The stupidity of the German ideology will come back to haunt them

There was an interesting article in the Financial Times last week (August 29, 2013) – The German miracle is now running out of road – about the myopia of policy settings in Germany. The FT author was Sebastian Dullien, who has been consistently presenting the case that Germany is not a role model for the rest of Europe to follow. For example, see – A German model for Europe?. He notes that by targetting a budget surplus in a period of fiscal austerity, the Germans are undermining the very factors which made their manufacturing sector some strong. Their public investment in education and infrastructure is now lagging so much that the costs of business are rising in Germany and the long-term consequences of this are likely to be very damaging. The stupidity of the German ideology will come back to haunt them. Sebastian Dullien argues that “(t)he country’s foundations for doing business are deteriorating” and while the economic data is the envy of Europe at present, the German underbelly is not so attractive.

The principal driver of Germany’s economic growth – its manufacturing sector – is under pressure.

Its export markets are slowing (mainly China) and its pre-crisis Hartz reforms that drove down wages and suppressed the capacity of German workers to maintain strong domestic spending is now becoming counter-productive.

First, the reforms undermined competitiveness in the other Euro-nations and stimulated German exports. But in doing so, they generated, in part, the conditions that have exacerbated the crash in Southern Europe.

Second, the harsh austerity that has been imposed on the formerly non-competitive Southern nations has led to a dramatic collapse of the prevailing wages in those nations (see below) which now means that Germany no longer looks as competitive in trade.

Third, “the foundations for doing business in Germany are deteriorating, increasing costs for companies and making flexibility more difficult”.

What factors are important here?

Sebastian Dullien says that, for example:

Public spending on education and on research and development as a share of output might not be as dismal as in Italy, but after severe cuts from the mid-1990s onwards, it now trails behind a number of countries that belong to the OECD, the Paris-based club of mostly rich nations, such as Austria, Finland and France. For roughly a decade now, public investment has been lower than the depreciation of public capital.

The OECD publication – Education at a Glance 2012 Highlights – shows that Germany has barely increased its share of national income devoted to spending on educational institutions between 2000 and 2009 and is well below the OECD average in 2009 for both primary, secondary and post-secondary non-tertiary education and tertiary education.

We also learn (Page 49) that the share of public spending on education in total public spending has not changed between 2000 and 2009 although public spending on education as a percentage of GDP has risen somewhat over the same period, although less than most other nations.

In 1995, Germany devoted 8.6 per cent of total public spending to education. This rose to 10.1 per cent in 2000 and 8 years later was still at 10.4 per cent (against the OECD average in 2008 of 12.9 per cent).

Further, between 2000 and 2008, as the neo-liberal vice was tightening on Germany, public spending on education as a share of GDP was unchanged.

The related data for private expenditure (Page 51) shows that Germany is well below the OECD average and private spending has barely changed as a share of total private spending.

On Page 83, we learn that Germany has one of the lowest rates of upward mobility between generations from education (as at 2009) and one of the highest rates of downward mobility.

Euronews carried a story (August 27, 2013) – Germany’s Lower Saxony seeks help over “modern slavery” – which details the conditions for migrant workers in Germany.

The OECD found in the publication – Education at a Glance 2012 – that Germany performs the worst of the OECD nations in terms of integration immigrant students in schools. Concentrated educational disadvantage is prominent in Germany.

Further, cutbacks in education and other public infrastructure funding take time to manifest in practical consequences.

Sebastian Dullien notes that:

After the investment boom following reunification in the early 1990s, infrastructure was in a relatively good state. But potholes are increasingly evident on the roads. The recent flooding led to the most important main artery in train traffic from Berlin to the west of the country being closed for the rest of the year, more than doubling the travel time from the capital to Volkswagen’s headquarters in Wolfsburg.

Other examples include an “increasing number of bridges” not open to “heavy loads” making lengthy detours necessary.

All of which is making “production in Germany increasingly difficult and expensive, and the economic data have begun to reflect this”. While the Germans are trying to relocate their plants to the states to the east of them, we learn that “(p)roductivity measured in output per working hour is now roughly at the level of 2007; such stagnation has not been observed here since the second world war”.

Why are government cutting their commitment to education?

In this OECD briefing note – What Is the Total Public Spending on Education? – we read (Pag:

Since the second half of the 1990s, and especially in the aftermath of the recent financial and economic crisis, most countries have made serious efforts to consolidate public budgets. Education has to compete with a wide range of other government-funded areas for available public resources.

