Archive for the ‘Recession’ Category
The Pew Research Center recently published a report titled “Pervasive Gloom About the World Economy.” The following two charts come from Chapter 4 which is called “The Causalities: Faith in Hard Work and Capitalism.”
The first suggests that the belief that hard work pays off remains strong in only a few countries: Pakistan (81%), the U.S. (77%), Tunisia (73%), Brazil (69%), India (67%) and Mexico (65%). The low scores in China, Germany, and Japan are worth noting. This is not to say that people everywhere are not working hard, just that many no longer believe there is a strong connection between their effort and outcome.
The second chart highlights the fact that growing numbers of people are losing faith in free market capitalism. Despite mainstream claims that “there is no alternative,” a high percentage of people in many countries do not believe that the free market system makes people better off.
GlobeScan polled more than 12,000 adults across 23 countries about their attitudes towards economic inequality and, as the chart below reveals, the results were remarkably similar to those highlighted above. In fact, as GlobeScan noted, “In 12 countries over 50% of people said they did not believe that the rich deserved their wealth.
It certainly seems that large numbers of people in many different countries are open to new ways of organizing economic activity. This is a hopeful development.
The conventional wisdom seems to be that our biggest economic challenge is runaway government spending. The reality is that government spending is contracting and pulling economic growth down with it. And worse is yet to come.
Perhaps the best measure of active government intervention in the economy is something called “government consumption expenditure and gross investment.” It includes total spending by all levels of government (federal, state, and local) on all activities except transfer payments (such as unemployment benefits, social security, and Medicare).
The chart below shows the yearly percentage change in real government consumption expenditure and gross investment over the period 2000 to 2012 (first quarter). As you can see, while the rate of growth in real spending began declining after the end of the recession, it took a nose dive beginning in 2011 and turned negative, which means that government spending (adjusted for inflation) is actually contracting.
The following chart, which shows the ratio of government consumption expenditure and gross investment to GDP, highlights the fact that government spending is also falling as a share of GDP.
Adding transfer payments, which have indeed grown substantially because of the weak economy, does little to change the picture. As the chart below shows, total government spending in current dollars, which means unadjusted for inflation, has stopped growing. If we take inflation into account, there can be no doubt that total real government spending, including spending on transfer payments, is also contracting.
The same is true for the federal government, everyone’s favorite villain. As the next chart shows, total federal spending, unadjusted for inflation, has also stopped growing.
Not surprisingly, this decline in government spending is having an effect on GDP. Real GDP in the 4th Quarter of 2011 grew at an estimated 3 percent annual rate. The advanced estimate for 1st Quarter 2012 GDP growth was 2.2 percent. A just released second estimate for this same quarter revised that figure down to 1.9 percent. In other words, our economy is rapidly slowing.
What caused the downward revision? The answer says Ed Dolan is the ever deepening contraction in government spending:
What is driving the apparent slowdown? It would be comforting to be able to blame a faltering world economy and a strengthening dollar, but judging by the GDP numbers that does not seem to be the case. The following table (see below) shows the contributions of each sector to real GDP growth according to the advance and second estimates from the Bureau of Economic Analysis. Exports, which we would expect to show the effects of a slowing world economy, held up well in the first quarter. In fact, the second estimate showed them even stronger than did the advance estimate. The contribution of private investment also increased from the advance to the second estimate, although not by as much. Exports and investment, then, turn out to be the relatively good news, not the bad, in the latest GDP report.
Instead, the largest share of the decrease in estimated real GDP growth came from an accelerated shrinkage of the government sector. The negative .78 percentage point decrease of the government sector is the main indicator that we are already on the downward slope toward the fiscal cliff.
If current trends aren’t bad enough, we are rapidly approaching, as Ed Dolan noted, the “fiscal cliff.” That is what I was referring to above when I said that worse is yet to come. As Bloomberg Businessweek explains:
Last summer, as part of its agreement to end the debt-ceiling debate (debacle?), Congress strapped a bomb to the economy and set the timer for January 2013. Into it they packed billions of dollars of mandatory discretionary spending cuts, timed to go off at exactly the same time a number of tax cuts [for example, the Bush tax cuts and the Obama payroll-tax holiday] were set to expire
The congressional deficit supercommittee had a chance to disarm the bomb last fall, but of course it didn’t. And so the timer has kept ticking. The resulting double-whammy explosion of spending cuts and tax increases will likely send the economy careening off a $600 billion “fiscal cliff.”
