Friday, 21 November 2014 / TRUTH-OUT.ORG

Systemic Malfunctioning of the Labor and Financial Markets

Thursday, 16 May 2013 11:51 By Paul Jay, The Real News Network | Video

Dr. Heiner Flassbeck: Government has to step in and correct the imbalances of low wages and unregulated financial markets or a deeper recession and crisis is inevitable.

Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. We're continuing our discussion with Heiner Flassbeck--the state of the world economy, the possibility or danger of deeper recession, and what should be done about it.

Now joining us again from Geneva is Heiner Flassbeck. He served as director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development, known as UNCTAD. He was a vice minister at the Federal Ministry of Finance in Bonn in 1998 and '99. He's now a professor of economics at Hamburg University. And you can find more of his work at FlassbeckEconomics.de.

Thanks for joining us, Heiner.

HEINER FLASSBECK, PROF. ECONOMICS, HAMBURG UNIVERSITY: Thanks for having me.

Jay: So in the book that you've just--you know, you released recently, Act Now, I'm just going to quote one of the headings. The financial crisis was not inevitable. Nor is the looming crisis of the real economy. Both are man made. Both are consequences, direct and indirect, of a flawed economic doctrine that has seen arrival over the past 30 years. Heiner, doesn't that doctrine, though, emerge from the system itself, in the sense that, you know, if you're a capitalist, there's some objectivity to how you can make the most money, and with the concentration of ownership and the immense political power in the hands of the finance sector as a result of that massive finance sector and, you know, how it essentially runs most parts of the economy these days, that it's inevitable to have this kind of policy. And not only that, it's kind of because of the way the system is. You can't even get the most measly, weakest regulation through to try to control this situation. What I'm getting at: the policy is--of course, you know, sets the framework, but it's the way the economy is built and structured now that you have such policy.

Flassbeck: Yeah, sure. But, well, what we can do is we ask policymakers to do more. What we said, Act Now, is to look at the different areas where we have still a lot of pending problems. And what we are asking for is to look into it in its interdependence. So you don't only have the fiscal side, with people afraid of government debt; you don't have only the monetary side, where monetary policy tries to do a lot of things. You mentioned rightly we still have the pending problems in the financial system as such and the financial markets, and we have a looming big problem on the labor market. So all this plays together, but it has a certain root cause, and the root cause is that we misunderstand what market economy is about, we misunderstand today how a market economy has to be run, and we misunderstand the role of policies.

Jay: Well, let's dig into some of those things. And we'll kind of return to this question near the end. But you talk about the main fallacies of this economic doctrine, and one of the ones you start with is this idea that markets are just inherently efficient. I mean, what's wrong with that idea?

Flassbeck: Well, it's wrong in financial markets. Obviously, what we have is herding. We have herding in financial markets. We have clear evidence that, for example, you have the commodity markets driven by financial action by financial market participants who in a herding way drive the prices up, systematically driving prices up. And this is clearly against the needs of the consumers. It's against the needs of even the producers, because it's producing volatility in the prices. And you have the same on the currency side. You have it in the stock markets. You have everywhere dramatic, dramatic distortions of prices by financial markets. So financial markets, with their herding behavior, do the opposite of what is expected of a reasonable market. That is one thing.

The other thing is that the labor market is not functioning. The labor markets--nowadays we have the lowest wage share ever and we have the highest unemployment at the same time. So that doesn't go together. That is obviously a systemic misfunctioning of the market. And it has to be called--the government has to be called in, because this doesn't work. It cannot heal itself. You have high unemployment putting pressure on wages. At the same time, you need wage increases for a sound consumption revival. But that's not there. And that is why, as I said before, people are desperately digging into their savings again and making the whole system extremely fragile.

Jay: And it's not only a lack of efficiency, as they say, but, you know, there are very important cases of outright fraud. The LIBOR scandal, where banks are essentially conniving with each other to manipulate interest rates and other similar kinds of things. I mean, have we--you know, we've gotten to a point where there's not even a pretention of an actual market.

