Ordoliberalism has played a significant role in German economic policy-making for decades. But ordoliberalism’s role in providing the theoretical framework for the policies adopted by the eurozone and EU in the post-2008 crisis environment has also been largely ignored by the financial press. It’s a curious lack of interest since the importance of ordoliberal thought on EU policy-makers isn’t exactly a secret:
Draghi says ECB has not compromised its ‘ordoliberal’ principles
ECB president tells Stanley Fischer farewell conference that the ECB’s LTRO and OMT operations are ‘controlled’ and ‘necessary for the pursuit of price stability’
Central Banking Newsdesk, Central Banking Journal | 18 Jun 2013
Mario Draghi, president of the European Central Bank (ECB), today insisted the ECB has not violated its “ordoliberal principles” by taking some credit risk onto its own balance sheet, through its long-term refinancing operations (LTRO) and outright monetary transactions (OMT).
Draghi told a conference in Israel in honour of outgoing Bank of Israel governor Stanley Fischer that the monetary constitution of the ECB is firmly grounded in the principles of ‘ordoliberalism’, particularly two of its central tenets: a “clear separation of power and objectives between authorities”; and “adherence to the principles of an open market economy with free competition, favouring an efficient allocation of resources”.
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Ordoliberalism’s Lasting Legacy. It Includes Fascism
First, consider that the head of the European Central Bank (ECB) felt the need to public defend his adherence to ‘ordoliberal principles’. And now consider that fact that the ECB has been notoriously hesitant to actually use the tools at its disposal (like sovereign bond purchases) that prompted the Draghi’s defensive comments. And now consider what an absolute disaster the EU/eurozone crisis-response (or lack of a response) has been over the past few years and how there’s almost no indication of a real, meaningful policy-shift. Considering all of that, a look at the origins and philosophical underpinnings of ordoliberalism is probably in order:
www.bisa.ac.uk
Freedom, Crisis and the Strong State: On German Ordoliberalism
Werner BonfeldIntroduction
The German ordoliberals tradition is better known in the Anglo-Saxon world as the Freiburg School, or German neo-liberalism, or indeed as the theoretical foundation of the German social market economy. It origins date back to the late 1920 / early 1930. Its foundation lies in the works of Walter Eucken, Franz Böhm, Alexander Rüstow, Wilhelm Röpke and Alfred Müller-Armack. These authors saw their work as providing a third way, a (neo-)liberal alternative to laissez faire liberalism and collective forms of political economy, ranging from Bismarckian paternalism to social-democratic ideas of social justice, from Keynesianism and Bolshevism. In the face of Weimar mass democracy, economic crisis and political turmoil, they advanced a programme of liberal-conservative transformation that focused on the strong state as the locus of social and economic order. The dictum that the free economy depends on the strong state is key to its theoretical stance.2
The fundamental question at the heart of ordo-liberal thought is how to sustain market liberal governance in the face of mass-democratic challenges, class conflicts, and political strife. How, in other words, to promote enterprise and secure the role of the entrepreneur in the face of powerful demands for employment and welfare, and protection from competitive pressures. For the ordo-liberals, yielding to any one of these demands was seen to lead to ‘collectivist tyranny’. Hayek’s Road to Serfdom (1944) brought this insight to wider attention, but did not provide its original formulation, which lies in the ordo-liberal thought of the late 1920s.3 It holds that a functioning free economy requires robust social and economic frameworks to assure undistorted competitive relations. Markets, they argue, also require provision of an ethical framework to secure the viability of liberal values in the face of ‘greedy self-seekers’ (Rüstow, 1932/1963, p. 255) and antagonistic class interests. The provision of these legal-social-ethical frameworks belongs to the state. The state is held responsible transforming a class-divided society into, and maintaining, an entrepreneurial market society. For the ordo-liberals, competition is the indispensable ‘instrument of any free mass society’, and the promotion of enterprise and entrepreneurial freedom is thus a ‘public duty’ (Müller-Armack, 1979, pp. 146, 147). They thus propose the strong state as the political form of the free economy.
The works of Wilhelm Röpke4 and Alfred Müller-Armack are of particular importance concerning the sociological and ethical formation of free markets. Both were adamant that the preconditions of economic freedom can neither be found nor generated in the economic sphere. A competitive market society is by definition unsocial, and without strong state authority, will ‘degenerate into a vulgar brawl’ (Röpke, 1982, p. 188) that threatens to break it up. In this context, Müller-Armack focuses on myth as the ‘metaphysical glue’ (Fried, 1950, p. 352) to hold it together. In the 1920s he espoused the myth of the nation as the over-arching framework beyond class, in the 1930s he addressed the national myth as the unity between movement and leader, and advocated ‘total mobilisation’ (Müller-Armack, 1933, p. 38), in the post-war period he argued for the ‘re-christianization of our culture as the only realistic means to prevent its imminent collapse’ (1981c, p. 496). Yet, in the context of the so-called West-German economic miracle, he perceived social cohesion to derive from an economic development that Erhard (1958) termed ‘prosperity through competition’. It offered a new kind of national myth rooted in the idea of an economic miracle as the founding myth of the new Republic (see Haselbach, 1994a,b). Sustained economic growth is the best possible social policy (Müller-Armack, 1976) – it placates working class dissatisfaction by providing employment and security of wage income. In contrast, Röpke had started out as a rationalist thinker of economic value, and in the course of his life he bemoaned the disappearance of traditional means of social cohesion in peasant life, and the relations of nobility and authority, hierarchy, community, and family. In his view, the free economy destroys its own social conditions in what he called human community. In his view, the ‘social market economy’ endangered the social preconditions of competition in „human community? — the economic miracle created materialist workers; it did not create satisfied workers who as self-responsible entrepreneurs, maintain their vitality by means of a ‘human community’ of family and natural community (cf. Röpke, 1936 with Röpke, 1998). He perceived the ‘menacing dissatisfaction of the workers’ (Röpke, 1942, p. 3) as a constant threat, and demanded that social policy ‘[attack] the source of the evil and...do away with the proletariat itself...True welfare policy’, he argued, ‘is...equivalent to a policy of eliminating the proletariat’ (Röpke, 2009, p. 225). In this same context, Eucken argued that economic constitution is a political matter. The economic and the political comprise distinct spheres social organisation, which need to operate interdependently for each other to maintain the system as a whole. For the ordo-liberals the state is the power of interdependence and is thus fundamental as the locus of liberal governance.
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I Convictions, Assumptions, Positions
In the late 1920s, in a context of economic crisis and political turmoil, conflicting ideologies and entrenched class relations, ordo-liberal thought emerged as a particular account on how to make capitalism work as a liberal economy, or as Foucault (2008, p. 106) saw it, on how to define or redefine, or rediscover ‘the economic rationality’ of capitalist social relations. The ordo-liberals conceived of individual freedom as the freedom of the entrepreneur to engage in competition, and seek gratification by means of voluntary exchanges on the market. The free economy is the purpose of its theoretical effort, the political state is endorsed as the means towards that end, and the social policy is the instrument with which to develop, promote and maintain undistorted competition. They recognised the ‘social irrationality of capitalism’, particularly that irrationality which they called proletarianization, and proposed means to restore the entrepreneurial vitality of the workers. Social crisis is brought about by the ‘revolt of the masses’,8 which destroys the culture of achievement in favour of a permissive society. For the ordo-liberals, this development called for a decisive defence of economic freedom by the elite (Böhm, etal, 1936, Röpke, 1998) to restore liberty, individual self-responsibility and entrepreneurial vitality. That is, „the “revolt of the masses” must to be countered by another revolt, “the revolt of the elite”? (Röpke, 1998, p. 130). They identified the welfare state as an expression of proletarianised social structures, and demanded the de-proletarianisation of social relations9; they argued that socio-economic relations had become politicised as a consequence of class conflict, and demanded the depoliticisation of social-labour relations; they saw unrestrained democracy as replacing the sovereignty of the rule of law by the sovereignty of the demos, and demanded that, if indeed there has to be democracy, it must be „hedged in by such limitations and safeguards as will prevent liberalisms being devoured by democracy. Mass man fights against liberal-democracy in order to replace it by illiberal democracy? (Röpke, 1969, p. 97). For the ordo-liberals, the resolution to proletarianization lies in determining the true interest of the worker in sustained accumulation, as the basis of social security and employment. De-proletarianisation is the precondition of „civitas?. Freedom, they say, comes with responsibility. They thus conceive of society as an enterprise society consisting of entrepreneurial individuals, regardless of social position.
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Based on the above description (and be sure to read the rest) ordoliberalism could be characterized as a philosophy that envisions every individual as a potential entrepreneur and it is the entrepreneurs that are to be the driving force behind a healthy society. And since an entrepreneur can only survive as long as there are healthy market conditions a strong State is require to prevent private interests and ‘greedy self-seekers’ from destroying a fair market environment. Now, except for the entrepreneur fetishism, that all doesn’t sound so bad, does it?
But it ordoliberal thinkers also appeared to champion the necessity of the “national myth”. And they also viewed the increasing affluence and political influence of the ‘proletariat’ as a direct threat to both the entrepreneurial vitality of society’s human capital AND a threat to the political order that, in turn, threatens the precious entrepreneurs. In other words, ordoliberal thinkers appeared to appeared to treat the concept of a decent life for non-business-owners as an existential threat to the social order. So if the ordoliberal thought-leaders like Wilhelm Röpke,Alfred Müller-Armack, and Walther Eucken sound sort of scary and authoritarian it’s because they sort of were:
davidlewisbaker.net
The Political Economy of Fascism: Myth or Reality: or Myth and Reality?David Baker
This is a working draft of an article published in New Political Economy, Volume 11, Number 2, June 2006. pp. 227–250.
“No comparative study exists of fascist economic systems. Nor is this surprising. For one can legitimately doubt whether it is appropriate to use so distinctive a term as system when discussing fascist economics. ...... Nor, in the economic field, could fascism lay claim to any serious theoretical basis or to any outstanding economic theoreticians. Were fascist economics.....anything more than a series of improvisations, of responses to particular and immediate problems? Were not the economic actions of any single fascist regime .... so contradictory as to make it difficult to speak of a coherent and consistent economic policy in one country, let alone of a more general system.”
S. J. Woolf: Did a fascist economic system exist? in Woolf (Ed) The Nature of Fascism, Random House, NY, 1968, p. 119.
It is almost forty years since Woolfs observations, yet they remain pertinent. At the time of writing, a search for the term political economy in the index of almost any serious work on fascism, or via a web search engine, yields distinctly thin results.[*] Equally, there is still no major comparative monograph dealing with the question, aside from Charles Maiers magisterial general political economy of the period, which concluded:[1]
“...if it advanced any economic program, fascism proposed an economy geared for national self sufficiency and war. Autarkic policies represented a natural outgrowth of their political premises. They seemed all the more attractive to the dictators as ways to cut through contradictory interests at home. Faced with a tug of war among conflicting priorities and bureaucratic agencies, Mussolini in 1925 and 1936 and Hitler in 1935–6 seized upon autarky to impose a more comprehensive authority over disputing factions..... In a larger sense, fascist economics was not really economics at all. As Hitler wrote, economic issues were problems to be overcome by political will. The original appeal of fascism consisted in part of its promise that ordinary people need not be powerless against what often seemed inevitable and overpowering economic trends.“Fascisms economic doctrines and aspirations have, therefore, remained amongst the least researched elements of classical fascism. They also represent one of the most difficult components of the value-matrix of fascism to probe, encapsulated in vague statements of the corporate state and of restoring blood and soil agricultural communities, largely abandoned in practice. Equally, a supposed adherence to forms of third way economics, between individualism and collectivism, appear little more than mobilising myths to separate fascism from its chief enemies and rivals — liberalism and socialism/communism rather than any developed political economy. There were also glaring contradictions and inconsistencies in the economic pronouncements of fascist leaders towards market capitalism and the proper functions of the state.”
Further, neo-Marxist scholars consistently conceptualise fascist movements, parties and regimes as licensed defenders of the interests of monopoly capital, seeking to rescue the capitalist system from the rising forces of the organised working class and inherently falling profits, while furthering the international Imperialist purposes of monopoly capitalism[2]. Frankfurt School Members Horkheimer, Adorno, Neumann, and Pollock, viewed fascism as a system in which capitalists increasingly acted through the medium of the authoritarian state. Such a society could eventually abandon market commodity production and its law of value, as it was replaced by the state bureaucracy, allowing capitalists to extract surplus value directly through the state. The market would be completely replaced by a state-owned and managed economy, and capitalists would no longer be capitalists, but rather owners of the state economy through their permanent control of the state.[3] As Maier put it, fascism represented crisis capitalism with a cudgel[4].
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When attempting to evaluate classical fascist economic doctrines, it is important to understand classical fascists aversions to traditional concepts of political economy, due to an inbuilt ideological bias against materialist based arguments and an associated hostility towards structural-economistic interpretations of events in history.[9] Marxism and socialism are inherently materialistic, embracing the need to have a highly developed understanding and appreciation of the interaction of the economic side of human existence upon the forms of politics and civil society they support. Liberal beliefs also derive from forms of political economy a term which emerged in liberal thought in order to explain the natural rise of market-based individualism and liberal notions of the innate value of freedom of action in civil society.
In his Fascism: Doctrine and Institutions, (1935) Mussolini explicity rejected all such economic conceptions of history:
Fascism, now and always, believes in .... actions influenced by no economic motive, direct or indirect.... Fascism denies the materialist conception of happiness as a possibility, and abandons it to its inventors, the economists of the first half of the nineteenth century...Fascism has taken up an attitude of complete opposition to the doctrines of Liberalism .... in the field of economics...... If the nineteenth century was a century of individualism ..... it may be expected that this will be a century of collectivism and hence the century of the State.[10]
Fascist anti-materialism ruled-out allocating a key role to any independent economic causation, either the disciplines of the free market, or materialist/structuralist class-based forms. The roots of fascist ideology lay principally in pseudo-Nietzschean superman myths, expressed first through the apocalyptic meta-historical writings of Oswald Spengler, and vitalistic opera plots of Wagner, which denied the significance of mere economics in dictating the upward (and downward) movement of peoples and civilizations. Fascist philosophy was centred on an anticipated triumph of the will of the chosen leader and his devoted disciples over mere material/structural obstacles. For fascists, when an economy failed, or succeeded, someone not something was responsible.
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Fascist Political Economy: A Two Regime Model
What scholarly effort has been devoted to understanding fascist political economy has naturally concentrated on the regime phases of fascism in Italy and Germany,[16] the only examples of mature fascist dictatorships.[] The problem with regime models, however, is that the realisation of the economic intentions of regimes depends upon their relative autonomy from the existing socio-economic structures and power blocs inherited from of the previous state, and the degree of pragmatism and/or force of will shown by the new leadership in overcoming a variety of external economic barriers to their plans.[17] In both cases the wishes and desires of both dictators were undoubtedly modified by the inherited exigencies of the pre-existing economies and by external forces in the international economy, undermining any genuine fascist political economy (in the case of Italy producing shallow corporatism and in Germany single-minded preparations for total war). Besides, Milward argues that:
economic policy .... remained not only subordinate to but also an integral part of the ideological and political ambitions of the fascist movement....the ideological framework within which economic decisions were made often had even more weight than the practical questions of satisfying the economic wishes of those groups which supported the regime.[18]
Nevertheless, if elements of fascist political economy can be discerned behind regime practices, this may partly explain the nature of the Italian and German economies under their dictatorships. In order to investigate this, a comparative analysis of the two regimes is undertaken below, divided into three idea-typically discrete historical phases, to capture the multi-layered ideological and/or contingent practices underlying fascist economic policies.
Phase One Radical Ideas and Reformist Leaderships.
Early fascism was militantly anti-big-capitalist and violently anti-Bolshevik, strongly for reclaiming and unifying the lost national territories, and located on the left of the fascist spectrum in the more radical elements within the early movements, many of which emerged from authoritarian-leftist and anti-capitalist rightist splinter groups. Consequently, such impulses produced programmes which were extremely anti-market-capitalist, authoritarian and ultra-nationalist.
The Italian fascist programme of 1919 demanded a heavy capital levy, a tax on war profits, generous minimum wage rates, participation by workers in management, confiscation of church property and surplus land to be allocated to peasants cooperatives. Leading Italian Fascist intellectuals spoke of a postcapitalist economic system with collective ownership of a corporative economy.
The Nazi programme of 1920 sought the abolition of unearned income, outright confiscation of excess war profits, nationalization of trusts, land reform, and the strengthening of the middle orders. Calls were also made for closing the stock exchanges and nationalising the banks. While: On taking power, radical Nazis launched a campaign against department stores which were hit with special tax legislation and by consumer boycotts. [] Artisan and small business groups sought to ban certain services from large chain stores and cooperatives. Even the concept of the industrial corporation was challenged by Nazi populists who dreamed of a return to the old system of patriarchal management.[19] In both countries, early fascists displayed a visceral mistrust of big capital, especially rapacious finance capital in Germany, contrasted with creative industrial capital, while fascists in Italy distinguished between the productive and the parasitic elements of the bourgeoisie and promised wholesale nationalisation of industry and commerce.
In Italy, the revolutionary syndicalism and corporativism of the more radical Ras (regional fascist leaders) lay behind such anti-capitalist beliefs, while in Germany nationalbolshevist left-Strasserism of the North German faction was responsible for much of the high profile argumentation within the nazi movement. But, arguably, the most important doctrine of this kind was the ordoliberalism of Wilhelm Roepke, Walther Eucken and Carl Schmitt. Schmitt, in particular, theorised the possibility of a natural compatibility between liberal economics and a total state.[**] But he was far from alone.
To achieve a healthy economy within a strong state, Rstow and others tolerated, even proposed to use authoritarian means. Mller-Armack, who was later to become the first section chief of the newly founded Grundsatzabteilung (planning section) of the ministry of economic affairs and state secretary under Ludwig Erhard from 1958 to 1963, sympathized with Italian fascism ...... and after 1933 warmly welcomed the new order ........ He joined the Nazi party the very same year. Eucken had become a sympathizer of the National Socialist party as early as 1931 ...... His 1932 article was nothing less than a total damnation of the system of Weimar. For Eucken, parliamentarism and particularism had become synonyms. He shared with Rstow, Mller-Armack and Rpke the profound distaste for the amorphous mass and favored a strictly elitist conception of political leadership.[20]
Of course, these were authoritarian liberal intellectuals Roepke was driven into exile by nazism but in terms of the impact of their ideas on nazi thinkers and bureaucrats, there is a case perhaps to be made for a distinctive German authoritarian doctrine of national economic development.[21]
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Be sure to check out the rest the above article. It’s a great resource. A key point to take from the above excerpt is that while the early years of fascist thought included a number of anti-capitalist/anti-communist radicals yearning for a return to a more patriarchal system and a collectively corporate state, it was the staunchly elitist, pro-big-capitalist ordoliberal thinkers that really made a lasting impression on the eventual development of fascist economics. AND some these same ordoliberal thinkers went on play key roles in crafting the West German post-war economic policy.
