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Learning from Roosevelt: His "New Deal"
by Stephan Schulmeister
Email: marc1seed (nospam) yahoo.com
08 Jul 2014
In the first phase Roosevelt concentrated in three areas: firstly, the social-psychological side of depression, combating despondency and despair, secondly, the strict regulation of the financial sector and thirdly, the stimulation of the economy by creating jobs and combating deflation and foreclosures.
LEARNING FROM ROOSEVELT: HIS “NEW DEAL” AND EUROPE’S GREAT CRISIS
By Stephan Schulmeister
[This study published in 2014 is translated from the German on the Internet, http://www.wifo.ac.at/jart/prj3/wifo/resources/person_dokument/person_do. Stephan Schulmeister is an economic researcher in Vienna and author of “Ten Theses on the Economic Crisis.” The financial sector must be shriveled. Incentives must be devised to encourage investing in the real economy.]
The measures with which Roosevelt led the US economy out of the 1929/1933 depression were strikingly different from the policy in the European Union (EU) since 2009. First of all Roosevelt concentrated on fighting despondency and despair, on strict regulation of the financial sector and stimulation of the real economy through public investments and jobs programs (1933/34), The “structural reforms” included introduction of unemployment- and pension insurance, “fair” working conditions (minimum wages, maximum working hours) and a progressive tax schedule (1935/38).
The real GDP of the US rose 43% between 1933 and 1937. Private investment demand expanded most strongly (+140%); state demand only grew 28%. With his battle against social-psychological depression and his promotion of entrepreneurship instead of financial speculations, Roosevelt anticipated those main messages of Keynes “General Theory” (1936) that were later pushed aside: firstly, the importance of uncertainty, trust and confidence and secondly, the necessity of radically restricting the possibilities for financial speculation.
LEARNING FROM ROOSEVELT: HIS “NEW DEAL” AND EUROPE’S GREAT CRISIS
Of all the regions of the world, the financial- and economic crisis of the last years struck Europe most grievously. There are four main reasons for this:
• In the EU, politics tried to combat the rise of unemployment and state indebtedness by cutting real wages, social benefits and other state expenditures and so deepened the crisis.
• The “speculation possibilities” of banks, hedge funds and other “financial alchemists” were not restricted in the EU – unlike the US.
• The organization of the EU as a confederation of states where 18 countries have a common currency makes difficult an energetic and combined control of crises.
• The neoliberal worldview marks the thinking and acting of European elites more prominently than in the US because the foundations of the EU are common markets and market freedoms, not social cohesion.
The 2009 financial crisis and the economic collapse struck the whole world economy. But the problems deepened in the EU. Speculation on state bankruptcy leaped from Greece to other countries like Portugal, Spain and Italy. In the commission of the “bailout umbrella,” the “Troika” ordered strict savings and wage cuts so the economies of these countries skidded into depression. The constantly high interest-differences between the “problem countries” in southern Europe and the “good” countries in the North led to the Euro crisis.
At the same time the state indebtedness increased in nearly all EU countries, most intensely in those countries with the most vigorous savings. The “fiscal pact” was passed that obligated further savings or economizing. Under these circumstances, the whole EU slipped into a recession in 2011/12 and unemployment rose to its highest level since the 1930s. A “genuine” economic upswing is not in sight.
Similarities exist between southern Europe’s way into depression and the way of the US between 1929 and 1933 (despite the different starting positions, political conditions and specific properties of the European monetary union). These include the role of financial instability (simultaneous fall of housing prices, stock prices and raw material prices as well as the massive rise of bond interests in southern Europe from 2010-2012), the devastating consequences of austerity policy, the enormous rise of unemployment and the hopelessness of millions of people.
An economic depression brings about a social-psychological depression, on individual and social planes. In an individual depression, someone falls into a “black hole” so to speak and cannot get out to be a confident person through his or her own strength. He or she needs therapeutic help. In a social depression, purchasing power weakness and pessimism of households and businesses reinforce one another. Therefore an economic and sociopolitical “therapist” is needed to discover a way out of the crisis.
ROOSEVELT AND HIS NEW DEAL
Roosevelt who took over the US presidency in March 1933 – at the low point of the Depression – acted as such a “therapist.” In the election campaign, he promised a “New Deal” with the population. A fundamental change of course in economic- and social policy should restore economic prosperity and strengthen social cohesion.
The social situation in the US was catastrophic in 1933. The real GDP shriveled 26% since 1929; the unemployment rate climbed to 25%. The decline of the price level (also around 26%) increased the real burden of debts that drove businesses, banks and farmers again into bankruptcy. In this situation, Roosevelt could not hearken back to any theory which could have explained the Depression as a basis for a “recovery program” (such a theory was first propounded by Keynes in 1936). His New Deal was a collection of different individual measures with the goal of changing the economic and social development. It was not a coherent total concept.
