THE STATE INVESTS

Schools, airports, windmills and roads. Everywhere in the world, economic packages should rescue the economy. Has this ever succeeded?

By Thomas Fischermann and Mark Schieritz

[This article published in: DIE ZEIT, Nr. 52, 12/17/2008 is translated from the German on the World Wide Web, images.zeit.de/text/2008/52/Konjunktur.]

The president who promised flourishing regions to America came to power in March 1933. That was the low point of the worst worldwide economic crisis of all time: the Great Depression that began after a bank- and stock market crash in 1929. The economy of the United States shriveled 30 percent after 1929. A fourth of the gainfully employed population had no job. Franklin Delano Roosevelt did not want any half measures in 1933.

“The nation wants something to happen now,” he said vigorously in his inaugural address. The president carried out the New Deal – a series of reforms that amounted to a comprehensive economic program. The state built bridges, airports, parks and structures. Construction workers, actors, painters and musicians received state contracts. A social security system was introduced.

America tried to get back on its feet again on credit. American state spending doubled from $4.6 billion in 1932 to $8.2 billion in 1936. The budget deficit climbed to 5.6 percent of the gross domestic product. That corresponded to the advice of the British economist John Maynard Keynes. In an open letter, the father of Keynesianism suggested the US president redress the distressed economy through higher state spending and more credits. That was regarded as dangerous and obscene by leading minds of the economy and political science. The plan seemed to come undone at that time. America’s economy grew again after 1933 – even if it took until 1939 until the pre-depression level was reached again. Since then Roosevelt has been a hero for supporters of state economic programs.

What is our situation today? Do Germany, Europe and the whole world need a Roosevelt again?

In Berlin, a Roosevelt seems necessary. In early December 2008, the German government changed its direction. After resisting massive economic programs and putting voters off to next spring, it may pass a genuine relief program in January or February. The preparations have already been completed. At the beginning of December, German chancellor Angela Merkel saw how the land lies at a meeting with bankers, economic professors and business leaders in the chancellor’s office. From what one hears, it will be a mix of tax cuts, investment programs and aid for low-income persons. Germany will become heavily indebted in the next years as never before in postwar history.

This can only be justified by a dramatic situation. Isn’t the situation dramatic in Germany as in the rest of the world? At the economic research institutions that present diagnoses for the German government in the spring and fall, the economy in 2009 is expected to shrivel up to three percent. Thousands of businesses will go bankrupt’ unemployment could reach record levels. Worldwide trade will dwindle and investments will collapse, the World Bank says. The Washington organization warns of the worst recession since the 1930s.

Therefore the New Deal is on the agenda again. The designated US president Barack Obama will begin his term in office in January with state investments and income relief packages from $500 to $1 trillion. France expands its state spending. Switzerland, China, India and Russia join in. Even Merkel does an about-face, as one of the last. (Translator’s note: Canada’s conservative prime minister Stephen Harper also reversed his direction and will propose massive state interventions in the auto industry and the economy in January 2009.]

There is only one problem. Up to today, economists are not agreed whether Roosevelt’s New Deal in the 1930s was successful. A debate over principles curls around this question that for decades has been regarded as the most important question in economics. In these days, it is also the most explosive.

For example, one can judge like the economists Harold Cole and Lee Ohanian from the University of California in Los Angeles. Representative for a whole school of conservative economists in America, they recently posed the old question again: Where were Roosevelt’s flourishing regions? The economic recovery after 1933 was basically very cautious. For the rest of the decade, the unemployment rate did not fall below 13 percent and even rose again at the end – even after years of state injections of money. In the eyes of Coles and Ohanian, the New Deal even lengthened the economic crisis. The state extended itself more and more in the economy, regulated everything imaginable, paralyzed market forces and drove wages up. The state curbed growth and even increased unemployment.

That is all wrong, the Roosevelt fans insist. This crisis would have continued even longer without the courageous interventions of the New Deal. In a mathematical model, the economist Gauti B. Eggertsson from the Federal Reserve Bank in New York calculated the gross domestic product would have fallen another 30 percent by 1937 without the New Deal.

Was Roosevelt’s New Deal much too pathetic?

