Auditioning for Austerity: What German "Success" Means for Us

AUDITIONING FOR AUSTERITY:
What German “Success” Means for Us

December 15, 2011

Dear Citizens and Elected Officials:

When I get calls from my readers at 7:30 AM Sunday mornings asking me to explain what is going on in Europe, and wondering what my take is on a NY Times story headlined “Euro Crisis Pits Germany and U.S. in Tactical Fight,” then I know it’s too early to break off for the Christmas Season, so I hope you understand.

A similar alarm bell had been sounded earlier that week, when another NY Times’ story quoted a Republican financial consultant, David Smick, who posed the following to Newt Gingrich in late November: “‘What if I told you that given what’s happening in Europe, that whoever is president in 2013 might not see his party elected for another 30 years.’” Now in my experience, Republicans never, never talk that way about “their” economy, so something very important, very troubling must be brewing.

As I took a closer look at the first article, by Nicholas Kulish, I worried too. (Here at http://www.nytimes.com/2011/12/11/world/europe/euro-crisis-pits-germany-.... The real question behind the article is this: who is sovereign, bond markets or elected governments, and the fact that there are major shortcomings in the Euro Zone’s financial institutions still doesn’t change that overriding issue. Kulish says the Obama administration is very worried that Europe is going to botch the policies needed in the short run to stabilize the markets in Europe, and to prevent a recession that would likely pull the US back into one, and which could spell doom for the President’s re-election chances. Our own increased national debt and deficits were the necessary price to preventing another Great Depression, says Obama and Treasury Secretary Geithner, and in this they are surely correct. But this Times’ article avoids a discussion of the deeper schizophrenia on economic policy both in Europe and the US, a schizophrenia that, as George Soros has pointed out, also characterizes markets, which often have conflicting narratives competing for dominance.

Let’s try to make some sense out of the seeming chaos. As Thomas Palley points out in his brief piece in the Financial Times here at http://blogs.ft.com/economistsforum/2011/12/the-euro-lacks-a-government-... , the basic European structural problem is that they do not have a central bank that can issue a fiat currency (the Euro) and at the same time sell “European” bonds, which don’t exist yet. So they do not have the equivalent of the US’s Federal Reserve or Great Britain’s Bank of England, and the bond prices of the individual state's debt instruments in Europe, especially those of Greece, Spain and Italy, reflect that fact, among other things. But there is much, much more going on than just institutional inadequacy, as Palley correctly points out.

And that makes our second point, without which you will have no basis to fully understand the moment: the trouble isn’t just institutional shortcomings, it’s also ideological. Germany, which is in the European economic policy driver’s seat, is still enthralled, deeply, deeply enthralled, with the tenets of neoliberalism. Neoliberalism is the updated conservative brand of classical economics from the early 19th century, which believes that governmental debt and deficits are the main problems in crises like this, rather than, as the Keynesians do, that they are symptoms of deeper problems: unemployment and lack of demand, and central bank distaste for looser monetary policies, to name some, but not all of the other major troubles. That is not to say that Greece, Spain and Italy don’t have major failings economically; they certainly do. But it was the near collapse of the world’s financial system, and the resulting recession’s shrinkage of government revenue, that has decisively put them in the current situation. In Europe, that financial crisis was driven by the lending of the dominant European nations’ banks to the now despised “periphery” - the fuel for a commercial and residential real estate bubble which crippled even “model” neoliberal nations like Ireland, which has not been diagnosed with a national character disorder, unlike these other three.

That’s what so strange about the New York Times article. It makes President Obama and Secretary Geithner sound like New Dealers, which they certainly are not, and makes Chancellor Angela Merkel sound too much like a populist in her distrust of the American Wall Street model, citing as proof her attempt to make private investors – bondholders of the periphery’s public debts – take their fair share of losses, a notion which the “bond markets” rejected.

