greeks cannot pay back what they owe, given that the policies enacted to help them grow have resulted in the collapse of nearly a third of their economy. The young and the talented have left, leaving pensioners and the public sector behind.

    But to recognize that fact and accommodate policy opens up issues in debtor countries such as Ireland and Portugal and Spain that creditor countries such as Germany do not want to deal with.

    So how do we move forward, and what is the role of a social-democratic party in shaping this path? Two issues stand out for me. The first is what I refer to in Austerity as “the false promise of structural reform.” There can be no doubt that the debtor countries of Europe need major reforms in taxation systems, labor markets, business regulation, and a host of other areas.


    1. When we say “structural reform” we really have no idea what those words actually mean, and we often fall back on them as a back-handed acknowledgment that austerity has failed, or

    2. We misunderstand what we did when we refer to prior episodes of structural reform, and thereby miss that it is impossible for anyone else to do what we once did.

    Let me explain. “Structural reform” used to be called “structural adjustment.” And European lefties like us used to condemn it as absurd, ridiculous, “neoliberalism gone mad” — and yet we seem quite happy to unleash these policies, despite the damage that they have done in the developing world, upon our European partners.

    When you ask for the content of what structural reform means, it seems to be a checklist of lower taxes, deregulate everything in sight, privatize anything not nailed down, and hope for the best. But are these policies not disturbingly American, if not Thatcherite? Indeed, isn’t this everything that the SPD is supposed to be against, and much of which the German public would never put up with?

    European reforms take the more subtle cover of simply asking everyone to become “more competitive” — and who could be against that? Until one remembers that being competitive against each other’s main trading partners in the same currency union generates a “moving average” problem of continental proportions.

    It is statistically absurd to all become more competitive. It’s like everyone trying to be above average. It sounds like a good idea until we think about the intelligence of the children in a classroom. By definition, someone has to be the “not bright” one, even in a class of geniuses.

    But something has to be done, and we are often told that Germany was the “sick man” of Europe, that the country took the “bitter medicine” of the Hartz reforms and became more competitive. Because of this, when the crisis hit, Germany survived and came back stronger. The conclusion that follows — the rest of Europe needs to embrace “structural reform” — quickly follows.

    This is a popular story, but it’s quite wrong, and its application to other countries rests upon a rather obvious misreading of recent German history. Christian Dustmann and his colleagues have examined this question in depth and concluded that what really made the German economy more competitive were three interrelated phenomena that happened a decade before Hartz.

    First, and I know all about this being married into a family of East Germans, was reunification. Having ten million extra workers suddenly enter the labor market puts massive downward pressure on wages that begins to show up around 1994.

    Second, moving parts suppliers for the German Auto complex out to the former eastern bloc countries makes the inputs for German exports even more competitive. This starts around the same time.

    Third, German unions, at the same time, realize that globalization starts east of the Elbe and simply stop asking for wage increases. The combined result is a squeeze on wages that lasts for nearly twenty years that is masked by the transfers of the welfare system. This is where your competitiveness comes from.

    What Hartz does, a decade later, is remove young single people from the welfare rolls and places them in mini jobs. The result of this is an expansion of the sheltered service sector, and of chronic low pay, that has to be addressed years later by the introduction of a minimum wage. Indeed, almost all the jobs created by Hartz are low-productivity, sheltered service sector jobs.

    The export sector, the “competitive” part of the economy, depends upon demand generated elsewhere in the world, and it continues to shed, not add jobs, as capital substitutes for labor in high-skilled production.

    If Dustmann et al. are correct, and I think that they are, then the ability to transfer these lessons to other countries is zero. No one else has an East Germany waiting around the corner to push down labor costs, and even if everyone did, all that would do is reduce consumption in the aggregate, thereby impoverishing everyone.

    The take home lesson is perhaps then that Germany is only Germany because everyone else is “not Germany.” To try and make everyone a bit more like Germany can only mean the expansion of a poorly paid service sector and the introduction of a minimum wage to compensate. I do not think that’s what structural reform advocates recommend, but it’s where we may end up.

    My second point returns us to the notion that we have grown quite comfortable talking about “creditor nations” and “debtor nations,” rather than “European nations,” as if being a debtor or a creditor is a national characteristic. Indeed, one of the most poisonous aspects of this period and policy of austerity is the discourse it produces that reduces complex formations of class and institutions to essentials of race and identity.

    But look beyond this, and there is a bigger issue for left parties to deal with, one that they unfortunately helped to create. Back in the 1970s, a period that now seems quite benign, corporate profits were very low, labor’s share of income was very high, and inflation was rising. We were told that this was unsustainable, and new institutions and policies were constructed to make sure that this particular mix of outcomes would never happen again.

    In this regard we were singularly successful. Today, corporate profits have never been higher, labor’s share of national income has almost never been lower, and inflation has given way to deflation. So are we happier for this change?

    What we have done over the past thirty years is to build a creditor’s paradise of positive real interest rates, low inflation, open markets, beaten-down unions, and a retreating state — all policed by unelected economic officials in central banks and other unelected institutions that have only one target: to keep such a creditor’s paradise going.

    In such a world, why would you, the average worker, ever get a pay rise? Indeed, is it any wonder that inequality is everywhere an issue? In Europe this plays out at the national level, and at the international level of creditor countries (good) and debtor countries (bad), where the rights of the creditors must be protected and the mantra that “you must pay your debts” must be respected.

    Yet even in terms of simple welfare economics, this is nonsense. If the cost of squeezing the debtor is to keep her in debt servitude, or if the losses to the creditors are less than the costs of servicing the debt in perpetuity, then default is efficient, if not moral.

    Today it is a profound irony that European social democrats worry deeply, as they should, about the investor protection clauses embedded in the proposed Transatlantic Investment Treaty with the US, and yet they demand enforcement of exactly the same creditor protections on their fellow Europeans without pausing for breath for the money they “lent” to them to bail out their own banking systems’ errant lending decisions.

    Something has gone badly wrong when social democracy thinks this is OK. It is not. Because it begs the fundamental question, “what are you for — if you are for this?” The German Social Democrats, for we are all the heirs of Rosa Luxemburg, today stand as the joint enforcers of a creditor’s paradise. Is that who you really want to be? Modern European history has turned many times on the choices of the SPD. This is one of those moments.

    Look at what you’ve become SPD, look at what you’ve become!

    What we have done over the past thirty years is to build a creditor’s paradise of positive real interest rates, low inflation, open markets, beaten-down unions, and a retreating state — all policed by unelected economic officials in central banks and other unelected institutions that have only one target: to keep such a creditor’s paradise going.

    Today it is a profound irony that European social democrats worry deeply, as they should, about the investor protection clauses embedded in the proposed Transatlantic Investment Treaty with the US, and yet they demand enforcement of exactly the same creditor protections on their fellow Europeans without pausing for breath for the money they “lent” to them to bail out their own banking systems’ errant lending decisions.

    Put the economic mad science away SPD. PLEASE. It’s going to destroy you. And others.

    Posted by Pterrafractyl | March 18, 2015, 5:57 pm
  15. Here’s a reminder that ‘the market’ would slit its own wrists if you pay it enough. Or, more precisely, here’s a reminder that ‘the market’ is currently in the process of slitting its own wrists because it’s really profitable these days:

    Japanese workers get smaller share of corporate earnings despite record profits

    GRAPHIC: Workers’ share of corporate earnings: link.reuters.com/muw24w By Tetsushi Kajimoto TOKYO, March 4 (Reuters) – Millions of Japanese workers are taking home their smallest share of corporate income in two decades as companies build record cash hoards and abstain from substantial wage raises seen by Prime Minister Shinzo Abe as critical to a durable economic recovery.