There is even a third perspective. Some economists – including this year’s Nobel Prize winner Paul Krugman – believe Roosevelt’s New Deal was much too measly. More money would have helped at that time. In going halfway, Roosevelt seemingly had fear of his own courage. His spending programs and tax deficits tore such deep holes in his state budget that he cut spending again in 1937 and raised taxes.

The so-called fiscal impulse – that extra money that the government freely spent in a debt-financed way according to John Maynard Keynes’ recommendations – only amounted to three percent of the gross domestic product according to estimates of the economist Bradford DeLong from the University of California at Berkeley. Roosevelt first went the whole distance when the US armed for the Second World War. The mass production of weapons financed by the state added around 15 percent to the gross domestic product.

How differently the past can be interpreted! The economists’ conflicts over principles regarding the New Deal deepened and were not settled. A real gulf runs through the guild, Keynesians passionate about intervention against neo-classicists far from the state. The respective majority opinion is marked by cycles like the economy itself. The positions of the two camps face one another constantly refined but unchanged in principle.

Neoclassicist: Let the market deal with its crises! You worry that the excesses of the boom years are corrected. For a long while, an upswing has followed every downswing.

Keynesian: That is needlessly brutal and entails heavy losses. A long and deep recession permanently damages the economy. The market takes everything to the extreme! Merely correcting excesses is not enough since solid businesses are destroyed together with the knowledge stored there. People will be unemployed for years, won’t be retrained and will lose their connection.

Neoclassicist: Will they take additional debts to finance tax vouchers, consumer checks or new infrastructure and thus artificially push demand? That is useless! If the people would rationally plan ahead, they could repay these debts one day. They tuck this money away, take it out of the economic cycle and even work less where possible. At the end of the day no money is spent any more.

Keynesian: The frugal Germans do not think so rationally. Low-wage workers and Hartz IV recipients who live from hand to mouth cannot revive the economy. When the state invests, it ensures that the economy will grow faster tomorrow than today: new streets, better schools and new eco-techniques. In a few years, we will all earn more. Then repaying the debts will not be a problem.

Neoclassicist: Oh I see, the state is the answer! Politicians controlled by lobbyists will identify future technologies better than the market…

Keynesian: We cannot speak about the wisdom of the market in future investments after the technology crash of 2000 and the many real estate bubbles or even about the usefulness of better schools and universities.

Neoclassicist: These are only sayings and aphorisms! If we didn’t have to pay off the mountain of debts from the 1970s from the state economic programs, we could invest more in education. The state is much too slow to help the economy! The economic slowdown will be over when the first tax rebates are due, construction workers are paid and investment plans and tax cuts are debated in parliamentary hearings. State investments will even be dangerous. They don’t fill any gaps but repress private initiative.

These two opposite positions on the New Deal do not help us advance. Are there other historical comparisons? Since the Great Depression of the 1930s, there were many attempts to revive the economy.

Consider the example of Japan. In the spring of 1998, the Japanese economy hit the bottom after a huge stock- and real estate bubble burst. The government passed an economic program amounting to two-and-a-half percent of the Japanese gross domestic product, around $90 billion. “This package is the largest package we ever carried out,” said Eisuke Sakakibara, the minister of finance at that time who was known abroad as “Mister Yen” on account of his great power.

This package was mammoth but unsuccessful at the end. Since then, opponents of economic programs cit Japan as a classic example why state spending according to Keynesian conceptions fails. The Japanese government announced new spending packages at that time. The newspapers of the country were full of reports about state-financed bridges to nowhere and corruption in awarding contracts. State indebtedness doubled, rising from 70 percent of the gross domestic product in 1990 to 140 percent ten years later. Nevertheless the economy stagnated for nearly ten years. This was a bitter setback for Keynesians, the neo-classicists said.

The Keynesians replied with a surprising argument: “Anti-cyclical policy was never really attempted in Japan<” claims Adam Posen, an economist at Peterson Institute for International Economics in Washington. Recent calculations by Thomas Mayer and Peter Hooper from Deutsche Bank concluded that Tokyo reacted too slowly and hesitantly. This conclusion was similar to a study of the American Federal Reserve.

In Germany there were more than a dozen economic programs.