The fiscal contraction will actually be even worse, since the extended unemployment benefits program is also scheduled to expire at the end of the year.
So, what does all of this mean? According to Bloomberg Businessweek:
If Congress does nothing, the U.S. will almost certainly go into recession early next year, as the combo of spending cuts and tax hikes will wipe out nearly 4 percentage points of economic growth in the first half of 2013, according to research by Goldman’s Alec Phillips, a political analyst and economist. Since most estimates project the economy will grow only about 3 percent next year, that puts the U.S. solidly in the red.
One can only wonder how it has come to pass that we think government spending is growing when it is not and that it is the cause of our problems when quite the opposite is true. Painful lessons lie ahead—if only we are able to learn them.
Greece has been in recession for close to four years and its economy continues its downward slide. Its unemployment stands at 20.9%, youth unemployment at 48%. In the words of the Guardian’s economic editor:
Greece is broke and close to being broken. It is a country where children are fainting in school because they are hungry, where 20,000 Athenians are scavenging through waste tips for food, and where the lifeblood of a modern economy – credit – is fast drying up.
According to the conventional wisdom, Greece’s current economic problems are the result of years of too much public spending on social programs and too little tax collection. Foreign borrowing enabled the Greek state to finance its ever larger budget deficits and sustain growth. However, this strategy reached its limits in 2008. The global crisis dramatically increased the country’s deficits and foreign lenders grew worried about Greece’s ability to pay its debts. Unable to tap credit markets, the Greek state and economy entered into crisis.
In response to the crisis, European institutions and the IMF have offered the Greek state special loans (so they can pay their debts to foreign banks—mostly German and French). In exchange, the Greek government has agreed to slash its spending. This has meant massive cuts in state employment and social programs and, of course, a worsening of the country’s economic downturn.
Interestingly, while the media has demonized Greek workers for creating the deficits and moralized about their need to readjust to the realities of Greek economic capacities, little attention has been paid to military spending as a cause of the deficits and the unwillingness of European leaders to demand a significant change in Greek defense spending.
Here is what a Guardian reporter has to say:
The current EU-IMF bailout remains conditional on further austerity measures, including reducing pensions, the minimum-wage and civil service jobs. However, one area of the Greek budget doesn’t seem to have received much scrutiny: its huge military spending. . . .
In 2006, as the financial crisis was looming, Greece was the third biggest arms importer after China and India. And over the past 10 years its military budget has stood at an average of 4% of GDP, more than £900 per person. If Greece is in need of structural reform, then its oversized military would seem the most logical place to start. In fact, if it had only spent the EU average of 1.7% over the last 20 years, it would have saved a total of 52% of its GDP – meaning instead of being completely bankrupt it would be among the more typical countries struggling with the recession.
So, what is driving this military spending—well just as German and French banks have been among the biggest lenders to the Greek state, German and French arms producers have been among the biggest arms sellers to the Greek state. As the Guardian article explains:
In the five years up to 2010, Greece purchased more of Germany’s arms exports than any other country, buying 15% of its weapons. Over the same period, Greece was the third-largest customer for France’s military exports and its top buyer in Europe. Significantly, when the first bail-out package was being negotiated in 2010, Greece spent 7.1bn euros (£5.9bn) on its military, up from 6.24bn euros in 2007. A total of £1bn was spent on French and German weapons, plunging the country even further into debt in the same year that social spending was cut by 1.8bn euros. It has claimed by some that this was no coincidence, and that the EU bail-out was explicitly tied to burgeoning arms deals.
Greece has finally begun to reduce its military spending, but the cuts in the military budget have been far smaller than those in social programs. In fact, Greece remains in the top spot in the EU for spending on the military as a percentage of GDP and is still one of the world’s biggest weapons importers.