Meanwhile, Obama’s willingness to risk much higher debt to stabilize financial markets in the short run is given proper credit for preventing Great Depression II, without pointing out how far short his policies have fallen. They have left him with deep troubles, economic and political, because they have failed to solve either the unemployment crisis or the mortgage crisis, and he too, as all neoliberals are, is more concerned with the high debt and deficits than with 17% un-and under-employment and 25% of the nation’s mortgage holders under water. (Some expert sources are predicting more than the 10 million total foreclosures we did in January of 2011(See the essay The Way Forward at the New American Foundation, here at http://www.newamerica.net/publications/policy/the_way_forward )

In fact, although the President gave a stirring defense of the role of government in the economy in his Osawatomie, Kansas speech of December 6th, both he, the Federal Reserve, Chancellor Merkel and the German central bankers share more neoliberal assumptions about economics than this NY Times article or his speech would lead you to believe. And that is very troubling to me, and should be to you too.

After all, in the President’s speech, it is still individual upward mobility through further education that is the focus of striving, and there was no mention of the good bill (S. 1346) Senator Carl Levin introduced to close offshoring tax rewards and tax sheltering, nor any mention of Rep. John Conyers full employment bill (H.R. 870) linked to a financial transaction tax – both direct policy routes to the President’s enunciated goals.

Many observers have commented on the populist tone of the speech, but I would be cautious about that assessment. To the extent that the President is going to “channel TR” in the future, and try to turn him into a populist, then he needs to consider historian Robert Wiebe’s comment in his well respected book, The Search for Order, 1877-1920 (1967): “When Theodore Roosevelt advocated ‘taking ten or a dozen of {the Populist} leaders out, standing…them against a wall and shooting them dead,’ he was both benighted and vicious.” Roosevelt was closer to the middle class dominated progressive movement than he was to the earlier populists, but, as you will see at the end of this posting, many progressives did not return the sentiments. According to another eminent historian of the period, George Mowery, the majority of progressives, “while sincerely desirous of improving the plight of the individual workingman, (were) perhaps basically more hostile to the union than to corporate monopoly.” Thus “Roosevelt’s inclination to try labor lawbreakers in criminal courts is well known; his administration’s failure to indict criminally one corporation executive is eloquent of the limits of his prejudice.” (The Era of Theodore Roosevelt and the Birth of Modern American, 1900-1912, {1958}, pages 102-103.)

While conservatives in the US are horrified with the way loose monetary policy at the Fed (interest rates too low, for too long, going back more than a decade under two chairmen) caused asset bubbles, the Fed long ago abandoned a more vigorous framework for fighting unemployment with the full range of methods used by the New Deal, especially the public employment programs like the WPA and CCC. Instead, it is limited by those silent lines draw by conservative neoliberal policies, whose worldview it in large part shares. The Fed began worrying a great deal about the size of federal debt and deficits, much more so than unemployment and foreclosure, well before it was clear that we were enjoying anything like a genuine recovery.

The Fed can still be seen hand-wringing when not proclaiming it has done all it can do and the rest is up to government policy. But it knows all too well that government is also under strict neoliberal policy constraints against bold New Deal type job creation programs – on both sides of the aisle, and, we must stress, on both sides of the Atlantic. As further proof, look at what Republican Right candidate Gingrich has just tossed out: he wants to formally remove the employment side of the Federal Reserve’s dual mission to control both inflation and unemployment. It’s very telling, but almost unnecessary, because the Fed doesn’t much believe in it themselves, and never would be caught explicitly calling for a full employment program from Congress, despite all the research Chairman Bernanke has done on the Great Depression.