Then And Now
As we saw in the second excerpt, the ordoliberal thinkers like Wilhelm Röpke viewed the defense of “capitalism” (his elitist conception of capitalism) against the whimsies of the devolved rabble or greedy capitalist predators as a paramount goal of ordoliberalism. And as we saw in the above excerpt, Röpke and his ordoliberal cohorts were also sympathetic influential on both the Nazi’s eventual economic policies and in the post-war era. And they were also apparently sympathetic to fascist ideals and methods. It’s against this historical backdrop that we should be viewing contemporary policy-making decisions emanating from Frankfurt and Berlin. It’s a policy-making backdrop with an ordoliberal inspiration:
The New Yorker
May 20, 2013
Why Is Europe So Messed Up? An Illuminating History
Posted by John CassidyThe big news of the past week had nothing to do with the I.R.S. or Benghazi. It was the confirmation that, while the American economy continues to recover from the disastrous financial bust of 2008 and 2009, Europe remains mired in a seemingly endless slump.
On this side of the pond, the Congressional Budget Office announced that, with the economy expanding, tax revenues rising, and federal spending being restrained, the budget deficit is set to fall to about four per cent of Gross Domestic Product this year, and to 3.4 per cent next year. The latter figure is pretty close to the average for the past thirty years. At least for now, the great U.S. fiscal scare is over—not that you’d guess that from listening to the public debate in Washington. In Europe, things are going from bad to worse. New figures show that in the seventeen-member euro zone, G.D.P. has been contracting for six quarters in a row. The unemployment rate across the zone is 12.1 per cent, and an economic disaster that was once confined to the periphery of the continent is now striking at its core. France and Italy are both mired in recession, and even the mighty German economy is faltering badly.
Why the sharp divergence between the United States and Europe? When the Great Recession struck, U.S. policymakers did what mainstream textbooks recommend: they introduced monetary and fiscal-stimulus programs, which helped offset the retrenchments and job losses in the private sector. In Europe, austerity has been the order of the day, and it still is. Nearly five years after the financial crisis, governments are still trimming spending and cutting benefits in a vain attempt to bring down their budget deficits.
The big mystery isn’t why austerity has failed to work as advertised: anybody familiar with the concept of “aggregate demand” could explain that one. It is why an area with a population of more than three hundred million has stuck with a policy prescription that was discredited in the nineteen-twenties and thirties. The stock answer, which is that austerity is necessary to preserve the euro, doesn’t hold up. At this stage, austerity is the biggest threat to the euro. If the recession lasts for very much longer, political unrest is sure to mount, and the currency zone could well break up.
So why is this woebegone approach proving so sticky? Some of the answers can be found in a timely and suitably irreverent new book by Mark Blyth, a professor of political economy at Brown: “Austerity: The History of a Dangerous Idea.” Adopting a tone that is by turns bemused and outraged, Blyth traces the intellectual and political roots of austerity back to the Enlightenment, and the works of John Locke, David Hume, and Adam Smith. But he also provides a sharp analysis of Europe’s current predicament, explaining how an unholy alliance of financiers, central bankers, and German politicians foisted a draconian and unworkable policy on an unsuspecting populace.
The central fact about Europe’s “debt crisis” is that it largely originated in the private sector rather than the public sector. In 2007, Blyth reminds us, the ratio of net public debt to G.D.P. was just twelve per cent in Ireland and twenty-six per cent in Spain. In some places, such as Greece and Italy, the ratios were considerably higher. Over all, though, the euro zone was modestly indebted. Then came the financial crisis and the fateful decision to rescue many of the continent’s creaking banks, which had lent heavily into property bubbles and other speculative schemes. In Ireland, Spain, and other countries, bad bank debts were shifted onto the public sector’s balance sheet, which suddenly looked a lot less robust. But rather than recognizing the looming sovereign-debt crisis for what it was—an artifact of the speculative boom and bust in the financial sector—policymakers and commentators put the blame on public-sector profligacy.
“The result of all this opportunistic rebranding was the greatest bait-and-switch operation in modern history,” Blyth writes. “What were essentially private-sector debt problems were rechristened as ‘the Debt’ generated by ‘out-of-control’ public spending.”
The obvious alternative to rescuing the bad banks in the periphery countries was to let them go bust, but that was a risky option. As we saw in the United States after Lehman Brothers was allowed to fail, once one domino goes down the others get very shaky. Preventing a wholesale U.S. banking collapse took the Fed launching all sorts of emergency lending programs and Congress approving a seven-hundred-billion-dollar bailout. In Europe, such policies weren’t available. The E.C.B.’s charter didn’t provide for it acting as a lender of the last resort. And the European universal banks were simply too big to rescue. In 2008, Blyth recalls, the combined assets of the six largest U.S. banks came to sixty-one per cent of U.S. G.D.P. Compare that with Germany, where the biggest financial institutions (Deutsche Bank and Commerzbank) had assets equal to a hundred and fourteen per cent of German G.D.P., or France, where the three biggest banks (BNP Paribas, Société Générale, and Crédit Agricole) had assets equal to three hundred and sixteen per cent of France’s G.D.P.
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Note that shifting massive amounts of private debt onto public balance-sheets could be seen as not just sleazybut also consistent with the “defence of capitalism” ordoliberal-ethos. Germany’s two largest banks had assets equal to 114% of Germany’s GDP and if they collapsed you can bet that capitalism in Germany, at least the form of ordoliberal capitalism preferred and protected by policy-makers, would probably collapse. And a similar threat existed for the other large European banks and their home economies. So, from this perspective, transferring private debt for ‘too big to fail’ institutions into the public debt of the eurozone’s smaller, weaker economies represents a kind of ordoliberal act of ‘saving the system’. A financial crisis response that results in greater public accountability, better government services, less inequality, and a more vibrant middle-class at the expense of an all-powerful business-government axis would be seen as a failure and abondonment of ‘the pro-entrepreneur system’.
Continuing...
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With defaults and a wholesale bailout off the table, Europe was condemned to muddling through as best it could. Coming out of the first stage of the crisis, which lasted until the first half of 2011, it was saddled with a periphery—Greece, Ireland, Portugal—that had been bailed out but that was still sinking under enormous debts, and a financial system that was highly leveraged and loaded up with suspect government bonds. What the continent desperately needed was a return to growth-oriented policies of the sort adopted in the United States. Higher growth would have raised tax revenues, boosted job growth, and shored up the banks’ balance sheets. But largely due to the euro, Europe was stuck in an austerity vice.
Membership of the common currency prevented individual countries from printing money and devaluing their currencies, which is what the United States had done. Blyth notes:
If states cannot inflate their way out of trouble (no printing press) or devalue to do the same (non-sovereign currency), they can only default (which will blow up the banking system, so it’s not an option), which leaves internal deflation through prices and wages—austerity.
Theoretically, there is another option: fiscal stimulus in the form of tax cuts and more government spending. But that, too, is effectively ruled out. Under the terms of the euro zone’s comically misnamed Stability and Growth Pact, countries like France and Italy, which have budget deficits larger than three per cent of G.D.P., are legally obliged to cut spending, even though doing so is sure to depress the economy further, leading to lower tax revenues and bigger deficits. Meanwhile, member countries that have a budget surplus, particularly Germany, refuse to help their neighbors by introducing a stimulus.
It’s all quite mad, but that doesn’t mean it will end anytime soon. Indeed, about the only things that seem likely to change the situation are another blow up in the bond markets or a political revolution in a member state. So far, Mario Draghi, the Italian financier who took over as the chairman of the E.C.B. in 2011, has managed to prevent the first of these things from happening. And despite mass protests from Athens to Madrid, the pro-euro political establishment has held onto power.
Blyth rightly describes this whole sad story as an attempt to recreate a European version of the gold standard, the “barbarous relic” (Keynes) that helped bring about the Great Depression. But rather than confine himself to explaining and bemoaning the enduring appeal of austerity policies, Blyth explores their roots in the laissez-faire writings of Locke, Smith, and David Ricardo; the Treasury view of the nineteen-twenties; the Austrian business cycle theory of Friedrich Hayek and Joseph Schumpeter; the monetarism of Milton Friedman; the Washington Consensus of the I.M.F. and the World Bank; and the “expansionary austerity” school that emerged from Bocconi University, in Milan. With so much hinging on Germany, the discussion of postwar German ordoliberalism, which underpins Berlin’s hostility to expansionary policies, is particularly valuable.
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The parallel drawn between the gold standard and what appears to be taking place in eurozone (and larger EU to a lesser extent) is an apt analogy. Under ordoliberal doctrines inflation and monetary instability as viewed as deep sins to be avoided at all costs, so it could be thought as a “good-as-gold standard”. And when you factor in that the gold standard didn’t actually bring about price stability we could almost think of the eurozone project as a “better-than-gold standard”. And when you consider how much the gold standard sucks in practice and clear follies of focusing on price-stability alone (which is the sole mandate of the ECB), we might rechristen it the “better-than-gold-but-still-woefully-inadequate standard”.
Continuing...
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As Blyth points out, German politicians influenced by ordoliberalism, such as Chancellor Angela Merkel and Wolfgang Schäuble, the finance minister, aren’t hostile to government activism in the same way conservatives in the United States and Britain are. To the contrary, they believe in a social market economy, where the state sets the rules, including the generous provision of entitlement benefits, and vigorously enforces them. But encouraged by Germany’s success in creating an export-led industrial juggernaut, they believe that everybody else, even much less efficient economies, such as Greece and Portugal, should copy them rather than rely on the crutch of easy money and deficit-financed stimulus programs.That’s all very well if you are an official at the Bundesbank, or one of the parsimonious Swabian housewives beloved of Merkel, but it ignores a couple of things. First, it’s the very presence of weaker economies in the euro zone that keeps the value of the currency at competitive levels, greatly helping German industry. If Greece and Portugal and other periphery countries dropped out, the euro would spike up, making Volkswagens and BMWs a lot more expensive. Second, it isn’t arithmetically possible for every country to turn into Germany and run a big trade surplus. On this, Blyth quotes Martin Wolff, of the Financial Times: “Is everybody supposed to run a current account surplus? And if so, with whom—Martians? And if everybody does indeed try to run a savings surplus, what else can be the outcome but a permanent global depression?”
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You have to love how it’s now widely recognized that the crisis strategy championed by Merkel & Friends is arithmetically impossible. And yet it all continues day after day without the entire continent suffering some sort of cognitive dissonance-induced nervous breakdown. It’s kind of medical miracle.
Welcome To The Funhouse
Unfortunately, while trying to achieve the impossible can be noble goal, it sort of becomes a stupid and mean Sisysphian hell when the method to the madness centers around pointless austerity and junk economic supply-side theories like ‘If governments send signals to the markets that governments were serious about cutting deficits this would induce “confidence” in the financial markets. This deficit-cutting turnaround in the financial markets would, in theory, alleviate the underlying jobs crisis as businesses started hiring again’. The austerity was supposed to literally be inspiring enough to create its own net job growth according to ordoliberal theory. All that was needed for the magic of the market to work was the creation of the right “conditions” by the EU-ECB-IMF Troika. And no stimulus spending because that’s apparently anti-ordoliberal for any state that hasn’t yet achieved its ordoliberally-deemed optimal state of competitiveness. As long as inflation is under control and the market structure is deemed to be fundamentally sound (according to ordoliberal principles) whatever happens happens. No intervention is deemed necessary. The system is sound. A ‘healthy’ economy doesn’t necessarily include a healthy, employed populace but it must include ‘healthy’ public finances before the economy can ever heal, hence the prohibition on stimulus spending. Plus, stimulus spending prevents a populace from engaging in the necessary “structural reforms” that typically involve making the poor and middle-class poorer along with various forms of “pro-business” deregulations. At least that’s theory theory fluttering about inside the mind of a madman:
Capitalism and Freedom
Inside The Mind Of Jens Weidmann
Christopher T. Mahoney
Sunday, July 7, 2013Jens Weidmann is the president of the Bundesbank and a member of the ECB Governing Council. He is seen as the leader of the Hawkish Group at the ECB. He holds views that are diametrically different from mine (not that he knows or cares). But it is crucial to understand how he thinks, because he holds an effective veto over ECB policy. That makes him one of the most important central bankers in the world. His views cannot be ignored.
Weidmann has provided us with two recent insights into his thinking: a speech today (7/7) in France, and a recent interview (6/24) with Suddeutsche Zeitung. Helpfully, both documents are available in English on the Bundesbank website.
Weidmann speaks in plain language and doesn’t mince words, or at least no more than he must. It appears that he regrets EMU, although he denies that (as he must as a board member of the ECB). His official posture is: effective monetary union will require greater fiscal discipline and structural reform; easy money is not the answer. His views about EMU can be summed up as: In the absence of fiscal union, EMU remains a looser grouping of countries that will face the discipline of the financial markets if they fail to produce economic convergence.
With respect to monetary policy, Weidmann adheres to a strict interpretation of the ECB Treaty which provides for a single mandate, price stability, and which excludes “monetary financing” or deficit monetization.
Weidmann’s attitude is: EMU was founded on the explicit understanding that the ECB would be as single-minded as the Bundesbank in its focus on the single mandate. His view is that not only does the ECB lack a growth mandate, it should not have one (and nor should any central bank). He is a supply-sider: growth results from sound fiscal, structural and monetary policies, not from “artificial stimulus”.
There is nothing radical or heterodox about Weidmann’s views. They are shared by a number of members of the FOMC. Indeed, his views are orthodox. I think that his true desire is a federal eurozone, modeled on the dollar zone. This would be a eurozone without national central banks and without national banking systems. South Dakota does not have a central bank, nor does it have a financial system. The Fed and the FDIC could not care less if South Dakota defaulted on its muni bonds.
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Note that, while it’s true that Bundesbank Chief Jens Weidmann’s supply-sider views on these matters are in keeping with a type of economic orthodoxy, it happens to be the supply-side orthodoxy that keeps trashing economies.
Continuing...
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Here are his words:
“We need to make sure that in a system of national control and national responsibility [federalism] , sovereign default is possible without bringing down the financial system. Only then will we really do away with the implicit guarantee for sovereigns. To achieve this, we have to sever the excessively close links between banks and sovereigns. Currently, European banks hold too many of their own governments’ bonds.”
Weidmann desires a eurozone where governments can default without collapsing their financial systems. He also desires a eurozone where banks can fail without becoming contingent liabilities of their governments:
“Getting to grips with the implicit guarantee for sovereigns would be a big step towards eliminating the inherent tensions in the monetary union’s structure. Removing the implicit guarantee for banks would be another one. To make that happen, we have to ensure the resolvability of banks. Defining a clear hierarchy of creditors is crucial. Shareholders and creditors will have to be first in line when it comes to bearing banks’ losses – instead of taxpayers.”
This is American federalism: states can go bankrupt without destroying their financial systems, and banks can fail without having any claim on their state. (Washington State did not shudder when WaMu failed.) We know that such a system could work because the dollar zone has worked for a couple of centuries.
But next we come to the crux: eurozone monetary policy. As a monetarist, I adhere to the view that the quantity theory operates, and that real growth is a derivative of money growth. In a nutshell: you can’t have 4% real growth with 1% nominal growth, and you can’t have 6% nominal growth without some inflation. That’s Market Monetarism, although it is really both Fisherian and Keynesian.
Here is Weidmann’s view: “The best contribution a central bank can make to a lasting resolution of the crisis is to fulfil its mandate: that of maintaining price stability.” In other words, there is no reason why the eurozone periphery cannot resume strong growth with 0% inflation and 0% nominal growth. I don’t mean to caricature his view, but it comes pretty close to that.
Has Weidmann read Fisher lately (or Bernanke, or Sumner)? To my knowledge he has not refuted the necessity of reflation in ending a depression. Indeed, I think that he is a sincere liquidationist, who views depressions and defaults as prophylactic. He wants to remake Southern Europe in the image of Northern Europe. He believes that, in the long run, it is in their own interest. He should read a financial history of the last three years of the Weimar Republic.
To summarize, the unrepentant Ghost of Andrew Mellon is now one of the most powerful bankers in the world. But as disturbing as it is to contemplate the fact that the guiding philosophy of the Bundesbank — and therefore the ECB — is stunningly similar to philosophy of Depression-era Republican economists, it is far more disturbing to realize that Jens Weidmann’s worldview appears to be shockingly similar to the modern day GOP. That’s right, the forced implosion of the eurozone economies could be thought of as part of Europe’s very own Supply-Side Revolution:
The New York Times
The Urge to Purge
By PAUL KRUGMAN
Published: April 4, 2013When the Great Depression struck, many influential people argued that the government shouldn’t even try to limit the damage. According to Herbert Hoover, Andrew Mellon, his Treasury secretary, urged him to “Liquidate labor, liquidate stocks, liquidate the farmers. ... It will purge the rottenness out of the system.” Don’t try to hasten recovery, warned the famous economist Joseph Schumpeter, because “artificial stimulus leaves part of the work of depressions undone.”
Like many economists, I used to quote these past luminaries with a certain smugness. After all, modern macroeconomics had shown how wrong they were, and we wouldn’t repeat the mistakes of the 1930s, would we?
How naïve we were. It turns out that the urge to purge — the urge to see depression as a necessary and somehow even desirable punishment for past sins, while inveighing against any attempt to mitigate suffering — is as strong as ever. Indeed, Mellonism is everywhere these days. Turn on CNBC or read an op-ed page, and the odds are that you won’t see someone arguing that the federal government and the Federal Reserve are doing too little to fight mass unemployment. Instead, you’re much more likely to encounter an alleged expert ranting about the evils of budget deficits and money creation, and denouncing Keynesian economics as the root of all evil.
Now, the fact is that these ranters have been wrong about everything, at every stage of the crisis, while the Keynesians have been mostly right. Remember how federal deficits were supposed to cause soaring interest rates? Never mind: After four years of such warnings, rates remain near historic lows — just as Keynesians predicted. Remember how running the printing presses was going to cause runaway inflation? Since the recession began, the Fed has more than tripled the size of its balance sheet, but inflation has averaged less than 2 percent.