How can this be? When it tied up its fiscal packages, Japan’s government actually realized its spending would not stimulate the economy – for example, purchasing development areas and state guarantees for credits. The actual volume of the economic program only amounted to a third of the official amount. Again and again the government made course corrections so that many projects were abandoned half-finished. That is Posen’s assessment. No wonder the Japanese economy is collapsing again! The permanent economic crisis was the real reason for the massive Japanese state deficit, not the pathetic economic programs.

Then there is the example of Germany. When the 1973 oil crisis ended the postwar boom, the German economy experienced its sharpest slump in a long time. In 1975 the gross domestic product shriveled 0.9 percent, a slap in the face for this affluent republic accustomed to growth. The number of unemployed soared to a million. In 1973 there were 274,000 unemployed. As a reaction, the social-liberal coalition in the following years presented more than a dozen economic programs. The construction industry was promoted, children’s allowance increased, a multi-year program of “future investments” was passed, taxes lowered and energy-savers received incentives.

The supporters of economic programs say: without the packages, the fall of the economy would have been much deeper. In the years 1975 to 1980, the German gross domestic product grew around four percent annually and the number of unemployed decreased again. “The thesis that the economic programs of the 1970s accomplished nothing is wrong,” the Berlin financial manager Dieter Vesper insisted.

Full employment did not return. There can also be no talk of flourishing regions. A multitude of problems restrained the economy. The high price of oil drove up the inflation rate. Strong unions gained much higher wages. As a result, businesses dismissed or simply abandoned people. Despite the weak economy, the German Federal Bank raised interests to combat the rise in prices. However long years of stagflation followed – a phase with high inflation and unusually weal growth.

Beyond the ideologies, several things can be learned from the history of economic programs. Firstly, there is no guarantee of success and also no convincing arguments that success will not occur. Secondly, these packages are very expensive. The state indebtedness increases. The many market interventions of the governments do not always improve things.

Therefore targeted economic programs should only be presented in a really serious crisis at the right time. In smaller crises, the built-in downswing brakes are adequate in tax- and social systems, at least in the rich countries. “Automatic stabilizers” exist. In the downswing, people and businesses earn less; the state takes less tax money from them. At the same time the state must pay more for the unemployed and welfare cases. When this is financed through debts and not from savings elsewhere in the state budget, an orderly impulse results for the economy. The central bank can do the rest. In the downswing, central banks lower the interests and thereby encourage demand. In normal times, that is enough.

However the times in the winter of 2008 are not normal. The power of the financial decision-makers fades. In the US, the interests are almost zero percent; in Europe, they are also falling quickly. Businesses do not invest because they expect falling sales and people hold onto their money because they fear unemployment.

Today even German Federal Bank president Axel Weber urges a state economic program. He believes the central banks otherwise will strike their limits. The Harvard economist and former Reagan advisor says an active tax- and spending policy of the state could play a constructive role “under one important condition: in a permanent downswing in which demand and interests are low and prices fall or could soon fall. This corresponds to the present diagnosis of many economic researchers for Germany.

Another lesson can be drawn from the history of the programs. If one compares today’s situation with past downswings, the prerequisites for a successful economic package seem relatively favorable, in any case more favorable than in the Germany of the 1970s. On account of the approaching world recession, the oil price has fallen dramatically and the wage settlements of the unions are moderate. No inflation threatens and no necessity for the central banks to raise their interests and raise the price of credits. Experts agree the worldwide collapse of demand is due to the downward suction – not a structural weakness in the businesses or in the labor market against which even the best economic program can get nowhere.

Unlike many other countries, Germany is economical. The third-largest national economy of the world has no excesses, neither on the real estate market nor elsewhere. While consumers in the US, Spain and Great Britain are heavily indebted and will have to limit their consumption sooner or later; the savings rate is high in Germany. When countries with a bad reputation on the capital market now want to carry out massive credit-financed economic programs like Italy or many Eastern European states, they find it is too expensive. The investors on the capital market do not trust them.

On the other hand, Germany is regarded as solid and can afford an economic program.