So what is the great difference between our Fed and the German outlook, now imposed on all the Euro nations? The US, with much Republican Right and Blue Dog democratic complaining, was willing to tolerate greater deficits in the short run than Germany will ever consider, to be better “emergency room Keynesians,” but both now want to lock in permanent austerity programs long before the deeper economic problems have been solved. President Obama says he wants a race to the top, not the bottom, but the views expressed in his Kansas speech don’t match up with his actions, and the fact that the essay The Way Forward has gotten so little attention despite Nouriel Roubini’s signature on it shows just how conservative mainstream economic thought still is, even among Democrats. Roubini and colleagues want to put all the debt and deficit talk aside for five to seven years, and I agree, to focus on job creation, and to force the banks, with carrots and sticks, to take losses to save millions more homeowners from foreclosure and further financial ruin. It’s so much easier to talk about what Teddy Roosevelt said in Kansas in 1910 than to consider more dire assessments of where we stand economically, and bolder plans to put people back to work.

Now let’s get to the schizophrenic aspects of Germany, the US and the markets. Chancellor Merkel, the Times’ article points out, is happy to use the panic caused by speculators in the bond markets to stampede reluctant nations like France to lock that fiscal austerity into the Union’s policies; yet any good economist ought to worry that the history of the last 30 years of financial markets proclaims that capitalism is nowhere near stable enough to legally lock in a policy that says governments can never run deficits greater than 2 or 3 percent of their GDP. So she is trying to use the same financial markets she otherwise has condemned as leading the US astray, detracting us from a more solidly grounded economy that still makes things. Yet what are those bond markets really saying?

We think they are saying two divergent things, because there is no one bond market. The bond market is composed of a range of institutional investors, from insurance companies to union pension funds, wealthy individual speculators, hedge funds, and investment banks, many of whom will benefit greatly from short and medium term turmoil. Many want the neoliberal prescriptions locked in: cut public wages and pensions, sell off all remaining public enterprises so the private buyers can make a killing at the distressed sale prices offered by desperate governments. If you have any doubt that is the goal just look at the stipulations for Greece, Spain and Italy as conditions for further assistance. It is pure wage and therefore demand suppression at an extraordinarily dangerous time. It may contain wonderful bargains for private firms and wealthy speculators and still be a disaster for the economy as a whole. One of the clear, if unstated, assumptions behind this view is that today’s capitalism is healthy enough to jettison the stability that a large and well paid public sector provided through the business and finance “cycles.”
But is it? How long can the unemployed wait for the recovery? (Echoes of from 1929-1932, and beyond). Who says the neoliberal dismantlement of what’s left of social democracy will go smoothly, without triggering a revolt in the streets? Even President Obama seemed to recognize, in his Kansas speech, that a hyper-efficient capitalism might not be the job generator it was in previous eras. Obama urges more American innovation to better compete in global markets; yet the previous rounds have led to lop-sided trade imbalances and the emergence of two champions: China and Germany. After German austerity has settled in over all of Europe and wages have equalized (fallen, that is) just what is it that Greece, Italy and Spain will make to sell to those world markets, where China and even Eastern European competitors can match their products at a lower price?

I had no sooner written the question-mark after that sentence when I came across this paragraph from a Matt Stoller posting at Naked Capitalism, where he is quoting the Dallas Federal Reserve President, Richard Fisher, from minutes to a 2005 meeting:

‘Everyone I’ve talked to continues to try to figure out ways to exploit globalization. Each of them, from the IT {information technology} guys to the big box retailers to the specialist chemical firms to the service firms, wants to have offshore supply. One of the CEO’s said ‘We have a long way to go in exploiting China.’ We’ve heard that forever. And one of my favorites was the comment, ‘China, India, and Indonesia can make Italian ceramics better than Italians can now or could 200 years ago’ {Laughter} Here at http://www.nakedcapitalism.com/2011/12/matt-stoller-why-does-the-dallas-...

Others in the bond markets, as a few news accounts suggest, think this is too deflationary a policy for this economic situation, and therefore are putting downward pressure against the Euro and the periphery bonds because they don’t think Germany’s policies will work. They want to see something very different, although exactly what is not usually spelled out; presumably it is something closer to the Obama-Geithner view, which is not terribly reassuring, since that view has failed as a medium term solution, whatever good it has done in the short run.

