We cannot go on like this

(The world economy is suffering with no growth or slow growth since the financial crisis that began in 2007. It was not able to revive to the same level of the preceding decade. While there is fragile recovery in America, the situation is alarming in Europe. It  is now on the brink of a deep recession and it will affect the fragile recovery in USA since the financial systems of America and Europe are intertwined.  While the growth rates of the developing countries China and India etc helped in some recovery in the developed countries, this possibility also is receding now since the growth rates of  China and India are coming down.

 In both America and Europe, attempts are being made to come out of this recession by fiscal austerity (cut in welfare measures, pensions etc) and cuts in wages and jobs. These policies will further increase the unemployment and inequalities and consequently more recession, instead of increasing investment and job creation. In the name of reforms, in India also, the same policies of selling PSUs, reducing jobs in organized sector, limiting the creation of jobs to unsecure jobs with low wages,cutting welfare measures, cutting the  subsidies to the poor and to the farmers etc are being implemented along with inviting FDIs in more and more sectors. Whether this is the way to come out of the recession and to solve the problems faced by the people in America, Europe, India etc? If not, what is the solution?

Mr. Paul Jay, Senior Editor of the Website “therealnews.com” interviewed Mr. Heiner Flassbeck, the Director of the Division on Globalization and Development Strategies of the United Nations Confeerence on Trade and Development (UNCTAD) on these issues. Mr. Heiner Flassbeck is the leader of the team that prepared the UNCTAD’s “Trade and Development Report, 2012” which was released recently.  In this interview, Mr. Heiner Flassbeck has enlightened about the futility of the policies followed by the Governments in America, Europe etc in the name of coming out of the recession and what the actual way is . Following is the summary of this interview, prepared by me—P.Asokababu)

The neo-liberal economic policies prescribed by World Bank, IMF and the Finance Department of America (Washington Consensus) for coming out of the economic problems of the world resulted in falling wages in the developed countries during the last 20 years. This was done in the name of making labour markets more flexible, which means increasing unemployment, cutting wages in relation to profits and cutting wages in relation to productivity. This lead to the present situation where the world economy is stuck and does not have any economic policy any more to get back into a recovery.

In the United States, the unemployment has jumped due to the financial crisis and it has put pressure on the wages.In auto industry, the workers are getting $ 13, $ 14 an hour or even $ 9 an hour where earlier they used to make $ 25-$ 27 an hour. 

In Europe the same thing is happening with more intensity. There are some countries which already cut wages by 20 per cent. But nevertheless, their economies are collapsing.

In the name of competitiveness, wages are reduced to make prices of the products competitive for exporting to other countries. But everybody cannot increase competitiveness, though every body can increase productivity.

 If wages fall, incomes fall and if incomes fall, consumption falls and if consumption falls, investment falls, and the economy will go deeper into recession.   If all your competitors are doing exactly the same thing as you are doing, that is, cutting wages, and then you are not really gaining any advantage. What you are doing is reducing the demand in the world economy thereby resulting in less production and recession.

When there is no real increase in demand due to fall in wages, the policy makers are suggesting the central banks to inject more money in the economy. It is supposed to give rise to growth. If fortunate, it may create another bubble, which is not a real solution. Earlier also this was done, bubble was created and it burst causing much more recession.

The theory that the market is growing in the developing countries and therefore the America and Europe should cut wages, and thus reduce the cost of their products to sell them at competitive rates in these developing countries is like the tail wagging the dog. In the global production the share of America, Europe and Japan is 65 per cent. Therefore unless there is recovery in these developed countries, China and India cannot save them from recession. Killing domestic markets by wage cuts will damage more than the gains coming in the exports.

This experiment is badly failing. In southern Europe, this failure is clearly evident. Greece has cut wages by 20 per cent, Spain is cutting by 10 per cent and Italy is on the path to cut. But it did not work and their economies are facing more and more recession.

But the American and European Governmetns are following the same policies of wage cuts for securing profits to the Corporates. It will move their economies much deeper into recession.

The Governments serving the finance capital have decided that the crisis and recession has to be utilised to the advantage of the capital against the labour, by shifting the income from the labour to the capital. They are doing this by reducing the power of the trade unions. An illusion was created by the artificial growth (bubble) in the economies that people could get rich without working, by investing in financial markets. The people including workers went on spending, by incurring debts. When the bubble burst, the crisis came.

But what is the way out? The Governments in America and Europe are following the same principles of cuts in social welfare measures, cuts in jobs, cuts in wages as a way to save the profits of the capital. If all companies are going for cuts in jobs and wages to remain competitive, the best cutter of the jobs and wages will win in the game.But for the economy as a whole, it is a disaster, since the purchasing capacity of people will be reduced drastically thereby reducing the demand and growth, throwing the economy into more recession.We have competitive wage cuts, competitive depreciation in currencies. But it will lead to disaster very quickly. In two or three years time we will have deflation and depression and no body can get us out of that any more.

So what should be done? These destabilizing forces should not be allowed to work. As long as incomes are stagnating or falling, you do not get consumption and without consumption, there is no way that the developed countries can come out of recession. For Japan, United States and Europe, consumption is some thing like 85 percent and you cannot replace that.

This reminds the story of fox and scorpion. The scorpion tells the fox to take him across the river, and the fox says, I can’t, you’ll sting me, and the scorpion halfway across stings the fox, and they are both about to drown, and the fox says, why you do it? And the scorpion says, it’s in my nature. Is it not just in the nature of the capital that they will let us drown because they can’t imagine creating conditions for wages to go up?

There should be a competent Government to prevent capital from excercising its vicious nature of drowning all people. There is no self-stabilizing mechanism in the market. The market is killing itself. The Great Depression that happened in 1930s is the example where market killed itself. The destabilizing forces in the market kill the market. Therefore you need a competent Government to prevent this. If we don’t get competent Governments who understand the logic of the markets, the destabilizing logic of the markets, then there is no way out. In 1948 there was a kind of Detroit consensus in the US automobile industry which said that the workers should systematically get the productivity increase plus inflation compensation. So the compensation should rise with inflation plus productivity. This was a good formula. If you revise it a bit, you get a perfect formula to get back into a growing economy. We have to relearn this lesson.

But one of the things about 1946 was that it was the year when more American workers were on strike in the history of the country. But the Union movement in America is very weak now. Not only in America, but also it is weak all over the world. It has been weakened by the neoliberal economic theory executed by the politics. We have to turn around from this. We cannot go on like this. We should have atleast some enlightened economists and politicians who change the course before it is too late. The workers need to get organized and fight for higher wages, not just for themselves, but the actual global economy depends upon it. The workers in America, Europe etc should look at the elections as a chance to get the right politicians atleast to get the right direction and to have a chance to be back into normal business. And normal business means rising wages in the next few years.