Flassbeck: Yeah, that's right. You have all these things in addition. But what I say is even worse. I have to insist it's even worse than fraud or anecdotal or single misbehavior of a certain person. What we have is the systemic malfunctioning of the system, system malfunctioning of the labor market, systemic malfunctioning of the financial markets. And these markets are so important that--these are the most important markets in the whole economy, and if they are not working well, then you cannot expect their economic policy to achieve what they want to achieve. Look at monetary policy. Monetary policy is the best example. There you have some people really trying to do what is possible, but they're trying desperately to get the economy going, but it's not going. The biggest stimulus in all times that we have in the last years in the United States, in Japan, in Europe now, it doesn't work. It doesn't permeate through the economy. It doesn't find the right channel to get people to investment. But they're investing in short-term [incompr.] again. But they're not investing in fixed capital in the long term. And this is where only the government can change things. The government has to be the game-changer here. The government has to step in. The government has to reduce, restrict the movement of the financial markets. It has to stimulate real investment in fixed capital, in infrastructure, in education, whatever you have.

Jay: Through direct public investment.

Flassbeck: Yeah. Public investment is an important part of it, no doubt about it. But, again, you see the ideology is such that they tell us, well, government debt is a bad thing. Government debt is not a bad thing. Government debt is absolutely necessary if you are in the situation where you are in the United States and elsewhere where the private households are, per balance, still savers, net savers, where the government should not go into debt anymore, but where the company sector is a big saver, a net saver. So how can you have all the sectors saving? It's impossible. It's absolutely impossible. But it's not allowed to talk about it. Nobody wants to talk about it, that not all sectors can be net savers. Somewhere someone has to be a debtor, because savings and debt always nets to zero. So for the world as a whole, there need to be--you have to be as many debtors as you have savers. But we do not have debtors anymore, because debtor, it seems to be a bad thing. And this cannot work. So the natural debtor for a market system is the company sector. Nowadays in most of the economies, not only in United States, but in Europe as well, in Germany, it's a scandal that the company sector is a net saver and is not doing their work in terms of taking the money from the banks and using it for productive investment.

Jay: Do you think it's possible that part of what's happening here in terms of the financial elite, the, you know, economic, corporate elite is that they want a fundamental restructuring, especially the United States and Europe, they want wages to go down, they want a lower-wage environment, partly 'cause they want to compete with the low-wage economies in Asia and other places, and partly just 'cause they can, they've always wanted it, and labor's just so much weaker now as a result of globalization and other reasons, they can do it, and that the sort of traditional Keynesian idea that it's okay to have public debt now because when the economy recovers, you know, taxes and other income will come in and you'll be able to get out of that debt? But is it possible that this economic elite don't think there's ever going to be that kind of recovery, in the sense they think there's going to, and perhaps even to a sense is what they want, a longer-term recession that restructures the whole relationship of labor and capital, and as a result of that, they focus on public debt, 'cause if you believe that's the trajectory, then maybe public debt does get to be big and dangerous in their eyes?

Flassbeck: Well, I think they're not as smart as you think. They are, because if they were that smart, they would understand that it cannot work in that way. But because the one thing is you cannot really compete with developing countries, no big economy like United States or Europe as a whole can compete with developing countries about wages. That wouldn't make sense, because, first of all, we have a currency in between, we have an exchange rate that can be changed, so you never can succeed, finally, in cutting your wage to get export markets. That doesn't work anyway. The other thing is that the domestic market is in danger of collapsing. And this would hurt these people as well. So they need a domestic market. In the end, they need a domestic market. I fully understand what you're saying. They like the power that they have with rather high unemployment. But in the end, they cannot succeed with that. They can only succeed with a flourishing economy, and you can make money in the long term only if the economy is growing sufficiently quick.

Jay: But are you kind of assuming--like, you say I shouldn't think they're that smart. But I'm suggesting to you, are you thinking they're really that rational? 'Cause you keep saying in the long run, in the long run. But do they actually care about the long run?