An article in the German press offers the following picture of how military spending is being handled relative to social programs:
In 2010 the military spending budget should have been cut by only 0.2 percent of economic output, or by €457 million. That sounds like a lot, but the same document proposed to cut back on social spending by €1.8 billion. In 2011, according to the EU Commission, Greece was to strive for “cutbacks in defense spending”. The Commission, though, didn’t make it explicit.
The Greek Parliament was quick to exploit this freedom. The 2012 budget proposes cuts to the social budget of another nine percent, or about €2 billion. The contributions to NATO, on the other hand, are expected to rise by 50 percent, to €60 million, and current defense spending by up to €200 million, to €1.3 billion – an increase of 18.2 percent.
And the German Federal Government’s stance? According to a spokesman, responding to an enquiry, the German government supports “the policy of consolidation of the Greek Prime Minister Papademos. The government’s guiding assumption is that the Greek government will, on its own responsibility, contemplate meaningful cuts in military spending.”
On June 17, Greece will hold national parliament elections. As the Washington Post explains:
Let’s recall the background. Greece owes a whole bunch of money it can’t repay. In February, the country received a $140 billion bailout from the IMF, the European Central Bank, and the European Commission. In exchange, Greece is supposed to make a bunch of sharp spending cuts. Greek voters don’t like this, given that their country’s economy is already in tatters. But if they don’t accept further austerity, they might not get the bailout. . . . So that’s the context for the upcoming Greek parliamentary elections.
The two parties leading in the opinion polls are Syriza (Coalition of the Radical Left), which rejects the austerity agreement and is promoting a restructuring of the Greek economy (of course, more is at issue than just military spending), and Nea Dimokatia (New Democracy), which has basically endorsed the status quo. Here is an article that provides some background on the main parties contesting the upcoming election and here is a statement of Syriza’s program for economic transformation. The statement is well worth reading; it includes policies that would be helpful for people in many countries.
Economic recoveries often depend on the state of the housing market. While an April increase in housing prices has led many analysts to talk of a housing recovery, U.S. home values still remain depressed (see the chart below). According to a Zillow real estate research report, they are still some 25% below their 2007 peak.
Perhaps the most telling indicator of the state of the housing market is that, as of the first quarter 2012, 31.4% of all owner-occupied homeowners with a mortgage were ”underwater,” which means they had a mortgage greater than the market value of their home. As the table below shows, these homeowners owed, on average, $75,644 more than what their home was worth.
To this point, the high percentage of underwater homeowners represents, in the words of Zillow, only “a potential danger.” That is because “the majority of underwater homeowners continue to make regular payments on their mortgage, with only 10.1% percent of the 31.4% nationwide being delinquent.” The following figure highlights the percent of delinquent/underwater homeowners in the largest metropolitan areas.
At the same time, as Zillow notes:
With nearly a third of the nation’s mortgaged homeowners in negative equity and the average underwater homeowner having a home value that is 31 percent lower than their mortgage balance, negative equity will prove both to be difficult to fully eradicate near-term and to have pernicious effects longer term as some households continue to encounter short-term financial trouble even with a slowly improving broader economy. Should economic growth slow, more homeowners will not be able to make timely mortgage payments, thereby increasing delinquency rates and eventually foreclosures.
In other words, if the economy slows, or interest rates rise, two very likely possibilities, the housing market could deteriorate quickly, intensifying economic problems. In short, we are a long way from recovery.
The situation for the unemployed is a case in point. We have a complex, but comparatively miserly, unemployment compensation system.
Workers are generally entitled to 26 weeks of unemployment benefits. However, there are two programs that potentially extend the benefit period for the unemployed. The first is the Emergency Unemployment Compensation (EUC) program, which was enacted in 2008 in response to the economic crisis. As the table below shows, the EUC offers workers in states with high rates of unemployment up to 53 additional weeks of benefits.
Workers who exhaust both their regular unemployment insurance and EUC benefits can receive additional support through the second program, the permanent federal-state Extended Benefits (EB) program. As the table above shows, that program offers a maximum of 20 extra weeks of benefits depending on state unemployment rate levels. However, there is an additional provision to the EB program that is now coming into play with negative consequences.