But the Mellonites just keep coming. The latest example is David Stockman, Ronald Reagan’s first budget director, who has just published a mammoth screed titled “The Great Deformation.”
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But that prescription is, of course, anathema to Mellonites, who wrongly see it as more of the same policies that got us into this trap. And that, in turn, tells you why liquidationism is such a destructive doctrine: by turning our problems into a morality play of sin and retribution, it helps condemn us to a deeper and longer slump.
The bad news is that sin sells. Although the Mellonites have, as I said, been wrong about everything, the notion of macroeconomics as morality play has a visceral appeal that’s hard to fight. Disguise it with a bit of political cross-dressing, and even liberals can fall for it.
But they shouldn’t. Mellon was dead wrong in the 1930s, and his avatars are dead wrong today. Unemployment, not excessive money printing, is what ails us now — and policy should be doing more, not less.
Sin Sells. So Does Sinn
Paul Krugman’s above op-ed was written about the policy advocated by US Republicans but notice how easily it could just have easily described the mindset emanating from the Bundesbank and ECB. Sure, there are real differences between the laissez faire true-believers like Andrew Mellon (and the GOP) vs the ordoliberal followers like Bundesbank chief Jens Weidmann (and virtually all of his predecessors at the Bundesbank). Weidmann and his fellow ordoliberalists probably have a much more open-minded attitude towards government regulations than their purely-supply-side-oriented counterparts. But those differences in methods shouldn’t be confused with a rejection of the belief in the universal supremacy of “markets” for determining social outcomes. The business of ordoliberalism is protecting business, not creating a better society(that’s the job of business). It’s just a question of whether or not the markets are unregulated or ordoliberally-regulated. Market outcomes will still dominate the fate of the individual in the society, even when it results in social catastrophe. As Krugman pointed out above, “The bad news is that sin sells”. And as he’s pointed out before, Sinn sells too:
The New York Times
Economix
April 6, 2009, 3:11 pm
Why Germany Prefers Regulation to Stimulus
By CARTER DOUGHERTYAmericans struggling to understand why Germans seem to care little about economic stimulus these days, and yet so much about regulation, could do worse than to read a recent essay by Hans-Werner Sinn, head of the Ifo Institute in Munich.
Mr. Sinn makes a brief appeal to John Maynard Keynes — somewhat oddly since that name is usually associated with stimulus — in arguing that governments need to step in and forcibly recapitalize hard-hit banks with equity. Sweetheart loans are a bad idea, says Mr. Sinn. Instead, only issuing new shares will do, and we should not cry for chief executives who have to water down their shares. That is the most pressing need, Mr. Sinn writes.
But take careful note of the name Walter Eucken, whom Mr. Sinn references with a reverential tone that could be found only in Germany. Mr. Eucken, who died in 1950, is closely associated with a school of economics known as ordoliberalism, which teaches that state regulations can help the free market produce results close to its theoretical potential.
After World War II, ordoliberals (also known, confusingly given the argot of today’s anti-globalization protesters, as neoliberals) defended capitalism but said the state needed to play a strong role in regulating what did not come naturally. That meant ensuring stable prices, protecting property rights and – oh, how prescient this sounds today! – ensuring unlimited liability for those daring capitalists so that they bear the rewards, but also the risks, of their behavior..
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It’s worth recalling that while there has been an extensive amount of public discussion over the last few years by folks like Angela Merkel and Jens Weidmann about forcing an investor “bail-in” in the various eurozone bank bailouts and other “tough love” approaches that are intended to use socioeconomic pain as catalyst for “structural” “reform”. But those plans were always abandoned when it became clear that such “tough love” approaches would cause a market meltdown. That whole dynamic all changed in March of this year, of course, when it Russian oligarchs finally got “bailed-in” in Cyprus and the markets only almost melted down (and it doesn’t look like the banks that the Russian oligarchs were actually investing in even had much to do with the Cypriot banking crisis). The “float a bad idea, tanks the markets” phenomena hasn’t been limited to the eurozone, but it’s been a policy-making theme in recent years. At the same time, Sinn’s concerns about the public paying the price for private risks and the related dangers of a vastly over-leveraged financial sector warping the self-correcting nature of the market are concerns that should not be dismissed.
Also note that Sinn’s attitude towards financial executives in the wake of the 2008 meltdown was surprisingly supportive given his stance on bailing out banksters.
Continuing...
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It is important to remember the historical context here. After the war, and the Depression that preceded it, capitalism looked discredited (and Communist armies occupied half of Europe). Ordoliberalism offered a credible argument that stemmed the socialist tide by essentially arguing for capitalism, but with a strong state. It helped cement a political coalition against widespread nationalization and central planning, two approaches very much in favor when Germany lay in ruins in 1945.
In his essay, Mr. Sinn writes that “a time bomb is ticking” because if banks shrink themselves back to health, they will drag down economies with them. “And all this just because banks, hedge funds, special purpose vehicles, investment funds and real-estate financers were allowed to conduct their business with only tiny amounts of equity capital,” he continues. “Without equity, there is no liability, and without liability, people gamble.”
This is a good jumping-off point to understand why Germans see regulation as part of the solution to today’s crisis — this was a major point at the recent G‑20 summit — even as the United States tut-tuts that the Germans are not stimulating enough. The most successful economic order that Germany – and some would say Europe – has ever seen put stability first and last. It did not encourage financial wheeling and dealing for its own sake, but put it in the context of the entire economy. Mr. Eucken would have asked what financial innovation did for the real economy, and whether the innovators were taking risks the rest of us would pay for, Mr. Sinn suggests.
And by the way: In case you are inclined to dismiss Mr. Eucken as a guru of some irrelevant talking heads, think again. Jürgen Stark, an executive board member of the European Central Bank, has praised Mr. Eucken as a thinker whose main work, Principles of Economic Policy, “has been a constant source of inspiration throughout my career.”
The Third Ordoliberal Way Still Leads To Austerity
Ordoliberalism’s mix of a strong belief in the primacy and necessity of market competition as the tool for achieving social justice which is why the term “competitiveness” gets endlessly used by the EU’s austerity-advocates. But the elevation of market competition is coupled with an ideological rejection of laissez faire capitalism. This naturally leads to much of the confusion outside observers have regarding the German government’s strenuous rejections of stimulus spending or any other state-directed efforts at rebuilding eurozone economies. On the surface it’s hard to discern large differences between ordoliberalism and the regulated capitalism found in most other developed economies so it’s no surprise that so many observers have been caught off guard in recent years by the intensity of the opposition to state stimulus spending and higher inflation coming from German ordoliberal economists like Mr. Sinn. German workers, after all, are generally perceived as being very well treated compared to their counterparts elsewhere. So how is it that an economy guided by the principles of ordoliberalism could generate would of the most robust welfare states on the planet while simultaneously demanding that its eurozone partners engage in brutal austerity for the masses? Well, one explanation is that the legendary German social safety-net is a lot less safe than it used to be:
Insight: The dark side of Germany’s jobs miracle
By Sarah Marsh and Holger Hansen
STRALSUND, Germany | Wed Feb 8, 2012 9:42am EST
(Reuters) — Anja has been scrubbing floors and washing dishes for two euros an hour over the past six years. She is bewildered when she sees newspapers hailing Germany’s “job miracle.”
“My company exploited me,” says the 50-year-old, sitting in the kitchen of her small flat in the eastern German town of Stralsund. “If I could find something else, I’d be long gone.”
Stralsund is an attractive seaside town but Anja, who preferred not to use her full name for fear of being fired, cannot afford the quaint cafes.
Wage restraint and labor market reforms have pushed the jobless rate down to a 20-year low, and the German model is often cited as an example for European nations seeking to cut unemployment and become more competitive.
But critics say the reforms that helped create jobs also broadened and entrenched the low-paid and temporary work sector, boosting wage inequality.
Labor office data show the low wage sector grew three times as fast as other employment in the five years to 2010, explaining why the “job miracle” has not prompted Germans to spend much more than they have in the past.
Pay in Germany, which has no nationwide minimum wage, can go well below one euro an hour, especially in the former communist east German states.
“I’ve had some people earning as little as 55 cents per hour,” said Peter Huefken, the head of Stralsund’s job agency, the first of its kind to sue employers for paying too little. He is encouraging other agencies to follow suit.
Data from the European Statistics Office suggests people in work in Germany are slightly less prone to poverty than their peers in the euro zone, but the risk has risen: 7.2 percent of workers were earning so little they were likely to experience poverty in 2010, versus 4.8 percent in 2005.
It is still lower than the euro zone average of 8.2 percent. But the number of so-called “working poor” has grown faster in Germany than in the currency bloc as a whole.
In response, as other European countries rush to deregulate, Germany is re-regulating.
Angela Merkel’s conservative government is trying to water down the effects of some labor reforms brought in by her Social Democrat (SPD) predecessor Gerhard Schroeder, a year-and-a-half before the next federal election, when she is expected to seek a third term.
PRECOCIOUS REFORMER
The contrast between Germany’s record levels of employment and the dire jobs situation elsewhere in Europe is stark.
Last year, the number of people in employment in Germany rose above the 41 million mark for the first time. The jobless rate has been falling steadily since 2005 and now stands at just 6.7 percent, compared to 23 percent in Spain and 18 percent in Greece.
It has been a tough battle since German unemployment peaked after reunification in 1990. Many east German businesses floundered in a free market once the Berlin Wall fell, sending joblessness there soaring over 20 percent.
Globalization put Germany’s export-reliant economy under competitive pressure, forcing it to adjust quickly.
By 2003, Germany was embarking on reforms hailed as the biggest change to the social welfare system since World War Two, even as many of its peers were moving in the opposite direction.
While the French Socialists were introducing the 35-hour week and cranking up minimum wages, Germany’s Social Democrats (SPD) were deregulating the labor market and raising pressure on the jobless to find work.
Unions and employers agreed wage restraint in return for job security and growth. Flexible working practices and government-subsidized reduced working hours enabled employers to adjust to the economic cycle without hiring and firing.
From 2005, joblessness started to fall and is nearing pre-reunification levels. Elsewhere in Europe, governments tackling high unemployment are playing catch-up, making labor reforms the number one priority.
France’s conservative President Nicolas Sarkozy has repeatedly cited Schroeder’s “Agenda 2010” reforms as an example for his country over the past few months. Labor reforms being introduced in Spain and Portugal have also borrowed heavily from Germany.
“BEST LOW WAGE SECTOR IN EUROPE”
Job growth in Germany has been especially strong for low wage and temporary agency employment because of deregulation and the promotion of flexible, low-income, state-subsidised so-called “mini-jobs.”
The number of full-time workers on low wages — sometimes defined as less than two thirds of middle income — rose by 13.5 percent to 4.3 million between 2005 and 2010, three times faster than other employment, according to the Labour Office.
Jobs at temporary work agencies reached a record high in 2011 of 910,000 — triple the number from 2002 when Berlin started deregulating the temp sector.
Economists say it was Schroeder’s intention to bring about a rapid expansion of these sectors in order to get the poorly-qualified and long-term unemployed back into the workforce.
In 2005, Schroeder’s last year as chancellor, he boasted at the World Economic Forum in Davos: “We have built up one of the best low wage sectors in Europe.”
Seven years later, employers praise the reforms that led to the growth of mini-jobs and temping.
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ROAD TO NOWHERE
Critics say Germany’s reforms came at a high price as they firmly entrenched the low-wage sector and depressed wages, leading to a two-tier labor market.
New categories of low-income, government-subsidized jobs — a concept being considered in Spain — have proven especially problematic. Some economists say they have backfired.
They were created to help those with bad job prospects eventually become reintegrated into the regular labor market, but surveys show that for most people, they lead nowhere.
Employers have little incentive to create regular full-time jobs if they know they can hire workers on flexible contracts.
One out of five jobs is a now a “mini-job,” earning workers a maximum 400 euros a month tax-free. For nearly 5 million, this is their main job, requiring steep publicly-funded top-ups.
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RE-REGULATING
While wage inequality used to be as low in Germany as in the Nordic countries, it has risen sharply over the past decade.
Low wage workers earn less relative to the median in Germany than in all other OECD states except South Korea and the United States.
“The poor have clearly lost out to the middle class, more so in Germany than in other countries,” said OECD economist Isabell Koske.
Depressed wages and job insecurity have also kept a lid on domestic demand, the Achilles heel of the export-dependent German economy, much to the exasperation of its neighbors.
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ILO’s Ernst says Germany can only hope that other European countries do not emulate its own wage deflationary policies too closely, as demand will dry up: “If everyone is doing same thing, there won’t be anyone left to export to.”
So part of the answer to the question “how could ordoliberalism create a worker-friendly economy in Germany but an austerity wasteland elswhere?” is that Germany hasn’t actually been a worker-paradise over the last decade specifically because it has embreaced ordoliberal dogma. But another part of the answer can be found with another look at the exellent paper “Freedom, Crisis and the Strong State: On German Ordoliberalism” by Werner Bonfeld. As we’ll see, the opposition towards state welfare policies held by the early ordoliberal thinkers like Walter Eucken included an deep opposition to the general character of ‘mass man’. And ‘mass man’ happens to be the general public:
www.bisa.ac.uk
Freedom, Crisis and the Strong State: On German Ordoliberalism
Werner Bonfeld...
Ordo-liberalism saw itself as a third way between collectivism and laissez-faire liberalism ’ a new liberalism that commits itself to battle to secure liberty in the face of selfish interest groups and the proletarian adversary. That is to say, laissez-faire is neither an answer „to the hungry hordes of vested interests’ (Röpke, 2009, p. 181) nor to the ‘disease of statism’ (Barry, 1989, p. 118) that the proletarian masses exact when in the face of class conflict the state weakens in its liberal resolve by conceding collective welfare provisions. Nor is it an ‘answer to riots’ (Willgerodt and Peacock, 1989, p. 6). That is, laissez-faire liberalism is unable to posit either political aims or definite social values. In the end, then, the laissez faire liberalism ‘dissolves [the state] into an apolitical exchange society’ (Müller-Armack, 1933, p. 21). Instead of defending liberty, the apolitical state becomes the prey of vested interests, and succumbs to proletarian demands. Laissez-faire conceptions of freedom are inherently self-destructive. For freedom to prevail a more or less ‘authoritarian direction of the state’ is necessary (Böhm, 1937, p. 67) to facilitate the utility of freedom within the limits of its form, that is, the individual as entrepreneur.
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II Social Policy: Freedom and Enterprise
Social policy is about the provision of a ‘stable framework of political, moral and legal standards’ (Röpke, 1959, p. 255). It is a means of liberal governance. Its purpose is to secure a market economy within the confines of what Adam Smith called the ‘laws of justice’ (1976, p. 87). A social policy that concedes to working class demand for social justice ‘by wage fixing, shortening of the working day, social insurance and protection of labour…offers only palliatives, instead of a solution to the challenging problem of the proletariat’ (Röpke, 1942, p. 3). It leads to the „rotten fruit? of the welfare state (Röpke, 1957, p. 14) which is „the “woddenleg” of a society crippled by its proletariat? (ibid., p. 36). The welfare state is the institution of ‘mass man’ who ‘shirk their own responsibility’ (ibid., p. 24). That is, social policy aims at transforming the proletarian into a citizen ‘in the truest and noblest sense’ (Röpke, 2009, p. 95).Haselbach (1991) has rightly pointed out that Schumpeter’s identification of capitalism with entrepreneurial freedom is key to the ordo-liberal conception of the free economy. For Eucken (1932, p. 297) the well-being of capitalism is synonymous with the well-being of the entrepreneurial spirit – innovative, energetic, enterprising, competitive, risk-taking, self-reliant, self-responsible, eternally mobile, always ready to adjust to price signals, etc. Müller-Armack (1932) speaks of the ‘doing’ of the entrepreneur, whom he likens to civilisation’s most advanced form of human self-realisation. Ordo-liberalism identifies capitalism with the figure of the entrepreneur, a figure of enduring vitality, innovative energy, and industrious leadership qualities. This then also means that they conceive of capitalist crisis as a crisis of the entrepreneur. Things are at a standstill because the entrepreneur is denied – not just by ‘mass man’ but by a state that yields to mass man. Crisis resolution has thus to restore the entrepreneurial vitality of society. For the ordo-liberals this task entailed a ‘policy towards the organisation of the market’ (Eucken, 1948, p. 45, fn 2) that secures ‘the possibility of spontaneous action’ without which ‘man was not a “human being”’ (ibid. p. 34). In this conception, ‘state-organised mass welfare’ (Röpke, 1957, p. 14) amount to a ‘revolt against civilisation’ (Röpke, 1969, p. 96) – it expresses a state of profound ‘devitalisation and loss of personality’ (Röpke, 2002, p 140), which for the ordo-liberals characterises proletarianised social structures.
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Whether or not one happens to be a member of the ‘mass man’ segment of society, the idea of running a society based philosophy that views anyone that isn’t an entrepreneur as some sort of degenerate parasite seems like an ill-advised solution to society’s challenges. And yet the entire eurozone appears to be rushing to implement a zone-wide set of new permanent rules that look like they could be pulled from the pages of the ordoliberal playbook without any general recognition that ordoliberalism is a far-right, elitist philosophy dedicated to the protection of ‘capitalism’ by protecting the biggest ‘capitalist’ under the guise of safeguarding a healthy market for the idealized hypothetical small entrepreneur. Ordoliberalism shares a lot of traits with its zany cousins in the Austrian Schools of thought but ordoliberalism is, in many ways, a much scarier variant of far-right thought. Ordoliberalism doesn’t contain the overt insanity of an adherence to anti-government solutions to societies problems. And ordoliberalism can even claim to be actively working to ensure a type of social justice even if it’s social justice exclusively for “the entrepreneur” that is ideologically achieved primarily through state-enforced competition. Selling ‘mass man’ on some sort of “Ordoliberal Populism”, in other words, is simply a much more plausible way to get the ‘mass man’ to accept a far-right economic paradigm than the “Libertarian Populism” far-right alternatives currently being peddled in the US. Compared to its laissez faire alternatives, ordoliberalism really is a more realistic approach to managing an economy and society. It’s still a hopelessly inadequate and flawed approach, but it’s less hopelessly inadequate and flawed than its far-right alternatives. And considering that it’s only far-right policy options that get any serious consideration across much of the world these days, we should probably expect the stealth adoption of ordoliberal principles and policies to continue. This stealth campaign shouldn’t continue, but as as long as ordoliberalism remains generally unrecognized as a far-right ideology, it probably will.
