[Review] Heiner Flassbeck - Fundamentals of Relevant Economics

Siehe auch:
[Rezension] Heiner Flassbeck - Grundlagen einer relevanten Ökonomik - Die Missverständnisse

Heiner Flassbeck is an economist from Germany. The economist born on December 12, 1950 was among other things State Secretary in the Federal Ministry of Finance under Oskar Lafontaine (SPD) from 1998 to 1999. And from January 2003 to the end of 2012 he was Chief Economist (Chief of Macroeconomics and Development) at the United Nations Conference on Trade and Development (UNCTAD). Flassbeck publishes among other things on Makroskop and Relevante Ökonomik in German and on Flassbeck Economic in English.

The book "Fundamentals of Relevant Economics (Grundlagen einer relevanten Ökonomik)" was written together with co-authors Friederike Spiecker, Patrick Kaczmarczyk and Alexander Mosca Spatz. The book is clearly specialist literature in nature but not a pure textbook. Although connections are discussed in detail at the level of specialist articles no absolute fundamentals are conveyed. The quality of the derivations is very high as the arguments are based on empiricism and logic rather than made in a vacuum. This sets the author apart from any ideology despite the topic. The book gains additional importance due to the current recession.

The Labor Market is not a Potato Market

Flassbeck explains why the promise of lower unemployment with lower wages cannot be kept. As a result of both the Great Depression in 1929 and the global financial crisis in 2007 attempts were made to reduce unemployment by lowering wages. The assumption here is that the labor market is a classic market and that the demand for labor can be regulated by the price of labor. By lowering wages i.e. the price of labor the demand for labor should be increased and unemployment reduced.

However Flassbeck explains that wage cuts cannot compensate for a demand gap as wages are the prerequisite for demand. In addition without an increase in demand no new employees will be hired. Flassbeck proves this with the developments following the Great Depression in 1929 in the USA and Germany as well as the developments following the global financial crisis in 2007 in Greece and Spain. In all of these cases wage cuts led to an increase in unemployment and a collapse in private consumption. Flassbeck also explains how wage cuts increase inequality as the expenditure ratio of income is inversely proportional to income. Consequently wage cuts immediately reduce the demand of those with the lowest income or the highest expenditure ratio. [1, p.15-30]

The Importance of Bretton Woods System and Keynesianism

Especially in Germany there is a belief that the economic miracle after the Second World War was a purely German phenomenon and was thanks to Ludwig Erhard (CDU). However Flassbeck refutes these assumptions and proves that the economic miracle was an international phenomenon and was due to the Bretton Woods system and Keynesianism. Keynesianism pursued a demand policy that ensured high economic growth and low unemployment by utilizing the full capacity of the economy. Keynesian demand policy essentially means the compensation of the lack of private-sector demand with state demand. In addition regulated exchange rates created balanced foreign trade balances and expansionary economic policy inevitably remained in the respective country or economy. Consequently regulated exchange rates are a prerequisite for demand policy or expansionary fiscal policy. Flassbeck proves this with the growth rates, unemployment rates and inflation rates of the USA, Great Britain, Japan, Germany, Italy and France since 1950. It is also clear that growth rates and unemployment rates were better in Japan than in the other countries until the end of the regulated exchange rates under the Bretton Woods system and that Germany did not develop significantly better than Italy or France. [1, p.30-42]

Since the regulated exchange rates under the Bretton Woods system were abolished in 1973 exchange rates should have been regulated through trading and speculation on currencies. However Flassbeck shows that this did not work and that foreign trade imbalances grew. Interventions such as the Plaza Agreement of September 1985 were therefore necessary to avoid worse consequences. [1, p.55]

Flassbeck also explains the need for constant and timely interventions as speculators take advantage of interventions that are too late and therefore too strong. When it became apparent in 1992 that the currencies of Italy, France and Great Britain would have to devalue the speculator George Soros took advantage of this. Soros did this by taking on debt in a currency that was likely to depreciate and then transferring the money in a currency that was not devaluing. [1, p.61-66]

How incorrect Diagnoses cause economic damage & sabotaged Keynesianism

In 1973 the regulated exchange rates from the Bretton Woods system were ended. The exchange rates of the countries' currencies were no longer tied to their foreign trade imbalances. And the oil crisis of 1973 was a supply shock because the price of oil rose sharply. States that import these raw materials can naturally do little to prevent rising prices. The combination of the end of the regulated exchange rates from the Bretton Woods system and the oil price shock of 1973 are however reinterpreted since then. The narrative that dominates the public debate is that demand policy and the state's overall economic control do not work. In fact the oil price shock has redistributed purchasing power globally from oil-importing to oil-exporting countries. And if the oil-exporting countries had replaced demand in the oil-importing countries there would have been no global economic crisis. But this did not happen. In addition various central banks reacted with higher interest rates following the oil price shocks of 1973 and 1979. This is a result of a short-term price shock being confused with long-term inflation and of central banks continuing to try to control inflation with the interest rate. Such behavior is futile against a price shock as higher interest rates cannot make imported raw materials cheaper. And in addition higher interest rates sabotage an economy in the event of a price shock by placing an additional burden on it. [1, p.42-55]

This wrong and counterproductive policy was repeated as a result of the supply shock and price shock from 2021 to 2024. Here too Flassbeck points out that the incorrect diagnosis has repeatedly led to an incorrect response. [1, p.85-89]

Supply-Side Policy was and is overrated

According to Flassbeck demand policy up to 1973 was undervalued in retrospect just as supply policy is overvalued. Flassbeck also dates the triumph of supply policy to the end of the second oil price shock in 1979. Supply-side policy essentially means tax cuts, liberalizations and often reductions in government spending that exceed the volume of tax cuts. The undervaluation of demand policy up to 1973 happened because the two oil price shocks were and are reinterpreted as a failure of demand policy. And the recovery after the two oil price shocks were overcome was reinterpreted as an overvaluation of supply policy since the 1980s. But on closer inspection the foreign trade balances are of greater importance. For example Germany increasingly concentrated on exports in the 1980s and generated higher foreign trade surpluses meaning export surpluses than before. In contrast there are countries such as the USA which have had a foreign trade deficit meaning import surplus since the 1980s. In addition the US has had increasing rather than decreasing government deficits since the 1980s and as a result government debt as a share of GDP has increased rather than decreased. However this would not have been possible without an end to the regulated exchange rates of the Bretton Woods system. [1, p.55-59]

[5, ZCPIN]

[5, OVGD]

[5, UBLGE]

In addition the USA as the supposed home of supply-side policy consistently refuses to pursue austerity policies. And on the other hand the USA, with this quasi continuation of demand-side policy achieves consistently higher economic growth than for example the EMU (Economic and Monetary Union of the European Union) or the EU (European Union). Flassbeck notes that the USA did not have higher inflation rates as a result of this expansive fiscal policy. Government spending and national debt have therefore not led to the inflation rate being higher in the USA. [1, p.77-83] [1, p.90-100]

Src:
[1] Heiner Flassbeck - Grundlagen einer relevanten Ökonomik - ISBN 978-3-86489-414-5
[2] Makroskop
https://makroskop.eu/
[3] Relevante Ökonomik
https://www.relevante-oekonomik.com/
[4] Flassbeck Economics
https://www.flassbeck-economics.com/
[5] AMECO - annual macroeconomic database / jährliche makroökonomische Datenbank
https://economy-finance.ec.europa.eu/economic-research-and-databases/economic-databases/ameco-database_en

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