As Hanna Shaw, of the Center on Budget and Policy Priorities, explains:
A state may offer additional weeks of UI benefits through EB if its unemployment rate reaches certain thresholds . . . and if this rate is at least 10 percent higher than it was in any of the three prior years. But unemployment rates have remained so elevated for so long that most states no longer meet this latter criterion (referred to as the “three-year lookback”).
Because of this lookback provision hundreds of thousands of unemployed workers are now losing benefits, not because conditions are improving but because they are not continuing to worsen. The table below highlights the 25 states that have been forced to stop providing EB benefits this year and the number of workers in each state that have been cut adrift as a result. Look at California–more than 95,000 workers have lost their benefits so far this year despite the fact that the state unemployment rate is almost 11 percent.
This is no accidental outcome. In fact, according to Shaw,
Policymakers could have addressed the “lookback” when they extended federal UI at the beginning of the year, but they didn’t. Instead, Congress not only allowed EB payments to fade out, but it also made changes that over the course of the year will reduce the number of weeks of benefits available in the temporary Emergency Unemployment Compensation (EUC) program, which provides up to 53 additional weeks to the long-term unemployed based on the unemployment rate in their state.
How serious is the long term unemployment problem? Check out the chart below. As it shows, the share of the labor force that is unemployed for more than 26 weeks is higher than at any point in the last six decades. Perhaps even more striking is the fact that 41.3 percent of the 12.5 million people who were unemployed in April 2012 had been looking for work for 27 weeks or longer.
In terms of the master narrative, this is just another of the necessary adjustments required to stabilize the “system;” no need for alarm. Makes you wonder about the aims of the system, doesn’t it?
Paul Krugman, a leading proponent of the deficit spending side, puts it like this:
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. . . .
The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.
There is no doubt that the European experience has put those supporting austerity on the defensive. As the New York Times explains:
Britain has fallen into its first double-dip recession since the 1970s, according to official figures released Wednesday, a development that raised more questions about whether government belt-tightening in Europe has gone too far. Britain is now in its second recession in three years. . . .
In a packed British Parliament, Prime Minister David Cameron had to defend his austerity drive against critics like Ed Miliband, head of the opposition Labour Party, who called the economic numbers “catastrophic.”
The raucous scene was the latest manifestation of growing popular frustration with the strict fiscal diet that has been prescribed by the European Central Bank and German leaders in response to the euro zone’s sovereign debt crisis. While Britain is not a member of the euro zone, its economic fortunes are closely linked with those of the currency union.
The discontent was on view in French elections last weekend and played a role in the collapse of the Dutch government on Monday. Greece, Spain and Italy have been the scene of mass demonstrations for months, but the turmoil now seems to be spreading to countries that were not seen as being at the heart of the crisis. Britain joined Belgium, the Czech Republic, Greece, Italy, the Netherlands and Spain in recession.
Of course, as Krugman notes, that doesn’t mean that the austerity defenders have given up. Here is the solution to the crisis put forward by Mr. Draghi, head of the European Central Bank, as reported by the New York Times:
He urged national leaders to take steps to promote long-term growth even when it is politically difficult. Some leaders have raised taxes or cut infrastructure projects, when instead they should be reducing government operating expenses, Mr. Draghi said.
Tragically, those in Mr. Draghi’s camp continue to blame Europe’s crisis on too much government spending when its roots lie far more in the collapse of speculative bubbles driven by private financial interests and German austerity policies. Of course, this understanding would require taking a critical stance against dominant capitalist interests; far easier to make the working class pay.
However, we should also be careful about assuming that the bankruptcy of the austerity strategy proves the wisdom of relying on deficit spending to solve our economic problems. The fact of the matter is that spending to stimulate growth will not solve our problems. The reason is that existing economic structures operate to generate what the United Nations Development Program has called “savage growth.” Savage growth refers to a growth process that enriches the few at the expense of the many. In other words, a process that is neither desirable nor sustainable. Therefore, unless we change the nature of our economy, deficit spending will just temporarily postpone the start of a new crisis.