Update 7/26/2013
Here’s an excerpt from the book The Road from Mont Pèlerin: the making of the neoliberal thought collective, available on Amazon and Google Books (with an excellent review here). The chapter “Neoliberalism in Germany” contains some great examples of the ordoliberal theoreticians were able to obtain the “anti-Nazi” mantle and wield such influence in the post-war era.
So, here’s a few excerpts form The Road from Mont Pèlerin: the making of the neoliberal thought collective
edited by Philip Mirowski, Dieter Plehwe
2009, Harvard University Press
p. 112:
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The Nazi Era: Working on the Theoretical Foundations of OrdoliberalismAfter its early formulations of culturally pessimistic perspectives during the early 1930s, German ordoliberalism assumed the format of an economic school of thought during the Nazi era. Its ambitions were to formulate universal economic policy principles with an eve to the whole of society. The circle aroundEurchn in Freiburg came to be considered both the point of departure and the theoretical backbone of later German ordoliberalism.
The work done by Eucken’s group between 1933 and 1945 fostered the precondiations for the Freiburger Schules, which became the most highly regarded academic institution of ordoliberalism after World War II-despite the rather close entanglement of manry of its members with the Nazi regime. The most relevant basic texts and the preliminary work for subsequent manuscripts came out of this period, yielding the broad theoretical foundation of ordoliberalism immediately after the end of World War II.
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p.115
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Articles published by Bohm, Eucken, and Miksch in a 1942 book, Der Wettbewerb als Mittel volkswirtschaftlicher Leistungssteigerung und Leistungsauslese ( Competiton as a means to increase and select national economic efficiency), edited by Klasse IV der Akademie fur Deutsches Recht (AfDR),21 took up a variety of topics closely connected to the Freiburg school’s perspective on competition theory and policy. These contributions did not cover new ground in terms of theory, but they were nonetheless politically important. The involvement of ordoliberals in Nazi Germany’s most important academic institution has been a subsequent topic of heated discussion in the historical literature. Ther ordoliberal contributions did indeed discuss the Nazi regime’s economic policies in the most concrete ways, but they show no evidence for the frequent claims22 that they were in fundamental opposition against the Nazis. Their contributions, rather, provide evidence that the ordoliberals constructively contributed to solutions of specific problems of the war economy, and they even seem to indicate their ability to grasp an opportunity “to gain influence on the programmatic efforts to plan for a post-war economic policy” (Haselbach 1991, 95). Arguments claiming that their activites in the these circles should be regarded as secret resistance efforts and promotion of an “underground economy” (Schlecht 1981, 15) are unconvincing. Because of the importance of the issue, we will present a separate discussion of the relationships between ordoliberals and the Nazis in the next section.
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p. 117–119
Ordoliberalism and Nazism
The very fact that ordoliberalism developed a large part of its theoretical foundations within the temporal and geographical bounds of Nazi Germany raises the important question, If and to what extent were ordoliberals influenced by Nazi Germany in general and by Nazi economic policy considerations in particular? Repeated claims that the Freiburg school and Ludwig Erhard were a staunch part of the opposition to the Nazis — claims that buttressed the legitimacy of the social market economy — deserve closer scrutiny[24].
What certainly can be rejected as a mere cover-up is the claim that the ordoliberals who did not emigrate from Germany opposed, or even persistently resisted, the national socialist regime (e.g., Willgerodt 1998; Wegmann 2002, 55–72; Goldschmidt 2005). With the exception of the documented emigrants (Wilhelm Ropke and Alexander Rustow), such a revionist history of the wartime ordoliberals is not supported by facts. Papers published in Freiburg between the mid-1930s and the beginning of the 1940s unquestionalby reveal the ordoliberal concepts were designed to be implemented under the auspices of a Nazi government. In particular, Bohm’s book o the order of the (Die Ordnung der Wirtschaft als geschichtliche Aufgabe und rechtschopferische Leistung), published in 1937, leaves no room for speculation in this regard (Abelshauser 1991; Haselbach 1991, 84f,; Tribe 1995, 212; Ptak 2004, 90f.). The very lack of a consistent economic policy under the Nazis — the Nazis’ economic policy oscillated wildly between planning and competition at least until the war — reinforced the ordoliberals’ hope of finding a sympathetic hearing for their authority-suppoerted model of competition (Herbst 1982; Abelshauser 1999).
At the same time, the economists who were on the road to ordoliberalism were not (necessarily) National Socialist economists. In spite of the totalitarian character of Nazi-Germany, it is very important to recognize and understand that different lines of economic thinking coexisted in Nazi Germany. Any analysis should therefore address the question of economics in Nazi-Germany in order to adequately address distance from and complicitness with the ruling powers and philosophies, as well as the changing perspectives and fortunes of individual economists over time. One must consider the multiform ways of relating to the Nazi regime (1) before and after 1933, when parliamentarian democracy and labor movement opposition were eliminated; (2) before and after 1938, when the pogroms against the Jewish population stated in earnest; and (3) before and after 1942, which marked both the year when the Holocaust decision was taken and when the war fortunes turned against the Nazis in Stalingrad (Walpen 2004, 93f).
After 1942, many people in Nazi Germany recognized that the war was lost and so attempted to distance themselves from the ruling Nazis (Roth 2004). Even if this was in a sense opportunistic, moving into opposition against the regime at that juncture did cost many lives, including the liberal economist Jens Jessen. Several members of the Freiburg school were questioned by the Gestapo, and some were imprisoned. However, any late participation in oppositional activities can hardly exonerate those right-wing liberal economists who had accommodated themselves to the regime before 1942 and deliberately lent their economic expertise to the Nazis for the bulk of the era. While early theoretical considerations of ordoliberalism were congenial to Nazi efforts to curtail certain special interests and trade unions in particular, the ordoliberal framework that promoted a strong and independent state could just as well be turned against the Nazi usurpation of power. This perspective was easier to articulate after the Nazies were toppled, but it should be noted that few expressed it before 1942.
With regard to more narrowly defined economic issues, the early ordoliberals were continually at odds with other schools of economic reasoning that operated during the Nazi era. As a coherent theoretical circle within the ordoliberal spectrum, the Freiburger Schule particular tried to promote a competitive order before and even during wartime. By developing policy advisory roles, they saw a chance to fill the economic theory vacuum in Nazi Germany with an authoritarian competitive order. Even though one cannot assume a broad, overall congruence between ordoliberal positions and National Socialist ideology, the authoritarian element, which Bohm characterized as kombinierte Wirtshaftsverfassung[25] (“combined economic constitutino”) (1937), represents a much visited point of intersection with National Socialist ideology regarding regional self-sufficiency. Despite the ordoliberals’ growing skepticism about Nazi Germany during the later phases of the wartime economy in particular, hope remained that the residual market economy could be preserved to create pro-market conditions that could be implemented after the war. Miksch as a journalist and Muller-Armack and Erhard as political advisers directly dealt with issues concerning the wartime economy and planning for the postwar period, and like many other economic professionals were at least indirectly entangled in National Socialist policies of expansion during much of the 1930s and 1940s (Ptak 2004). Tribe (1995) has mapped the respective attitudes of neoliberals ranging from Republican resistance (Ropke) to staunch conservatism (Eucken) and active Nazism (von Stackelberg). Other researchers try to excuse cooperating ordoliberals by speking in rather obscure ways of exiles and “half exiles”.[26] In any case, Wegmann (2002) and others who insist that a huge distance be maintained between ordoliberals and the Nazis fail to understand the considerable overlap of ordoliberal and Nazi critiques of parliamentarian democracy, trade unions, and the Communist Party in particular.[27]
Reading the early critiques of parliamentarian democracy in the ouvre of German ordoliberals and Austrian school neoliberals reveals the obscure authoritarian tendencies that were operating just beneath the surface of many neoliberals. These tendencies have reemerged time and again in eras of perceived danger to the neoliberal cause. These weaknesses for repressive regimes and recur in the history of neoliberalism, as evidenced by Hayek’s and Frieman’s support of “free market economic policies” under the leadership of Pinochet in Chile, for exaumple (see Fischer, Chapter 9 in this volume).
...
Internal note glaring type.o at the top there “Fasism” In the “Lasting Legacy” portion of the “broadcast.”:) Frosty is on the lookout.
@Frosty–
You got your wish! Your comment about Greenwald being part of an “Israeli” operation was more than revealing–about you.
It’s in the trash, where it belongs.
Cheers!
U R Made
@Dave: Ugh, I used to be a dupe of the “Mossad helped pull off 9–11/Zionists control the U.S. government” school myself.....never again (Frosty really needs to wake up, though).
Just stumbled across this article that covers the ongoing influence of ordoliberalism on Merkel on crafting a crisis response. The article was written in 2011. Notice how little the overall situation has changed:
See 7/26/2013 update for more on ties between the Nazi regime and ordoliberal theoreticians and how they avoided a post-war Nazi-taint.
Searched the Spitfire blog with keyword ‘poverty’ for a place to post this documentation of post-WWI German poverty, desperation; and it’s groundwork staging for a future “strong leader” to represent their vital, yet alarmingly and rapidly declining racial interests across a racially and culturally mixed continent...
http://bigstory.ap.org/article/exclusive‑4–5‑us-face-near-poverty-no-work‑0
EXCLUSIVE: 4 IN 5 IN US FACE NEAR-POVERTY, NO WORK
By HOPE YEN
— Jul. 28 8:36 AM EDT
Home » Barack Obama » Exclusive: 4 in 5 in US face near-poverty, no work
WASHINGTON (AP) — Four out of 5 U.S. adults struggle with joblessness, near poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an elusive American dream.
Survey data exclusive to The Associated Press points to an increasingly globalized U.S. economy, the widening gap between rich and poor and loss of good-paying manufacturing jobs as reasons for the trend.
The findings come as President Barack Obama tries to renew his administration’s emphasis on the economy, saying in recent speeches that his highest priority is to “rebuild ladders of opportunity” and reverse income inequality.
Hardship is particularly on the rise among whites, based on several measures. Pessimism among that racial group about their families’ economic futures has climbed to the highest point since at least 1987. In the most recent AP-GfK poll, 63 percent of whites called the economy “poor.”
“I think it’s going to get worse,” said Irene Salyers, 52, of Buchanan County, Va., a declining coal region in Appalachia. Married and divorced three times, Salyers now helps run a fruit and vegetable stand with her boyfriend, but it doesn’t generate much income. They live mostly off government disability checks.
“If you do try to go apply for a job, they’re not hiring people, and they’re not paying that much to even go to work,” she said. Children, she said, have “nothing better to do than to get on drugs.”
While racial and ethnic minorities are more likely to live in poverty, race disparities in the poverty rate have narrowed substantially since the 1970s, census data show. Economic insecurity among whites also is more pervasive than is shown in government data, engulfing more than 76 percent of white adults by the time they turn 60, according to a new economic gauge being published next year by the Oxford University Press.
The gauge defines “economic insecurity” as a year or more of periodic joblessness, reliance on government aid such as food stamps or income below 150 percent of the poverty line. Measured across all races, the risk of economic insecurity rises to 79 percent.
“It’s time that America comes to understand that many of the nation’s biggest disparities, from education and life expectancy to poverty, are increasingly due to economic class position,” said William Julius Wilson, a Harvard professor who specializes in race and poverty.
He noted that despite continuing economic difficulties, minorities have more optimism about the future after Obama’s election, while struggling whites do not.
“There is the real possibility that white alienation will increase if steps are not taken to highlight and address inequality on a broad front,” Wilson said.
___
Sometimes termed “the invisible poor” by demographers, lower-income whites are generally dispersed in suburbs as well as small rural towns, where more than 60 percent of the poor are white. Concentrated in Appalachia in the East, they are also numerous in the industrial Midwest and spread across America’s heartland, from Missouri, Arkansas and Oklahoma up through the Great Plains.
More than 19 million whites fall below the poverty line of $23,021 for a family of four, accounting for more than 41 percent of the nation’s destitute, nearly double the number of poor blacks.
Still, while census figures provide an official measure of poverty, they’re only a temporary snapshot. The numbers don’t capture the makeup of those who cycle in and out of poverty at different points in their lives. They may be suburbanites, for example, or the working poor or the laid off.
In 2011 that snapshot showed 12.6 percent of adults in their prime working-age years of 25–60 lived in poverty. But measured in terms of a person’s lifetime risk, a much higher number — 4 in 10 adults — falls into poverty for at least a year of their lives.
The risks of poverty also have been increasing in recent decades, particularly among people ages 35–55, coinciding with widening income inequality. For instance, people ages 35–45 had a 17 percent risk of encountering poverty during the 1969–1989 time period; that risk increased to 23 percent during the 1989–2009 period. For those ages 45–55, the risk of poverty jumped from 11.8 percent to 17.7 percent.
By race, nonwhites still have a higher risk of being economically insecure, at 90 percent. But compared with the official poverty rate, some of the biggest jumps under the newer measure are among whites, with more than 76 percent enduring periods of joblessness, life on welfare or near-poverty.
By 2030, based on the current trend of widening income inequality, close to 85 percent of all working-age adults in the U.S. will experience bouts of economic insecurity.
“Poverty is no longer an issue of ‘them’, it’s an issue of ‘us’,” says Mark Rank, a professor at Washington University in St. Louis who calculated the numbers. “Only when poverty is thought of as a mainstream event, rather than a fringe experience that just affects blacks and Hispanics, can we really begin to build broader support for programs that lift people in need.”
Rank’s analysis is supplemented with figures provided by Tom Hirschl, a professor at Cornell University; John Iceland, a sociology professor at Penn State University; the University of New Hampshire’s Carsey Institute; the Census Bureau; and the Population Reference Bureau.
Among the findings:
—For the first time since 1975, the number of white single-mother households who were living in poverty with children surpassed or equaled black ones in the past decade, spurred by job losses and faster rates of out-of-wedlock births among whites. White single-mother families in poverty stood at nearly 1.5 million in 2011, comparable to the number for blacks. Hispanic single-mother families in poverty trailed at 1.2 million.
—The share of children living in high-poverty neighborhoods — those with poverty rates of 30 percent or more — has increased to 1 in 10, putting them at higher risk of teen pregnancy or dropping out of school. Non-Hispanic whites accounted for 17 percent of the child population in such neighborhoods, up from 13 percent in 2000, even though the overall proportion of white children in the U.S. has been declining.
The share of black children in high-poverty neighborhoods dropped sharply, from 43 percent to 37 percent, while the share of Latino children ticked higher, from 38 to 39 percent.
___
Going back to the 1980s, never have whites been so pessimistic about their futures, according to the General Social Survey, which is conducted by NORC at the University of Chicago. Just 45 percent say their family will have a good chance of improving their economic position based on the way things are in America.
The divide is especially evident among those whites who self-identify as working class: 49 percent say they think their children will do better than them, compared with 67 percent of non-whites who consider themselves working class.
Last November, Obama won the votes of just 36 percent of those noncollege whites, the worst performance of any Democratic nominee among that group since 1984.
Some Democratic analysts have urged renewed efforts to bring working-class whites into the political fold, calling them a potential “decisive swing voter group” if minority and youth turnout level off in future elections.
“They don’t trust big government, but it doesn’t mean they want no government,” says Republican pollster Ed Goeas, who agrees that working-class whites will remain an important electoral group. “They feel that politicians are giving attention to other people and not them.”
___
AP Director of Polling Jennifer Agiesta, News Survey Specialist Dennis Junius and AP writer Debra McCown in Buchanan County, Va., contributed to this report.
neglected to embolden this:
“They don’t trust big government, but it doesn’t mean they want no government,” says Republican pollster Ed Goeas, who agrees that working-class whites will remain an important electoral group. “They feel that politicians are giving attention to other people and not them.”
@Participo–
The stage is certainly set for a first class horror show, if the GOP gets back in power.
Doing just that is one of the goals of the “Snowden” psy-op.
Best,
Dave
@Pterrafractyl–
With regard to the 7/26 update–Mont Pelerin is an interesting place.
Check out FTR #456 (among other programs) for the conference there in April of 2002.
VERY interesting.
Best,
Dave
@participo: Here’s a recent article that’s a reminder of the split in the Federal Reserve’s Board of Governors, with the inflation hawks holding a Merkel/Weidmann-esque mindset where austerity now (for the proles) to prevent possible future inflation is the only acceptable course of action. No matter what. It’s the kind of mindset that leads one to suggest that the economy is doing well enough now that it would be desirable for the to Fed intentionally raise interest rates in order to increase borrowing costs and, in turn, increase the deficit at a fast enough rate to “force” the US Congress to find “a sustainable solution” to the deficit. And it must be implemented ASAP for the markets to have enough confidence in the future to begin making new investments now. It the kind of mindset held by the inflation hawks that leads one to conclude that only after we officially make long-term plans for long-term austerity will the job creation truly begin:
Note that the threat of higher inflation is the usual argument for ending the Fed’s market interventions. We can now apparently had low inflation to that list of reasons.
Also, note that an +8% unemployment rate is apparently not very alarming anymore and a lower priority than the threat of maybe possibly some non-ultra-low inflation in the future.
Continuing...
“He said he hoped the Fed’s planned scaling back of bond purchases this year and rising interest rates would force the U.S. Congress to agree more quickly on reducing debt”. Now where have we heard that before?
@Dave:
That book contains quite a bit on the extensive help the ordoliberal thinkers received from both thier laissez faire counterparts like Friedrich von Hayek, one of the founders of the Mont Pelerin Society, as well as Germany’s big corporations intent on squashing any “collectivist” sentiment in post-War Germany. From p.119–122 of The Road from Mont Pèlerin: the making of the neoliberal thought collective:
And here’s an article about a Mont Pelerin Society gathering last year where the eurozone crisis and the legitimacy/usefulness of eurozone itself was discussed. The discourse was revealing:
You have to wonder how many ‘dreamers’ of the Jean Marie Le Pen/Ahmed Huber variety were in the audience for that one.
Here’s another reminder of how the dire warnings in the US by people that should know better about Social Security and Medicare being perpetually on the verge of burying the nation in unsustainable spending have been perpetually wrong:
And in other news about being perpetually wrong...
Wait, so the official Greek bailout plan that mandates economy-crushing “reforms” also assumes a 3% annual rate of economic growth?! And if Greece doesn’t achieve that 3% growth it’s forced to endure more austerity? How could that be?