As I have noted in the past, education is one of the first casualties in myopic efforts to restrict government spending and run surpluses. And it should never been seen as an appropriate vehicle for fiscal austerity, even if such austerity was warranted in the face of a major inflation outbreak.

Educational investments are about the long-term – given it takes years to graduate a skilled-worker from inception.

There are two aspects to the European problem. First, the design of the Eurozone means that the member states are like state governments in a sovereign federal system (such as the US or Australia) and all use a foreign currency. They have no monetary autonomy.

In that sort of environment, the federal body (in this case, the ECB) has to fund appropriate budget deficits which are scaled by the size of the private output gap. That is not happening in Europe., which is why the region is in crisis still.

Second, the broader problem is neo-liberalism.

The idea that it is necessary for a government, which has currency sovereignty, to stockpile financial resources to ensure it can provide services required for, say, an ageing population in the years to come, has no application. It is not only invalid to construct the problem as one being the subject of a financial constraint but even if such a stockpile was successfully stored away in a vault somewhere there would be still no guarantee that there would be available real resources in the future.

Discussions about “war chests” completely misunderstand the options available to a sovereign government in a fiat currency economy.

The best thing governments can do now is to maximise incomes in the economy by ensuring there is full employment. This requires a vastly different approach to fiscal and monetary policy than is currently being practised.

Third, if there are sufficient real resources available in the future then their distribution between competing needs will become a political decision which economists have little to add.

Long-run economic growth that is also environmentally sustainable will be the single most important determinant of sustaining real goods and services for the population in the future.

Principal determinants of long-term growth include the quality and quantity of capital (which increases productivity and allows for higher incomes to be paid) that workers operate with. Strong investment underpins capital formation and depends on the amount of real GDP that is privately saved and ploughed back into infrastructure and capital equipment.

Public investment is very significant in establishing complementary infrastructure upon which private investment can deliver returns. A policy environment that stimulates high levels of real capital formation in both the public and private sectors will engender strong economic growth.

If we adequately fund our public universities to conduct more research which will reduce the real resource costs of health care in the future (via discovery) and further improve labour productivity then the real burden on the economy will not be anything like the scenarios being outlined in the “doomsday” reports. But then these reports are really just smokescreens to justify the neo-liberal pursuit of budget surpluses.

Germany might think it is immune from these imperatives but it will learn the hard way that it is not.

Sebastian Dullien says that Germany should increase public investment now and run deficits. He doesn’t challenge the idiocy of the fiscal compact that is choking Europe but still claims there is “wiggle room” for larger structural deficits.

But he notes that:

Instead of using these funds for infrastructure investment, the government plans to run a small but growing surplus in the coming years … [under the guise] … of so-called fiscal responsibility.

If they follow through with their promises, this might lead to the very outcome they promise to prevent: the burdening of future generations. After all, a few percentage points of less government debt cannot buy the benefits of a world-leading manufacturing sector.

The neo-liberal approach habit of shooting itself in the foot. They deregulated markets on the premise that there will be more efficient and self-regulating – and thus deliver maximal outcomes for all.

What we observed was a spectacular market failure driven by greed and dishonesty of those with market power.

They argue that wage cuts will generate full employment but what we have observed is increased poverty rates and sky-rocketing rocketing unemployment.

They argued that massive cuts in government spending would reduce deficits and public debt and what we have observed are increased deficits and rising debt levels in many nations subjected to fiscal consolidation.

As the author notes, by pursuing policies Allegedly to reduce the burden on future generations the targets of the fiscal cuts are the very areas of spending which deliver advantage and benefit to the adults of the future.

The neo-liberal approach considers it “necessary” to ensure that, in some cases, more than 60 per cent of youth of a nation’s youth who have left school are unemployed.

What will the future of those “kids” be?

There was an interesting OECD study published in 2000 – The Impact of Public R&D Expenditure on Business R&D – which attempted “to quantify the aggregate net effect of government funding on business R&D in 17 OECD Member countries over the past two decades”.

It noted that several arguments are used to question “the effectiveness of the policies aiming at stimulating private R&D outlays”. I use “question” in the context of disappearing as us of any notion that public spending might be effective in this regard.

The paper lists three mainstream economic arguments against public spending on R&D.

1. “government spending may crowd out private money, by increasing the demand, hence the cost, of R&D”. The argument is that government funding just increases in wages of researchers, which drives up the cost of R&D and leads to private firms reallocating funding elsewhere leaving a smaller pool of R&D funding of “lesser economic efficiency”. This is a standard type argument by those that eschew government spending ( Unless of course they are the ones getting the funding).