Here are two charts from an Economic Policy Institute report that highlight the workings of savage growth in the United States. The first shows a sharp divergence, beginning in the mid-1970s, between productivity and hourly compensation for private-sector production/nonsupervisory workers (a group comprising over 80 percent of payroll employment). In other words, the owners of the means of production have basically stopped sharing gains in output with their workers. This wedge between productivity and compensation helps explain both the growth in inequality and the need for debt to sustain consumption.
The second provides a closer look at post-1973 trends. A key point: median hourly compensation basically stopped growing starting early in the 2000s, even though the economy continued to expand for several more years, and it continues to fall despite the end of the recession.
In sum, if we are serious about improving economic conditions we need to move past the austerity-deficit financing debate and begin pressing for adoption of trade, finance, production, and labor policies that strengthen the position of workers relative to those who own the means of production. Anything short of that just won’t do.
The news is filled with reports of positive economic trends–supposedly we are making slow but steady progress in recovering from the Great Recession. The Great Recession ended in June 2009, which means we have been in economic expansion for almost 3 years. So, how seriously should we take these reports?
One indicator worth looking at is median household income. Unfortunately its trend suggests little reason for cheer. In January 2012, median household income was $50,020. That was 5.4% lower than it was in June 2009. Even worse, as the chart below reveals, after a brief uptick it headed back down again.
It is true that employment is finally growing, a development reflected in the decline in the unemployment rate (see above). Unfortunately, this has done little to boost wages. In fact, real wages actually fell in 2011. The first chart below highlights the downward turn. The second chart reveals just how far per capita earnings remain below historical trend.
This situation helps to explain why growth has been so anemic. As the Wall Street Journal wrote:
Many economists in the past few weeks have again reduced their estimates of growth. The economy by many estimates is on track to grow at an annual rate of less than 2% in the first three months of 2012. The economy expanded just 1.7% last year. And since the final months of 2009, when unemployment peaked, the economy has expanded at a pretty paltry 2.5% annual rate.
Without a dramatic change in median household income, growth will remain slow and even the limited employment gains we currently celebrate will likely prove impossible to sustain. Given the current political climate, it is hard to see how this expansion will be either long lasting or bring meaningful improvements in majority living and working conditions.
The economy has officially been in recovery since June 2009, but it is only wealthy individuals and corporations that are celebrating. For example, real wages fell by almost 2 percent in 2011. At the same time corporate profits hit a record high in the third quarter of 2011. Businessweek explains how corporations continue to enjoy profits in the face of declining wages as follows:
Companies are improving margins and generating profits as wage growth for the American worker lags behind the prices of goods and services. The year-over-year change in the so-called core consumer price index, which excludes volatile food and fuel, has outpaced hourly earnings for the last four months. In January, average hourly earnings climbed 1.5 percent from a year earlier, while core inflation was up 2.3 percent.
“A lot of the outperformance of profits has been due to the fact that margins are expanding,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “Firms have been able to keep prices intact even though labor costs have been declining.” While benefiting the bottom line for businesses, the decline in inflation-adjusted wages bodes ill for the sustainability of economic growth as consumers may eventually be forced to cut back, Feroli said. Businesses have also been slow to redeploy their profits into new hiring.
“So far what you’ve had is the government has been able to step in and prop up household purchasing power by various cuts in payroll taxes, various increases in social benefits,” said Feroli. “That has sort of kept the whole thing going, but you might worry with real wages being hit spending is going to decline.”
In other words, as far as business is concerned, things are pretty good. Economic conditions enable them to suppress wages while tax cuts and social spending ensure sufficient demand. So goes “the recovery.”
Working people increasingly understand that the system is not working for them; their sacrifices are translating into corporate gains, gains sufficiently satisfying to those at the top that business and political leaders have no interest in pursuing change. Here and there successful resistance has taken place. But to this point, popular pressure has not been great enough to really shake business or government leaders out of their complacency.
What will it take? We can learn an important lesson from the recent WikiLeaks publication of over 5 million emails taken from the servers of Stratfor, a so-called intelligence/information company, by Anonymous. As explained by a Yes Men blog post:
The emails, which reveal everything from sinister spy tactics to an insider trading scheme with Goldman Sachs (see below), also include several discussions of the Yes Men and Bhopal activists. (Bhopal activists seek redress for the 1984 Dow Chemical/Union Carbide gas disaster in Bhopal, India, that led to thousands of deaths, injuries in more than half a million people, and lasting environmental damage.)