    A seasonally adjusted estimate by the independent NLI Research Institute shows worker compensation fell as a percentage of corporate income in 2014 to the lowest level since 1991. By contrast, companies piled up 332 trillion yen ($2.75 trillion) in internal reserves as of the end of last year on the back of record profits while increasing the number of low-paid, non-regular jobs to curb fixed personnel costs.

    Although Japan’s economy emerged from recession in the last quarter of 2014, many companies are looking for signs of sustained economic growth before committing to a decision to raise salaries. Labour unionists are seeking much higher salary increases this year as they meet with their employers during the so-called “shunto”, or annual wage negotiations, this month. Analysts warn that caution about raising wages could create a vicious cycle of shrinking domestic demand and diminished economic growth prospects.

    “Unless wages are raised in a sustainable way, domestic demand and consumption will continue to languish, preventing companies from finding profit opportunities at home,” said Taro Saito, director of economic research at NLI Research Institute.

    Ok, so to review:
    Japanese worker compensation as a percentage of corporate income to the lowest level since 1991, companies are sitting on growing piles of cash and record profits, a growing percentage of the workforce is low-paid and working in non-regular jobs, and the analysts that compiled this report are warning that if Japanese companies don’t start raising wages they might create a vicious cycle of shrinking domestic demand. But the companies are waiting for more signs of sustained economic growth before raises will be considered.

    In other news…

    German employers get creative to skirt new minimum wage
    BERLIN | By Michelle Martin
    Oddly | Thu Mar 12, 2015 3:51pm EDT

    (Reuters) – From charging slaughterhouse workers for their knives to compensating staff with tanning salon vouchers, German employers are coming up with creative ways to avoid paying a new minimum wage, angering unions.

    Chancellor Angela Merkel’s government introduced Germany’s first nationwide wage floor of 8.50 euros per hour early this year. The law was the brainchild of the Social Democrats (SPD), who made it a condition of joining Merkel’s coalition in 2013.

    The centre-left party argued that it was a necessary response to the sharp rise in low-wage jobs over the past decade. Some 3.7 million people were expected to benefit.

    But in the months since it went into effect it has become clear that not everyone is taking home more pay. The NGG food and catering union is fielding up to 400 calls a day from people who say their employers are finding ways to circumvent the law.

    “We’re seeing some employers display an awful lot of creativity to get round paying the minimum wage,” Burkhard Siebert of the NGG said.

    He said some workers were no longer getting paid for overtime. Others are being charged for drinks and clothing they are required to wear on the job.

    German Labour Minister Andrea Nahles has admitted to implementation problems but said she had not yet heard anything to suggest the law may need to be changed. The far-left Linke party say it was “botched” and contains too many loopholes.

    Butchers have complained that they must pay a fee of up to 100 euros per month to use knives they need to cut meat. Bakers say they are being paid in buns and bread instead of cash.

    Bernd Bischoff, who runs an advice center for contractors in the city of Oldenburg, said the meat industry was especially affected. Workers from southeast Europe were being charged more for accommodation to offset the cost of higher wages.

    Last week a survey by pollster Infratest dimap showed 15 percent of Germans had heard about employers sidestepping the minimum wage from friends and family. Some 3 percent said they were directly affected.

    Among them is 66-year-old Juergen Schluens, who used to earn around 6.30 euros per hour delivering papers in the village of Witzwort close to the North Sea.

    Once the new wage law took effect, he says his boss reduced the premium he received for starting work at 4.45 a.m. and demanded that he get the job done in half the time.

    “The minimum wage of 8.50 euros per hour was paid on paper but my boss said I could only take 52 minutes to do my round,” he told Reuters. “I needed about 94 minutes — and I should know as I’ve been doing the job for nearly 11 years.”

    Unions report cases of bakeries, a solarium and a gym giving staff coupons to use on site rather than paying the minimum wage. A baker who refused such an offer was told to give the vouchers to her husband, the NGG said.

    Other workers have had their holiday entitlement reduced or premiums for working nights, holidays and Sundays slashed.

    Yes, Germany’s new minimum wage is also too much for employers to handle during a period of record low unemployment and now employers are ‘getting creative’.

    It’s all a reminder that, with corporate profits at records around the globe and a number of major free-trade agreements under consideration, the most potent ‘trade’ agreement for increasing global trade and overall economic activity would be an agreement that has nothing to do with lowering trade barriers but instead is simply an agreement to tax the s#@t out of all these corporate giants with record profits and massive cash piles and then just having the government cut use to the proceeds to everyone a check! An international Robin Hood agreement to help everyone, rich and poor alike! It would be like the already proposed “Robin Hood tax/Tobin tax”, except you would specifically target the cash piles and everyone would just get a check from the proceeds instead. The poor get cash and the rich get to avoid actually coming to seeing the system that made them rich collapse under the weight of its own internal contradictions. They just get taxed instead. It’s win-win!

    Of course, for this scheme to work you would have to get a lot of each nation’s major trading partners on board but that’s already happened with the TPP and TPIP so it’s not like it’s impossible. Maybe the UN could play a role? And when the corporations inevitably complain about how unfair it is, all we have to do is point to the record profits, decades of stagnant wages, and decades of hearing about how global competition forced the suppression of those wages and then point out that raising taxes on all the major exporters simultaneously isn’t going to put anyone at a relative disadvantage. And then we give them the stink eye.

    Posted by Pterrafractyl | May 6, 2015, 3:14 pm
  16. The CEO of Airbus just gave a helpful tip to the German government over how to incorporate the flood of refugees into the German society: deregulate the labor market and get rid of the minimum for the refugees so they can be put to work doing low-paid mini-jobs:

    Airbus boss calls on Germany to open up labour market to refugees


    Sun Oct 25, 2015 4:15pm GMT

    Germany should deregulate its labour market and create more lower-paid jobs to help refugees find work and integrate better into society, the head of Europe’s largest aerospace group Airbus (AIR.PA) said on Sunday.

    Germany expects at least 800,000 migrants to arrive this year alone, almost 1 percent of the population, many of them fleeing conflicts in Syria and elsewhere. Politicians and economists have warned the influx will push up unemployment in Europe’s biggest economy.

    “We must have the courage for deregulation in the way that so far we know from the United States,” Tom Enders, a German, wrote in a commentary for the Sueddeutsche newspaper.

    “That seems hard to imagine. But there, you see a successful integration of migrants who are allowed to work soon after they arrive,” he wrote.
    Germany should make exceptions for the minimum wage and offer more flexibility with short-term contracts, he said.

    “If the threshold for entry into the labour market is too high, the integration of immigrants in society will fail,” Enders wrote.

    “It is better to enter the labour market with mini-jobs or low-paid jobs than not at all and to be condemned to social security, doing nothing and frustration.”

    Some economists have argued that the influx of migrants could provide skilled labour, especially in some areas where there are shortages such as engineering, and boost economic growth.

    While it’s certainly true that taking in 800,000 refugees, 1 percent of Germany’s population, wasn’t going to be easy, it’s difficult to think of a policy that’s going to be more likely to exacerbate growing xenophobia than a sudden deregulate of labor laws so companies like Airbus can employ all those refugees in below-minimum wage jobs…just like the US does (to its undocumented immigrants that lack labor protections). What a helpful suggestion!

    Posted by Pterrafractyl | October 27, 2015, 8:16 pm
  17. With Angela Merkel running still possibly running for reelection in 2017, here’s a reminder that the direct and indirect consequences of the economic devastation imposed on European society, in particular German society, prelude to what could end up being a major issue in Germany’s 2017 elections: German elderly poverty.