Let’s also not forget that many, if not most in the speculative markets are there to make a profit, if not a killing. As the fate of Jon Corzine’s MF Global and the Belgium-French bank Dexia have shown, market turbulence still has the potential to backfire on even the savviest of players, and it was not too reassuring to learn that MF Global had leveraged up heavily in that favorite old worry spot of mine – the repo market. That market represents the deepest and most mysterious of finance’s magic show, and I don’t recall reading much about whether the 2010 financial reform had improved it.

And the broader lesson we draw is this: despite the spin put on the President’s Kansas speech, and on TR himself, neither view matches the scope and creativity found in the New Deal, which in turn must be surpassed to get us out of this crisis and on to a better economic future. Both the President and the Chancellor are in thrall, more than they admit, to the financial markets and the neoliberal project, which demands lower wages from all but the owners of businesses themselves - and selective and rapidly changing technical skill niches.

It is not widely known that wage austerity was already applied domestically in Germany, years ago, to keep Germany’s export driven economy more competitive with the depressed/suppressed wages in Asia. The governmental debt and deficit limits are in bold print in the new agreements, but the coming wage austerity – creating more “flexible labor markets” – in the rest of Europe, is in the finer, and even in the “implied print” of these arrangements. While some progressives ( like Thomas Geoghegan) have praised what Germany has done internally by holding down wages, and done so without formally breaking the unions, there are great dangers when other nations follow the same path simultaneously. It is not much different than the effects that the gold standard had in the 1930’s: to force balanced budgets upon even left wing governments, which were so unsure of themselves that they could not creatively challenge financial orthodoxy. England and the US only saved themselves by ditching both the gold standard and balanced budget austerity, even though the leaders who did it were still more than a bit haunted by the guilt of the break and the growing deficits.

And that’s exactly why we recommended Karl Polanyi’s The Great Transformation to you this summer. As the authors of The Way Forward pointed out, what is sound policy at the individual and single firm level, becomes a collective disaster when applied across many firms and nations. And that’s where we’re headed now in the West, Europe as well as the U.S. The great tragedy for everyone is that centrist and even left of center governments here and in Europe are still so enthralled (or is it trapped?) by neoliberalism that they could not design effective and convincing policies to save their people and their economies, primarily because the brute fact is that the financial markets still rule over the common good, despite The Presidents declarations.

Editor’s Note: The elected European left which tried to “moderate” their way through this crisis have been tossed out of office, as have clowns like Berlusconi. So who has replaced them? Mario Monti, Italy’s newly appointed Prime Minister, the new head of the European Central Bank, Mario Draghi and Greece’s new Prime Minister, Lucas Papademos, all share a common tie according to Elisabetta Povoledo’s November 14th article in the New York Times: they have worked for Goldman Sachs. That should be a resounding alarm to the European left, which has yet to develop, like the left in America, a humane civilian economic counterpoint to the “moral equivalent of war,” to break through the barrier to recovery which the New Deal faltered at in 1937-1938. You can read a hundred articles from the NY Times and Bloomberg News and other mainstream financial sources, but you’ll find they mainly talk to economic institutes (moderate to conservative ones), academic economists, or leading hedge funds/speculators, but rarely to folks like Rob Johnson, James Galbraith, or the German economist which I am going to introduce you to below, courtesy of the Real News network. Thus, with very few exceptions, readers are left with the impression there is still “No Alternative” to the Center-Right’s policies.

But please don’t take just our word for it on these directions. Here are two interviews which lay out the brutal facts for you. In the first, Rob Johnson of the Roosevelt Institute walks you through the steps our Federal Reserve has taken to help keep the European banking system’s liquidity intact; that’s the first six minutes or so. Then comes the economic dynamite of the last four: what the private sector in Europe wants, along with most of the speculating market players is nothing less than the final dismantlement of social democracy in Europe. The private sector tolerated the generous market buffering social democratic arrangements only so long as there was a draconian threat on the horizon: Soviet Communism. With that threat gone, they no longer want to foot the bill, even though Europe is not carrying anything close to the US defense burdens. The total interview is just 13 minutes. Here at http://www.nakedcapitalism.com/2011/12/rob-johnson-on-real-news-network-...

