Economists Issue Statement Questioning German Austerity Policies
German Unemployment Caused Mainly By Tight Monetary Policy
Eighty-one economists from across the United States issued a statement today expressing their concern over the austerity policies proposed for Germany by Chancellor Gerhard Schroder. These policies call for reductions in Germany’s Social Security benefits, unemployment benefits, and other forms of social welfare spending. The savings will be used primarily to finance reductions in the personal and corporate income tax.
The economists argued that the widespread view that the United States enjoys low unemployment because of greater “flexibility” is largely a myth. Rather, the United States enjoys low unemployment mainly because of a relatively expansionary monetary policy under Alan Greenspan, and an integrated national credit market. By contrast, the German and European Central Banks have pursued tight credit policies, the effect of which is compounded by poorly developed credit markets in Europe’s poorer countries.
The statement cautions Germany against the view that the high degree of wage inequality in the United States and a weak social safety net are necessary for obtaining low unemployment. It points out that aspects of the safety net in the United States, such as the earned income tax credit and the minimum wage, have actually been increased as the unemployment rate has declined.
The letter also points out that the portrayal of the United States as a hugely dynamic economy and Germany as a stagnant moribund economy is entirely a myth. Data from the United States Bureau of Labor Statistics, the OECD, and other sources, show that Germany has consistently enjoyed more rapid productivity growth than the United States over the last two decades.
The signers include many prominent economists, most notably Ray Marshall, the Secretary of Labor in the Carter Administration. Other prominent signers include Jeff Faux, the President of the Economic Policy Institute, and James K. Galbraith, the author of Created Unequal and Professor at the Lyndon Johnson School of Government at the University of Texas.
Statement to German Colleagues
As American economists and social scientists, we are concerned about the plans recently announced by the German government to restructure and deregulate the German economy along lines alleged to be the “American model.” This effort to emulate the United States is driven by misconceptions about the nature of recent American successes, and also about the sustainability of the American path. While we recognize Germany’s severe unemployment problem, these policies could jeopardize the real gains achieved by German workers over the last three decades without curing German unemployment.
It is true the U.S. economy has a lower unemployment rate than at any time in the last twenty five years. But, contrary to myth, this was not achieved through deregulation and increasing inequality. In fact, inequality increased most in the United States in the 1970s and 1980s, while unemployment was also rising. And American pay inequality, though still far too high, has been falling as unemployment declined after the mid-nineties. In recent years wages have been rising more rapidly than average for low-income American workers, minimum wages have been raised, and the Earned Income Tax Credit has strengthened the after-tax income of low-income working families, all while unemployment declined. The American employment miracle is also not due to deregulation. Employment has grown rapidly in sectors like health care where the government plays a large and continuing role, but not in trucking or air travel or banking, where the effects of deregulation are greatest.
The most important source of American growth has been a Federal Reserve policy of low interest rates and easy credit; this has fostered an enormous expansion of borrowing by households and by state and local governments for capital projects. This has proved successful so far, particularly when compared to stagnation in Europe. But we now fear for the sustainability of a boom built on these grounds. Consumer debt is now more than 20 percent above its previous peak as a share of disposable income. The U.S. trade deficit has soared. And the U.S. stock market has risen to price-earnings ratios that are more than twice their historic average. No one can say how or when these trends may be reversed, but they are clearly dangerous, and they suggest that further American growth may well require a stronger, not weaker, presence of government in the U.S. economy.
Unlike the U.S. economy, the German economy has managed to produce large gains in living standards for the vast majority of its work force over the last quarter century. Measured productivity growth in Germany has also significantly outpaced productivity growth in the United States, and by some measures absolute productivity levels are higher in Germany today. It is no surprise therefore that in Germany real wages should also be high. There is no basis today for giving up these gains and absolutely no reason to do so.
The drive to undermine wage standards in Germany will not reduce unemployment; German firms will not add workers that they do not otherwise need. Meanwhile cuts in pensions, social programs and public investments will have the opposite effect. Nor will these policies raise savings and investment: during the Reagan period they had no such effect in the United States.
Germany is today in the grip of an ideology of free markets, deregulation and privatization that originated here. But as that ideology was the source of American failures in the 1980s, and not of our recent successes, many Americans have abandoned it. The extraordinary fall in the German government’s polls shows that the German people are suspicious of this model, and in our view, rightly so.
In this country, there is increasing recognition of the vital role of government to support low-income working people, to support the elderly through a strong Social Security system, to provide critical infrastructure, to support education at all levels, to expand access to first-quality health care, and to properly regulate the financial sector. Germany should look to these positive features of U.S. policy, and not to our most destructive recent phase.
Signed: <snip>
Source: http://www.barkhof.uni-bremen.de/kua/memo/docs/prea_en.pdf
German translation at http://www.barkhof.uni-bremen.de/kua/memo/docs/erklaer.htm resp. http://www.fr-aktuell.de/archiv/fr30t/19991016135.htm