    First, here’s a look at the pressure she’s going to feel from the right to make sure a German (presumably Bundesbank chief Jens Weidman) takes over as head of the ECB so he can jack up interest rates…ostensibly to help Germany savers and retirees despite the fact that this would possibly tank the eurozone economy. So engaging in an intra-eurozone power grab to execute policies that are even more irresponsible than before is probably going to be on the 2017 agenda:


    Next ECB president must be German, Merkel’s Bavarian allies say

    BERLIN | By Caroline Copley
    Mon Apr 18, 2016 10:05am EDT

    The next European Central Bank president should come from Germany, German conservative politicians said on Monday, ramping up pressure on what they see as too much free-spending by the ECB and not enough rigor.

    One said the current president, Italian Mario Draghi, had weakened the ECB’s reputation.

    Such conservatives have complained loudly in recent weeks that the ECB’s ultra-low rates are creating a “gaping hole” in savers’ finances and pensioners’ retirement plans as returns have dropped.

    Germany also has a long history of preferring strict fiscal and monetary policy.

    Hans-Peter Friedrich, a leading lawmaker for the Christian Social Union (CSU) and former interior minister, told mass-selling daily Bild the policy of current ECB President Mario Draghi, an Italian, had “lead to a massive loss of credibility.

    “The next ECB chief must be a German, who feels bound to the German Bundesbank’s tradition of monetary stability,” Friedrich added.

    Hans-Peter Uhl, the CSU’s spokesman on interior affairs, called for a German financial specialist to head the central bank. Meanwhile, Markus Soeder, finance minister for the state of Bavaria, told the Bild am Sonntag paper it was time for a “change of direction” and more German influence.

    A spokeswoman for the German Finance Ministry said the question of who will succeed Draghi was not relevant at present since he is not due to step down until November 2019.

    Nonetheless, the fact that some lawmakers in Merkel’s coalition government are raising the topic now underscores how fraught relations between the euro zone’s biggest country and Draghi have become.

    Mario Gruppe, an economist at Nord LB, described the latest comments as a new episode in a serial called “The Germans get annoyed about monetary policy”.

    “It shows that unhappiness among German politicians about the ECB is increasing. And if there are no signs of change, the tone should get even louder,” he said.

    However, Gruppe does not expect a serious debate about Draghi’s successor for another two years.


    Early on in his term as president, Draghi was presented with a black-and-gold spiked helmet dating from 1871 by Bild to symbolize the newspaper’s confidence that the Italian boss would stick to Prussian-style discipline against inflation.

    But relations with Europe’s biggest economy have soured as the central bank has unleashed round after round of monetary easing, including cutting its deposit rate into negative territory and expanding asset buys, in an effort to stimulate growth and stave off the threat of deflation.

    A storm of protest erupted in thrifty Germany after Draghi last month described the idea of “helicopter money” – sending money directly to citizens – as a “very interesting” – if unexamined – concept.

    Last week, Finance Minister Wolfgang Schaeuble said the ECB’s policy was causing “extraordinary problems” for banks and risks undermining support for European integration and reportedly blamed its policy.

    “However, Gruppe does not expect a serious debate about Draghi’s successor for another two years.”
    That’s probably true. We shouldn’t expect a serious debate about Mario Draghi’s successor at the ECB for at least another two years since his term isn’t up until 2019. But how about an unserious highly politicized debate in the middle of nasty campaign season? It’s hard to see why that won’t be a factor. Especially since there’s no reason to assume the AfD won’t make similar demands for a German heading the ECB.

    So get ready for 2017 to be the year German politicians pledge to ensure the ECB falls into German hands next. It might not be good policy but it’s good politics. And it will be especially good politics for the German right-wing if, as SPD leader Sigmar Gabrial suggests below, saving pensions and preventing elderly poverty is what they’re going to attack Merkel on from the left:


    Merkel Faces First 2017 Election Gambit as Pension Demands Made

    * SPD Chairman Gabriel calls for halt to dwindling pensions
    * Party to make pensions an election issue if Merkel opposes

    Patrick Donahue
    April 12, 2016 — 6:53 AM CDT

    Chancellor Angela Merkel faced the opening gambit of the 2017 election campaign as her Social Democratic coalition partner demanded a halt to dwindling pensions.

    SPD Chairman Sigmar Gabriel, Merkel’s vice chancellor, said his party would seek to halt the decline in average pensions as a percentage of working wages at their current level. Should Merkel’s Christian Democratic-led bloc reject that, Gabriel said his party will campaign on the issue in next year’s vote, which can be held at the latest in September.

    “If pension levels drop any further, then old-age poverty will become a threat,” Gabriel told the Funke newspaper consortium in a group interview published Tuesday. “If the CDU/CSU aren’t with us, then the SPD will put this to a vote during the next election.”

    Merkel, in office for more than a decade, hasn’t announced whether she’ll seek a fourth term. While anxiety over the region’s refugee crisis has cost her party support, with CDU losses recorded in three state elections last month, the SPD’s backing has dropped to record lows. The SPD slid half a percentage point to 19.5 percent in a weekly Insa poll for Tuesday’s Bild newspaper, the first ever reading below 20 percent. Merkel’s CDU and its CSU Bavarian sister party stood at 31.5 percent, also down a half a point.

    As the country’s population ages, declining pensions have become a source of anxiety among voters. Pensions are projected to drop to about 43 percent of average wages by 2029 from 46 percent in 2020, according calculations from Germany’s Labor Ministry.

    “As the country’s population ages, declining pensions have become a source of anxiety among voters. Pensions are projected to drop to about 43 percent of average wages by 2029 from 46 percent in 2020, according calculations from Germany’s Labor Ministry.”
    Projected falls in pensions should make for quite a political football. And note that it’s actually more ominous for middle aged and elderly Germans that the above stats might suggest because the pensions are projected to drop as a percentage of average German wages and average German wages have been decimated for years. And that’s not simply due to the eurozone crisis. Wages have been falling for years because that was the official plan for Germany’s “Agenda 2010″/Hartz IV national austerity drive. And don’t forget the planned pension cuts that were also part of the Agenda. That should seems like a factor in the pension pains.

    So while there doesn’t appear to be much discussion as to whether or not that “Agenda 2010” reforms started in 2003 are playing a role in the rising woes of German pensioners, it’s pretty much guaranteed that Germany’s national austerity program is actually playing a role and will continue to do so into the future because it would be silly to think otherwise. And that ongoing austerity fallout is a big reason why we shouldn’t be surprised if substandard pensions and old-age poverty is one of the defining issues for Germany politics for years to come. Whether or not a critique of Agenda 2010/Hartz IV itself also becomes a defining issue for German politics remains to be seen, but if you’re looking for an issue to debate regarding growing poverty for elderly Germans, the planned national austerity that cut pensions seems like a good place to start:

    United Youth Journalists

    The Controversial Legacy of Agenda 2010 – David Zuther, Germany

    by United Youth Journalists
    September 23, 2015

    It was August 16 2002, a warm summer day, when Peter Hartz entered the stage in the French Dome of Central Berlin, where his performance had been meticulously planned; to say: ” Today is a good day for the unemployed in Germany”. His enthusiasm was shared by many politicians and experts at the time. Hartz gave his name to the biggest reforms in the German labour market since World War Two. To this day, the benefits paid to long-time unemployed is commonly known as “Hartz IV”.

    But today, the legacy of Peter Hartz and the sweeping reforms introduced by chancellor Gerhard Schröder (Social Democrat Party SPD) – the “Agenda 2010 ” – is at the center of a controversial debate that continues to divide experts, politicians and activists. Its supporters have aggressively advertised the agenda as a model for other countries while its critics called the reform a historical mistake.

    Peter Hartz, Messiah of German business

    In September 2002, after Schröder and his centre-left coalition of Social Democrats and Greens was re-elected, the German economy reached rock bottom. The New Economy bubble burst, the unemployment rate was 11.3 percent and more than 4.7 million Germans were unemployed.