Flassbeck: Yeah, that's one thing that I acknowledge already. Many of these people do not care about the long run. But this is mainly true for people in the financial markets, because they don't have any fixed assets. You know? They have nothing that can be lost, so to say. They have a number of papers, and they know anyway that the value of these papers is very questionable, and the only problem is to get out early on. But if you are an owner of a bigger compound, of a bigger factory [incompr.] and you have a lot of fixed capital, then I think you think a bit about it. Otherwise, we would have to say, well, then market economy is over and it's no longer doable, it's no longer an efficient model at all. I'm not that skeptical. I'm very skeptical concerning the financial market and the labor market. But I think overall in the goods market, if the other sectors are well regulated, then you have a chance to go back to [crosstalk]

Jay: Now, do you see any sign of this at the political level, a division in the interests between what you can say is the goods sector and the financial sector? Because the goods sector seems just gleeful about the fact that they can drive wages down, break unions. And they don't seem to have any longer view than the financial markets do. I mean, they think if they get their own--they can beat up their own workers, somehow magically there's going to be some other workers that can buy their stuff.

Flassbeck: Yeah. Yeah. But this is an error, as I said. This is the biggest of all errors. If you are a short-sighted person in the financial markets, you can be very rational. If you are a short-sighted person in the goods market, it is much more difficult to be rational, so to say, and to get what you want, because you have to use your capacities for a couple of years, and you cannot expect that the people can be exploited for a couple of years without having negative repercussions.

What we see after the 2008, 2009 crisis is already extremely negative repercussions that are coming from consumers that are not able to buy. I mean, why is the American economy in such a bad shape? Why is Europe going down? Why is Japan not recovering for 20 years? It's always the same reason, namely, that consumers do not expect income growth and they cannot get out of it. So you can survive--Japan has shown that you can survive for 20 years. But what we do, if we look at this: we're endangering our democracies. We're endangering the way we have been working in the past. And we are endangering the whole edifice of our societies, the moral ground, so to say, on which our societies have been built in the past.

Jay: I was at a conference a couple of years ago that Soros, George Soros organized. And he started off the conference. He spoke first. And he's certainly someone who knows how to make money out of crises. But his opening words were: I'm bewildered. And he went on to say that he's totally flummoxed, bewildered by the attitudes of the rest of the financial elite, who don't seem to want to deal with any of the structural issues. And this is a guy, as I say, he knows how to make money out of these situations, but that there's no rationality left in these circles. It's a feeding fest. And they have a political power that doesn't seem to be able to be challenged, at least within the current paradigm.

Flassbeck: No, that's right. As I said, in the financial markets I fully agree. If you look at how fiercely they are fighting at this moment in the United States against any bit of regulation in the commodity markets, for example, where we have very clear evidence, as I said, we have extremely clear evidence that the prices are driven up by financial speculation, by the kind of financialization that we have, where we have clear evidence that the volatility is increasing. But they're fighting like hell with their lobbies in Washington. They're fighting in Brussels. They're fighting everywhere. And they're quite successful in at least delaying any kind of legislation, of regulation that would stop them making short-term money. This is--there we have a big systemic problem. This is a systemic problem of the market economy. As I said, I'm not as skeptical in the goods market, in the normal producing markets. There it is always an attempt, as you said, by enterprise, by company sector to drive down wages in a very short-sighted view also. But this is manageable, much more manageable by a competent government than in financial markets, because the financial markets are putting so much pressure and they have so much money and they are permanently sponsored by the government system with zero interest rates at the moment. The get a huge subsidization, they get a huge subsidization from the government, and nevertheless, or because of that, are able to stop the government from regulating them.