Many of the Bhopal-related emails, addressed from Stratfor to Dow and Union Carbide public relations directors, reveal concern that, in the lead-up to the 25th anniversary of the Bhopal disaster, the Bhopal issue might be expanded into an effective systemic critique of corporate rule, and speculate at length about why this hasn’t yet happened—providing a fascinating window onto what at least some corporate types fear most from activists.“
[Bhopal activists] have made a slight nod toward expanded activity, but never followed through on it—the idea of ‘other Bhopals’ that were the fault of Dow or others,” mused Joseph de Feo, who is listed in one online source as a “Briefer” for Stratfor.
“Maybe the Yes Men were the pinnacle. They made an argument in their way on their terms—that this is a corporate problem and a part of the a [sic] larger whole,” wrote Kathleen Morson, Stratfor’s Director of Policy Analysis.
“With less than a month to go [until the 25th anniversary], you’d think that the major players—especially Amnesty—would have branched out from Bhopal to make a broader set of issues. I don’t see any evidence of it,” wrote Bart Mongoven, Stratfor’s Vice President, in November 2004. “If they can’t manage to use the 25th anniversary to broaden the issue, they probably won’t be able to.”
Mongoven even speculates on coordination between various activist campaigns that had nothing to do with each other. “The Chevron campaign [in Ecuador] is remarkably similar [to the Dow campaign] in its unrealistic demand. Is it a follow up or an admission that the first thrust failed? Am I missing a node of activity or a major campaign that is to come? Has the Dow campaign been more successful than I think?” It’s almost as if Mongoven assumes the two campaigns were directed from the same central activist headquarters. Just as Wall Street has at times let slip their fear of the Occupy Wall Street movement, these leaks seem to show that corporate power is most afraid of whatever reveals “the larger whole” and “broader issues,” i.e. whatever brings systemic criminal behavior to light. “Systemic critique could lead to policy changes that would challenge corporate power and profits in a really major way,” noted Joseph Huff-Hannon, recently-promoted Director of Policy Analysis for the Yes Lab.
Thus, what those with power really fear is not popular outrage at a particular injustice, or even financial penalties in response to that injustice, but rather that somehow people will come to see an overall pattern of behavior that ties together these injustices, revealing an underlying exploitative class system. Said more plainly, those with power fear that an aware populace will come to understand the need to challenge and transform capitalism. No doubt that is why they fear the Occupy movement. And that is why we need to ensure that our organizing and resistance efforts are conducted in ways that help promote this understanding.
As growing numbers of countries face renewed austerity pressures, there is a tendency to explain the trend by searching for specific policy failures in each country rather than considering broader structural dynamics. Key to the credibility of those who argue for a focus on national decisions is the existence of countries that people believe are performing well. Thus, the argument goes, if only policy makers followed best practices their people wouldn’t find themselves in such a bad place. Recently, German has become one of these model countries.
Here is a typical framing of the German experience:
At a time when unemployment rates in France, Italy, the UK, and the US are stuck around 8%-9%, many are turning to the apparent miracle in the German labor market in search of lessons. In 2008–09, German GDP plummeted 6.6% from peak to trough, yet joblessness rose only 0.5 percentage points before resuming a downward trend, and employment fell only 0.5%. In August 2011, the standardized unemployment rate was about 6.5%, the lowest since the post-reunification boom of 20 years ago.
In other words, Germany seems to be doing things right. Despite suffering a deep decline it actually enjoyed a lower unemployment rate. So, how did it do it? Often cited are recent German policies which have increased labor market flexibility. But are these the best practices that should be adopted elsewhere? One way to answer that question is to look at what these changes have meant to German workers. A Reuters report concluded:
Job growth in Germany has been especially strong for low wage and temporary agency employment because of deregulation and the promotion of flexible, low-income, state-subsidised so-called “mini-jobs”.