Oh yeah, I forgot for a moment that we’re living in a world managed by “supply-side” nut jobs:
It’s often said that the rest of Europe needs to become more like Germany to fix their economies. Are folks sure about that?
Krugman gives credit where credit is due: Art Laffer just admitted that “Inflation does not appear to be monetary base driven”:
Keep in mind that the “Laffer Curve” is the popularized term for the general economic relationship between tax rates and government revenues but with a Reaganomics/tax-cuts-for-the-rich-friendly interpretation. Also keep in mind that Art Laffer has been using his celebrity economist status on the right to advocate junk economic-policies for decades, so this really was a pretty great comment for Laffer to make. Especially because the idea Laffer publicly questioned — that the expansion of the money supply/monetary base (which is often required for government stimulus programs or deficit spending) must necessarily lead to inflation — is some sort of unstoppable and unkillable zombie cockroach idea that’s long been used to justify all sorts of really bad policies for years and still gets used to this day (Just ask the eurozone).
So, in the spirit of evidence-based open-mindedness towards inflation-related economic ideas...I would like to preemptively and simultaneously endorse both Bitcoin and The Venus Project, but it’s a package deal with conditions: If humanity should someday create a society where the consumption of vital non-renewable resources is anonymously tracked using a fixed-supply digital crypto-currency and then equitably shared amongst all using a giant supercomputer and this future economy doesn’t end up giving Jean-Luc Picard a concussion then Bitcoin and The Venus Project totally get my endorsement. Consider this a cautious putative thumbs up.
Krugman reminds us of a historical fun-fact that remains tragically topical: Historically speaking, the gold-standard mostly sucked even during the best of times:
Well, if ‘passably well’ economic performance isn’t going to be an option for the eurozone, there are always the unpassably well options.
Here’s some good news for Germany’s youth and maybe even the global youth...if they happen to live in Germany:
Well, you can’t complain about that! Although let’s hope those students studying in Germany’s economics departments stay away from the economics programs with an ordoliberal bias. That kind of education in ‘ordoarithmetic’ might not be worth it even if it’s free:
Yes, let’s hope those young econ students, especially the international students that might take their new knowledge back home, stay away from the courses offering ordoarithmetic. Otherwise we could see a growing international contingent of new economists dedicated to same old ideas that brought us this:
Of course, prospective economics students should keep in mind that the ordoliberal school of economics is far from the only one in need of significant revisions. So choose wisely young economists because many of your prospective professors didn’t. Also, when in doubt reread your basic macroeconomic textbooks.
In the latest futile effort to drag the EU out of the austerity-induced deflationary death trap, France has given up declaring “No more!” to further austerity. Instead, France has a new proposal: France cuts 50 billion euros in public spending with an offsetting 50 billion euro increase in spending by Germany so at least the austerity madness doesn’t continue to drag down the total EU aggregate demand. This never really had a chance of success, but it couldn’t hurt to try....assuming another round of futile negotiations doesn’t hurt:
So after all of France’s huffing and puffing about “no more austerity!”, we get this offer: How about France cuts 50 billion euros from its public spending with an offsetting 50 billion in investments by Germany. And these aren’t investments in France by Germany. France is simply calling for Germany to make investments in Germany’s infrastructure. And, as expected, such calls were met with dismay.
Also note that German finance minister Wolfgang Schaeuble ruled didn’t rule out a German stimulus package entirely. As we’ll see below, he just ruled out any form of stimulus that might increase Germany’s debt (because who cares about collapsing aggregate EU demand when Germany’s first balanced budget since 1969 might be achieved next year). So he basically ruled out a stimulus, but he’s open to magical spending-free stimulus programs. Also, he’d like to see Germany implement more measures to increase its “competitiveness”, which, as we know by know, is a call for further wage suppression and austerity. Yes, France requests more spending by Germany in exchange for ongoing French austerity and Berlin responds with calls for no increases in spending and more Germany austerity. How helpful:
So here we are: European economies can’t even convince Germany to end austerity plans for itself while growth forcasts are getting slashed and the continent is about to fall into outright deflation. Why? Because “we must keep to what we have promised,” says Schaeuble. Keep in mind that this “promise” was a Merkel campaign promise. That’s it. And yet somehow other campaign promises don’t seem to get the same kind of priority in the new EU. Funny how that works.
When parallel universes collide all sorts of crazy things can happen. It might even create the kinds of conditions you’d find in a sci-fi fantasy flick, although a horror movie scenario is what you should probably expect:
This last part pretty much summarizes the situation:
Yes, “As a result [of the unrelenting parallel universe policies], the economic costs of crisis resolution will be extremely large”. Much like ordoliberalism, the parallel universe phenomena is unfortunately asymmetric. The nice parallel universe policies that care about everyone tend to stick to their own planes of existence.
Bloomberg has a piece on lingering French/German trust issues and how it’s bleeding into today’s EU economic policy debates. It’s a rather significant complication for the EU era when multinational consensus is required to create any sort of meaningful policy shift. But if no actual policy shift is desired and the austerity and deflation that arise from policy inertia are the actual goals, these trust issues are exactly the kind of hurdle that should give one deep faith that nothing will change. Except for the lingering trust issues. They’ll presumably change as the economy continues to erode. For the worse:
Wow, so according to senior policy fellow at the European Council of Foreign Relations, the German public’s distrust of French economic management is a consequence of a convenient “narrative” propagated by Germany’s politicians and media and the“Germans think they did everything right, and in reality they benefited a lot from a combination of good luck and wage moderation...If you speak to senior politicians and policy makers in Germany, they are well aware that this isn’t as easy for France as people might believe.” It seems like some of those trust issues might be a bit misdirected.
In other news...
Our Chillingly Ironic New World Ordoliberalism:
Because it’s always 1923. Always.
Of all the macroeconomic BS to emerge from the poor-kicking trans-Atlantic pro-austerity economic establishment in the last few years, one of the worst is the new notion that near-zero inflation or even a little outright deflation isn’t so bad after all, despite all the empirical evidence to the contrary. What’s wrong with lower prices? Aren’t lower prices a good thing? That’s one of the new memes that, curiously, we hear more and more from the defenders of austerity as the eurozone slips closer and closer to outright deflation.
Well, here’s an example of what’s wrong with a little deflation: “less investment, which in turn reduces potential growth, the future becomes even grimmer and investment is reduced even further”. You know, the classic deflation trap that is now gripping Europe:
Yep, the classic deflationary trap is already manifesting. And that’s according to Peter Praet, the European Central Bank’s chief economist. And the “minimum requirements for monetary union” laid out by ECB chief Mario Draghi is a European superstate that has no chance of being implemented and could easily result in a technocratic nightmare if ever implemented (it wouldn’t have to be a technocratic nightmare but it would probably end up that way given the current leadership).
So it’s not really debatable whether or not a deflationary trap is beginning. Instead, we get debates from policy makers over whether or not the deflation is a bad thing:
You read that correctly: Mariano Rajoy’s ruling right-wing Partido Popular (People’s Party) of Spain welcomes deflation as an example of the success of the insane “internal devaluation” strategy. Feel the optimism:
Note that the above poll results were published by the European Commission, an entity that would have an incentive to skew polling towards more positive EU views if anything. And yet 66% of Spanish citizens believe their voice does not count for anything in the European Union, 65% support the euro, and 53% are optimistic about the continent’s future. And more generally, only four in ten EU citizens “feel that their voice counts”. And a majority of EU citizens expect that ‘the worst is still to come’ economically.
So we’re seeing a popular psychology where a significant percentage of those that the support the current structure of the European Union and eurozone also view themselves as voiceless and think a bad situation is going to get worse and this pattern is true even in the most austerity-ravaged nations. So basically the EU citizens’ appear to be stuff in a strange head space of plummeting hope for their own personal futures but tepid hope for the continent as a whole. Remember when Merkel was pushing a 25 year economic consolidation package for Greece back in 2012? Well, it looks like a large chunk of the EU populace is already internalizing that set of expectations: a lost generation as the only source of hope.
So given the incredible betrayal of the EU elites in the obvious damage they’ve inflicted in civic spirits across the continent, here’s a reminder from Paul Krugman that EU policy makers’ betrayals includes a betrayal of basic economics:
“Both basic macroeconomics and the agreed-on rules of the game for the euro said that this adjustment should be symmetric with what went before — that overall euro area inflation should remain at target (or higher, says the economics, but leave that aside), with Germany running significantly higher inflation so that low inflation in the south could deliver the needed “internal devaluation”.” And yet the rules got changed and Southern Europe and Ireland are now relegated to a new “lost generation” paradigm.
It’s quite a betrayal and yet it seems to be working. Not working economically, but if enough people just lose hope and deflationary traps become redefined as acceptable or somehow unavoidable, the economic lessons of the Great Depression and the following seven decades (Keynesian economics, etc) just might become de facto dead. At least in Europe. So it’s been an incredible betrayal because it’s just a betrayal of the public trust. It’s also a betrayal of the idea that reason, knowledge, and compassion should determine public policy instead of ideology and superstitions. So it’s sort of a betrayal of The Enlightenment too:
Yep. There’s no shortage of blame to throw around for the ongoing deflationary austerity disaster and incredible betrayals of civic trust, but you can’t really blame orthodox economics for this latest round of madness. Our new Dark Age of Macroeconomics has basically been an act of macroeconomic textbook burning.
But here we are, betrayed and living in the Macroeconomic Dark Ages and forced to find a way out of this mess. Good luck. Sado-thetans don’t purge easily.
Part of what makes the EU economic crises so alarming is that, with the collapse of the political center, we’re seeing a political landscape emerge where the newly rising left-wing parties HAVE to see significant changes to the prevailing austerity policies if they’re going to have any credibility at all with the voters, and yet ANY success by parties like Syriza or Podemos is going to be interpreted as political death for the parties in power that backed austerity. The pro-austerity parties simply cannot ever allow voters to find out that all this pain and suffering was totally pointless. It would be guaranteed political austerity.
And yet the current situation, where economies just continue languishing in near-depressions, is also untenable and will only drive more and more voters into the hands of parties like Syriza or, alarmingly, the far right. Which basically means that the EU political elites have managed to box themselves into a corner with no obvious way out. Beware of feral elites busily backing themselves into corners:
As Evans-Pritchard points out:
And that pretty much summarizes the situation. Even the austerity-riddled governments of Italy and Spain arguably have an incentive to be so uncompromising with Greece that a Grexit occurs and financial turmoil consumes their nations because that turmoil isn’t as scary to these governments as the possibility that the populace will realize that their leaders....
Yep. A complete disaster like a Grexit that risks the future of the European Project is apparently less scary to EU politicians than the possibility that voters wake up to their complete betrayal of known economic science and the lessons of the 1930s. Which, terrifyingly, suggests that Europe’s governments have by and large already crossed the Rubicon of mass deceit. The Big Lie of austerity-o-nomics has been so big and so contrary to reality that there is no going back. And it’s mostly been the center-right and center-left pushing this Big Lie.
So beyond questions of what’s going to happen in the short or medium-term, you have to wonder what the long-term repurcussions are going to be for Europe to see its center-left and center-right governments all simultaneously discredit themselves in such an historic and epic manner. Especially in Germany. Because as much as we hear from German analysts that a Grexit would be acceptable, that’s still going to be a massive shock to the country, especially if its followed by an unwinding of the euro altogether. And if there’s one thing the German political establishment does not want to see, it’s a large amount of public attention on the very logic of the austerity policies and what could be more effective at garnering all that public attention than a dissolution of the eurozone?
In addition, what’s going to happen to German workers if they lose the euro and the nation’s currency spikes as a result. Oh yeah: Austerity. A LOT more austerity, which will be needed if Germany’s export-oriented industries are going to keep their global edge. Keep in mind that Germany’s council of economic ‘Wise Man’ were calling for more austerity back in 2013 when the German economy was still doing quite well. What kind of austerity schemes are these ‘Wise Man’ going to have in mind for the German workers when the economy loses the massive export-edge gained from from using the euro?
That’s all part of the impossible mess facing Europe right now. The EU elites crossed the Rubicon, backed garbage economic theories that were going to create long-term doom for the masses, ended up creating ongoing medium-term doom, and now find themselves in a situation where basically everyone is backed into a corner, including the EU elites.
So with all that in mind, let’s take a look at a recent Paul Krugman piece on the American elite’s mental allergy to thinking about money:
“The sad thing is that this epistemological panic is gaining a growing hold over American conservatives at a time when the standard way of dealing with money has, in fact, been covering itself in glory. ”
And that same epistemological panic, or something analogous to it, has gripped Europe so tightly over the last six years that we might actually see the entire European Project fail because that would be less painful than an elite-rethink of the nature money. At least less painful to the elites. Others will probably be more open to a money rethink.
Here’s a reminder that the eurozone is totally screwed unless the populace can come to terms with the fact that fiscal transfers from rich member states to poor members states is the only realistic way to make the eurozone work, and since there’s no realistic way to get the citizens of the wealthier nations to accept the notion that their poorer neighbors actually deserve fiscal transfers (in exchange for using an artificially high currency), there’s also no realistic way to actually solve this fundamental challenge for the eurozone. This sounds like a job for
SupermanShare Bear! If anybody sees Share Bear please let her know that Europe needs to learn the power of sharing:What happens when an irresistible force meets an immovable object? They presumably pass through each other without interacting, which is sort of opposite of sharing but probably preferable to them interacting since that could create a super black hole or something.
But at least if the super black hole eats us, it will also consume all of the other black holes in our vicinity, like the various socioeconomic and ethical black holes created by austerity policies and junk economic theories that are slowly consuming society. The silver linings are never easy to see when your society is being consumed by black hole policies, but they’re there. Could be worse!
It’s Back!
Remember the whole Reinhart-Rogoff debacle? That was the controversy that erupted in 2013 when it was discovered that the paper published by economist Carmen Reinhart and Kenneth Rogoff had some serious errors, which was a big deal since their 2010 paper concluded that once government debt surpasses 90% of GDP serious negative consequences will take place and austerity measures designed to bring down that public debt are totally justified to ward off the looming +90% disaster. So when it was discovered that this influential paper had a problem it was a very big deal since it was published right when right-wing governments around were looking for an excuse to slash public programs. So yes, flaws were found in the theory, Paul Krugman pointed these flaws out, Reinhard and Rogoff called him uncivilized, the IMF closed ranks around them, and the rest is history. Except for the austerity. That isn’t history.
Still, at least it seemed like the world had sort of moved past the magical “90% of doom” thing. But as we’ve learned over the years, stopping the zombie hoards is easier said than done:
91%! We’re in the danger zone people!
Also, note that when Weidmann talks about how “Sovereign debt needs to be backed by capital”, he might be referring to another one of his pet zombies, the gold-standard zombie (Weidmann sees fiat currency as a Faustian bargain). But he’s also referring to another, related idea he’s been pushing for years: Systematically discouraging banks from buying sovereign debt for poorer countries:
“Indeed, Mr. Weidmann said that Europe should go it alone if global agreement on the treatment of government bonds proves impossible.” So that’s probably going to happen at some point.
Also keep in mind that part of Weidmann’s long-term plans don’t just include systematically raising public borrowing costs (especially for the poorest nations) and forcing nations to hold higher levels of capital to back up their debt. The ability for nations to go bankrupt is very important for his vision of the future:
That’s right, according the head of the Bundesbank, not only do we need to jack up borrowing costs for the poorest nations, but we also need to ensure those nations can default. Now, presumably he isn’t imagining that non-eurozone nations adopt this model since it would basically involve nations that still have their own central banks (the non-eurozone zone of the world) self-imposing a synthetic gold-standard and refusing to print money when the situation calls for it. But still, for the eurozone members, the possibility of default is pretty much already reality thanks to folks like Jens Weidmann:
That’s right, the same guy that wants to systematically raise rates for countries like Greece AND wants them to be able go bankrupt ALSO accepts “that Greece’s overall debt is very high, but said the burden was more manageable due to lower interest rates and deals to extend repayment deadlines”.
He also doesn’t “buy the argument that they are financially overburdened,” but then warns that Greece is about to default, but opposes an increase in emergency loans.
So it looks like we might be entering into a new phase of the Europe’s descent into madness: First we got that brutal “we’re imposing austerity so you can get your debt under control phase”-austerity phase. And now that all the austerity has caused a rise in debt-to-GDP ratios, it looks like we might be entering the “how about we just let you default”-phase.
The future awaits!
Ambrose Evans-Pritchard has another piece on the crisis in Europe over what to do about the the biggest single violator of the eurozone stability rules. And no, it’s not Greece:
Well that was typically shocking, but here’s the real kicker:
Yep! One of the excuses you often hear of late to these kinds of criticisms is that Germany’s trade is almost in balance with the rest of its eurozone members which is true now, but that’s only because demand for German goods evaporated in the austerity-addled countries after they fell into depressions. Instead of reducing its trade surpluses by raising wages and importing more from its neighbors, Germany continued largely suppressing wages and demanded that its ailing neighbors follow the “internal devaluation” path to trade rebalancing where all of the eurozone’s ‘periphery’ economies ended up ‘devaluing’ their internal economies so much that the public simply couldn’t afford to import. That’s how the intra-eurozone surpluses were dealt with.
And now, instead of using those surpluses to import more from its neighbors and rebalancing the eurozone or just engaging in fiscal transfers (which are politically toxic but probably the most effective and fairest long-term solution), those German surpluses are getting reinvested in neighboring economies that are so weak that the rates of return are a pittance. In other words, by pursuing a mercantilist economic strategy, German’s economy gained relative strength within the eurozone in a manner that weakens the overall eurozone itself. There’s a word for that.
And going forward, pretty much the best case scenario for the rest of eurozone ‘periphery’ is the worst case scenario for the world, especially given all of the grand global free trade agreements under consideration. The only path to healing for the eurozone periphery that the troika allows is that they redesign their economies under the German ‘Ordoliberal’ model to promote exports, suppress wages and domestic consumption, and then run massive surpluses with the world too and pulling that off is the best case scenario under these rules. And if they all accomplish that, the whole world is f@#ked. There’s a word for that too.