    The government had to act. In March 2003, Schröder gave a speech to the German parliament laying out a path that abandoned everything that social democracy had traditionally fought for. He declared: ” We will cut state services and benefits, support individual responsibility and demand more effort from every single person.” Schröder asked Peter Hartz, who was chief human resources officer for the automobile company Volkswagen at the time, to design the reforms. Hartz became the reform overlord, the Messiah of the German economy – or so it was seen by most at the time. The fact that the benefit paid to long-term unemployed is now often called Hartz IV, most likely fills him with pride.

    Stigmatising the lower class

    The Agenda’s core element is reforms to the German labour market. They mainly consist of eroding the German social security system, including drastic cuts to benefits paid to long-term unemployed. The idea was clear: if you lose your job, you had better find a new one fast, or your living standard will soon slump. Schröder had already set the tone for the debate about unemployment in a 2001 speech: “There is no right to be lazy”. The stereotype of the workshy, lazy jobless was born. Today, the term “Hartz IV” is widely used to stigmatise the lower class. Reality TV shows depict people on Hartz IV benefits, eating unhealthy, uneducated, sitting on the couch all day, often screaming at their children, living in messy homes.

    Hartz IV became a horror to all working-age Germans. It allowed employers to force down wages. People looking for work now found it almost impossible to turn down job offers with bad conditions since if they didn’t accept them, they had to face the shame and deprivation that was Hartz IV. As the coalition failed to introduce a minimum wage (a disgraceful mistake only corrected ten years later), there was no limit to employers’ wage-dumping.

    The sanction machine

    The Hartz laws also introduced a new, controversial tool for job centres: sanctions. From now on, the authorities could cut people’s benefits as a penalty for “offenses” such as failing to show up at a job interview or missing a jobcentre appointment. This has a drastic impact. The amount of Hartz IV is calculated to guarantee a basic subsistence level. If cuts are made, it effectively means that people are forced to live below subsistence level by the state. The penalties are especially harsh for under-25-year-olds. One missed appointment, and all benefit payments except housing and health insurance are capped. Even those two services will be frozen in case of a second offense for three months. In a parliamentary hearing on June 2015, experts warned that tough sanctions might lead to the unemployed becoming homeless and force them to commit crimes to make a living. One million sanctions were handed out by jobcentres in 2014 and 20,000 young people are currently ‘lost’ – out of reach for jobcentres. Meanwhile, increasingly many sanctions are being withdrawn by courts: in 2014, they ruled that sanctions were illegal in more than 50,000 cases.

    The birth of wage-dumping

    Additionally, Agenda 2010 included watering down employees’ protection against unfair dismissal and deregulation of temporary employment. The explosion in the number of people employed in the low-wage sector or precarious, temporary jobs in the past decade is therefore often blamed on the Agenda reforms. According to some statistics, the percentage of low-wage work in all jobs went up from 14 to 21.5% in the last few years. Germany now has the biggest low-wage industry in Western Europe. Due to Agenda 2010, the labour leasing industry boomed: in-labour leasing, private agencies “lend” workers to companies. The “workforce broker” agency makes huge profits, while the company can pay the leased workers less than its own employees and thereby reduce its wage bill. The losers in this game are the leased workers: according to one study, 75% of full-time leasing workers earn a salary below the low-wage threshold. Thanks to Agenda 2010, the number of workers in labour leasing contracts almost tripled between 2003 and 2012.
    The reforms also created a new mass phenomenon in Germany: the working poor. More and more people work full-time for wages that are still not enough to make a living. As of now, almost 1.5 million Germans in work are dependent on additional benefits to make ends meet.

    Pensions and healthcare under attack

    Outside of the labour market, Agenda 2010 includes reductions to pensions. The effects of those regulations are not extremely negative, given the good economic situation in Germany which has filled retirement funds. However, labour market reforms are forcing many people to retire at later times. And in a recent court ruling, jobcentres were given the right to force long-term unemployed people into early retirement if the authorities consider them unlikely to find work again. This power is problematic because going into early retirement as a Hartz IV recipient means automatically receiving a lower pension. One charity estimates that until next year, this mechanism will cost 140,000 people around 10 percent of their pension.

    In the health sector, Agenda 2010 sought to reduce health insurance costs by increasing individual’s contributions. Some services, such as in-vitro fertilisation, were not covered by insurance anymore. Additionally, the principle of shared costs between employer and employee was abandoned for some expensive areas. All in all, however, the reforms only helped little in slowing down the massive increase in healthcare costs.

    A debated success

    The Agenda 2010 supporters faced massive criticism in the first years of the reforms. Unions criticised it for allegedly dismantling the social safety net and leading to low wages and poverty.
    Then came the 2008 financial crisis, and the reforms’ supporters saw an opportunity to exonerate ‘their’ Agenda. It is a fact that the German economy performed extremely well when the global economy crashed. The Agenda creators have argued that Germany’s success is due to their reforms – which they characterised as ‘harsh but necessary’.

    Without a doubt, there are some success stories about the Agenda reforms. In April 2015, the unemployment rate in Germany was 4.7 percent – less than half of what it was in 2002. However, one must not only ask ‘ How many people are employed?’ but also consider ‘Under what conditions are those people employed?’. Sadly, the answer is that the Agenda 2010 has led to a significant increase in the number of people in insecure, temporary and low-paid jobs.
    The argument that the reforms helped the economy get through the crisis easily is too simplistic. Germany’s economic success story is based on multiple, complex factors, and not only a set of laws passed in 2003. A 2013 study by the economic think-tank DIW concluded that the scientific evidence for the Agenda’s effectiveness is ‘incomplete and inconsistent’.

    Rich country, poor people

    Despite the Agenda’s popularity and its many prominent supporters, which include former French president Nicolas Sarkozy and the head of the US company General Electric, a critical look is worthwhile. The reforms’ effects on the economy may be debated among experts, but the impact on society is clear: the stereotypes about allegedly lazy jobless people has increased. Hartz IV became a stigma, a social shame. Joblessness became more embarrassing, with people on benefits being forced to constantly justify why they had trouble finding work. The reforms have furthered class divide in our country. In May, the Organisation for Economic Cooperation and Development (OECD) reported that the income gap has widened in Germany since the 2000s. According to recent data, 2.1 million German children under 15 years of age live below the official poverty line – which is one in five children. In addition, around 200,000 German children live in families that cannot afford appropriate warm clothing for all family members.
    Germany may be a rich country overall, but we must not neglect the fact that poverty remains a problem.

    Outside of the labour market, Agenda 2010 includes reductions to pensions. The effects of those regulations are not extremely negative, given the good economic situation in Germany which has filled retirement funds. However, labour market reforms are forcing many people to retire at later times. And in a recent court ruling, jobcentres were given the right to force long-term unemployed people into early retirement if the authorities consider them unlikely to find work again. This power is problematic because going into early retirement as a Hartz IV recipient means automatically receiving a lower pension. One charity estimates that until next year, this mechanism will cost 140,000 people around 10 percent of their pension.
    None of that is particularly helpful for pensioners, but that’s just part of the damage done. It was all the other factors in the article that have because transformed the Germany economy into one of the biggest pools of low-wage temp workers in Europe that’s REALLY going to destroy the German pensions. If you’re a German worker that’s seen your wages stagnate for years, that’s not going to help your pension. So not only are pensions as a percent of wages projected to fall, but they’re falling as a percent of cut or stagnant wages.

