Austrian National Bank, Vienna
Is growth normal and are the recessions of the 1970s/80s and since 2008 just the exceptions to the rule? Calls for reform always follow economic crises. Here are two examples of reforms that were introduced in Europe and can certainly not be seen as meaningful: Due to the serious sovereign debt crisis starting in Greece in 2010 the Greek government was obliged to carry out a multitude of reform measures, called “The Long March to Recovery”, among them laws on household insolvency, bankruptcy, foreclosures and pension reform. In how far were those really reforms and how could they benefit the Greek society? The second example is taken from Latvia: When the country emerged from the USSR it was without debt and mortgages. Then mostly Scandinavian banks moved in and gave extensive loans to the Latvians which finally could not be paid back and the Latvians faced the threat of foreclosures. “Reforms” were carried out that the duty to pay back the loans could be extended to family members, which ended in foreclosures anyway. In which way are these two examples meaningful reforms?
The idea of such “reforms” is based on the American practice of the cycles of bubbles and foreclosures, called “re-possession”. The vast fees on setting people and businesses up with mortgages and the securitization of mortgages enriches e group of financial executives only, the people are foreclosed and dispossessed. “Reform” in the US usually means financial deregulation and withdrawal of supervision. There are many places and towns in the US which will never recover from this “reform”.
In the 1970s and 1980s the word “reform” in the West was linked to neoliberalist economic policies, the introduction of market practices and decentralisation while in the communist USSR “reform” meant a less rigid system of perestroika and glasnost. “Reform” in Greece after 2010 meant deregulation of the labour market, which did not produce employment, but increased the unemployment rate and the informalisation of the labour market which further eroded the tax base. The pension reform deepened the impoverishment of the elderly and further reduced demand and privatisation raised much less money than expected because if you put all at once on the market with the need to sell quickly, you achieve a low price. All this further increased the indebtedness of the Greek society and constituted a policy of public and private dispossession.
So is there a conceptual link between policies and objectives here? Can this type of reform be linked to economic growth? There are two economic views: First, the US conservative neoliberalist view, which states that food stamps, disability insurance, medicaid, etc. produce laziness and not wanting to work. Reform therefore means cutting benefits and raising the retirement age as an incentive to work and this will then boost economic growth. Cutting benefits is the solution to all these problems. This is also called the model of the “Southern Plantation”. Second, late Keynesianism views the lack of demand is the crucial aspect. You only need to get the people into the shops and this will produce growth. But the true aspect of the growth problem today is a structural one and there are four principle sources of structural deficiencies.
The first structural deficiency is the distribution of resources. Speculative and financialised energy markets appeared around 2000 and the unstable cycles they produce trigger speculation and increase the instability of commodity markets. The second structural deficiency is the end of political stability in the world after the coming down of the Iron Curtain and the end of the bi-polar world after 1989. Half a century of stability at the time of the Cold War ended then. There was just the illusion of recovering world-wide political stability. It always broke down with multiple crises in Afghanistan, Iraq, Syria etc. The present world system does not have a stabilizing political mechanism in world politics and this causes excessive instability. The third structural deficiency is caused by the third technological revolution, the digital economy. This development reduced the cost of communication drastically, but also reduced labour requirements massively. In a slump businesses lay off people and in the recovery they don’t hire them again as in earlier slumps, but replace them by digital technology. Previous technological revolutions created new jobs in new areas in compensation for the jobs that were destroyed. This technological revolution does not have the same characteristic because it is not labour-creating. Finally, the fourth structural deficiency is to be found in the institutional and legal environment, the hypertrophy of the financial sector. The financial sector has completely abandoned its link and responsibility to the state and the society. There is no longer any chartered sense of mission and social and economic responsibility. On the contrary the finance sector tends to blackmail the state. There is a nexus of political power, financial power and digital technology, which allows them to escape supervision.
Huge financial institutions need to be broken up as they constitute a threat to the state, society and democracy. Such large institutions are difficult to manage and above all, to control. The digital revolution is irreversible and that’s why societies need to take full advantage of the capabilities of the digital technology by finding imaginative solutions, such as a “basic income” for everyone. This idea was even launched in Silicon Valley to make sure that all people can buy their products in the future. But more important is to make sure that people have proper housing, a proper income and can enjoy an adequate lifestyle. Austerity dismantled the stabilising factors of the welfare institutions. But in times of low average growth rates economists need to worry more about the lower end of the income levels. If you protect the more vulnerable strata of the society, you have a better chance for them to contribute in reconstruction. If you destroy the welfare state in Europe, and completely resort to the unfettered market, you won’t produce growth. You have to reduce the drain on society by military, security expenses and financial services because they don’t contribute anything productive to society and you have to strengthen the “real economy” and innovative sectors of the economy.
Literature: Galbraith, James K., The End of Normal. The Great Crisis and the Future of Growth, 2015