How to generate unemployment and deflation

... like a dentist
How to generate unemployment and deflation
By Heiner Flassbeck

[This article published on 7/31/2020 is translated from the German on the Internet, https://makroskop.eu/2020/07/wie-man-arbeitslosigkeit-und-deflation-erzeugt/.]


In the USA at the moment pretty much everything that can be done wrong is being done wrong. If wage cuts are now being implemented across the board, a scenario like that of the Great Depression of 1929 can no longer be ruled out. But even in Germany the importance of stable wages is not understood.

A lesson in the wrong economic policy choices can currently be learned in the USA. Once again, companies are doing what they can't help doing: They cut wages. As is graphically reported here, not only are many millions of workers being laid off in the USA as a result of this crisis directly caused by the state, but many more millions are having their wages cut because unemployment is high.

That is fatal, as the report rightly points out. Because the American economy is more dependent on consumption than any other, the reduction in wages leads directly to a fall in consumption, which in turn directly harms companies as a whole. Is the reduction in wages becoming a mass phenomenon - and who wanted to prevent this in the case of 'freely deciding' companies? - the wage cuts are the direct path to deflation and a crisis that is really almost impossible to control.

Like in the Great Depression

This corporate behavior is exactly what dramatically exacerbated the crisis in many countries, including Germany, during the Great Depression of the 1930s: Because of mass unemployment, companies cut wages at that time, which exacerbated mass unemployment and drove up deflation. It is more than tragic that more than a hundred years later the relevant context is still not understood.

Friederike Spiecker and I already pointed out last week that even in Germany, far into the trade unions, there is a tendency to forego wage increases because of the difficult economic situation. This is exactly the same mistake as in the USA, only the dimension is different. If, as you can hear these days all over the country, companies step on the cost brakes hard, as you can hear these days, they will trigger nothing more than such a dangerous deflationary mechanism.

Dismissals, however harsh they may be for those affected, are in fact better than wage cuts in macroeconomic terms. In this case, shared suffering is not half suffering, but rather, so to speak, double. A company that cuts wages for the entire workforce by ten percent does more damage to the economy than a company that cuts its payroll by ten percent by laying off ten percent of its workforce. The complete loss of wages for the ten per cent of those made redundant is offset by 60 per cent state support, whereas no one is compensated for the entire workforce when wages are cut. If the affected employees do not draw on their savings, the wage reduction will have a full impact on demand and thus a negative effect on jobs. Wage cuts immediately destroy jobs and, in a second step, force companies to adjust prices downwards, thus following unemployment with deflation.
The companies as a whole cannot reduce costs...

The principle behind it is actually easy to understand, but has still not found its way into the generally accepted canon of economics, although it is of paramount importance. Companies that reduce their costs always immediately and directly reduce the profits of other companies. As the companies concerned tend to do the same, because they too fear losses, a downward spiral occurs which knows no limit.

The companies dig their own grave with the reduction of costs, unless at least one powerful actor counters it and even then does not cut (but better still increases) its expenditures, even if it itself is affected by cuts by the other actors. This can apparently only be the state that understands the programmed failure of entrepreneurial attempts and opposes them vigorously.

... and never spend their resources

Conversely, however, it is also true that companies that spend money with their hands full always only fill the hands of other companies. The corporate sector as a whole is a cash cow whose reserves never run out. If companies take on debt and invest on balance, they can trigger a boom, which likewise only comes to an end when it leads to inflation via rising wages and calls on the state - this time in the form of the central bank - which chokes off the boom with interest rate hikes.


What can an enlightened state do?

An enlightened state can, of course, intervene long before the catastrophe occurs and try to stop companies from their senseless actions. Especially in today's deflationary situation, where the state no longer has the simple means of stimulating low interest rates and further interest rate cuts at its disposal, other interventions must not be taboo from the outset. The state could easily impose a wage target that would prohibit companies from adjusting wages downwards in any way during the crisis. However, it cannot at the same time prevent a company operating in a market from reducing its staff if the company is in a state of crisis.

On the one hand, it follows from this that the state can improve the situation for all companies through direct state demand. But there are limits to government demand. On the one hand, the state cannot really serve all areas of the economy, but is usually extremely heavy on construction because it focuses on public infrastructure. On the other hand, the state is often not fast enough to absorb a deep slump in time.

But there is a simple way out of this dilemma: the state can pay an extremely generous wage replacement benefit, i.e. unemployment benefit, to all those who become unemployed in such a crisis.

Generous unemployment insurance as a solution

If the state were to pay all unemployed people 70 to 80 per cent of their last earnings for two years, it would on the one hand facilitate wage negotiations and on the other hand support demand better than any other measure without completely calling into question the existing production structures.

This is often overlooked: It is not possible to replace the existing production structures with new ones without friction - not only the "machinery" but also the workforce with its know-how. The restructuring process takes time and is accompanied by unemployment. Particularly in times of already high unemployment, this is a massive additional burden for the employees, who are expected to be highly mobile and flexible in terms of their adaptability in terms of qualifications and occupational field at a time when the chance of finding a job is low.