Jay: Right. Okay. We're going to do one more segment, where we're going to talk about, well, if there was a competent government (I'd like to know where that's going to be) that actually was rational and actually had the interests of the society in its agenda, what would it do? That's going to be the next part of our interview with Heiner Flassbeck on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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Systemic Malfunctioning of the Labor and Financial Markets

Thursday, 16 May 2013 11:51 By Paul Jay, The Real News Network | Video

Dr. Heiner Flassbeck: Government has to step in and correct the imbalances of low wages and unregulated financial markets or a deeper recession and crisis is inevitable.

Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. We're continuing our discussion with Heiner Flassbeck--the state of the world economy, the possibility or danger of deeper recession, and what should be done about it.

Now joining us again from Geneva is Heiner Flassbeck. He served as director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development, known as UNCTAD. He was a vice minister at the Federal Ministry of Finance in Bonn in 1998 and '99. He's now a professor of economics at Hamburg University. And you can find more of his work at FlassbeckEconomics.de.

Thanks for joining us, Heiner.

HEINER FLASSBECK, PROF. ECONOMICS, HAMBURG UNIVERSITY: Thanks for having me.

Jay: So in the book that you've just--you know, you released recently, Act Now, I'm just going to quote one of the headings. The financial crisis was not inevitable. Nor is the looming crisis of the real economy. Both are man made. Both are consequences, direct and indirect, of a flawed economic doctrine that has seen arrival over the past 30 years. Heiner, doesn't that doctrine, though, emerge from the system itself, in the sense that, you know, if you're a capitalist, there's some objectivity to how you can make the most money, and with the concentration of ownership and the immense political power in the hands of the finance sector as a result of that massive finance sector and, you know, how it essentially runs most parts of the economy these days, that it's inevitable to have this kind of policy. And not only that, it's kind of because of the way the system is. You can't even get the most measly, weakest regulation through to try to control this situation. What I'm getting at: the policy is--of course, you know, sets the framework, but it's the way the economy is built and structured now that you have such policy.

Flassbeck: Yeah, sure. But, well, what we can do is we ask policymakers to do more. What we said, Act Now, is to look at the different areas where we have still a lot of pending problems. And what we are asking for is to look into it in its interdependence. So you don't only have the fiscal side, with people afraid of government debt; you don't have only the monetary side, where monetary policy tries to do a lot of things. You mentioned rightly we still have the pending problems in the financial system as such and the financial markets, and we have a looming big problem on the labor market. So all this plays together, but it has a certain root cause, and the root cause is that we misunderstand what market economy is about, we misunderstand today how a market economy has to be run, and we misunderstand the role of policies.

Jay: Well, let's dig into some of those things. And we'll kind of return to this question near the end. But you talk about the main fallacies of this economic doctrine, and one of the ones you start with is this idea that markets are just inherently efficient. I mean, what's wrong with that idea?

Flassbeck: Well, it's wrong in financial markets. Obviously, what we have is herding. We have herding in financial markets. We have clear evidence that, for example, you have the commodity markets driven by financial action by financial market participants who in a herding way drive the prices up, systematically driving prices up. And this is clearly against the needs of the consumers. It's against the needs of even the producers, because it's producing volatility in the prices. And you have the same on the currency side. You have it in the stock markets. You have everywhere dramatic, dramatic distortions of prices by financial markets. So financial markets, with their herding behavior, do the opposite of what is expected of a reasonable market. That is one thing.

The other thing is that the labor market is not functioning. The labor markets--nowadays we have the lowest wage share ever and we have the highest unemployment at the same time. So that doesn't go together. That is obviously a systemic misfunctioning of the market. And it has to be called--the government has to be called in, because this doesn't work. It cannot heal itself. You have high unemployment putting pressure on wages. At the same time, you need wage increases for a sound consumption revival. But that's not there. And that is why, as I said before, people are desperately digging into their savings again and making the whole system extremely fragile.

Jay: And it's not only a lack of efficiency, as they say, but, you know, there are very important cases of outright fraud. The LIBOR scandal, where banks are essentially conniving with each other to manipulate interest rates and other similar kinds of things. I mean, have we--you know, we've gotten to a point where there's not even a pretention of an actual market.