The London School of Economics and Political Science’s European Politics and Policy Blog has an interesting post summarizing the work of two researchers that just interviewed a number of senior German finance and foreign ministry officials and examined how the dominant role ordoliberalism plays in Germany policy-making decisions has basically become the new overriding framework across Europe with all sorts of negative unintended consequences (they actually frame their analysis within an “unintended consequences” model). Putting aside whether or not all those negative consequences were actually unintended, it sounds like some interesting new research:
“In this vein, many of the interviewees within the German ministries expressed a sense of bathos that although Germany, as both a political actor and a source of institutional norms has effectively ‘won’; this has resulted in a large number of consequences that Germany neither foresaw nor wished for.”
Bathos in the halls of power from the folks that have consistently insisted on the very policies that keep the crisis going. Imagine that.
And note this key insight gathered from their interview of senior German finance and foreign ministry civil servants:
First, keep in mind that one of the most severe structural weaknesses across almost all of the eurozone economies at this point is the fact that the eurozone has removed their monetary and fiscal room for manoeuvre. But also note the key paradox at work in the worldviews the researchers found held by senior German foreign and finance ministry officials: in order for Germany to be an effective leader, it needs to have a strong economy. And therefore, policies that keep Germany’s economy strong are needed in order to ensure Germany has the credibility and legitimacy it needs to steer Europe through this period of crisis. How exactly policies that might harm Germany’s economy somewhat but help the rest of the eurozone get interpreted within this framework is a bit of a mystery which is rather problematic for something like the eurozone. And it’s a reminder that, when it comes to crafting crisis-response policies for the eurozone, there’s a rather fine line between “unintended consequences” and acceptable collateral damage.
In the long run, we’re all dead. But at least before we die we get to learn a lesson or two and hopefully carry on those lesson to the next generation. So in the long run, we may be dead, but hopefully humanity is more knowledgeable too.
Of course, as this 2010 post by Paul Krugman reminds us, when those lessons of the past involve things like adopting a Keynesian-style short-term stimulus response in order to deal with a major consumer demand shortfall that logically results from a major recession so we can avoid a deflationary death-spiral, there’s no shortage of economist that would gladly choose long run deflationary damage as long as it involves the kinds of supply-side “structural reforms” (like gutting pensions and public spending and cutting taxes on business) that the right-wing has been pining for for a long, long time and would only help (in theory) in the long run unless “expansionary austerity” is actually a valid concept and the implementation of long run supply-side “reforms” somehow leads to a short-term stimulus.
In other words, in the long run we may all be dead, but the ideological zombies of the pro-austerity supply-side crowds don’t learn and never die:
So that was 2010, when the US’s fiscal stimulus (which, as Krugman pointed out when it was being proposed, was too small for the task at hand) was winding down and Europe was just getting started in its quest to prove Keynes wrong and supply-side Ordoliberalism right. As we already know, it’s a long run quest:
Note that the above article was written in 2012 and it was already apparent by then that Europe’s policy debates were going to be less about that actual merits of the dominant Orodoliberal orthodoxy that had suddenly become the default economic template for Europe and more about how the rest of Europe is just going to have to come to terms with the fact that opposition to anything other than Ordoliberal supply-side mandates were simply not going to politically feasible in Berlin:
Also note that when you read:
that this analysis ignores the Keynesian argument that a temporary stimulus is actually what is needed to get a nation’s house “back in order” under abnormal circumstances like a major demand shortfall (assuming you don’t want to wait for “the long run” to fix things). But beyond that, the Ordoliberal argument not only ignores the fundamental issues associated with a currency union and “sharing” monetary policy, but, somewhat amazingly, Ordoliberalism actually rejects the lessons from one of the schools of economic thought most associated with the term “supply-side economics”: Milton Friedman and monetarism:
“In conclusion, it is hard to be optimistic about Europe’s economy while conventional economic thinking and history are being ignored.”
Yes, it is indeed hard to be optimistic about Europe’s economy when it’s leaders are caught in the grip of an economic death cult that makes Milton Friedman seem like a genius in comparison. And as the article pointed out, it’s also hard to be optimistic when the Ordoliberal policies focused on “structural reforms” actually make key structural reforms (like reducing private-sector debt) less likely:
Feeling optimistic? No? Well, don’t think that complaining to the architects of Europe’s Ordoliberal regime like German finance minister Wolfgang Schaeuble will make a difference. He’s already made it clear to critics that he’s had enough of their criticism of Ordoliberalism and Berlin’s “management role” that it never wanted but has accepted (his words):
When you read, “referring to economies in Spain, Portugal and Ireland that returned to good health after adopting unpopular EU rescue programs that enforced austerity measures,” note that the unemployment rate in Spain is the second highest in the eurozone at 22.5 percent. Also, Ireland’s recovery should probably be taken with a grain of salt. And Portugal’s overall unemployment rate in July fell from 14.1 percent in July 2014 to 12.1 percent this year. And the youth unemployment in Portugal fell from 31.6 percent to 31.0 percent, which is significantly better than Spain’s 53.2 percent youth unemployment rate but still significantly greater than the EU average youth unemployment rate of 22.2 percent.
These are the Schäublenomics success stories touted by Schaeuble and Merkel.
Continuing...
Behold, Schäublenomics!
Yes, “We intend to make sure that government spending grows more slowly than tax revenue. This generally means that government spending must not grow faster than GDP does,” so let’s implement austerity policies that shrink the GDP so much by slashing government spending that the debt-to-GDP ratio is actually higher in Spain, the UK, France, Italy, Portugal, Ireland, and Greece than it was in 2012 (which were already significantly elevated from the 2010 debt-to-GDP levels, when austerity really got underway and much much higher debt-to-GDP levels than in 2008, which is quite notable when the entire narrative of pro-austerity crowd was that out-of-control public spending was the problem).
But we shouldn’t complain about the imposition of “Schäublenomics” because Germany, as Europe’s biggest economy, has a “special relationship” with the rest of the eurozone (and EU) to do that which politicians won’t normally do because it might cost them their elected office:
“As long as there were 28 governments accountable to their 28 parliaments and electorate, nothing will ever happen that could harm politicians’ chances to be re-elected.”
And therefore the eurozone should just let Wolfgang Schaeuble assert his rightful “management role” as the finance minister of the eurozone’s largest economy and impose “Schäublenomics” on the rest of the the European Union despite the fact that it’s an economic theory that’s basically failed supply-side economics combined with the false hope of a decent public sector (because only the wealthiest nations get that under “Schäublenomics”) and some sort of mercantilistic exports-at-all-costs viewpoint that can’t possibly work at a continental or global level. Europe has a “special nature” with 28 sovereign countries and therefore a grand EU experiment with an unprecedented monetary union and “Schäublenomics” should just be uncritically imposed and given enough time to prove its critics right. Americans should just think of him as Europe’s version of Grover Norquist, except taking the pledge isn’t really an option. Why can’t people accept all that and stop complaining? It will all work out in the long run.
In other news...
The Economist had a piece on Ordoliberalism that makes some key points about the economic philosophy that really can’t be stressed enough these days: First, it’s important to keep in mind that Ordoliberalism is school of thought that, like the Austrian School, is basically a liquidationist school that declares government stimulus spending a pointless waste and mandates that we just wait for “the market” to work itself out regardless of the consequences. It’s not particularly surprising considering that Walter Eucken, the father of Ordoliberalism, frequently shared ideas with his close friend Friedrich von Hayek.
A second key is closely related to the first, but still worth explicitly pointing out. It’s also a rather shocking point considering that this is the economic school of thought that dominates the eurozone’s policy-making, but it is what it is: Ordoliberalism “is at heart a microeconomic model that disavows macroeconomic policy because it treats countries, or even an entire currency zone, as if they were individual households”:
“Ordoliberalism’s biggest flaw, says Mr Burda, lies in “failing to do the aggregation step”. It is at heart a microeconomic model that disavows macroeconomic policy because it treats countries, or even an entire currency zone, as if they were individual households. It makes sense for individuals to save when they are in debt, as the proverbial Swabian housewife does in Germany. But if all individuals cut spending at the same time, the result can be a shortfall in demand that negates the benefits of microeconomic reforms. Once in a while it is better to break rules than all go under in law-abiding misery. Yet that is not how things are seen in Berlin or Frankfurt.”
That’s a pretty good summary of a pretty massive flaw: economic models that are to be applied to entire nations (or continents) probably should disavow macroeconomic policy and treat countries as if they were an individual household. And yet here we are:
Yep, the EU is now run according to an economic philosophy that is a somewhat less insane version of the Austrian school, in that it actually allows for the involvement of the government in managing the economy. So the government is highly limited in what its allowed to do to help during a crisis under ordoliberal doctrine, but still empowered to do what it takes to maintain the integrity of the marketplace (that’s stuck in the crisis). Just sit back and wait for the market to work it’s magic, and eventually the crisis will work itself out. The most important thing is that the market be allowed to work its magic. Also, nations can be treated like households when crafting economic policy. In other words, contemporary ordoliberalism somewhat less insane version of the Austrian school and, therefore, a less insane (but not nearly less insane enough to avoid self-reinforcing depressions) version of the the Ron Paul school of economics. So it could be worse for Europe in terms of the quality of the dominant economic philosophy. But not much worse than if the Austrian school was running the place. Bravo!
And in unfortunately related news, Neel Kashkari, a former top U.S. Treasury official who managed the government’s $700 billion Troubled Asset Relief Program during the financial crisis and then ran as the Republican nominee for Governor in California, and who also happens to be a strong proponent of seeing the Fed raise interest rates over unfounded fears of runaway inflations, just got chosen to head the Minneapolis Federal Reserve Bank, replacing one of the biggest supporters for the current policy of low interest rates and Quantitative Easing:
“At the end of the day, this is not going to lead to real economic growth...Unfortunately, it likely leads to an inflationary outcome.”
That was Kashkari’s predicted result of Fed’s decision in 2012 to extend the Quantitative Easing program. Fortunately, the inflation permahawks like Kashkari and Richard Fisher have had a habit of being perma-wrong over the past six years. Unfortunately, that perma-wrongness also means inflation is probably still too low for the Fed to start the inevitable rate rise without risking the recovery. And now, with the Fed set to end its Quantitative Easing program and raise rates sooner or later, one of the biggest supporter of the low rate policies that helped the US avoid a eurozone-style deflationary death spiral is getting replaced with a permahawk. As Paul Krugman recently put it, in the words of Charlie Brown, AAUGH!:
“That word “artificially” is the real telltale, as is Kashkari’s description of Japanese monetary stimulus as “morphine.” It’s straight out of the liquidationist playbook, e.g. Hayek denouncing the use of “artificial stimulants” to fight the Great Depression.”
Yes, the newest Federal Reserve governor sure does sound a lot like Friedrich von Hayek. Of course, Hayek was also an opponent of having central banks at all, which is presumably something Kashkari doesn’t quite agree with. Of course, he also managed the US bailouts, which presumably wouldn’t have been approved under an Ordoliberal regime either. And back in 2001, he even advocated that the European Central Bank start its own QE program and buy bonds (while he was working for the bond giant Pimco).
So while Kashkari’s views share a number of disturbing similarities to the Ordoliberal school, he would appear to be a bit of a fair-weather Ordoliberal at best (And he’s not the only one)
Germany appears to have a surplus of record surpluses on its hands. First it reported a record budget surplus for 2015 back in February. Recently it was placed on a new US watchlist for nations potentially engaged in unfair foreign-exchange practices due to its massive current-account surpluses, which was the second-highest in the world. And how it has another record current-account surplus:
“While Germany has no direct influence over the value of its currency, being just one member of the 19-nation euro area, it was cited because of its current-account and trade surpluses. Taiwan made the list because of its current-account surplus and persistent intervention to weaken the currency, according to the Treasury.”
The fact that Germany has no direct influence over the value of its currency, since it’s part of the eurozone, is important to keep in mind. Because it is true that the economic woes across the eurozone call for a much lower currency valuation than Germany would normally have, and you can’t blame Germany for a cheap currency. The rest of the eurozone really does need it.
Granted, this is ignoring the critical role Berlin has played in maintaining the depressed eurozone economies via its insane and ongoing demands for austerity. But in a general sense, the way the eurozone is structured it’s entirely predictable that situations where Germany has a much cheaper currency than it probably should have, due to weaknesses elsewhere in the eurozone, are going to pop up over and over. And that’s why it makes sense for US criticism to focus on the massive current-account/trade surpluses. Because, while a cheap currency that leads to a big surge in exports might sort of be beyond German control at this point (again, this ignores the profound and outsized role Berlin plays in shaping eurozone and EU policies), whether or not this results in record surpluses or record budgets is still entirely totally within Germany’s control. We can’t have a functioning global economy when major exporters keep running chronic trade and budget surpluses and the eventual plan is to have those major exporters just own larger and larger chunks of the global economy. Germany just needs to spend and import more. It’s not like it can’t afford it.
Although, if you listen to Bundesbank chief Jens Weidmann, Germany basically can’t afford it. Why? Because it has a long-term demographic issue of a shrinking population and so, according to Weidmann, the appropriate thing to do is run structural surpluses now. And when you factor in that Germany’s population is probably going to be falling for decades to come, it’s basically an argument for structural surpluses indefinitly:
“The long-term sustainability of public finances calls instead for Germany, with its demographic burden, to run a structural surplus.”
Now, keep in mind that, to some extent, this is sort of a valid argument...if only consider one nation and ignore the rest of the world and the fact that large swathes of the world (primarily the developed world) are also already facing shrinking populations and the countries that are still growing are generally a lot poorer and had better start leveling off sooner rather than later if we’re going to avoid an eco-collapse. Because the global population can’t grow forever. Leveling off, or shrinking, the global population humanely is simply one of he major challenges of the 21st century. So if shrinking populations are going to be an excuse for running permanent trade and budget surpluses, we’re basically setting ourselves up to systematically strangle the global economy. Because, as the eurozone crisis needlessly reminds us, we can’t all run surpluses at once! In other words, like much of the economic ordoliberal orthodoxy we’ve seen emerge from the Berlin (which is basically updated crypto-mercantilism), if that orthodoxy gets applied everywhere, the global economy breaks.
So we’ll see if the “we’re shrinking and therefore we need to run record trade budget and surpluses indefinitely”-argument catches on outside of Germany. Japan and China probably wouldn’t mind the argument for permanent surpluses although the developing nations still struggling with high growth rates presumably won’t be super enthusiastic about the wealthiest nations in the world systematically hoarding wealth and expecting the poorer nations to basically finance those surpluses indefinitely. But, for now, it’s one of the justifications getting used by very influential people for why Germany’s surplus of surpluses is not only not a problem, but is actually a needed long-term strategic goal. Let’s hope it’s an idea that doesn’t get overly exported.
Nobel prize-winning economist Joseph Stiglitz wrote a book about the eurozone. Based on the excerpt below, it sounds like a must-read book. Especially for the eurozone’s policy-makers. Although one of the key points of the following excerpt is that the eurozone’s policy-makers have an ideological commitment to discredited theories driving the eurozone’s dysfunction, so a lot of other people should probably read this book too:
“Why would well-intentioned statesmen and women, attempting to forge a stronger, more united Europe, create something that has had the opposite effect? .The founders of the euro were guided by a set of ideas and notions about how economies function that were fashionable at the time, but that were simply wrong. They had faith in markets, but lacked an understanding of the limitations of markets and what was required to make them work. The unwavering faith in markets is sometimes referred to as market fundamentalism, sometimes as neoliberalism. Market fundamentalists believed, for instance, that if only the government would ensure that inflation was low and stable, markets would ensure growth and prosperity for all. While in most of the world market fundamentalism has been discredited, especially in the aftermath of the 2008 global financial crisis, those beliefs survive and flourish within the eurozone’s dominant power, Germany. These beliefs are held with such conviction and certainty, immune to new contrary evidence, that they are rightly described as an ideology. Similar ideas, pushed by the IMF and the World Bank around the globe, led to a lost quarter-century in Africa, a lost decade in Latin America, and a transition from communism to the market economy in the former Soviet Union and eastern Europe that was, to say the least, a disappointment.”
That’s right, the ideological economic foundations of the eurozone were fashionable in the 90’s, subsequently and thoroughly discredited through neoliberal policy failures across the globe, and yet still they remain fashionable. Or, if not entirely fashionable, still the rules. With no end in sight.
And the same is largely true from the rest of the European Union too. Well, except for Britain, although even in that case it’s very unclear just how long the long arm of the austerity fetishists will reach because there’s a new EU policy fashion emerging regarding the best type of glue to use to hold the remaining EU together, and Britain needs to be squashed in order to get that glue:
Fear. Fear is the fashionable new euro-glue.
If that scares you it’s apparently supposed to. For the benefit of everyone. Or at least someone.
The ECB just issued a report calling for greater fiscal spending in the eurozone “core” economies as a means of mitigating the effects of austerity on the austerity-riddled periphery economies and pulling the zone out of near deflation and weakening growth. Not that this paper is going to make any difference, but it’s still worth noting the ECB wrote it since it’s going to be completely ignored:
“His plea has fallen on deaf ears so far, with Germany, which is sitting on its biggest budget surplus since records began with reunification in 1990, reluctant to loosen the purse strings.”
Of course it fell on deaf ears. That’s just how the eurozone rolls. Even after a Brexit, persistent near-deflation, and a socioeconomic “lost generation” on the periphery, and basic economic theory, the eurozone “core” just can’t bring itself to engage in a fiscal stimulus.
Maybe this could change if, for instance, Germany started running a really, really big fiscal surplus and the eurozone as a whole started generating a massive current account surplus with the rest of the world. But since that’s already happening, maybe not:
“The Germans tend to see it differently. Rather than viewing budget surpluses as a beggar-thy-neighbor restraint on demand, they believe their fiscal prudence sets a good example for their neighbors.”
And once again we learn that Berlin’s economists either have no idea how economies works or are just playing dumb. Might they be playing dumb? Hmmmm...
Wow, so by refusing to acknowledge basic macroeconomic realities and accumulating a giant pile of excess cash, Germany is “sending the excess abroad in return for increasing financial claims on the rest of the world.” How helpful.
But at least it sounds like the IMF will be able to more easily call for Germany to increase its fiscal stimulus next, which should be helpful assuming Germany doesn’t just decided to ignore those IMF calls like it did this year. But even if the IMF does make that useless call, it’s worth noting that it’s basically the only call for fiscal stimulus the IMF is going to make:
“We’ve been living with low-rate, depression economics for 8 years now — and key players are still acting as if they’ve learned nothing.”
Yes, the key players are still acting as if they’ve learned nothing. Either that or, you know, maybe the key players have learned that they actually kind of like depression economics and would like to see it continue. Seems possible.