    It’s all part of why we shouldn’t be surprised if attacks on the ECB not only become a political issue when Angela Merkel runs for reelection in 2017, but it’s quite possibly going to be a political issue basically any time there’s a need for the ECB to cut interest rates. Sure, given the alarming trends in Germany’s rates of poverty and massive wealth inequality, it’s only a matter of time before you have a generation of US-style poor middle-aged and elderly Germans who largely have to no savings and won’t really care about low central bank rates. At that point the ECB will probably stop feeling the heat, at least from the rabble. Of course, before the full gutting of the German middle class is complete (which could take a few more decades), the ECB will presumably just raise rates because that’s what economic conditions merit. But ultra-low rates is still projected to last until the end of this decade, which is a lot longer than pissed off German voters are willing to wait. And with Germany being an aging society, the concerns of pensioners are only going to grow in political importance and the politicians know this and are no doubt preparing for the era of old-age poverty that’s basically guaranteed at this point. So, in the mean time, get ready for a lot more ECB bashing in Germany’s elections. The architects of the German miracle need to build a scapegoat.

    Posted by Pterrafractyl | April 19, 2016, 2:45 pm
  18. This definitely sounds like a must-read book. It’s currently only published in German so unless you can speak German it’s a must-read/can’t-read book. Either way, here’s a review:

    The Financial Times

    ‘Verteilungskampf’, by Marcel Fratzscher

    A deliciously iconoclastic book that highlights Germany’s economic underbelly
    Martin Sandbu

    July 24, 2016

    Review by Martin Sandbu

    If only we could be more like the Germans. Then we, too, could have a powerhouse economy with low unemployment, a strong export industry and many other good things.

    This is the gist of a widespread admiration of Europe’s sole superpower. Thus in the eurozone, the German liberalising labour market reforms of the early 2000s are often taken as the textbook policy for those seeking prosperity in a currency union. Elsewhere, it is often education and business institutions — its system of vocational training supporting the Mittelstand of medium-sized companies that are niche producers of high-quality industrial export goods — that cause admirers to swoon.

    Amid such fawning, Marcel Fratzscher’s book is deliciously iconoclastic. The author, who directs the German Institute for Economic Research (DIW) in Berlin, has form on highlighting the country’s economic underbelly, even courting controversy. In an earlier book, he challenged his compatriots’ self-congratulatory view of the strength of Germany’s growth and their sense that the euro needs them more than they need the euro.

    In Verteilungskampf: Warum Deutschland immer ungleicher wird, Fratzscher takes aim at inequality. (The title literally translates as Distribution battle: Why Germany is becoming ever more unequal; something like The struggle for a share would express the message better.)

    The book is an accessible read (if only in German for now) and gives as good a summary as any of the forces of rising inequality that have afflicted the rich world in the past few decades: economic and financial globalisation; technological change; and — and this is not sufficiently appreciated — active policy choices. Fratzscher’s general discussion of the harm excessive inequality can cause is also good.

    The most instructive and original parts of the book, however, are those describing the facts about German inequality and the reasons behind it. The specifically German version of the global inequality story may shock Germanophile readers outside the country (and no doubt some within). Fratzscher’s message is — by a host of measures, Germany is one of the most unequal rich countries in the world.

    The market incomes of Germans — what they receive before redistributive policies kick in — are as unequal as those of Americans. Since average wages have been stagnant for the past quarter-century, this means the low paid have seen their pre-tax pay fall in real terms.

    Redistributive policies bring post-tax inequality to levels similar to those elsewhere in continental Europe — yet the high degree of taxes and transfers required comes at a cost to Germany’s economy and political harmony.

    Wealth is even more unequal than incomes. While the median German person’s net worth is modest by European standards, in no other European country is wealth so unequally distributed — often because of the way family businesses are privileged by the tax system. Wealthy Germans are wealthier (and poor ones poorer) than their counterparts in other European countries. As capital returns are growing faster than wages, unequal wealth exacerbates income inequality as well.

    High rates of social mobility might alleviate some concerns about inequality. But here, too, Fratzscher exposes the country’s failings. He argues that the life chances of Germans are overwhelmingly fixed by the position or background they are born into. The economy tends to keep people stuck in their place in the distribution of income and wealth, and within occupational roles. He blames low mobility in part on an ossified professional structure in which there has been little change in traditional “men’s and women’s jobs” in the past 40 years.

    He also finds that Germany invests relatively little in early childhood education and generally underinvests in human capital. The share of workers with higher training than their parents, for example, is among the OECD’s lowest; and Germany is one of few countries with a falling share of young men completing university-level education.

    “The most instructive and original parts of the book, however, are those describing the facts about German inequality and the reasons behind it. The specifically German version of the global inequality story may shock Germanophile readers outside the country (and no doubt some within). Fratzscher’s message is — by a host of measures, Germany is one of the most unequal rich countries in the world.

    Yep, by a host of measures, Germany is one of the most unequal rich countries in the world. That’s definitely something to keep in mind now that Germany is Europe’s model economy. Especially since the parts of that model economy that actually help alleviate the growing inequality, the redistributionist policies and welfare programs, are under an unrelenting attack via endless EU-wide austerity.

    It’s also worth noting that when you read:

    Wealth is even more unequal than incomes. While the median German person’s net worth is modest by European standards, in no other European country is wealth so unequally distributed — often because of the way family businesses are privileged by the tax system. Wealthy Germans are wealthier (and poor ones poorer) than their counterparts in other European countries. As capital returns are growing faster than wages, unequal wealth exacerbates income inequality as well.

    it’s a reminder that the downward spiral of self-reinforcing inequality Thomas Piketty has been warning the world about applies to Ordoliberal economies too.

    Posted by Pterrafractyl | July 31, 2016, 8:47 pm
  19. Here’s a series of articles that highlights one of the complications that could make the UK/EU fight free movement of people in the Brexit negotiations so messy: First, here’s the latest warning from the EU that free movements of peoples is basically non-negotiable if the UK wants to keep its access to the EU market:

    BBC News

    EU leaders ‘not bluffing’ over Brexit terms, warns Malta’s PM

    25 November 2016
    From the section UK Politics

    EU leaders are not “bluffing” when they say the UK will be left without access to the single market when it leaves the bloc if there is no free movement of people, Malta’s prime minister says.

    Joseph Muscat, whose country assumes the EU’s presidency in January, told the BBC: “This is really and truly our position and I don’t see it changing”.

    Theresa May says the UK will begin the legal process to leave the EU by March.

    Mr Muscat said talks on the details of a “new relationship” could be delayed.

    ‘Best deal for Britain’

    A Downing Street spokesman insisted negotiations were being approached in the “spirit of goodwill”.

    “This is a negotiation that will take place next year and the government will set out its negotiating strategy in the fullness of time,” he said.

    “The aim of that negotiation is to get the best possible deal for Britain, for British companies to access and work with and within the single market and for European businesses to have the same access here.”

    Much political debate has focused on the possibility of a “soft” Brexit – the UK retaining some form of membership of the single market in exchange for conceding some control over immigration – and “hard Brexit” – leaving the single market but having fuller control over migration.

    Asked about a suggestion from Foreign Secretary Boris Johnson that the UK could in theory stay in the single market and place limits on the freedom of movement of EU citizens, Mr Muscat told the BBC: “It’s just not happening”.

    “All of us have been pretty clear in our approach that we want a fair deal for the UK but that kind of fair deal can’t translate itself into a superior deal,” he said.

    “I know that there is absolutely no bluffing from the European side, at least in the council meetings I have attended, saying ‘we will start in this position and then we will soften up’.

    “No, this is really and truly our position.”

    He acknowledged the talks could get “complicated” and amount to a “bit of a Catch 22 – it won’t be a situation when one side gains and the other side loses.

    “We are all going to lose something but there will not be a situation when the UK has a better deal than it has today.”

    Mr Muscat’s comments come days after the UK’s Brexit Secretary David Davis described his meeting with the European Parliament’s chief negotiator Guy Verhofstadt as a “good start”.

    Mr Davis said their pre-negotiations discussion had been able to cover structures and how both sides propose to approach the Brexit talks, adding a deal was possible that was in the interests of the EU and the UK.

    The UK government has said it does not want to reveal its negotiating hand on Brexit before the talks take place.