MEMORANDUM 2008: SHORT VERSION

Redistributing Income, Work and Power

Alternatives to Serving the Upper Class

By alternative economic policy study group

[Since 1977 a German study group led by Professor Jorg Huffschmid at the University of Bremen presented a memorandum on alternative economic policy every April. Reducing working hours is the only way to create meaningful jobs in a world of reduced work volumes, rationalization and information technology. This short version of Memorandum 2008 is translated abridged from the German on the World Wide Web, www.memo.uni-bremen.de/docs/memo08-kurz.pdf]

Insecurity, Indignation and Return of the Social

1. “Pressure is effective”: Pseudo-successes and Small Successes on the Labor Market
2. The Economy: Downswing from its own Dynamic
3. The “Worldwide Financial Crisis”: Danger of Infection
4. Long-term tendencies: Low Income, Miserable Work and Greater Inequality
5. After the Mega-projects of Neoliberal Reorganization
6. Alternatives
6.1 Ways to Full Employment
6.2 Control of the Financial Markets
6.3 Redistribution from Top to Bottom
7. Redistribution of Income, Work and Power

Insecurity, Indignation and Return of the Social

At the beginning of 2008, a strange mixture of different perceptions and estimates marked the economic- and social-political climate in Germany. Three discussion themes can be identified. The first concerns the judgment of the economic situation and prospects by the German government. A mixture of defiant optimism and gloomy presentiment of coming hardship for which all government responsibility is denied prevails here. In this view, the upswing is still robust and this is the merit of government policy. However if the upswing does not continue and the downswing forces become stronger, this is not due to German politics but to the “worldwide financial crisis” about which German policy cannot do anything. This quick invocation of a scapegoat is very practical for the government because it relieves politics and allows it to continue the past course of budget consolidation, market opening and privatization. The second strand of the economic- and social-political discussion is the growing realization that Germany has an upper class problem that is not publically emphasized, not only a lower class problem occasionally thematicized by politics in the last year. The callous destruction of tens of thousands of jobs and productive locations by the management of highly profitable businesses, the extremely high bonuses and golden handshakes for failed managers, the combination of megalomania and greed, corruption and influence-peddling in top German businesses and the recent revelations about the widespread practice of criminal tax evasion among top-earners – all this triggers an incredible amazement and indignation among those who do not belong to these circles. The integrity and competence of German economic leaders are increasingly questioned. A wave of discussion about moral standards in the economy has begun. The third strand in the economic- and social-political mixture is the attempt of all authoritative political actors to profile themselves as the rock of the social amid the neoliberal surge urging small corrections before atrocities are committed and carrying them out in isolated cases. This strand marked by hypocrisy is promoted by moral indignation but its essential foundation may be the political relative strengths slightly changed by social criticism, mobilizations and new parliamentary constellations and the focus on the approaching German parliamentary elections. However these corrections will hardly change anything in the overall neoliberal orientation of politics. Nevertheless these corrections should be understood as signs that relative strengths can be changed in a positive sense and that the effort of struggling for another policy requiring a long breath is very rewarding. They should not be brushed off as frauds.

Memorandum 2008 could make a contribution here. We will show that the employment successes extolled by the government with triumphant gestures are dubious and manifest a massive devaluation of labor; that the economy is very fragile and not robust and this has its cause in the weakness of the domestic German economy, not in the American mortgage crisis. An increasingly misguided distribution of income, work and power has long-term repercussions. Overcoming the continuing mega-economic problems and intensifying social problems requires a re-distribution of income, work and power. This re-distribution must be driven by strong social movements and leads to a radical democratization of the economy.

1. “Pressure is effective”: Pseudo-successes and Small successes on the Labor Market

…Low wages have become a mass phenomenon in Germany… 22.2 percent endure low wages, more than a fifth of all employees. This share is almost 50 percent higher than in 1995 (15 percent)…

Mass unemployment is still the central social problem in Germany. First of all, the unemployed themselves are affected immediately and very harshly. Second are the employees who are forced by competition on the labor market and present labor market policy to accept precarious – underpaid, temporary and unprotected – working conditions. In addition, the continuing mass unemployment is also a fiscal and mega-economic scandal…

2. The Economy: Downswing from its own Dynamic

The worldwide economic upswing in the developed industrial countries has come to its end and threatens to pass into a downswing. This cannot be questioned. During the last months, all international institutions, all governments and research institutions have corrected their forecasts downward… The European Union like the German government assumes the main cause for this sudden change lies in the turbulences of the financial markets.