Here’s a great example of why the eurozone is basically doomed to dysfunction and despair: Germany’s export numbers for July just came in, along with fears that the sharpest drop in exports in over a year point towards a “crash landing” in global demand. This is all to be expected since a global demand shortfall has been one of hte hallmarks of the post-2008 crisis global economy and, thanks to the GOP in the US and the Berlin-led austerity faction in Europe, there’s basically nothing other than central bank monetary easing left to avoid a crash. In addition, ECB chief Mario Draghi just issued a rebuke to Berlin for refusing to use its fiscal surplus to shore or domestic demand and hopefully rebalance the wildly unbalanced eurozone current accounts. And despite this bad news for Germany’s exports and the ECB’s calls for a stimulus package, Germany’s imports dropped too and the its current account surplus (exports minus imports) is set to make another record this year after breaking records in 2015. Plus, Finance Minister Wolfgang Schaeuble declared that there will be no additional government stimulus and nothing should be done to decrease the record surplus.
So we now have an answer to the question of whether or not Berlin would be willing to shift gears and back pro-growth policies even in the face of falling exports: Nope, it will just cut imports instead and keep the record surpluses:
“The Munich-based Ifo economic institute has said the wider measure of Germany’s current account would probably hit a new record surplus this year, overtaking that of China again to become the world’s largest.”
Yeah, despite the medium-term drop in Germany’s current account surplus, somehow it doesn’t seem like Berlin’s policy-makers are going to be a hurry to change anything after once again overtaking China to hold the world’s largest current account surplus.
So is there anything that’s going to make Berlin change its mind? Well, it sounds like it’s maybe possible if the SPD somehow gains control although who knows what they could accomplish in a political environment where the AfD is on the rise.
But as the article below hints, there is actually one very real possible scenario that would almost inevitably entail a pretty massive stimulus commitment from not just Berlin but the entire EU and that scenario became a lot more likely in the wake of the Brexit: Replacing NATO with an EU army. That’s not going to be cheap:
“The Brexit vote has opened the floodgates to the idea. The prime ministers of Hungary and the Czech Republic have urged the EU to build its own army. Only this week, German Defence Minister Ursula von der Leyen, who was visiting Lithuania, declared that “it’s time to move forward to a European defence union which is basically a ‘Schengen of defence’.””
Note that when Germany’s Defense Minister Ursula von der Leyen called for a “Schengen of Defense”, she told the audience in Vilnius that “That is what the Americans expect us to do.”. So there appears to be a big push for a big new EU Army.
Also keep in mind that when you read the above opinion that the prospects of an EU Army run by the EU, as opposed to a NATO model of a coalition of sovereign militaries, that assumes there aren’t serious plans for an EU military:
Well, we’ll see if the term “EU army” remains largely meaningless and just a coalition of militaries without the creation of a single EU Army command structure. But if EU Commissioner Jean-Claude Juncker’s vision for an EU Army that he laid out in 2015 comes to fruition, there’s going to be a Brussels-run army. And be part of a large European-wide military modernization investment program. The EU Army gets built with a bunch of new weapons and a new mega-MIC to boot. And German Defense Minister Ursula von der Leyen endorsed the idea at the time, saying an EU Army is in the future, but not yet:
“But in Germany, Ursula von der Leyen, the defence minister, said in a statement that “our future as Europeans will one day be a European army”, although she added “not in the short term”. She said such a move would “strengthen Europe’s security” and “strengthen a European pillar in the transatlantic alliance”.”
That was German Finance Minister Ursula von der Leyen’s opinion last year: Jean-Claude Juncker’s vision for an EU Army is the future, just not in the short term, which means the short term is only about a year since she thinks it’s time for an EU Army now.
Also note that in 2013, there were reports of existing EU plans for and EU air force of air-to-air refueling planes, heavy transport, and a military drone program and purchased and managed at an EU level. So there really probably is going to be an “EU Army” that’s a command structure fully operated by Brussels.
And, again, all that’s going to be mighty expensive. There’s no way an EU army isn’t going to end up being a major fiscal stimulus. A misdirected one, perhaps, but the bigger this gets, the bigger that stimulus is going to be. And we know Germany wants to make this thing happen so that’s a huge signal that it could happen in the short term. And assuming this new army is acquired in such a way that acts as a real stimulus, where there aren’t automatic budget cuts elsewhere but this become real EU-level stimulus spending, it’s going be a real stimulus and probably at least kind of popular everywhere because of that. It’s a reminder that one thing austerity policies could end up doing is catalyzing acceptance of spending money on an EU army in a big way: building an EU Army, run by a Brussels command structure and assumed fiscal and/or direct military contributions by the the entire EU, could end up being the only allowable EU-wide stimulus that even austerity-stricken countries get to participate in. Because so far there’s nothing. Even Germany, with with world’s largest current account surplus and budget surplus, won’t allow itself to fiscally stimulate its own domestic demand. That’s how crazy the EU’s fiscal stimulus are now and for the foreseeable future. Imagine how tantalizing EU army spending is in that kind of policy environment.
If it’s hard to imagine the EU nations all agreeing to start pooling military spending and personnel under a common Brussels-run command-structure without further political and fiscal integration (i.e. creating a “United States of Europe” first), keep in mind that the eurozone was a giant real-world experiment in skipping politics. It happened. And as long as tensions with Russia continue to simmer, the odds of a “we have to build an EU army to stop Russia from invading” argument is going to gain momentum. So this could happen sooner than we think The EU knows how to build put politics in the backseat.
Don’t forget how much creating the euro — unifying currencies without a much deeper political unification, the kind that would have prevented Berlin from basically running the continent in in the even of a fiscal crisis — was basically an insane idea that involved creating a shared sovereign framework without the required fiscal burden sharing and political fusion or general solidarity that’s required to make shared currencies for something on the scale of the eurozone to work. The eurozone was supposed to help create political fusion and general solidarity. That’s how the EU operates. It happened. So when you read that Juncker sees the EU army as helping to integrate the foreign policies of EU nations, he’s describing a eurozone “Field of Dreams” template of political integration: if you build the EU-wide institution that requires political integration, the political integration will come. Last time it was monetary policy, this time it’s going to be the procurement and direction of military forces and foreign policy:
““Such an army would help us design a common foreign and security policy,” the former prime minister of Luxembourg said.”
An EU army that leads to integrated foreign and security policies (so everyone falls in line when Brussels declares war) is pretty much what we should expect. This is how the EU operates and all signs are things like an EU army are how it’s going to integrate further. The eurozone was just the first “zone”. It is now time for the “Schengen of Defense”. As Juncker said last year “A joint EU army would show the world that there would never again be a war between EU countries”. An EU army is intended to be part of what creates an EU identity.
So, given the looming EU army reality, it’s going to be absolutely fascinating to see how this new army gets financed. And where this new army gets built. Military procurement in the US has been, if anything, a political bonding experience. It’s been a big trough, and a lot of people shared it. That’s not now the EU has operated so far, but it could. If there was an EU institution that could most easily be arranged to facilitate the widespread of EU-wide pork spending and make everyone kind of happy, it’s the procurement of a brand new EU army. Especially because no other form of stimulus is allowed.
This all assumes that there is any meaningful short or medium-term investments in an EU army. Maybe austerity will win the day even on that. But even if that military build up stimulus only happens in the long run in a big way it’s a notable development in the evolution of the EU that we’re seeing a big push from key players to create an EU army in the wake of the Brexit. If that happens soon it’s going to be exactly the kind of fiscal stimulus the EU economy desperately needs. And if that stimulus happens later rather than sooner, it’s still probably also going to be exactly the kind of fiscal stimulus the EU economy will need because nothing else is allowed. That’s how the EU is set up now after all the treaties like the Fiscal Compact and all indications are that further “integration” is going to involving more built-in austerity is junk economics. Whatever stimulus is allowed, military or otherwise, is exactly the stimulus the economies need because they are starved for demand due to the insane Ordoliberalism that dominates the EU’s fiscal policy now.
So, assuming spending on an EU army gets budget prioritization and becomes a mechanism whereby the EU can “redistribute the wealth” and a mechanism for fiscal transfers from rich member states to poor, and remains basically the only EU policy that allows for stimulus spending, we could be looking at the emergence of a new framework that super-charges the creation of a big new military force. Spending on schools and the poor is highly controversial, especially if it involves fiscal transfers from rich countries to poor countries to pay for the poor countries’ poor. But fiscal transfers from rich to poor for a new army? That’s probably going to be much more politically palatable. Because people are messed up like that.
try not to be super shocked if the next big push in EU solidarity is an EU army that’s sort of a military version of the eurozone’s “if you build the politically complicated institution, the politics will come”-experience. An EU army is the one potentially allowable kind of investment everyone might get behind where it’s conceivable that we could see a big EU spending push and Germany is already behind it. This could happen.
If you’re wondering how an EU army under a central command is going to happen without adequate political integration, just think of the eurozone and the whole Ordoliberalism experience. *gulp*
With the proposed purchase of Time Warner by AT&T once again bringing attention to stunning level of concentration of ownership in the US media landscape, it’s worth noting that discussions of corporate ownership are about to heat up for a different, although overlapping, set of reasons: German politicians are pushing for EU rules against foreign corporate acquisitions of high-tech companies, in particular acquisitions by state-owned or partially state-owned firms. Fears of Chinese investors buying up German companies is creating a backlash and it’s getting taken to the EU level. So this could happen as an EU thing. Sooner than you might think since it’s getting a good reception. At least from the EU’s competition minister Gunther Oettinger, who also happens to be Germany’s former energy minister and a CDU party member. How this evolves is going to be something to watch.
Also keep in mind that one of the signature characteristics of the EU and the austerity/exports at all costs strategy that Berlin has demanded of the EU. Especially in the eurozone and especially to the benefit of Germany exporters. And that means growing levels of foreign acquisitions by EU firms, especially German firms, is a given. That’s part of the plan. The whole Ordoliberal-ish theory behind austerity is that nations cut their costs and imports so much that they can export their way back to prosperity. And that means generating current account surpluses and foreign acquisitions. That’s the EU plan. And now new barriers on foreign acquisitions of high-tech companies are part of the plan too:
““Minister (Sigmar) Gabriel has, however, repeatedly made clear that he would like to sound out options — also at the European level — to make fair competition possible, especially in international competition with state-subsidized foreign companies, and at the same time to remain open for investment,” the spokesman said.”
That’s Sigmar Gabriel — the Minister of Economic Affairs and head of the Social Democrats — who is repeatedly making it clear he would like to “sound out options — also at the European level”. So we should probably listen when they get around to sounding this out. Because based on the article below, it sounds like they’re specifically trying to target Chinese corporate takeovers in Germany and countries with their own barriers to foreign acquisitions more generally, but the proposals are also vague enough that it might create a general EU right to block all non-EU investments greater than 25 percent of ownership of a company. So that’s pretty big. It’s not quite clear if that’s really what’s being proposed. So when they start sounding this out, listen:
“The initiative by Gabriel, who also is Germany’s economy minister, calls for allowing EU member states to step in if a non-EU investor seeks to acquire more than 25 percent of the voting rights in a company, according to a government document obtained by Bloomberg. Restrictions would potentially kick in if the home country restricts foreign investment or its government orders or funds the acquisition.”
Well, we’ll just have to wait and see how this plays out, but an EU-wide frameworks that makes it easy to block partial foreign corporate takeovers is going to be a quite a development for how both the EU and the global community evolve going forward. Or at least might be a big development. If EU “core” creditor nations end up having less competition when it comes to gobbling of corporations on the periphery that’s the kind of dynamic that could create new strains on the social cohesion of the EU which would be ironic given the ostensibly ‘EU patriotic’ nature of the whole proposal. And it could have all sorts of fascinating impacts on global trade rules. It all depends on what the actual proposals are. But with the EU and Canada’s trade deal stalling and the TTIP potentially dead too, we’re at one of those points were new protectionist foreign ownership laws could become a global trend.
In other news, Germany’s current account surplus is scheduled to hit another record this year and German corporations are investing heavily abroad. It’s a reminder that unbalanced capital flows are going to make the upcoming protectionist foreign ownership phase of the breakdown of globalization extra awkward.
Now that a Trump presidency is slated to destabilize the world with incredibly ill-advised policies, foreign and domestic, one of the few positive things we can expect to emerge from the US federal government for at least the next four years is an endless stream of unfortunate lessons about what not to do. They might be unfortunate lessons, but if they’re the kinds of unfortunate lessons that help future generations avoid obvious blunders, hey, that’s could be a real positive legacy of a Trump administration. This is of course assuming there actually are future generations.
But a Trump administration isn’t going to have a monopoly on bad ideas and some of the unfortunate lessons the Trump administration bequeaths to future generations could be collectively learned lessons via global screw ups that a Trump administration enables but doesn’t solely create. For instance, now that the EU has adopted a de facto Ordoliberal economic paradigm and basically dedicated itself to running net trade surpluses indefinitely, and China and Japan are similarly running significant annual surpluses, who on earth is supposed to by all these net global export surpluses if the US ends its historic role as the demand-sponge for the rest of the world? What type of impact is that going to have not just on the current global economy but also prevailing economic thought if the US suddenly prioritized running its own trade surpluses indefinitely too, and implemented policies intended to slash imports rapidly? We might find out. And we might not like that answer.
Also recall that this issue of the impossibility of collective trade surpluses came up elsewhere recently The impossibility of every eurozone country running trade surpluses simultaneously was a major underlying issue raised by the eurozone crisis, due in large part to austerity and trade surpluses being the only allowable path out or the many eurozone members’ array of crises. That’s the Ordoliberal paradigm for economic recovery, and it wasn’t resolved in any meaningful way. Or even meaningfully acknowledged by European’s leaders. But it was a real issue. And with China and Japan also running major trade surpluses, it’s pretty clear that the only thing keeping this ‘balance of trade global surplus impossibility’ from blowing up globally is the fact that the US was willing to be the global export sponge indefinitely. That’s one of the major advantages to holding the global reserve currency: the US could be a massive demand sponge and just keep the global economy sort of chugging along. So what’s going to happen when the prevailing doctrine of ‘trade surpluses lead to national wealth’ gets auto-debunked after the Trump administration tries the same scheme:
“Mr. Laperriere said markets aren’t taking seriously enough Mr. Trump’s tough talk on trade, in which he equates trade deficits with theft. While the White House needs Congress to approve tax cuts, Mr. Trump has wide authority to change trade policy unilaterally.”
Ok, so if trade deficits are going to be equated with theft, it sounds like Trump is going to be prioritizing both decreasing imports and increasing exports. Of course, all the major export partners he’s going to try to be increasing exports to are, themselves, running net-surplus trading strategies and general adopt the “trade surpluses are the path to prosperity” paradigm. This is going to end well.
Now, it’s important to point out that the “trade surpluses for prosperity” paradigm isn’t a false paradigm. It really will make a nation wealthier if it’s just running trade surpluses year after year indefinitely. The problem is that it’s a paradigm that, by definition, can’t work for everyone. It really is a “zero-sum” approach to increasing prosperity if the same nations are running surpluses year and year and it’s an impossibility for everyone to do it year after year. So it’s not a very neighborly national paradigm and an insane global paradigm. And that’s the problem. Trade surpluses for everyone isn’t a functional global paradigm, whether or not that globe is embracing economic globalism or protectionism. The math simply does not work either way.
Also keep in mind that running trade surpluses could end up being the rhetorical trick a Trump administration uses to back out of its pledge to pull the US out of major trading agreements while still appearing to stick to the spirit of that pledge. So, assuming Trump really does make running US trade surpluses a priority, there could an economic ideological reckoning of sorts on the way for the global community. Considering that we’re talking about a reckoning of basic math and out inability to face up to it, it could be quite a reckoning.
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It’s all a reminder that Trump’s promises to blow up ‘the system’ really is going to present some significant opportunities to rethink long-held assumptions because while Trump can blow things up easily, there’s very little indication his team will have the competence to put things back together. So we just be be on the verge of one long reckoning filled with lots of new lessons we should already know. Enjoy everyone!
Here’s a article from June of 2017 that gives a nice overview of the transformation of the AfD from what was originally a party about promoting Ordoliberalism and calling for Germany to exit the euro and slowly transformed into a party focused on ethnonationalism. It’s an article that was written at a time when the AfD’s fortunes were seen to be falling and it’s taken on a new significance now that the AfD is poised to make big gains in the upcoming vote in Bavaria and is just generally rising in popularity. Because while it’s clear that a rising AfD is going to push Germany to the right on all sorts of policy issues related to refugees and immigration, a rising AfD is also going to be inevitably pushing Germany economic policy in its direction as the CDU and CSU adopt positions designed to stop the electoral hemorrhaging. And that’s going to include movement towards the AfD’s economic platform. So it’s going to be important to keep in mind that the rise of the AfD — a party founded to promote Ordoliberalism and the idea that Germany is being sapped by the eurozone (which is laughable) and should ditch the euro — is probably going to make the German political establishment even more ordoliberal when it comes to economic policy, with an additional willingness to threaten leaving the euro if they don’t get their way. Which is terrifying given how disastrous Europe’s ordoliberal-driven austerity policies have been in recent years.
So that’s all one more reason the rise of the AfD is such bad news: it doesn’t just mean more ethnonationalism and far right chauvinism. It also means more Ordoliberalism, which is extra scary in the context of Germany’s place in the eurozone So don’t forget that the rise of the AfD is also terrifying for economic reasons too:
“The man is called Bernd Lucke, founder of the AfD and an ordoliberal economist at the University of Hamburg. He sees himself and the party in the tradition of Kohl, Schmidt and Adenauer who acted, so he says, in the interests of the people and in respect of other European nations. Merkel, however, makes the Germans pay for Greek mistakes while interfering in other countries’ business. Rather than saving Europe, she threatens it.”
It’s easy to forget these days that it was ordoliberal economist Bernd Lucke who founded the AfD on a platform of primarily economic grievances related to the eurozone crises and the various ‘bailouts’.
Lucke had the view that the eurozone was unsustainable, which was and is a valid criticism of the eurozone. But because of his ordoliberal ideology, Lucke is adamantly opposed to the kinds of things that would make the eurozone work, like the expectation of regular financial assistance from the rich to the poor member states. And for some reason the ordoliberals don’t acknowledge that the wealthy export powerhouses like Germany are helped economically by pooling their currency with a basket of weaker currencies at the cost of the poorer states have more expensive exports and that’s part of the reason there should be an expectation of regular rich-to-poor fiscal transfers. But in the ordoliberal narrative the best and only way to deal with situations like the Greek crisis was mass ongoing austerity and the demands that countries adopt a strict ordoliberal policy orthodoxy.