    “Asked about a suggestion from Foreign Secretary Boris Johnson that the UK could in theory stay in the single market and place limits on the freedom of movement of EU citizens, Mr Muscat told the BBC: “It’s just not happening”.”

    Those were some strong words from the guy who is going to assume the EU’s presidency in January. And based on those strong words it would appear that there’s no way the UK can stay in the single market without conceding on the EU’s free movement of people policies, which is a bit of a sticking point since getting rid of that policy was one of the driving factors behind the whole Brexit campaign.

    But those aren’t the only EU words on the matter. The EU’s chief Brexit negotiator also had a message for the UK on this matter: the EU is considering allowing Brits to keep their current EU rights, including the free movement of people, but only for an annual fee that individuals will have to pay:

    Press Association

    Britons could pay for EU citizenship after Brexit, says top negotiator

    Brexit negotiator said he ‘supported the principle’ behind UK citizens keeping their EU rights by paying an annual fee

    Friday 25 November 2016 17.54 EST

    Britons could pay to retain the benefits of European Union citizenship after Brexit under plans being considered by MEPs.

    The European parliament’s lead Brexit negotiator Guy Verhofstadt said he supported the principle of the idea, which would see UK citizens sending an annual fee to Brussels..

    The former Belgian prime minister said Britons who voted remain did not want to sever their links to the EU.

    “Many say ‘we don’t want to cut our links’,” he told the Times. “I like the idea that people who are European citizens and saying they want to keep it have the possibility of doing so. As a principle I like it.”

    The proposals were tabled by a liberal MEP from Luxembourg and MEPs will vote on the proposals by the end of the year, but any Brexit deal with the UK would have to have the agreement of the leaders of the other 27 EU nations as well as the parliament.

    Brexit-backing Tory MP Andrew Bridgen claimed that these plans were just the EU attempting to undermine the referendum result.

    He told the newspaper: “It’s an attempt to create two classes of UK citizen and to subvert the referendum vote. The truth is that Brussels will try every trick in the book to stop us leaving.”

    “It’s an attempt to create two classes of UK citizen and to subvert the referendum vote. The truth is that Brussels will try every trick in the book to stop us leaving.”

    Is this just a trick? Or is the EU seriously considering a fee-for-rights service? If so, it would be really interesting to learn more about what exactly this annual fee is going to cost. Because if it’s too expensive for poor Brits who might desire to go work in the EU, that would indeed create a kind of two-tier UK class-system: those who can afford EU rights and myriad of benefits that come with that including all the economic opportunities that come with easily being able to travel and work on the European continent. And those who can’t and are stuck on the UK. If the annual fee is like one pound, on the other hand, it would be a very different scenario.

    So it will be interesting to learn more about what those annuals fees are expected to be if that’s a real proposal and there really is going to be an option for Brits to up and move to the EU with relative ease. Especially since Europe’s largest debt collector, Intrum Justitia AB, recently conducted a survey on European saving habits. Not surprisingly given the austerity-induced economic devastation, over two thirds of Europeans put their savings in the bank despite the ultra-low interest rate environment. And also not surprisingly, almost a quarter of EU citizens expressed an interest in relocating to a different country to escape their nation’s economic situation,including almost a third of young Britons:


    Negative Rates Are Failing to Halt Savings Obsession in Europe

    November 20, 2016 — 1:00 PM CST

    * Survey shows 69% of Europeans put savings into bank accounts
    * Intrum Justitia survey also shows 29% wanting to move abroad

    After years of turbo-driven central bank stimulus, most Europeans still want to leave their spare cash in savings accounts, even if those accounts pay zero interest.

    That’s the finding of a survey by Europe’s biggest debt collector, Stockholm-based Intrum Justitia AB.

    “After the financial crisis, people have felt a need — even if they have small means — to create some kind of security,” Chief Executive Officer Mikael Ericson said in an interview in Stockholm on Nov. 16. “It can’t be that people save in a bank account because of the fantastic returns, so it must be about a sense of security, having money in the bank.”

    Some 69 percent of Europeans put their savings into bank accounts, according to Intrum Justitia’s European Consumer Payment Report. The survey is based on feedback gathered in September and covers about 21,000 people in 21 countries.

    The survey also shows that 26 percent of Europeans prefer keeping their surplus funds in cash, while 16 percent hold stocks. Only 14 percent turn to investment funds, 8 percent invest in real estate and 8 percent in bonds. In Denmark and Sweden, where central bank benchmark rates are negative, almost 80 percent of people put their surplus cash in bank accounts. In France, the U.K. and the Netherlands, the figure is above 80 percent.

    But worryingly, Intrum Justitia’s survey shows that even after years of extreme monetary support, many Europeans are wondering whether they’d be better off if they lived somewhere else.

    Looking for Escape

    Across Europe, 24 percent of people said they want to move to escape their country’s financial plight. About 27 percent of respondents said they sometimes can’t pay their debts. Of those, 58 percent feel they don’t have enough money “for a dignified existence.”

    In Britain, 29 percent of people aged 18 to 24 said they’d consider leaving the country, possibly in response to the U.K.’s decision to quit the European Union, Intrum Justitia said. A year earlier, only 13 percent of young Britons said they wanted to leave.

    The survey also revealed how financially fragile many Europeans continue to be almost half a decade after the region’s debt crisis. About 44 percent of all Europeans were unable to pay at least one bill on time during the last 12 months, mainly because of a lack of money, the survey found. Greece was worst, with 76 percent of households failing to pay on time.

    The report comes as central banks run out of tools to provide further stimulus and after years of austerity policies in Europe produced questionable results. Now, with U.S. President-elect Donald Trump promising an investment boom driven by fiscal stimulus, the outlook for interest rates is unclear. An inflationary spending cycle would drive rates higher, but an economic downturn triggered by an international trade war might have the opposite effect.

    Across Europe, 24 percent of people said they want to move to escape their country’s financial plight. About 27 percent of respondents said they sometimes can’t pay their debts. Of those, 58 percent feel they don’t have enough money “for a dignified existence.””

    One in four Europeans want to move to escape their economic plight. When you look at numbers like that you can see one of the reasons why the Brexit was tempting. And yet a third of Brits age 18 to 24 want to move too, in part in response to the Brexit:

    In Britain, 29 percent of people aged 18 to 24 said they’d consider leaving the country, possibly in response to the U.K.’s decision to quit the European Union, Intrum Justitia said. A year earlier, only 13 percent of young Britons said they wanted to leave.

    Yes, we have a situation where the UK voted to leave the EU, in part out of anxieties over immigration enabled by the EU’s right to freedom of movement, and the EU is now demanding the UK allow that freedom of movement if it’s going to keep free trade with the EU. And now the EU is floating the idea that may Brits will be able to keep their EU rights to free movement, along with all their other EU rights, but only for a fee. And we don’t know yet what that fee might be and whether or not it will create two-tier system for UK citizens. But we do know that a large number of EU’s economies are so messed up that a quarter of Europeans would like to move, possibly to the UK, along with a large percentage of young Britons, many of whom are going to want to move back to the EU.

    So if the EU does pass the fee-for-EU-rights law and the UK does implement a Brexit without the EU’s freedom of movement demands, the UK could end up not only blocking immigration further EU but actually end up seeing a net migration of young people. Or people in general across the age spectrum. Because we’ll a situation where it’s very easy for people to leave the UK, but not enter. And the harsher the economic fallout from a Brexit ends up being, potentially due in part to the loss of single market access if that’s what happens, the greater the economic incentive for people to leave.