We regard this explanation as false for the EU altogether and for Germany in particular. The causes for the economic downswing in Germany are not in the financial crisis but that the preceding upswing was weak and based essentially only on exports and investments. These two pillars of the economy slackened in 2008. If a powerful stimulation of private consumption and/or state spending does not replace them, the downward economic movement will accelerate. The acute danger of a recession will arise.

Exports: False Hopes. In 2007 Germany was again an export world master…

Investments: The End of the Cycle. The enormous increase of investments during the last three years was an expression of the law of cyclical development of a competitive capitalist economy. The means of production must be changed at certain intervals and modernized to remain in business…

Private Consumption: The Money Disappears. The most important reason is the inadequate development of wages and salaries. The decline of the wage rate manifest in a long-term trend since the end of the 1970s accelerated since the beginning of this decade and continued in 2008. Politics has not reversed the weak mass income but rather further strengthened the sales tax (value-added tax) three percentage points or around 24 billion euros. While private consumption will not decrease further in 2008, it will not prevent the downswing.

The much-praised upswing only arrived for a minority of the people in Germany but passed by the large majority, 81% according to a poll. The effects of a new growth weakness or downswing will be opposite. The small minority of the upper income class will be relatively untouched but the large majority will suffer additional and more massive losses.

State spending: Lower prices instead of counter-measures. Politics has not used the additional revenues realized through higher taxes to greatly increase state spending for public services in order to gradually correct public malformations and massive injustices in labor market- and social policy and close increasing gaps in the infrastructure and also counteract the macro-economic weaknesses. On the contrary, the further relief of businesses through the corporate tax reform and budgetary consolidation through drastic reduction of new state indebtedness were at the center of state economic policy. This course is maintained in 2008 according to the will of the German government. The German government curbed the past upswing and reinforced the downswing forces.

East Germany: No Lasting Stimulus

3. The “Worldwide Financial Crisis”: Danger of Infection

The effects of the current worldwide financial crisis on the German economy are now limited to writing-off losses for credits and other financial investments of the big banks. In inscrutable and speculative businesses, public institutions strived for positions as global players in the great world of international financial markets. In the past years, they did not concentrate on their public task of promoting regional development. The indignation over these malformations with ruinous consequences for public banks and financial investors – after the boom and the crash of the new economy-bubble at the end of the 1990s – recently drove the boom of the speculative credit trade and caused the crash…

Long-term dangers starting from the increasing power of the financial sector in Germany lurk in the pressure that financial investors can exert on corporations (in concentration on “shareholder value”) and on governments (tax cuts for capital), not so much in the financial crisis.

4. The Long-term Tendencies: Low Incomes, Miserable Work and Greater Inequality

…Mass unemployment has lasted more than a quarter century in Germany. Mass unemployment has changed the former “economic wonderland.” The well-developed welfare state and the economic front-runner in the EU. The long-term growth and investment rate of the German economy are under the rates of other industrial countries. Public spending in the economic infrastructure ranks second to last in the OECD. In the meantime, the international model of the German training- and education system has changed into a straggler role. The social cuts and (partial) privatization and commercialization of health services and old age security under the pressure of the public financial distress and private investors have torn great holes in the net of social security. The social cohesion has become fragile. Social security is lower and poverty – especially child poverty – has climbed considerably.

Continuing mass unemployment has proven to be the most effective lever to change the social climate, the relative strengths and distribution of incomes and assets. Mass unemployment is the main social evil. However mass unemployment is an advantage for firms and business-oriented policy because it supports the neoliberal forces of counter-reform…

Expecting market forces could lead us out of this fortified vicious circle would be ridiculous. These market forces caused the vicious circle and gave priority to the profit expectations and power positions of financial investors and the export industry. The long-term development in Germany has been marked by the increasingly misguided distribution of work, income and power.