The second interview is with a UN economic official, a German by upbringing and training, Dr. Heiner Flassbeck. He literally shreds progressive illusions about the German model and directions, saying the wage austerity was imposed on German unions, not chosen by them, and amounts to a “beggar-your-neighbor” trade policy, an imposed austerity for other nations, which will have their economic policies taken out from under electoral politics and handed over to neoliberal economic technocrats at the central European Union economic bureaus, with German veto power over appointments implied. The interview is just 15 minutes long but it is an eye opener, a stark and startling warning which goes well beyond the best NY Times reporting on the European crisis.

http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&I...

And now a word of caution to my readers, especially the Democratic ones. When I enter the voting booth in November of 2012, I can’t imagine pulling the lever for anyone other than President Obama. To vote for a candidate from the Republican Right is unthinkable, and I see nothing in Thomas Friedman’s third party philosophy that would make me change my mind.

In the meantime though, I will do everything I can to move the President out of the neoliberal camp, and closer to that of the other Roosevelt, the one that wanted a “Second Bill of Rights,” economic ones, for the American people, who had earned them through their hardships in the Great Depression and World War II. It is not enough for the troubles of the American people today that President Obama just be better than the awful Right. He must also propose better solutions to our economic troubles than he has so far put on the table, the good speech in Osawatomie, Kansas, notwithstanding. I hope that he builds upon it over the next year.

That speech sent me back to my library to brush up on the 1910-1912 political dynamics, and I’ve already written that it was Gifford Pinchot who wrote TR’s “New Nationalism” speech, and it was a good one; one that in theory, might still carry us even beyond FDR’s New Deal. But that was a speech from the Progressive Era, which had been building for decades. Roosevelt’s campaign in 1912 as the leader of the new Progressive Party, and guided by that famous speech, excited many of the reformers of his day. Here’s how one of the major historians of the period, Arthur S. Link, describes the reaction:

Needless to say, it attracted a large following, particularly among the social justice group and the social workers. As the campaign progressed, however, Roosevelt became increasingly radical and explicit. He began to place more emphasis upon the social justice objective of his program – a minimum wage for women workers, a federal child labor law, a federal workmen’s compensation act, federal intervention in labor disputes, and expanded federal health and conservation program, use of tariff protection to insure fair wages to workers in industry, and the like. In turn, he scoffed at Wilson as representing ’rural Toryism,’ the mossback, worn out Jeffersonian philosophy of laissez faire. (Woodrow Wilson and the Progressive Era, 1910-1917, 1963, Arthur S. Link, page 20.)

To me, that sounds like TR was to the left of Woodrow Wilson, and Wilson’s “New Freedom” doesn’t sound too different than neoliberalism today. But here’s what came next in Link’s book:
The significant development of the campaign was Roosevelt’s failure to unite progressive Republicans and progressive Democrats. The Roosevelt that progressives knew had many sides, and a considerable portion of the progressives refused to believe he was now sincere. ‘I wish I could believe he intended to do a single honest thing,’ wrote Anna Howard Shaw, for example, ‘or that he would carry out a single plank in the platform if he were elected…I cannot.’ (Page 21.)

Link points out that when Wilson won the White House, he had the chance, because the country had turned so decisively progressive, to govern by uniting the Congressional progressive forces from both parties, which would have given him a strong majority. But instead, he relied on the established Democratic leaders, who were far from progressive.

So these are cautionary words to all my readers about the inevitable gaps between movements and politicians, then and today. And a reminder that neither TR nor Woodrow Wilson, progressive as they might have been, achieved anything like what FDR did in the New Deal, which is the far better historical analogy – but far from perfect - for today’s circumstances.