This solution can easily be implemented in all large, relatively closed economic areas. In the USA in particular, the export share of less than 15 percent is so small that domestic demand plays a decisive role (Figure 1). But even for EMU as a whole, where exports account for around twenty percent of GDP, only such a measure can prevent massive labor market problems.
Figure 1

With its huge current account surplus and its extreme dependence on exports, Germany is in a much worse starting position than the rest of EMU or the USA (Figure 2). No one can replace the loss of export demand, neither domestic private households nor the state.
Figure 2

This structure is simply not sustainable, unless a miracle happens to enable importers around the world to buy the goods that Germany offered before the Corona crisis again very soon. But this miracle will not happen because it is already clear that the shock has caused and will continue to cause massive distortions in income and profits in practically all countries. In Germany, more than in any other comparable country, even with major macroeconomic countermeasures, millions of jobs are no longer viable because of its export-heavy structure.

It is high time that German policymakers drew conclusions from this and actively pushed ahead with restructuring towards a greater role for domestic demand. Political support for a wage policy that is unimpressed by the current crisis is the most important measure.




135 billion for the rich hidden in Trump's Covid aid package
135 billion dollars in tax deductions for billionaires and managers of hedge funds © Inequality Media

by Robert Reich

This article published on 8/2/2020 is translated from the German on the Internet,

Editor / 02 Aug 2020 - Clinton's former Secretary of Labor Robert Reich describes Donald Trump as an assistant to large corporations and the super-rich.

On closer inspection, the multi-billion-dollar aid package for the economy in the US benefits less the direct victims of the Corona pandemic than billionaires, hedge funds, construction and other large corporations, explains Robert Reich in one of his latest video views. He calls the stimulus package "Trump's Worst Attacks on Workers".

Hidden in the middle of the almost 900-page legal text, Congress, at Trump's request, has placed tax gifts amounting to 135 billion dollars for millionaires and managers of hedge funds under the title "Modification of credit for prior year minimum tax liability of corporations".

Since taking office, Trump has made sure that his rich friends have become even richer. Reich criticizes that he has let down the workers and employees.

As a further example, in addition to tax gifts to the super-rich, Reich cites the prices of medicines, which in the USA are the highest in the world. During the election campaign Trump had railed against the "usurious prices", but nothing had happened since then. On the contrary: the development of the drug Remdesivir, which is now used to treat Covid-19 patients, was supported by the manufacturing company Gilead Sciences with 70 million tax money. Nevertheless, the company is now allowed to charge $3120 for a treatment with Remdesivir. Poor people without health insurance simply cannot afford such treatment.


Less is less
Growth critics in the corona crisis

The crisis shows what to think of the philosophers' talk about "Degrowth" and "postal growth". A settlement.
by Alexander Neubacher

[This article published on 7/31/2020 is translated from the German on the Internet, https://www.spiegel.de/politik/deutschland/degrowth-und-postwachstum-weniger-ist-nicht-mehr-sondern-weniger-kolumne-a-00000000-0002-0001-0000-000172270204.]


Termination of business

Corona achieves what growth critics have long dreamed of: the economy is shrinking. Now the "less is more" movement finally has the chance to find out whether reality delivers what its Degrowth theory promises. Will we lead a modest but happier life? Is the earth breathing?

Air traffic has been largely shut down, car and chemical factories have curbed production, parts of the cruise industry are practically on the brink of collapse. So, from the way the movement reads it, the right people have been hit. "All the people I know want love, peace, the overcoming of poverty and a beautiful and safe environment," writes Maja Göpel, who is currently number 4 on the SPIEGEL bestseller list with her ecological sermon "Rethinking our world". And Richard David Precht, number 1 on the SPIEGEL bestseller list, says: "With less electricity consumption, without factory farming and without cruising, it's great to live.

The question is, how long will the joy of giving it up last? I suspect: not long. For some, it's already wearing off. At the beginning of the Corona era, some were quite happy to tend the balcony, bake bread and clean out the wardrobe in peace. For many of them there was short-time work and compensation. But in the meantime one would like to have one's old life back, because it wasn't that bad. Not everybody wants to repeat the holiday on the camping site in the Lüneburger Heide.

In the meantime one would like to have one's old life back. It was not that bad.

If holidays are still possible. Because even if it is different in Göpel and Precht-books: The two goals "less growth" and "less poverty" unfortunately don't go hand in hand. In the real world, the statistical connection looks like this: If the economy shrinks, poverty grows. Thousands of companies are facing bankruptcy, hundreds of thousands of people fear for their jobs. Precht may be able to live perfectly well without cruises. The employees of MV Werften in Rostock and Meyer in Papenburg see things differently.

It is also a mistake to believe that it benefits the environment when the economy shrinks. For a few months of lockdown the sky may look a little bluer. But where will the money come from that is needed for climate-friendly technologies and the restructuring of industry, energy supply, agriculture? Certainly not from countries struggling with unemployment and growing social costs. It is no coincidence that Europe's heads of government were the first to shave the planned EU programs for innovation and climate protection at their Corona summit.

The theory put forward by fair-weather philosophers that the pandemic will be a salutary shock leading to a better, more sustainable world is wrong. Forced renunciation and economic decline do not make anything better. Less is not more, but less. Corona is not an opportunity, it is an evil. We can only hope that one day it will pass.