And that’s part of what’s absurd about the AfD’s ordoliberal complaints: the austerity policies imposed on countries like Greece and Ireland were ordoliberal policies. The only thing Lucke was really opposing about the austerity policies getting imposed on Greece back in 2015 was the billions in ‘bailouts’ that were paid out as part of the deal and a perception that that there wasn’t enough austerity imposed on Greece.
And we can’t forget that the ‘bailouts’ were actually largely loans to the P.I.I.G.S.. An those ‘bailout’ loans were used to actually bailouts private lenders. And the repayment of those ‘bailout’ loans became the pretext to implement the ordoliberal austerity policies. So the AfD was founded on opposition to the ‘bailouts’ that were actually usury agreements used to impose the ordoliberal austerity demands. The origins of the AfD is rooted in a horrible unresolved economic psychodrama:
Highlighting how the rise of the AfD is going to particularly impact the policies of the CDU and CSU, we can’t forget the AfD was largely started with CDU members:
But then, in 2015–2015, the far right ethnonationalists like Frauk Petry took over and Lucke was out, causing him to leave the party. The focus on ordoliberal economics was also replaced with xenophobia over refugees:
But with the rise of Alice Weidel as one of the AfD’s key leaders we’re seeing the enduring influence of the AfD’s ordoliberal roots. So it’s going to be interesting to see if that’s an enduring trend:
Yep, Weidel is both an ordoliberal and comfortable working with the New Right nationalist (neo-Nazi) wing. That’s how the ordoliberal wing of the AfD dealt with the rise of the neo-Nazi wing. They put forward a far right agenda that includes strict Ordoliberalism. And that’s probably going to remain a feature of the AfD because Ordoliberalism is very amendable to the far right’s various economic policy agendas and is going to have an obvious appeal to German chauvinists. So there’s no reason to belive that the ordoliberal ideology is going to get pushed out by the rise of the ethnonationalist wing of the AfD. They can co-exist just fine. As Alice Weidel and Alexander Gauland manifestly makes clear.
We’ll see. But a party that thinks Greece has it too easy is on the rise in Germany and it’s doing that by largely stealing the CDU’s and CSU’s voters. So Germany’s right-wing is about to get extra crazy for the foreseeable future. That’s just a given at this point. And since it’s the AfD that’s driving the CDU and CSU extra crazy, and since Ordoliberalism is a key aspect of the AfD’s ideology and popular appeal (German voters that hated the bailouts will find the ordoliberal positions appealing), it’s almost certain that the CDU and CSU are going to get more ordoliberal going forward. Which is amazing and terrifying. But that’s where we are. So let’s hope we don’t see any new national financial crises pop up in the eurozone over the next decade or so. Because that crisis probably going to get a super extra hardcore ordoliberal response if current German political trends continue.
International financial markets have been swooning again in the wake of another day of President Trump’s rage tweeting on Friday. And while that sounds like just another day during the Trump presidency, part of what made Friday’s tweets so unsettling was both the scope and intensity of the rage tweets.
For starters, following the announcement by China that it was considering new retaliatory tariffs on US goods and a speech by Federal Reserve Chair Jerome Powell at Jackson Hole where Powell accurately noted that, while future Fed rate cuts are on the table, there are limits to the economic stimulus a central bank can provide in the face of a president determined to wage one trade war after another, Trump asked himself on Twitter whether or not Powell or Chinese President Xi Jinping is a bigger enemy of the United States. It was a destabilization-by-tweet twofer:
““While monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rule book for international trade,” said Mr. Powell, who spoke in Jackson, Wyo., at the Federal Reserve Bank of Kansas City’s annual symposium.”
Stimulative monetary policy an do a lot and the Fed is ready to do more, but it can’t simply negate the effects of an ongoing and deepening trade war where tit-for-tat retaliatory measures have become the norm. That’s the message Jerome Powell had for the markets on Friday and it was message Trump didn’t take well:
So Trump declared both the president of China and the head of the Fed to be “enemies” of the United States. And that just the first part of Trump’s Friday rage-tweeting. He went on to tweet out that we had the authority to order US companies to leave China. This is why markets are swooning.
At least it’s part of why markets are swooning. As precarious as Trump’s open-ended ad hoc approach to trade negotiations may be, we can’t pretend that he’s the only source of economic instability around the globe. And that points towards one of the current opportunities available at the moment for cooling things off between the US and China. As we’ve learned over and over, the one sure fire way to diffuse a Trumpertantrum is to distract Trump with a different fight. And with the G7 meeting taking place this weekend there is a wonderful potential distraction right there: Germany.
Because if we had to look for a country with leadership more intent on damaging the global economy than Trump, it’s Germany. After all, it’s German leadership that helped send the eurozone into a depression, resulting in a weak euro that’s boosted German exports. And it’s Germany that has long played the role of the top decision-maker in EU, and especially eurozone, economic affairs and guided policies from an Ordoliberal economic orthodoxy that is mathematically unworkable on a global stage. Running massive trade surpluses as the path to national wealth might work for individual nations but the entire European continent, let alone the world, obviously can’t run a trade surplus with itself, and yet that’s more or less the economic model Germany has imposed on Europe.
Beyond that, Germany has led the way in opposing the very idea that fiscal stimulus measures can be effective and appropriate. Instead, as Germany’s European neighbors have seen their economies sputter, we’ve seen Germany running steady budget surpluses since 2014. Part of the justification for these surpluses is the absurd EU debt rules stating that a debt-to-GDP ratio below 60% and deficits below 3% needs to be maintained under the threat of fines. Rules that conveniently weren’t enforced back in the early 2000’s when Germany and France were systematically violating them. In other words, the decision to run budget surpluses under the guise of adhering to the 60% debt-ceiling rule was really a political and ideological choice.
Yes, instead of doing its part to stimulate both the Germany economy and the economies of his eurozone partners and correct its obscene trade surpluses, Germany has been lowering its debt-to-GDP ratio for the past five years. But as the following article describes, those surpluses have resulted in Germany’s debt-to-GDP ratio dropping so fast that it’s schedule to fall below the 60% ceiling next year. And that means that debt-ceiling rule is no longer going to be a valid excuse for Berlin to avoid doing the responsible thing and run fiscal stimulus policies. As a result, even politicians in Berlin are beginning to warm to the idea of running some surpluses next year. But at this point it’s still just talk, talk that’s predicated on Germany not falling into recession before then and not hitting that 60% ceiling in time. And as is abundantly clear at this point, if Berlin can find an excuse not to engage in fiscal stimulus, it’s going to do so.
Also keep in mind that when Jerome Powell lamented how there are limits to what central banks can achieve with monetary stimulus alone, one of the major economic tools central banks have no control over is fiscal policy.
So if President Trump wants to pick a useful fight in global trade relations he could hardly find a better fight to pick than the fight to get Germany to actually spend its wealth for everyone’s benefits. Especially now that Germany is about to lose the debt-ceiling excuse:
“Germany’s debt level is expected to fall to roughly 58% of economic output this year from 60.9% the previous year, putting it below the European Union’s debt ceiling of 60% and giving it more flexibility on future spending.”
No more excuses. At least next year there won’t be any more debt-ceiling excuses for Berlin’s reckless budget surpluses, assuming there isn’t a recession before then that causes the GDP to shrink. and right now it’s looking like that recession just might arrive. Or might already be here:
And that’s part of why pressuring Berlin it to start running surpluses now would be an actually useful trade fight for Trump to pick. At least in theory. He’d probably still screw it up. Still, given the ideological aversion to fiscal stimulus that dominates in Berlin, perhaps threats from Trump are exactly the kind of political excuse Merkel’s government needs justify the immediate stimulus that the situation calls for.
Although Trump’s threats might also be the excuse Berlin uses to resist a stimulus. Who knows at this point. All we know is that Berlin really doesn’t want to deviate from the current path of massive budget and trade surpluses, regardless of the costs to the rest of the European or global economy. For example, as the following article lays out, at the same time we’re getting chatter from German media that Berlin is starting to think about fiscal stimulus measures to counter the fear looming recession, we’re also told by Merkel herself that she doesn’t see the need for any new stimulus to counter the slowing economy:
“Chancellor Angela Merkel said on Tuesday she did not see any need for a fiscal stimulus package to counter the effects of a slowing economy. She added that her government remained committed to a high level of public investment.”
And that’s why we shouldn’t be taking this talk of Berlin’s willingness to engage in fiscal stimulus seriously. Merkel herself sees no need and this is with the German economy shrinking in the last quarter. Of course, she might change he mind, especially if there’s a sharp contraction over the next year. But let’s not forget that the 2014–2019 period was filled with far worse economic turmoil for the eurozone than the current situation and Berlin was adamantly opposed to fiscal stimulus back then. So if recent history is a guide, we probably shouldn’t be counting on any meaningful stimulus from Berlin regardless of how bad it gets.
Sure, there might be a few symbolic fiscal stimulus measures if it gets really bad, but we can’t forget that letting the economic situation get really bad and forcing mass austerity is a core element of Ordoliberal orthodoxy. It’s a version of supply-side economics that prioritizes budget and trade surpluses over useful public investments which is one of the reasons it’s such a bad economic ideology to adopt on a continental or global scale and why Merkel’s pledges of sustaining Germany’s current levels of public investment ring hollow. It has been widely recognized for years now that Germany has a huge backlog of public infrastructure needs that aren’t be addressed and now would be the perfect time to do it with interest rates at record lows. But budget surpluses were prioritized instead because that’s all part of Ordoliberal orthodoxy. Applying this philosophy to a union of member states or the globe is a recipe for endless disaster and that’s why Trump really would be actually helping for once if he managed to give Germany the excuse it needs to adopt a meaningful fiscal stimulus policy that addressed its egregious destabilizing trade surplus.
And if Trump does decide to pick a trade fight with Germany over its twin budget and trade surpluses, let’s hope he picks a fight with the Bundesbank too. Or maybe we shouldn’t hope that. It depends on whether or not Trump’s rage-tweeting makes the Bundesbank more or less hawkish and Trump usually screws these things up so we probably shouldn’t hope he rage-tweets at the Bundesbank. But as the following article about the Bundesbank’s stance on fiscal stimulus makes clear, the Bundesbank deserves a Trump rage-tweet. The German central bank expects another round of economic contraction in the current quarter, which would technically be a recession given the contraction last quarter, and yet it still doesn’t see any utility in fiscal stimulus. Like Merkel:
“Even with long-term borrowing costs below zero, the government has been reluctant to abandon its balanced-budget policy and jump into action. However, Bloomberg reported this week that it’s is preparing measures that could be triggered by a deep recession.”
Yep, only a deep recession will trigger the talked about fiscal stimulus measures. That’s the reality of Berlin’s apparent change of heart on fiscal stimulus. It’s not actually a change of heart.
But even more ominous is that the Bundesbank takes a similar view and also suggests that a deep recession is very possible. We’re also told the Bundesbank is expecting protracted stagnation. Which, again, is consistent with Ordoliberal orthodoxy. Fiscal stimulus, maybe, during a deep recession will be considered but protracted stagnation doesn’t call for fiscal stimulus. That’s why there’s mere talk of fiscal stimulus only if there’s a deep recession at the same time a recession is looking likely and a deep recession looks very possible. That’s how Ordoliberalism works. With planned austerity and a focus on maintaining surpluses at all cost:
So while all eyes are going to be on Trump’s ham-fisted rage-tweeting thumbs during the G7 summit as he continues to haphazardly shake the foundations of the global economy, let’s hope he he manages to make some sort of real progress on Germany troubling addiction to the twin budgets and trade surpluses. It would be nice if Trump brought up the insanity of the Ordoliberal demands for austerity, but the Trump administration is all about austerity for social programs too so he’s unlikely to bring that up. But he might bring up those twin surpluses and he should. Or maybe not. He’ll probably screw it up. But he should in theory. And it might distract him from accidentally breaking the US economic supply-chain in his fight with China. So maybe it’s worth it for him to bring it up despite the risks he’ll screw it up. A theoretical non-insane Trump should definitely bring this up during the G7 meeting because it’s actually pretty important.
It’s back. The European Union’s austerity monster is back. Not that it ever really left. But it’s striking a relatively unlikely target this time: Germany.
But it’s not EU rules imposing this on Germany. This is a purely German affair, thanks to the ‘debt brake’ rule that limits deficits to 0.35% of the GDP enshrined in Germany’s constitution in 2009. While that rule was never enforced during Angel Merkel’s years of CDU rule, it’s being enforced now, thanks to a CDU appeal to the German Constitutional Court over plan by current SPD-led government to use a 60 billion euro special fund set up by the CDU in 2020 in response to the COVID pandemic to finance the coalition’s ambitious green energy agenda. The court ruled in the CDU’s favor and now Germany is facing a fiscal crisis. And a likely dissolving government coalition.
As we’re going to see, the debt brake could be overcome with a simple a two-thirds parliamentary vote. But that’s not likely to happen without CDU support. And with polls showing the CDU likely to retake control during the next election cycle, there’s basically no political incentive for the CDU to compromise. Instead, it’s looking like it’s going to be a politically strategic fiscal and economic emergency for Germany until the next election cycle. Which isn’t coming until the fall of 2025. Almost two years of strategic crisis and forced austerity, thanks to Germany’s insane economic policies that are now enshrined in the constitution:
“The bombshell ruling by Germany’s Constitutional Court blew a €60 billion hole in the country’s finances, leaving the government scrambling to fill the gap. At the same time, the ruling sharply limits the government’s ability to draw from special funds created to circumvent the country’s constitutional debt brake, which restricts the federal deficit to 0.35 percent of GDP except in times of emergency.”
It was always obvious Germany’s constitutional ‘debt brake’ adopted in 2009 — restricting the federal deficit to 0.35 percent of GDP — was a disaster waiting to happen should it ever be enforced. It took 14 years, but here we are thanks to Germany’s Constitutional Court ruling on the use of the $60 billion special fund set during the COVID pandemic. As a result, the German ruling coalition’s ambitions green energy agenda has ground to a halt, at the same time Germany continues to struggle with high energy costs resulting from the war in Ukraine:
Beyond the immediate economic consequences, there’s the political reality that this ruling could effectively kill the Green Party’s political viability in Germany. If deficit spending can’t happen, the only other option for financing ambitious agendas for the future is politically damaging tax hikes. Germany’s debt brake, now that it’s actually being enforced, has effectively reoriented Germany’s politics towards the agendas of conservative tax-cutting parties:
Also note the disturbing political dynamic that is helping to drive the FPD’s and CDU’s opposition to lifting the debt brakes: the conservative parties are trying to peel away voters from the surging far right AfD, which has been surging in part thanks to its attacks on climate measures. This fiscal emergency is happening at the same time German voters are growing increasingly conservative, creating the political incentives to see this budget crisis worsen until it translates into a new conservative ruling coalition:
Will Germany’s odd-throuple coalition of the SPD, Greens, and FPD find a solution? Not likely. And certainly not with any help from opposition parties like the CDU. At least not as long as polls show the CDU likely to retake control in the next elections. Elections that don’t happen until the fall of 2025. Which means get ready for two years of politically strategic crisis and austerity for Europe’s biggest economy:
“The decision blew a massive hole through the middle of the coalition’s signature legislative agenda, in particular a plan to remake the German economy root and branch by weaning it off of fossil fuels. If the parties fail to find a new way to finance those plans, the coalition itself could quickly collapse, some analysts warn.”
As we can see, the ruling coalition could simply collapse as a result of this ruling. And while the SPD, largest member of the coalition, might have an incentive to dump the Greens and FPD and try to put together a new coalition with the CDU, there’s no incentive for the CDU to accept such an offer. Not with polls showing the CDU with a wide lead with elections two years away. Instead, Germany is in store for two years of political and economic turmoil. Strategic turmoil for Germany’s conservatives:
Also note the timing of this sudden right-wing concern over Germany’s deficits: it’s only now, after Angela Merkel’s 16 years as prime minister, that the debt brake rules are being imposed, and after they were lifted for the pandemic. It’s a rather selective idea of what constitutes an emergency:
And that brings us to the following Project Syndicate piece about how Germany’s new debt brake debacle is destroying its economy. And yet, thanks to the ability to create special funds and other workarounds, it’s actually quite easy to get around the debt brake. Two thirds of the parliament can vote for it. Except there’s no way that’s happening since all of the conservative parties are unified against the green retooling of the $60 billion emergency fund. The CDU — which was behind the original creation of the $60 billion fund in 2020 — even filed the appeal that resulted in the Constitutional Court ruling. As a result of these political dynamics, the debt brake effectively acts as a built-in austerity mechanism for Germany:
“Germany introduced the debt brake into its constitution in 2009, imposing limits that were far more rigid than those required by the European Union’s Stability and Growth Pact. The brake largely prohibits the federal and state governments from taking on new debt; exceptions are allowed only in extreme emergencies. The federal government used this emergency exemption in 2020 to allocate more than €200 billion in special funds to mitigate the pandemic’s economic impact.”
Germany isn’t just constrained by the European Union’s Stability and Growth Pact. It’s extra constrained by its own onerous constitutional amendment adopted in 2009 at the height of the global financial crisis. And the relatively even political divisions that require some sort of consensus from right- and left-wing parties. As a result, Germany’s conservatives have a permanent political and legal cudgel they can use to force austerity. Selectively. Corporate subsidies — at least non-green-related corporate subsidies — can continue through various special funds. But when it comes to social spending, the debt brake cudgel is wielded:
And note who was in power when the $60 billion special fund was created: Angela Merkel. The CDU was fine with creating this special fund to deal with a pandemic-induced economic emergency. But when it comes to both the immediate economic emergency created by the war in Ukraine and the long-term economic emergency of climate change, it was the CDU who appealed to the Constitutional Court, triggering this whole crisis:
How much worse will this crisis get for Germany? We’ll see, but the worse it gets the better it is for the CDU. And it wouldn’t have been possible without the debt brake clause added to the constitution. In other words, this is just going to keep happening. More and more special funds are going to be created. And more constitutional court rulings are going to go down in favor of austerity, damn the economic consequences. Politically strategic fiscal crises are is a feature of contemporary Germany. That wasn’t clear during Angela Merkel’s term in office. But it’s clear now. And bound to be more clear after the CDU takes over and finds all sorts of new things to specially fund.