The number of full-time workers on low wages – sometimes defined as less than two thirds of middle income – rose by 13.5 percent to 4.3 million between 2005 and 2010, three times faster than other employment, according to the Labor Office.
Jobs at temporary work agencies reached a record high in 2011 of 910,000 — triple the number from 2002 when Berlin started deregulating the temp sector. . . .
Data from the Organization for Economic Co-operation and Development shows low-wage employment accounts for 20 percent of full-time jobs in Germany compared to 8.0 percent in Italy and 13.5 percent in Greece.
New categories of low-income, government-subsidized jobs – a concept being considered in Spain – have proven especially problematic. Some economists say they have backfired.
They were created to help those with bad job prospects eventually become reintegrated into the regular labor market, but surveys show that for most people, they lead nowhere.
Employers have little incentive to create regular full-time jobs if they know they can hire workers on flexible contracts.
One out of five jobs is a now a “mini-job”, earning workers a maximum 400 euros a month tax-free. For nearly 5 million, this is their main job, requiring steep publicly-funded top-ups.
“Regular full-time jobs are being split up into mini-jobs,” said Holger Bonin of the Mannheim-based ZEW think tank.
And there is little to stop employers paying “mini-jobbers” low hourly wages given they know the government will top them up and there is no legal minimum wage.
This development was far from accidental. It was the result of policy changes implemented in the early 2000s by then Chancellor Gerhard Schroder. In 2005, Schroeder proudly announced at the World Economic Forum in Davos, Switzerland, that “We have built up one of the best low wage sectors in Europe.”
The New York Times described the German employment miracle as follows:
But hidden behind the so-called German economic miracle is an underclass of low-paid employees whose incomes have benefited little from the country’s stability and in fact have shrunk in real terms over the last decade, according to recent data.
And because of government policies intended to keep wages low to discourage outsourcing and encourage skills training, the incomes of these workers are not likely to rise anytime soon.
That, in turn, means they are likely to continue to depend on government aid programs to make ends meet, costing taxpayers billions of euros a year.
The paradox of a rising tide that does not lift all boats stems in part from the fact that Germany has no federally set minimum wage. But it also has its roots in recent German politics, which have favored measures to keep unemployment low and win support from employers. . . .
The Confederation of German Employers’ Associations says the introduction of a minimum wage would push up labor costs and lead to more unemployment. Jobs would simply move out of Germany and to Eastern Europe or Asia.
These new labor policies have not only taken a toll on German workers, they have also greatly contributed to the growing crisis in Europe. The low wages and insecure employment conditions have both enabled German employers to boost exports and limited imports. Global Employment Trends 2012, an ILO report, highlights this connection. According to an article summarizing its contents:
“The rising competitiveness of German exporters has increasingly been identified as the structural cause underlying the recent difficulties in the Euro area,” the report said. Crisis countries had not been able to export enough of their goods to Germany as domestic demand there was not strong enough because of low wages.
The ILO said German policies to keep down wages had created conditions for a prolonged slump in Europe as other nations on the continent increasingly saw only even harsher wage deflation as a solution to their lack of competitiveness.
The body called on Germany to enact swift changes. “An end to a low-wage policy would create positive spillover effects to the rest of Europe and restore a more equitable income distribution,” it said in the study.
As the chart below shows, German wages have been stagnating for over a decade.
No wonder that Germany has been exporting so successfully and that other economies in Europe have found it difficult to compete. While German politicians blame these other economies for their problems, the fact is that German growth has depended on the high consumption and borrowing in these other countries. As one analyst noted:
Germany, remember, accounts for 28% of the whole Eurozone economy. It is not fanciful to imagine that imbalances in the German economy are capable of driving — or at least amplifying — imbalances within the entire region. Indeed Germany’s capacity to buy from Europe is even more limited than its stagnating wages would suggest. Because on top of this Germany has experienced a sharp increase in inequality. This means wealth has been redistributed from poor, who tend to spend, to the rich, who tend to save.
In short, if we are going to meaningfully address our economic problems we need to begin looking critically at how capitalist accumulation dynamics actually work. Trying to emulate so-called success stories is not the way to go.
