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PAUL JAY: Welcome to The Real News Network. I'm Paul Jay in Baltimore.
There's a lot of discussion taking place in the presidential elections about Europe. Some
people point to it as an example of how austerity doesn't work. Other peoples point to it as
in a way it does work and what needs to be done, that there's no choice but austerity
measures, and people need to take the bitter medicine in order to have growth.
Now joining us to talk about all of this is Engelbert Stockhammer. He's a professor of
economics at the school of economics, Kingston University, in the U.K. His research areas
include macroeconomics, applied econometrics, and financial systems. His research work includes
the books Unemployment in Europe and the edited 2011 volume A Modern Guide to Keynesian Macroeconomics
and Economic Policies. And he joins us from the PERI institute in Amherst, Massachusetts.
Thanks very much for joining us.
ENGELBERT STOCKHAMMER: Thank you.
JAY: So what do you think Americans have to learn from the European crisis?
STOCKHAMMER: I think there's really two things that Americans can learn. The first is that
austerity policies don't work, and the second is that it's extremely important that monetary
policy and fiscal policy work together and not in opposite directions.
Let me elaborate briefly on the first one, that austerity policies don't work. The matter
of the fact is that European economies actually didn't have much of a debt problem prior to
the crisis. After 2008 and 2009, when the sovereign debt crisis in Europe started, government
debt levels started increasing sharply. Now, countries like Greece have had three years
or more of austerity policies, and not only has GDP been declining by more than 15 percent
and real wages been falling, it is also that government debt has not fallen, but it has
But even if you look closer to the U.S., if you look at Great Britain, which is not part
of the euro crisis, Great Britain has had one of the most aggressive austerity programs
outside Southern Europe, and the economy has essentially flatlined. And, again, it's not
only that GDP growth, economic growth is not getting active again; it is also that government
debt is not increasing.
The second thing that Americans can learn is that it's very important that fiscal policy
(that is, government expenditure) as well as monetary policy (that is, central bank
policy) work in the same direction. Now, to some extent, for some time that has happened
in the U.S. But in Europe, the policy mix has been particularly dysfunctional, in the
sense that the European Central Bank has not given the necessary support to peripheral
European countries, and that has made the crisis a lot worse than it would have to be.
JAY: Well, if you go to the argument taking place on austerity in the presidential elections
(although both of the main candidates buy into the idea that after this election there'll
have to be a massive takedown or reduction of the American debt, and so they both kind
of agree with a certain amount of austerity, but certainly Romney is for a more extreme
version of that), the argument simply is it will free up more capital. You know, less
government, less government expenditure frees the private sector to invest. And, yeah, there's
pain. You've got to take the bitter pill to get to the growth. What's wrong with that
STOCKHAMMER: It's wrong in the sense that it assumes that private spending will suddenly
get going if governments only spent less. That might be true in normal times--it probably
isn't even true in normal times, but it's certainly not true in a debt overhang recession.
The situation that we have now is that a lot of households are still underwater. They certainly
have enormous amounts of debt. And you have a private business sector that on the one
hand also has substantial amounts of debt, but it is facing a private sector that is
not spending on consumption. So, in other words, as long as the private sector is saving,
there's really not much that the government can do other than run big deficits.
The only way that--the effect that it would have if the government tried to reduce expenditures
is that it would reduce private expenditure even more, it would turn the stagnation that
we're presently in into something like the Great Depression of the 1930s.
JAY: The argument that, for example, Romney camp make--and to some extent the Obama camp
makes, 'cause there's the rumor that President Obama has said that his plan, if elected,
will be: for every $1 of increased taxes on the wealthy, he's going to find $2 of cuts.
If that's true, then he's planning for, essentially, an overall reduction in government spending.
But the argument coming from both quarters there is that the debt is simply unmanageable.
Romney talks about, you know, it'd be, like, virtually a sin to pass on this much debt
to future generations and such. Why isn't that true?
STOCKHAMMER: It ignores that we're talking about the national economy, that in a national
economy, certain accounting identities have to hold. In other words, if the private sector
is saving a lot, there are some other [incompr.] that have to run a deficit. One sector's surpluses
have to be another sector's deficit. Therefore, as long as the private sector is not spending,
there's no way that the government can reduce its deficit.
JAY: Well, this point of view is certainly well known to European leaders and people
heading up the European Central Bank, and certainly the German political and financial
leaders. They don't seem to agree with this. They seem quite committed to this path of
austerity, and there seems to be no compromise towards Greece or Spain or some of the other
peripheral countries. Why do you think they don't get this? 'Cause the logic of what you're
seeing seems fairly obvious.
STOCKHAMMER: It is a very good question, why they're not getting it, and indeed it's a
very painful question/issue for Europe. It is the case that European economic policy
has for a long time now been in a very neoliberal mindset. It's a neoliberal or, if you want,
monetarist mindset, in the sense that European economic policies have at its very core been
determined to reduce government activities. I mean, the Maastricht criteria to Growth
and Stability Pact had as one of the key conditions an upper limit on government expenditure and
on government debt. So the assumption was that it was the public sector that created
economic instability. Now, in fact it was the private sector that created economic instability.