    It’s all a reminder that the UK isn’t just negotiating a significant amount of its economic future right now in these Brexit negotiations, it’s potentially negotiating whether or not there’s going to be a youth exodus. Although since the EU’s economic set up is so dysfunctional that youth unemployment it still around 20 percent, there’s going to be a limit to the number of possible job openings for Britain’s youth to flee to so even if we see this asymmetric UK migration situation materialize who knows what the impact will actually be. Still, if that migration asymmetry ends up being a permanent feature between EU and UK relations, and if the eurozone holds together and the British pounds falls in value significantly relative to the euro – which is very possible in the long run given the domination of pro-deflation Ordoliberal thought in the eurozone – it’s going to be interesting to see how long it takes before we see another EU “-exit” event triggered, in part, by ‘all these Brits coming in and taking everyone’s jobs’. Wouldn’t that be something.

    Posted by Pterrafractyl | November 25, 2016, 11:56 pm
  20. Here’s a pair of articles that serve as a reminder that the mystery of near complete absence of wage growth in Europe in recent years, even in economies like Germany that are running at near full capacity, probably isn’t going to be helped by the EU’s systematic attack on labor unions and fixation on austerity or the last decade or so.

    First, here’s a quick look at the wages in Germany during a period of record low unemployment, massive trade surpluses, budget surpluses, and the strongest economy the country has seen since reunification. So how are German wages doing? Surprise! They’re persistently stagnant. But there is one source of hope for higher wages: union negotiations:

    Bloomberg Markets

    Germany Asks If Its Economic Boom Needs a Policy Rethink

    By Carolynn Look
    January 17, 2018, 7:05 AM CST Updated on January 17, 2018, 11:15 AM CST

    * Bundesbank/IMF conference to discuss German surpluses, wages
    * Christine Lagarde and ECB’s Benoit Coeure are among speakers

    Germany is about to throw its economic boom open to debate.

    Acknowledging a “particularly intense” discussion in recent years on matters such as the country’s twin surpluses, the Bundesbank will host a clutch of policy makers and economists in Frankfurt on Thursday, including International Monetary Fund Managing Director Christine Lagarde.

    While robust growth and record-low unemployment have been a boon for Europe’s largest economy and the region, it has also drawn persistent criticism for being reticent to spend. A focus now is whether that’ll change as tight labor markets push up wages and companies invest, and whether the government will make the reforms needed to boost productivity.

    “The trouble in Germany is there’s a lot of complacency,” Ifo Institute President Clemens Fuest, who will speak at the event, said in a Bloomberg TV interview. “The government thinks it needs to do nothing because the economy is going alright. But that’s wrong — the next crisis will come.”

    Current Account

    One of the conference’s more controversial topics might be Germany’s current-account surplus, a lightning rod for criticism — including from U.S. President Donald Trump’s administration — that it’s a sign of trade distortion. Lagarde’s IMF has urged the nation to reduce its external imbalances.

    German politicians have balked at the suggestion that maybe the country should export less or import more. Chancellor Angela Merkel has noted the criticism, without accepting it, and said last year that her government’s plans to invest more in infrastructure might help.

    Fiscal Policy

    The issue of what to do with the cash has been hotly contested. The government wants to reduce its debt burden. At more than 60 percent of GDP, that’s above the maximum set by European Union rules, though Germany is hardly alone. The country’s top economic institutes weighed in with their biannual assessment last fall, arguing for lower income tax and social-security contributions. Some economists want greater investment in education.

    Wage Growth

    If Germans are to spend more, they probably need to be paid more. Yet despite the lowest unemployment since reunification, and in common with developed nations elsewhere, wage growth has been slow to pick up.

    That may be on the cusp of changing. Germany’s largest union IG Metall is in talks on behalf of 3.9 million metalworkers and engineers for 6 percent more pay, plus an option to receive subsidies for reduced working hours to take care of family members.

    Bolstering its argument is the increasingly scarce supply of labor. The Bundesbank predicts that an aging population and slower migration will lead to a significant decline in employment growth in the next few years. That holds ramifications for output if companies don’t find a way to boost productivity.

    “We’ve not seen this kind of economic data from Germany since the reunification — it’s unprecedented,” said Claus Vistesen, an economist at Pantheon Macroeconomics. “Whether growth can be sustained is another question, especially if you look at where the labor market is, but that doesn’t necessarily mean it’s going to hit a brick wall.”


    “Germany Asks If Its Economic Boom Needs a Policy Rethink” by Carolynn Look; Bloomberg Markets; 01/17/2018

    “While robust growth and record-low unemployment have been a boon for Europe’s largest economy and the region, it has also drawn persistent criticism for being reticent to spend. A focus now is whether that’ll change as tight labor markets push up wages and companies invest, and whether the government will make the reforms needed to boost productivity.”

    Yep, with robust growth and record-low unemployment, the question of why wages aren’t growing is coming into focus. Although note the other thing that is forever in focus for Germany policy-makers: “whether the government will make the reforms needed to boost productivity.” Keep in mind that “the reforms needed to boost productivity,” typically translate into “lowering costs of workers”. The “Agenda 2010” reforms the German government put in place in 2005 were basically all about lowering labor costs. So the above statement could be reasonably translated as, “a focus now is whether that’ll change as tight labor markets push up wages and companies invest, and whether the government will make the reforms needed to [keep employee costs low].”

    And note now, in the context of this discussion of stagnant wages, Clemens Fuest, the President of the Ifo Institute – an influential German economic think-tankand a fan of the kinds of austerity policies inflicted upon Greece, is complaining about how, “The trouble in Germany is there’s a lot of complacency,” which is another way of saying ‘the current economic boom is no excuse for not doing more austerity’:

    “The trouble in Germany is there’s a lot of complacency,” Ifo Institute President Clemens Fuest, who will speak at the event, said in a Bloomberg TV interview. “The government thinks it needs to do nothing because the economy is going alright. But that’s wrong — the next crisis will come.”

    So, on one level, it’s pretty clear why Germany wages remain stagnant: the government has long view stagnant wages as central to Germany’s economic success, even if that isn’t fully admitted in public.

    But note the one factor that might lead to at least some increase in Germany wages: Germany’s largest union, IG Metall, is in talks on behalf of 3.9 million metalworkers and engineers:

    Wage Growth

    If Germans are to spend more, they probably need to be paid more. Yet despite the lowest unemployment since reunification, and in common with developed nations elsewhere, wage growth has been slow to pick up.

    That may be on the cusp of changing. Germany’s largest union IG Metall is in talks on behalf of 3.9 million metalworkers and engineers for 6 percent more pay, plus an option to receive subsidies for reduced working hours to take care of family members.

    So pretty much the only thing that might trigger a rise in Germany’s overall wages is a powerful union. And sure, maybe, at some point in the future, the aging population and slower migration will lead to such a massive shortage of workers that wages start creeping up in response. But considering that unemployment is already at a record low and wages remain stagnant, it’s unclear how much wage growth we should expect from future labor shortages. Plus, given the nature of the EU, with free movement of labor, it’s unclear when this hypothetical future labor shortage is even going to take place. And when when keeping wages low is seen as critical to Germany’s economic success by the country’s key policy-makers, it’s also unclear that we shouldn’t assume the government will take steps to ensure a labor shortage doesn’t result in higher wages.

    At this point, a powerful union looks like the only realistic path to higher wages in Germany. In the midst of an economic boom. So with that in mind, here’s a reminder that the destruction of the collective bargaining system across Europe has been one of the key outcomes of the Great Recession and it was an intentional outcome:

    Social Europe

    Why Won’t Wages In Europe Rise As They Should?

    by Thorsten Schulten and Malte Luebker on 9 August 2017

    The economic mainstream is perplexed: growth is finally taking hold across Europe, economic forecasts have been revised upwards, and employment is expanding. The only indicator that stubbornly refuses to follow suit is wage growth, defying textbooks and economic orthodoxy alike. Bloomberg has called it the “mystery of missing wage growth,” the Financial Times writes about the “Eurozone’s strange low-wage employment boom,” and the European Commission has put forward the diagnosis of a “wage-poor recovery”. Moreover, there is a growing consensus among economic policy-makers that wages should indeed grow much faster that they do.