In the first phase (New Deal 1933/34), Roosevelt concentrated on three fields of activity: firstly, the social-psychological side of depression, combating despondency and despair, secondly, the strict regulation of the financial sector and the consistent battle against the “practices of the unscrupulous money changers” and thirdly, the stimulation of the economy, particularly by creating jobs and combating deflation (especially the fall of farm prices) and foreclosures.”
Roosevelt was clear that energetic action was necessary simultaneously in all three areas. The measures had to strengthen each other and together help in reaching the three partial goals.
1933 INAUGURATION SPEECH
This attitude and strategy were spiritedly announced in his March 4, 1933 inauguration address (http://histrorymatters.amu.edu/d/5057/) If Obama and top European politicians would have oriented themselves a little in the guidelines of this speech, the disaster of millions of people would have been mitigated a little.
At the outset he addressed the social-psychological depression: “So, first of all, let me asset my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”
Then he outlined the catastrophic situation in the US and added: “Yet our distress comes from no failure of substance… Nature still offers her bounty and human efforts are multiplied. Plenty is at our doorstep, but a generous use of it languishes in the very sight of supply. Primarily this is because the rulers of the exchange of mankind’s goods have failed through their own stubbornness and their own incompetence… Practices of the unscrupulous moneychangers stand indicted in the court of public opinion, rejected by the hearts and minds of men… Faced by failure of credit they have proposed only the lending of more money. Stripped by the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading fearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision, the people perish.”
In no uncertain terms Roosevelt named financial speculation as the main cause of the demand-weakness and the crisis. This was his conclusion: “This Nation asks for action and action now. Our greatest primary task is to put people to work.” He then listed numerous measures that serve this goal and added “In our progress towards a resumption of work we require two safeguards against the return of the evils of the old order: there must be a strict supervision of all banking and credits so that there will be an end to speculation with other people’s money; and there must be a provision for an adequate but sound currency. These are the lines of attack.”
This attack occurred in quick succession in the famous “first hundred days” after Roosevelt’s inauguration.
REGULATION OF THE FINANCIAL SECTOR
First of all, the financial sector had to be stabilized. For months customers had withdrawn money from their bank accounts. Therefore Roosevelt ordered 4 “banking holidays” to test the solvency of the institutes in a turbo-process and so restore trust. On the eve of the reopening of the banks, Roosevelt held the first of his legendary radio broadcasts (“fireside chats”) to the population. He explained the necessity of the shutdown and in this way strengthened trust. On the next day there was a considerable money infusion in the banking system. In contrast to the fears of many, the “banking holidays” did not intensify but overcame the panic.
In these four days, the US Congress passed the “Emergency Banking Relief Act” which granted the president a right of intervention in the financial sector including complete access to internal bank transaction data.
In May 1933 the “Securities Act” followed that obligated the issuers of securities to full information. In June 1933 the “Banking Act of 1933” or the “Glass-Steagall Act” was passed. It ordered the strict separation of “investment banking” and “commercial banking” and set the legal framework for general deposit insurance through the “Federal Deposit Insurance Corporation.” In 1934 these measures were supplemented by the “Securities Exchange Act” and the “Gold Reserve Act.” The first law regulated the exchanges, in particular by creating the “Securities and Exchange Commission” as a board of control. The second law ended the gold standard of the dollar. Its value was massively downgraded which corresponded to a devaluation of nearly 50%.
MEASURES FOR STIMULATING THE ECONOMY
Roosevelt’s most important interim goal, permanently improving the social mood and a continuing economic upswing, consisted in a rapid reduction of unemployment, especially of youth, in strengthened cooperation between businesses and unions and in forcing public investments and improving the situation of farmers and heavily-indebted households. The following measures pursued these goals.
The “Civilian Conservation Corps” (CCC) organized in the spring of 1933 as an emergency measure as “camps” in which young unemployed between 18 and 25 worked at least 6 months, building (forest) roads, bridges and dams, particularly in the national parks. Even though the pay was meager (around 25% of the normal wage) and a large part had to be remitted to the – mostly unemployed – parents, the CCC program helped overcome the basically pessimistic mood in society. Within a few months, 500,000 young persons had hope again (altogether 3 million youths had a job through the CCC program up to the entry of the US in the 2nd World War).
The “National Recovery Act” of June 1933 had several goals. The government should intervene in case of an economic emergency (“widespread unemployment and disorganization of industry”). Businesses and unions had a right to join the conversation. “Codes of fair competition” granted employees the right to unions and collective bargaining and demanded compliance from businesses with minimum standards on pay and working hours. Businesses that held to these rules could be members of the “National Recovery Administration” (a kind of “seal of quality” for fairness). With that law the “Public Works Administration” was founded and coordinated and financed public investments, particu9larly in underdeveloped regions of the US.
The most famou8s example of such projects was the regulation and energetic use of the “Tennessee River” managed by the – still existing – “Tennessee Valley Authority.”
In 1937 the “Public Works Administration” (PWA) was replaced by the “Works Progress Administration” that promoted a variety of public interventions from building schools and streets to mega-projects like the Lincoln Bridge, the La Guardia airport and the Overseas Highway. The PWA was the largest New Deal organization.