2. “public money directly displaces private funding” – with no net gains.

3. “government funds, being allocated to projects in a less efficient way than market forces would do, generate distortions in the allocation of resources between the various fields of research”. This is the standard mainstream argument that markets are rational and deliver optimal allocations of resources. The corollary is that government (regulative) allocations are inferior. Been there done that!

After a detailed study, the major findings of the paper reject all three arguments. The authors find that:

1. “Direct government funding of business R&D and tax breaks has a positive impact on business spending in R&D” – that is, it brings multiplied benefits.

2. “The effect of public funding is more long-lived than that of tax incentives”. There is a long held belief among conservatives that tax hikes are much more damaging than cuts in government spending and that tax cuts (or other tax breaks) are much more stimulative than increased government spending.

In the current climate, this leads to the dominance of expenditure cuts over tax hikes in so-called fiscal consolidation efforts. The evidence does not support the mainstream view and this example of the contrast is indicating that lack of evidential support.

3. “These two policy tools are more effective when stable over time” – so cutting programs for sham political purposes (to reign in deficits) is very damaging.

4. While public research spending reduces “business-funded R&D” but “publicly produced knowledge may result in technology that is used by business while not inducing it to increase its research expenditure. Moreover, it is not the major purpose of government laboratories to produce knowledge for the business sector.

There was another article in the London Review of Books (August 29, 2013) – Vanity and Venality- – by Susan Watkins, which tells us, in no uncertain terms, what the iron policy fist that the Germans have imposed on the Southern European states has done down there.

We read that:

A new authority, the Troika, is policing the countries that got themselves into trouble; governments are constitutionally bound to the principles of good housekeeping … Seen from the besieged parliaments of Athens and Madrid, from the shuttered shops and boarded-up homes in Lisbon and Dublin, the single currency has turned into a monetary choke-lead, forcing a swathe of economies – more than half the Eurozone’s population – into perpetual recession. The Greek economy has shrunk by a fifth, wages have fallen by 50 per cent and two-thirds of the young are out of work. In Spain, it is now commonplace for three generations to survive on a single salary or a grandparent’s pension; unemployment is running at 26 per cent, wages go unpaid and the rate for casual labour is down to €2 an hour. Italy has been in recession for the past two years, after a decade of economic stagnation, and 42 per cent of the young are without a job. In Portugal, tens of thousands of small family businesses, the backbone of the economy, have shut down; more than half of those out of work are not entitled to unemployment benefits. As in Ireland, the twentysomethings are looking for work abroad, a return to the patterns of emigration that helped lock their countries into conservatism and underdevelopment for so long.

Okay.

I guess it is only reasonable that the German stupidity, as it has in other historical epochs, comes back to haunt their own nation.

But how we see these obvious facts is not straightforward. In this vein, I have been reading the work of – a href=”http://en.wikipedia.org/wiki/George_Lakoff”>George Lakoff – recently and been pondering over the implications of this “Metaphor Thesis” (outlined in his 1980 book >Metaphors We Live By) for the development of Modern Monetary Theory (MMT).

George Lakoff has made an academic career out of studying “how brains work and how language affects politics”.

His argument, presented, for example in this article (December 10, 2010) – Untellable Truths – tells us that underlying matters of fact is what really matters:

… what is being ignored is that the answer to material policy questions depends on how Americans understand the issues, that is, on how the issues are realized in the brains of our citizens. Such understanding is what determines political support or lack of it in all its forms, from voting to donations to political pressure to what is said in the media.

The central learning conclusion is that we have to be careful not to use language that we think is progressive but which just “activates the conservative view” of the issue at stake and leads to “(t)he progressives … helping the conservatives”.

But, for example, saying that “wages have fallen by 50 per cent” in Greece – isn’t that bad, just triggers the conservative view that they were too high and finally those fat, lazy Greeks are getting paid what they contribute.

And saying the 2/3rds of Spanish youth are out of work just prompts the response that any support to them is just “money the government takes out of the pockets of people who have earned it in order to give it to people who haven’t earned it and don’t deserve it”.

In other words, there has to be more than meagre indignant recital of facts.

I will write more about what I think of all this in due course.

Conclusion

History isn’t kind to our view of Germany and the ideology that infests its ruling elite and is, seemingly shared by the population. Once again they are spearheading a political position that not only pushes significant and damaging intervention in the affairs of other neighbouring nations but also is likely to back-fire and damage itself.

By being obsessed with the inflation of the Weimar years they have forgotten what happened the following decade.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.