    An unlikely cheerleader for higher wages is the European Central Bank (ECB), whose failure to nudge inflation upwards has led it to look for outside help. “The case for higher wages is unquestionable,” Mario Draghi has neatly put it. Likewise, the Commission argues that “the outlook for wages has now moved centre-stage for the sustainability of the recovery,” and even the IMF – pointing fingers at Germany – has discovered the virtues of wage growth. It looks as if the European trade union movement has found some improbable allies in its campaign, “Europe needs a pay rise”.

    This is bad news for private consumption, currently the main engine behind European growth. For some years, low inflation had at least ensured modest real wage gains despite low pay settlements. Across the Euro area, these have remained far below of what they used to be prior to the crisis of 2008/09 (see Chart 1).

    So, what is holding wages back? Ask any economist with a neo-classical outlook, and she – or, more likely, he – will tell you that wages follow prices and productivity. Both have, of course, grown at an anaemic pace of late. But are low inflation and the lacklustre productivity performance the cause of subdued wage growth, or merely a symptom? Start with inflation. Traditionally, central bankers have been obsessed about wage-price spirals and called for wage moderation to rein in inflation. Now, they are discovering to their detriment that wage-price spirals work in reverse, too. The poor performance of wages is, in fact, seen as one of the key reasons why domestic price pressures have been subdued and core inflation has disappointed consistently over the past few years.

    The case of productivity is more complex. Economists like to treat productivity growth as exogenous, determined by hard-to-quantify factors such as technical change. For all the buzz about the digital revolution, by this account the 1960s and 1970s were the heydays of rampant innovation, producing productivity growth at up to ten times the current pace. Strange, also, that productivity growth went into a sudden reverse in 2008/09, just as the financial crisis hit, and has been stuck in low gear ever since. Did technical change come to an abrupt halt, by sheer chance at about the same time Europe faced the biggest demand drop in a generation?

    Some find this story hard to swallow. Surely, if wages were to rise, entrepreneurs would buy new machinery and find ways to make more efficient use of scarce workers? In the economic jargon, this is called capital–labour substitution and is generally recognized as a driving force behind long-run productivity growth. But it is no longer happening. According to the ECB, capital deepening has been virtually absent since 2013. But then, why should firms invest in labour-saving technologies when there is no cost pressure from the wage front and aggregate demand remains feeble? Accept this logic, and productivity growth becomes endogenous – something that is itself driven by macroeconomic factors, with wages playing a prominent role.

    But maybe we are about to witness a return to robust wage growth? All the signs seem to point that way. “As economic activity gains momentum and the labour market tightens, upward pressures on wages are expected to intensify,” was the ECB’s assessment just over a year ago. Now, the verdict is that “Euro area wage growth remains low”. In fact, the ECB has a long history of predicting that wage growth is just around the corner, only to revise forecasts downwards again and again. For Europe’s workers, it’s a case of always jam tomorrow, never jam today.

    So why do standard economic models keep on predicting wage growth that then fails to materialize? One possibility is that they are fed with wrong or misleading labour market data. There are indeed good reasons to believe that headline unemployment rates underestimate slack in the labour market, given that everyone who works for at least an hour per week counts among the employed. With the spread of precarious contracts and often involuntary part-time employment, there now are millions of workers in Europe who would happily move to a regular job.

    The more worrying possibility is that the models were trained to predict the behaviour of wages in a world that no longer exists. In the name of flexibility and competitiveness – and often at the behest of the Commission, the ECB and the IMF – post-crisis labour market reforms have put the axe to centralized collective bargaining and a myriad of other protections. Taking into account that wage-setting institutions have been severely weakened, the failure of wages to grow looks much less surprising.

    Almost everyone now seems to agree that wages have to grow if Europe wants to escape the cycle of weak demand, low inflation, stagnant capital deepening and low productivity growth for good. But wage growth will not pick up in response to a magic wand held by central bankers. Instead, Europe needs to re-build wage-setting institutions – chiefly by actively supporting collective bargaining, by providing for extension mechanisms that increase coverage of collective agreements, and by developing a European minimum wage policy that guarantees a decent living wage to all.


    “Why Won’t Wages In Europe Rise As They Should?” by Thorsten Schulten and Malte Luebker; Social Europe; 08/09/2017

    “An unlikely cheerleader for higher wages is the European Central Bank (ECB), whose failure to nudge inflation upwards has led it to look for outside help. “The case for higher wages is unquestionable,” Mario Draghi has neatly put it. Likewise, the Commission argues that “the outlook for wages has now moved centre-stage for the sustainability of the recovery,” and even the IMF – pointing fingers at Germany – has discovered the virtues of wage growth. It looks as if the European trade union movement has found some improbable allies in its campaign, “Europe needs a pay rise”.”

    It looks as if the European trade union movement has found some improbable allies. And in the case of the IMF it’s an exceedingly improbable ally considering the role the IMF played in the Troika demanding austerity and ‘structural reforms’ designed to weaken unions in one country after another. But better late than never when it comes to things like recognizing that wage-price spirals can work in reverse:

    So, what is holding wages back? Ask any economist with a neo-classical outlook, and she – or, more likely, he – will tell you that wages follow prices and productivity. Both have, of course, grown at an anaemic pace of late. But are low inflation and the lacklustre productivity performance the cause of subdued wage growth, or merely a symptom? Start with inflation. Traditionally, central bankers have been obsessed about wage-price spirals and called for wage moderation to rein in inflation. Now, they are discovering to their detriment that wage-price spirals work in reverse, too. The poor performance of wages is, in fact, seen as one of the key reasons why domestic price pressures have been subdued and core inflation has disappointed consistently over the past few years

    But even if institutions like the IMF have suddenly recognized that stagnant (or falling) wages don’t come with some sort of magical self-correcting mechanism and can actually become a self-reinforcing prophecy, it’s still not at all clear what’s going to lead to higher wages across Europe thanks, in part, to the massive attack on collective bargaining the IMF and European institutions demanded in recent years as part of the austerity policies

    So why do standard economic models keep on predicting wage growth that then fails to materialize? One possibility is that they are fed with wrong or misleading labour market data. There are indeed good reasons to believe that headline unemployment rates underestimate slack in the labour market, given that everyone who works for at least an hour per week counts among the employed. With the spread of precarious contracts and often involuntary part-time employment, there now are millions of workers in Europe who would happily move to a regular job.

    The more worrying possibility is that the models were trained to predict the behaviour of wages in a world that no longer exists. In the name of flexibility and competitiveness – and often at the behest of the Commission, the ECB and the IMF – post-crisis labour market reforms have put the axe to centralized collective bargaining and a myriad of other protections. Taking into account that wage-setting institutions have been severely weakened, the failure of wages to grow looks much less surprising.

    “In the name of flexibility and competitiveness – and often at the behest of the Commission, the ECB and the IMF – post-crisis labour market reforms have put the axe to centralized collective bargaining and a myriad of other protections. Taking into account that wage-setting institutions have been severely weakened, the failure of wages to grow looks much less surprising.”

    Collective bargaining, the only clear driver for higher wages in Germany during a record boom economy, was axed across Europe. Often at the behest of the Commission, the ECB and the IMF (the Troika) in the name of “structural reform”.

    So that’s all something to keep in mind should Europe’s economic recovery continues without the kind of meaningful wage growth economists expect: it turns out one of the key structural reforms demanded by the Troika might induce self-reinforcing wage-price deflationary death spirals. It’s an outcome so awful for nearly everyone you almost have to wonder why they demanded it in the first place. Almost.

    Posted by Pterrafractyl | January 25, 2018, 10:50 pm

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