European economic policies were also neoliberal in the sense that they supported capital flows
across Europe. What we did end up with was property bubbles in peripheral Europe. In
the southern European countries and in Ireland these property bubbles and asset price bubbles
were fueled, among other things, by massive capital inflows from the central countries.
And on the other hand, you have countries like Germany and Austria that developed an
export-led growth model. So instead of creating a growth model where wages would grow enough,
such that people could finance consumption expenditure out of it, there was really two
growth models. One growth model essentially operated by rising house prices and high household
debt, meaning it was a debt-led growth model, and on the other hand, you have the Germanic
model that essentially accepted a flatlining domestic demand and created GDP growth via
JAY: And this is essentially what you're saying is wages were either stagnant or it sometimes
even went down a little bit.
STOCKHAMMER: German aggregate demand in the decade prior to the crisis was essentially
flat internally. There have been studies that show that more than three-quarters of all
growth in Germany in the decade prior [to this] was driven by export surpluses. It is
only in the crisis itself that Germany started to have a good growth performance, and that
to a significant extent has to do, on the one hand, with the fact that they had a fairly
flexible program of shortening working hours during the recession, and the fact that they're--in
their export orientation, happened to be focused on the growth markets, which is the Asian
markets and China.
JAY: And they seem to be putting--if the export model is their hope--and they've kind of more
or less wiped out or destroyed demand in the peripheral countries of Europe, which were
the big customers for German products particularly. So they're putting all their eggs in the Asian-Chinese-Indian
STOCKHAMMER: That is what they're presently doing. For a long time, the export surpluses
for Germany essentially came from the euro area. Germany is still doing most of its trade
within the euro area. So whatever happens in the euro area, that meant a great deal
But yes, Germany is increasingly orienting towards Asia. And Germany is essentially now
recommending its own growth model to the other European countries. But don't forget that
the euro area overall is a relatively closed economic system. So, in other words, one country's
export surplus is within the euro area and another country's deficit. Therefore, logically,
it just doesn't make sense to try to implement the German model in the euro area overall.
JAY: Alright. So the guys running this policy are not fools. And if you--from what I've
been told by economists I've talked to, the market in Asia is not nearly--it's a lot of
people, but in terms of real aggregate demand, it doesn't deal anything close to what either
the American or European consumer market was. So where does all this lead?
STOCKHAMMER: It is certainly the case that in terms of volume, these markets are in no
position to substitute for American or European markets. But in terms of growth rates, they
were the main areas to which you could have export growth.
JAY: And so does this--it may be terrible for European and American workers, but in
terms of if you're a financier or a holder of lots of capital in either Europe or North
America, does this work as a strategy?
STOCKHAMMER: That is what I was trying to say. It will work for a short time, but not
in the long term. In the long term, if an economy wants to grow, you have to make sure
that domestic expenditures are also growing, and that at the very core requires that consumption
expenditures are growing.
Now, there is essentially two ways that you can do that, and only one of them is sustainable.
The sustainable way is that you have wage growth in line with GDP growth, and thus you
can have a stable growth of consumption expenditures.
The second way is what the Anglo-Saxon countries have tried in their debt-led growth model,
and that was essentially that they had a fairly flat real-wage level, but an increasing level
of household debt. And a growing part of household expenditures were financed out of increasing
debt levels. Now, that is clearly not a sustainable growth model, and it essentially is working
as long as you have property price bubbles or asset price bubbles. And that is why the
U.S. and the U.K. are finding themselves in such a difficult position to reignite their
economies, essentially because you have a huge debt overhang. And you have the huge
debt overhang because wages have not been growing in line with GDP.
JAY: Well, I--at the time of the G20 meetings in Toronto, I went through the final statement
that all the countries signed on to, and it was mostly about how to deal with the economic
crisis. And I looked for the word wages in the document. I couldn't find the word wages
used a single time. There was some reference to how China should do something to increase
domestic demand, but zero when it came to rising wages in Europe and North America.
And you certainly have not heard the word wages once in the presidential campaign, except
from Romney, who says he wants people to have more take-home pay--but he means because he's
going to lower taxes, not because wages are going to go up. So, assuming the discourse
doesn't change in North America or Europe and there's nothing done that does facilitate
higher wages, then what?
STOCKHAMMER: Then we're in for a decade or two of stagnation. And whether that stagnation
turns into a depression essentially depends on how much of austerity policy will have
a fiscal policy.
But the matter of the fact is that the structural reason why consumption expenditures have not
been growing in large parts of the developed countries is exactly that wages have not been
growing, and therefore consumption expenditure can't grow. There is a strong tendency to
look at wages only as a cost factor--in other words, as decreasing competitiveness. But
Keynes already pointed out in the 1930s in a discussion of the Great Depression that
wages, of course, are a source of demand, and if you cut wages, you're cutting off the
branch on which you're sitting. Therefore, the only way that you can have a sustainable
recovery is also if you have sustainable wage growth.
JAY: Thanks very much for joining us, Engelbert.
STOCKHAMMER: Thank you.
JAY: And thank you for joining us on The Real News Network.