Flassbeck: Yeah, that's right. You have all these things in addition. But what I say is even worse. I have to insist it's even worse than fraud or anecdotal or single misbehavior of a certain person. What we have is the systemic malfunctioning of the system, system malfunctioning of the labor market, systemic malfunctioning of the financial markets. And these markets are so important that--these are the most important markets in the whole economy, and if they are not working well, then you cannot expect their economic policy to achieve what they want to achieve. Look at monetary policy. Monetary policy is the best example. There you have some people really trying to do what is possible, but they're trying desperately to get the economy going, but it's not going. The biggest stimulus in all times that we have in the last years in the United States, in Japan, in Europe now, it doesn't work. It doesn't permeate through the economy. It doesn't find the right channel to get people to investment. But they're investing in short-term [incompr.] again. But they're not investing in fixed capital in the long term. And this is where only the government can change things. The government has to be the game-changer here. The government has to step in. The government has to reduce, restrict the movement of the financial markets. It has to stimulate real investment in fixed capital, in infrastructure, in education, whatever you have.

Jay: Through direct public investment.

Flassbeck: Yeah. Public investment is an important part of it, no doubt about it. But, again, you see the ideology is such that they tell us, well, government debt is a bad thing. Government debt is not a bad thing. Government debt is absolutely necessary if you are in the situation where you are in the United States and elsewhere where the private households are, per balance, still savers, net savers, where the government should not go into debt anymore, but where the company sector is a big saver, a net saver. So how can you have all the sectors saving? It's impossible. It's absolutely impossible. But it's not allowed to talk about it. Nobody wants to talk about it, that not all sectors can be net savers. Somewhere someone has to be a debtor, because savings and debt always nets to zero. So for the world as a whole, there need to be--you have to be as many debtors as you have savers. But we do not have debtors anymore, because debtor, it seems to be a bad thing. And this cannot work. So the natural debtor for a market system is the company sector. Nowadays in most of the economies, not only in United States, but in Europe as well, in Germany, it's a scandal that the company sector is a net saver and is not doing their work in terms of taking the money from the banks and using it for productive investment.

Jay: Do you think it's possible that part of what's happening here in terms of the financial elite, the, you know, economic, corporate elite is that they want a fundamental restructuring, especially the United States and Europe, they want wages to go down, they want a lower-wage environment, partly 'cause they want to compete with the low-wage economies in Asia and other places, and partly just 'cause they can, they've always wanted it, and labor's just so much weaker now as a result of globalization and other reasons, they can do it, and that the sort of traditional Keynesian idea that it's okay to have public debt now because when the economy recovers, you know, taxes and other income will come in and you'll be able to get out of that debt? But is it possible that this economic elite don't think there's ever going to be that kind of recovery, in the sense they think there's going to, and perhaps even to a sense is what they want, a longer-term recession that restructures the whole relationship of labor and capital, and as a result of that, they focus on public debt, 'cause if you believe that's the trajectory, then maybe public debt does get to be big and dangerous in their eyes?

Flassbeck: Well, I think they're not as smart as you think. They are, because if they were that smart, they would understand that it cannot work in that way. But because the one thing is you cannot really compete with developing countries, no big economy like United States or Europe as a whole can compete with developing countries about wages. That wouldn't make sense, because, first of all, we have a currency in between, we have an exchange rate that can be changed, so you never can succeed, finally, in cutting your wage to get export markets. That doesn't work anyway. The other thing is that the domestic market is in danger of collapsing. And this would hurt these people as well. So they need a domestic market. In the end, they need a domestic market. I fully understand what you're saying. They like the power that they have with rather high unemployment. But in the end, they cannot succeed with that. They can only succeed with a flourishing economy, and you can make money in the long term only if the economy is growing sufficiently quick.

Jay: But are you kind of assuming--like, you say I shouldn't think they're that smart. But I'm suggesting to you, are you thinking they're really that rational? 'Cause you keep saying in the long run, in the long run. But do they actually care about the long run?