5. After the Mega-Projects of Ne0oliberal Reorganization

a. Big projects without great breakthroughs

- The labor market reforms (Hartz I-IV) have brought intense pressure on employees and the unemployed without creating regular jobs. They were and are a decisive lever for deterioration of working conditions.
- The pension reforms of 2001 and 2006 incited the exodus from the system of transfer-financed old age security and rose the pension age. Both led to increasing old age poverty in Germany…
- The health reform encourages increased competition among physicians and health funds. Across-the-board provision with medical services is undermined.
- The many tax reforms since the beginning of this decade – including the corporate tax reform that took effect at the beginning of 2008 – have massively relieved top-earners, corporations and owners of capital by lowering tax rates and tax exemption of alienated profits (Verausserungsgewinn)…
- The financial market reforms have made the German capital market attractive for international financial investors and allowed for the first time the activity of highly speculative actors like hedge funds. This led to a new wave of financial speculation in Germany, put management and employees in businesses under the massive pressure of financial investors and changed the business culture.

b. Mini-corrections for the Election Campaign

…Politics only grapples with the problem of increasing poverty very late, under external pressure and in a shamefully half-hearted and inadequate way. This problem was long known in its extent and its dynamic…

c. Standstill in the Federalism commission II

d. The discussion about state debts plays a great and fatal role in the economy. These state debts are the background of the German government’s scandalous refusal to present an economic program to stabilize economic development given the threatening downswing and to prevent the further increase of unemployment. In this context, the demonization of state indebtedness that was almost an obsession has proven counter-productive and dangerous. When the new state indebtedness fell to zero in 2007 for the first time in 20 years, this was referred to the tax revenues that flowed intensely as a result of economic growth. When politics orients itself in “zero deficits” in a situation of threatening downswing, this is counter-productive and dangerous. Rather politics should counter the downswing with a public investment- and jobs program that should be mainly financed on credit. In the past years we were opposed again and again by a demonization of new state indebtedness that was partly hysterical, partly due to misunderstandings and partly from calculated neoliberal interests. We are not debt fanatics but we oppose rejecting an important and reasonable political-economic instrument to stabilize the economy and finance long-term public services for ideological reasons…

e. Despite all usual half-heartedness, the German government seems determined to introduce and complete the privatization of the German railroad in 2008 as the last great “reform” project in this legislative period…

6. Alternatives

6.1 Ways to Full Employment

Time and again the study group on alternative economic policy has emphasized the continuing unemployment as the central problem of economic and social development in Germany. Despite the slight stimulation of the labor market, this is still the case in 2008. An effective jobs policy with the goal of full employment is the starting point for solving this problem. This does not mean creating as many jobs as possible without regard to their quality. Full employment requires more and better jobs or “good work” for everyone who wants to work and can work. The quality of work refers to health protection on the job, working hours and working conditions (equal joint-determination, protection against unlawful termination, unlimited working conditions, no discrimination on the job etc.) pay enabling independent life and possibilities for using and developing one’s abilities. Full employment in this sense promotes self-assured people and thus democratic discussions, processes and structures. Incidentally full employment is an essential factor to overcome future democratic strains.

What is necessary to reach the full employment goal in Germany? Three starting points could be named:

- Public investment- and jobs-programs,
- Reduced working hours and
- Expansion of publically promoted jobs.

a. Public investment- and jobs programs

…A successful jobs policy would lead to more tax revenue and thus to a considerable relief of public budgets. State spending could be pre-financed by accepting public debts and paid back later from the higher tax revenues.

b. Reduced working hours.

The permanent increase in mass purchasing power and the expansion of public investments could promote economic growth in the long run. This is a necessary but not sufficient condition for the return to full employment. For that, growth rates would be necessary that are neither possible nor ecologically responsible. The return to full employment requires actively promoting the long-term trend of reduced working hours. An ambitious demand-oriented growth program and measures to permanently reduce individual working hours are the two sides of an alternative economic program. If this does not happen, it is because of the hierarchy of power in globalized capitalism. Full employment is possible but must be politically willed and carried out…

Collective reduced working hours negotiated across the board contributes to the reduction of unemployment. It offers the chance of shaking the traditional division of labor between men and women. Reduced working hours create possibilities for humanizing work. It reduces foreign-determined time in the capitalist production process and so expands the daily share of freedom and leisure, i.e. self-determined time.