Even though FDR did not hit it off so well with Keynes at the temperament level, his Second Bill of Rights pointed in the same direction of Keynes’ remarkable essay from 1930, Economic Possibilities for our Grandchildren, which looked forward to the days when capitalism’s great productivity would enable citizens to get off the treadmill driven by the brutal austerity logic of the Protestant Ethic, the one that continues to undermine demand and consumer spending today in the name of saving and investment for tomorrow. That Protestant Ethic still sounds good to neoliberal ears because it puts fighting debt and deficits ahead of full employment, assuring that Keynes in his grave would be fighting still one more battle with Hayek, as he did in the 1930’s, which you can revisit yourself here in about 15 minutes of videos at http://ineteconomics.org/blog/inet/bringing-gunslinger-nicholas-wapshott...

This conflict between denial and consumption, saving and spending, a schizophrenia at the heart of the political economy, has very deep roots indeed in the long history of capitalism. Some of the great thinkers on the left before Keynes also looked to the productive powers contained in capitalism and envisioned a future with a more democratic way to share its bounty, and its direction, and would be as horrified as Keynes would be that it is Europe itself, in 2011, that is going to side with austerity.

And that is the warning, and the hope contained in James Livingston’s book, Against Thrift: Why Consumer Culture is Good for the Economy, the Environment, and Your Soul which I have just finished reading. He sides decisively with Keynes, and the case he builds for doing so will challenge many long standing assumptions across the entire political spectrum. I heartily recommend its advice in helping prevent the world economy from repeating the experience of the Great Depression, which is where we are poised, precariously, right now, as even one Republican financial consultant had the courage acknowledge to candidate Gingrich. That’s heresy of the best kind, and Keynes would have deeply appreciated the comment.

Yet Livingston’s arguments, because they deal with some of the oldest tensions within capitalism, between that old Protestant ethic and consumerism, for example, need to be further aired, and we’d love to see him debate with Chris Hedges and Naomi Klein, who have very different views about the merits of the consumer culture.

My own task over the next few months is to bridge the gaps, especially the cultural ones, about work and reward, between Keynes’ Economic Possibilities, Livingston’s Against Thrift, and FDR’s Second Bill of Rights. That’s so the majority of Americans who still have jobs, working extra hours if not two or three jobs, can appreciate what that new meeting place might look like, where society and the individual begin to draw up the next great emancipatory document of rights and responsibilities, and mutual obligations, meeting each other half way, that will return us to the great arc of justice that previous generations have set in motion at such a high cost.

We’ll know we’re getting closer to the essence of it when the average person in the street can look the Tea Party in the eye and tell them that the Right to a Job is hardly an “entitlement,” or cousin to that proverbial chip-on-the-shoulder put down, that society “owes them a living.” It is rather, finally, after more than two hundred years’ struggle, the acknowledgement of the economic component of human dignity, which requires in return conscientious effort and good faith on the part of the citizen.

What is helping bring this about is not theoretical; it flows from fact, good capitalist fact: modern capitalism, as even President Obama hints at , has become so hyper-efficient that it no longer needs between 20-30 percent of its ever expanding labor pool, a pool which added more than 2 billion new job seekers under globalization. Neoliberalism’s answer is to dismantle public employment and the remaining labor protections, and push the refugees into the arms of the already dire labor market situation. It is, in other words, anxious to mimic the conditions under which modern capitalism began, in England from 1790-1840, which Karl Polanyi has so brilliantly described in his book The Great Transformation, when truly there was no alternative yet. This assertion will bring shouts of protest from the Center and the Right, especially over the measure of degree, but let’s not kid ourselves about the direction. That’s very clear.

Acknowledging this situation must also result in the expansion of the meaning of democracy, because it can no longer work under the conditions of concentrated economic power that we now have, and the philosophy of neoliberalism which has fostered it, as our own and European events are demonstrating every day.

I leave you then with two questions: will the private sector admit its limitations and abandon its attempts at total control of the definition of work and employment, and over the government’s responses; and will the average citizen rise up and demand something better, more dignified than the labor market conditions they now face?

The best to all my readers,

Bill Neil
Rockville, MD

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