The Federal Reserve Bank recently released 1,197 pages of transcripts of its 2006 closed door meetings. As the Wall Street Journal comments: “The transcripts paint the most detailed picture yet of how top officials at the central bank didn’t anticipate the storm about to hit the U.S. economy and the global financial system.”
Federal Reserve officials suspected that housing prices were peaking (see chart below). But since they didn’t believe that prices had been driven up by a well entrenched bubble, they were not very concerned that they were coming down.
The Financial Times described the general Federal Reserve stance as follows:
Almost every Fed policymaker concluded that weaker housing would cause a slowdown in consumption and investment but expected that to offset strength elsewhere in the economy, leading to continued growth overall.
“Housing is the crucial issue. To get a soft landing, we need some cooling in housing,” said Ben Bernanke, Fed chairman, in his summing up of the economic situation in March 2006. “I think we are unlikely to see growth being derailed by the housing market.” . . . .
Indeed, a number of Fed officials saw the housing slowdown as welcome news that would help resolve a potential threat to the economy. “As to housing, we are in fact, as all have noted, squeezing out of that sector the speculative excesses that developed with the low interest rates of recent years — and doing so is unavoidable if we want to correct the sector,” said Thomas Hoenig, then president of the Kansas City Fed, at the September 2006 meeting of the FOMC.
The transcripts show that the Federal Reserve was so confident that the economy was on solid footing that many officials were, according to the Wall Street Journal:
offering praise for outgoing Fed Chairman Alan Greenspan, who attended his final Fed meeting in January 2006. Timothy Geithner, then president of the Federal Reserve Bank of New York and now Treasury Secretary, playfully offered this forecast about Mr. Greenspan’s legacy: “I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.” . . . .
The transcripts also suggest that Fed officials misgauged the potential for housing problems to spill over into the broader economy.
“Our recent financial-market data don’t, in my view, provide a convincing case for a substantial increase in the probability of a much weaker path for growth going forward,” Mr. Geithner said at a meeting in December 2006.
So how did the best and the brightest get it so wrong. Perhaps the major reason is because it served their interests to pretend there was no housing bubble. The recovery from our 2001 recession was driven by consumption and that consumption was supported directly and indirectly by the housing bubble. In other words stopping the bubble would have revealed the weakness in our economy and the need for serious structural change. It was far easier and more lucrative for those at the top to just let the bubble go on expanding and pretend that it didn’t exist.
The following chart from the New York Times puts the movement in housing prices highlighted above into a longer term perspective, revealing just how strong speculative pressures were in the housing market.
As Dean Baker, one of the very few economists to warn about the dangers of the bubble, explains:
First, what happened is very straightforward: we had a huge run-up in house prices that had no basis in the fundamentals of the housing market. After 100 years in which nationwide house prices just kept even with the overall rate of inflation, house prices began to sharply outpace inflation, beginning in the late 1990s.
By 2002, when some of us first noticed the bubble, house prices had already risen by more than 30 per cent in excess of inflation. By the peak of the bubble in 2006, the increase in house prices was more than 70 per cent above the rate of inflation.
This was a huge problem – because this bubble was driving the economy. It drove the economy directly by creating a boom in residential housing construction. We were building housing at near record pace in the years 2002-2006. This was in spite of the fact that we had an ageing population and record levels of vacancies at the start of that period.
The other way in which the bubble was driving the economy was through its effect on consumption. The bubble created more than US $8tn in ephemeral wealth in housing. Homeowners thought this wealth was real and spent accordingly. The result was a massive consumption boom that sent the saving rate down to zero in the years from 2004-2006.
In reality, a lot of the consumer spending driving growth was financed by home refinancing, which helped many housholds compensate for stagnant wages and weak job creation at the cost of a sharp rise in debt. As a Wall Street Journal blog post pointed out, “From 2000 to 2007, household debt doubled from $7 trillion to $14 trillion, with debt related to housing responsible for 80% of the increase. By 2007, the household debt to GDP ratio reached its highest level since 1929.”
As we now know only too well, the collapse of the housing bubble reverberated through the economy, including the financial sector, triggering the Great Recession. Tragically, many of the “best and brightest” remain in leadership positions today, still arguing for the soundness of economic fundamentals.