There is no royal way or universal model of reducing working hours. Dividing fairly future work volumes needed by the total economy on account of increased productivity developments is important. More part-time work is only an acceptable partial solution when it is sought voluntarily and joined with full social security. It should be rejected as a stopgap solution because of the lack of full time jobs in typical women’s jobs that do not ensure a reasonable income. Rather the goal should be: short full time for everyone. Thus the reduction of individual weekly working hours is vital.

Redistribution of working hours and income is always involved in reduced working hours. Therefore it is always conflict-laden. It is economically obvious that raising wages for workers is harder for unions in times of a surplus of workers. Reduced working hours can and should occur without cuts in pay. This is necessary for maintaining the living standard of the employees and reasonable from an overall economic perspective. Reduced working hours with no cuts in pay can be realized in different variants that all have positive effects for employment.

c. Expansion of public employment

In the course of mass unemployment continuing for decades, groups of workers formed that were far from the labor market and had no chance for a regular job in the foreseeable future when the labor market altogether falls. To help these groups to a paid, socially recognized employment, the study group on alternative economic policy has long urged the development of publically promoted employment in long-term employment conditions. Public employment helps satisfy a growing need for necessary public work and makes possible a planned economic life – unlike precarious job conditions in the private economy or in neo-feudal exploitation conditions in private households. Therefore the alternative economic policy study group rejects state subsidizing jobs in private households already implemented by the German government and planned for the future. The German government promotes a re-feudalization of social structures that in its core is nothing but a hidden tax subsidy for those rich in income and assets.

6.2 Control of the Financial Markets

Even if the immediate effects of the current financial crisis on the German economy cannot be exactly predicted, the instability of the financial markets and the activity of financial investors represent incalculable risks and potential dangers that politics should energetically oppose. More transparency is not enough because this does not prevent other cumulative herd conduct or the pressure of financial investors on business leaders directed to short-term profit maximization. The following measures should be adopted – either in European cooperation or in single-handed German efforts – to prevent excessive financial speculation:

- All types of tax privileges for financial investors should be ended immediately. This is true especially for the tax exemption or relief of alienated profits and so-called “transitory” (durchlaufender) profits and incomes of financial managers.

- The guaranteeing, bundling and alienation of credits by banks should be prohibited as evasion of legal capital holding requirements or at least made dependent on the explicit approval by the financial monitoring authorities…

- Borrowing by financial investors to finance takeovers should be drastically restricted. As a measure to increase capital profits for owners of assets, borrowing for takeovers brings additional risks into the financial system and contributes to an unintended expansion of the money- and credit-supply. For example, the limitation could occur by setting a foreign financing limit – e.g. 40 percent – for corporate takeovers by financial investors.

- To protect future pensioners from reduction or loss of their old age provisions, investment of pension funds in hedge funds, private equity funds, derivatives and currencies allowed in Germany should be prohibited. Investments in stocks should be strictly limited. Politics should renounce on promoting private pension funds and return as much as possible to the more reliable, more just and cheaper transfer payments. Old age provisions may not be made into playthings of financial speculation.

- Businesses and employees should be better protected from plundering by financial investors. Binding the voting right in corporations to a certain minimum duration of the owner’s capital share is an appropriate measure. Corporate joint-determination should be extended so employees and unions can prevent takeovers by financial investors.

- The business model of public banks must be reoriented to fulfilling public functions and services. Promoting politically intended regional and supra-regional development structures – for example, reorganization of the energy supply and transportation systems – support of medium-sized business structures in agriculture and regional services are part of that orientation. Public financial investments may not be endangered in speculative businesses or in striving for positions as international or global players.

6.3 Redistribution from Top to Bottom

The same causes underlie speculative excesses, bubbles, crashes and instabilities as continuing unemployment, precariousness of work and the rise of poverty. Redistribution of incomes and assets from bottom to top continuing for thirty years with only brief interruptions has led to the new lower class (“dependent precariousness”) and to an upper class whose assets destabilize the financial markets in the constant search for new profit sources. A permanent stabilization of the financial markets – like a permanent stabilization of economic development and improvement of living standards and social security for most people – is only possible if this trend is stopped and reversed. In other words, redistribution from top to bottom must be introduced.