Flassbeck: Yeah, that's one thing that I acknowledge already. Many of these people do not care about the long run. But this is mainly true for people in the financial markets, because they don't have any fixed assets. You know? They have nothing that can be lost, so to say. They have a number of papers, and they know anyway that the value of these papers is very questionable, and the only problem is to get out early on. But if you are an owner of a bigger compound, of a bigger factory [incompr.] and you have a lot of fixed capital, then I think you think a bit about it. Otherwise, we would have to say, well, then market economy is over and it's no longer doable, it's no longer an efficient model at all. I'm not that skeptical. I'm very skeptical concerning the financial market and the labor market. But I think overall in the goods market, if the other sectors are well regulated, then you have a chance to go back to [crosstalk]

Jay: Now, do you see any sign of this at the political level, a division in the interests between what you can say is the goods sector and the financial sector? Because the goods sector seems just gleeful about the fact that they can drive wages down, break unions. And they don't seem to have any longer view than the financial markets do. I mean, they think if they get their own--they can beat up their own workers, somehow magically there's going to be some other workers that can buy their stuff.

Flassbeck: Yeah. Yeah. But this is an error, as I said. This is the biggest of all errors. If you are a short-sighted person in the financial markets, you can be very rational. If you are a short-sighted person in the goods market, it is much more difficult to be rational, so to say, and to get what you want, because you have to use your capacities for a couple of years, and you cannot expect that the people can be exploited for a couple of years without having negative repercussions.

What we see after the 2008, 2009 crisis is already extremely negative repercussions that are coming from consumers that are not able to buy. I mean, why is the American economy in such a bad shape? Why is Europe going down? Why is Japan not recovering for 20 years? It's always the same reason, namely, that consumers do not expect income growth and they cannot get out of it. So you can survive--Japan has shown that you can survive for 20 years. But what we do, if we look at this: we're endangering our democracies. We're endangering the way we have been working in the past. And we are endangering the whole edifice of our societies, the moral ground, so to say, on which our societies have been built in the past.

Jay: I was at a conference a couple of years ago that Soros, George Soros organized. And he started off the conference. He spoke first. And he's certainly someone who knows how to make money out of crises. But his opening words were: I'm bewildered. And he went on to say that he's totally flummoxed, bewildered by the attitudes of the rest of the financial elite, who don't seem to want to deal with any of the structural issues. And this is a guy, as I say, he knows how to make money out of these situations, but that there's no rationality left in these circles. It's a feeding fest. And they have a political power that doesn't seem to be able to be challenged, at least within the current paradigm.

Flassbeck: No, that's right. As I said, in the financial markets I fully agree. If you look at how fiercely they are fighting at this moment in the United States against any bit of regulation in the commodity markets, for example, where we have very clear evidence, as I said, we have extremely clear evidence that the prices are driven up by financial speculation, by the kind of financialization that we have, where we have clear evidence that the volatility is increasing. But they're fighting like hell with their lobbies in Washington. They're fighting in Brussels. They're fighting everywhere. And they're quite successful in at least delaying any kind of legislation, of regulation that would stop them making short-term money. This is--there we have a big systemic problem. This is a systemic problem of the market economy. As I said, I'm not as skeptical in the goods market, in the normal producing markets. There it is always an attempt, as you said, by enterprise, by company sector to drive down wages in a very short-sighted view also. But this is manageable, much more manageable by a competent government than in financial markets, because the financial markets are putting so much pressure and they have so much money and they are permanently sponsored by the government system with zero interest rates at the moment. The get a huge subsidization, they get a huge subsidization from the government, and nevertheless, or because of that, are able to stop the government from regulating them.

Jay: Right. Okay. We're going to do one more segment, where we're going to talk about, well, if there was a competent government (I'd like to know where that's going to be) that actually was rational and actually had the interests of the society in its agenda, what would it do? That's going to be the next part of our interview with Heiner Flassbeck on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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