The most important corrections against the decline of mass incomes are enormous increases in wages and salaries. We welcome the fact that unions in recent times are obviously ready to accept harsh conflicts. Successes in these conflicts are very possible. This is not only beneficial for individual employees. Higher real wages could stop the mega-economic development… Higher wages promote growth in employment and halt the further decline of social cohesion…

- The introduction of a legal minimum wage of 1500 euros monthly for full-time workers. This amount is two-thirds of the average gross salary paid in 2007. With an average monthly working time of 160 hours, this is equivalent to an hourly wage of 9.38 euros. This must rise in the course of the reduced working hours.

- The complete abandonment of the Hartz IV system and lengthening the duration of regular unemployment benefits to at least 32 months without intensifying reasonability rules.

- Introduction of a need-oriented basic security of 1000 euros (2006: 940 euros) with supplements of 500 euros for household members from 14 years of age and 300 euros for children under 14 years. This basic security should correspond to the inflation rate.

Excessive incomes and assets of the upper class can be decreased through the following measures:

- Raising the top tax rate for incomes to 48 percent plus solidarity supplements and raising the corporation tax rate to 30 percent;

- Immediate cancellation of tax exemption for alienated profits;

- Resuscitation of the property tax for private households through proper assessment of real estate and immovables. The tax should amount to 1 percent of taxable assets with a tax allowance of 300,000 euros for married couples and 100,000 for every child.

- Introduction of an inheritance- and gift tax for private households. This could bring 8 billion euros from mammoth assets…

Battles against tax evasions. The upper class has privileges in the form of extremely massive assets, salaries, bonuses and golden handshakes supplemented by low taxes, tax exemptions and many tax-restructuring possibilities. In addition, many of its members have also used criminal methods for further enrichment. The combination of greed and moral decline discredit the criminal actors and their many helpers inside and outside banks and financial institutions. Greed and moral degeneracy poison the social climate and undermine the political stability that depends on observing constitutional rules and the authority of the law for everyone. Enormous funds from public budgets urgently needed to finance public functions are withdrawn and parked in tax havens and offshore centers. For example, the German tax union estimates annual tax losses of 30 billion euros through tax evasion. To stop this development, the German government should finally take courageous steps on national and international planes.

Nationally the number and intensity of investigations of tax offenders, tax evasion and tax fraud as crimes should be expanded. Internationally the government should work toward shutting down or drying up tax havens and offshore centers that serve as shelters for tax criminals. This is hard for the German government because it is a passionate defender of international tax competition. The difference between “countries with good tax competition” and “wicked tax havens” decays to political arbitrariness. Therefore the whole neoliberal concept of international tax competition must be challenged. Investors in Germany from other EU countries should not be enticed by tax incentives.

In practical tax collection, collaboration with the tax authorities of other states must be intensified. The case of Zumwinkel and Liechtenstein has shown that readiness for cooperation can be increased with political pressure, as for example the threat of limiting business dealings. The US uses this method with success against tax havens and offshore centers.

7. Redistribution of Income, Work and Power

The thesis that a common cause of the many economic, social and political-economic problems in Germany lies in an increasingly misguided distribution runs through the analyses and reflections in Memorandum 2008. A wrong distribution of income leads to the standstill of macro-economic development and to growing poverty and polarization and to the speculative overheating of the financial markets. A wrong distribution of work prevents turning the positive effects of long-term advances in productivity and decreasing work volumes into shorter working hours in a fully employed economy. Instead higher productivity has led to mass unemployment and longer and more miserable work. Finally, a wrong distribution of power and possibilities of influencing decisions leads to an economic policy that serves the rich, becomes more and more estranged from the needs and problems of most people and thus undermines the foundations of a democratic society.

A correction of this long-term malformation necessitates a basic redistribution of income, work and power. A redistribution of income permanently strengthens private and public consumption and reinforces social cohesion. A redistribution of work can overcome unemployment. Higher productivity could benefit all people. A redistribution of power is necessary to overcome the resistance of those whoa s a small powerful group profit from harmful conditions altogether and to strengthen democracy in the economy. Another economic policy in the interests of the majority of people is possible. Alongside good convincing arguments, readiness and ability to push these arguments through in conflict against powerful minorities is necessary.