The “Agricultural Adjustment Act” of May 1933 and the “Emergency Farm Mortgage Act” passed the same year introduced subsidies for limiting production (to stop the fall of farm prices) and facilitated changing the terms of debts into longer and low interest credits. The “Federal Housing Administration” and the “Home Owners Loan Corporation” pursued the last-named goal for other indebted households. The objective was to directly support the debtors of banks – not the banks – although that obviously indirectly benefited the banks.
THE STRUCTURAL REFORMS OF THE NEW DEAL
The second phase of the New Deal (1935/37) concentrated on a permanent reorganization of the framing conditions (genuine “structural reforms”) by creating social state and social partnership institutions, strengthening the rights of workers and a (somewhat) progressive tax schedule. The following laws and institutions helped reach these goals.
The “Social Security Act” (1935) introduced unemployment- and pension insurance and set up additional measures for the socially weak and widows of victims of work accidents.
The labor conflicts of the 1930s led to the “National Labor Relations Act” (1935): “The denial by some employers of the right of employees to organize and the refusal of some employers to accept the procedure of collective bargaining lead to strikes and other forms of industrial strife…” (From the motivation report, see www.nlrb.gov). The law aimed at reducing the unequal distribution of power between businesses and unions. The “National Labor Relations Board” (that still exists today) should prevent intimidation of employees by employers and promote the process of collective bargaining.
The “Fair Labor Standards Act” (1938) established nationwide minimum wages and maximum 40 weekly working hours (!) although there were many exception clauses.
With the “Wealth Tax Act” of 1935, the top tax rate was raised to 79%. The income level in the top tax bracket was set so high that only one person (Rockefeller) was affected by this tax rate.
GDP PERFORMANCE 1933 to 1937
Between 1933 and 1937 the real GDP of the US increased 43% and the nominal GDP 63% (the price development “turned” at the end of 1933 from a deflation to a – slight – inflation). Private investment demand exploded most strongly (real +140%); the state demand only grew 28%. The unemployment rate fell from 25% to 14% between 1933 and 1937…
In the fourth year of the upswing (1937), Roosevelt essentially eliminated the – very moderate – budget deficit. By reducing spending and raising revenue, he realized a budget surplus at the expense of a recession. Households lowered their consumption very slightly; businesses massively cut their investment activity – almost 20%. The “Roosevelt recession” in 1937/38 showed that trust is very fragile after such a massive deterioration of the “state of confidence” as in 1929/33 and in the fourth year of the upswing. The aggregate economic losses of austerity policy were much greater than their fiscal returns (southern European countries made similar experiences in the last years).
Roosevelt corrected his austerity course. However the dislocation through the recession was so great that the depression was first overcome with the arms boom and the subsequent entry of the US in the 2nd World War.
THE POLITICAL STRUGGLE FOR A BROAD “NEW DEAL COALITION”
The New Deal represents the totality of different measures whose fou9ndation was the political will to change economic and social development for the better, not an economic theory. The presupposition was the readiness to break with the market radical worldview and the derived navigation chart, that is enter a battle with those groups that considered and defended this ideology as useful to their interests.
In view of the desperate situation in 1933 and the fact that the prescriptions of this ideology caused and massively deepened the crisis, Roosevelt chose a very offensive strategy differentiated according to groups. He attacked the representatives of the “Wall Street culture” most harshly, the speculators “with other people’s money.”
His attitude toward the mainstream of economics and its “doctrine that Government is best which is most indifferent” was just as irreconcilable. Therefore Roosevelt and his team could not and would not rely on “experts”; they thought independently and concretely.
Another “conflict area” resulted since print media mainly defended the market-liberal mainstream. Tensions with the print media intensified in that the owners of the newspapers – like most other “big capitalists” – saw in Roosevelt a “class traitor.” Roosevelt was indeed an offspring of a family from New York’s “money aristocracy.” In relation to the print media, Roosevelt pursued a “twofold strategy.” On one hand, he courted the approval of journalists and on the other hand tried to directly reach the population with his radio broadcasts.
No other US president of the 20th century succeeded as convincingly as Roosevelt in “taking along” the population – in the entry in the 2nd World War and not only on the way out of the Great Depression. Roosevelt owed his ability to join the tradition of a “government of the people, by the people and for the people” (from Abraham Lincoln’s Gettysburg Address) to three qualities.
Firstly, his thinking and his proposals started from the concrete problems that oppressed many people like (youth-) unemployment, the social situation of indebted farmers and (small) businesses, the unfair distribution of power between “big business” and employees, the inequality in the distribution of incomes, assets and chances of development and the hopelessness of millions of people. All individual measures of the New Deal were manifestations of this problem- and solution-oriented thinking.
The second (emotional) quality of Roosevelt’s policy, the sympathy for the distress of people; as a “source of energy” for thinking and acting, is closely connected with his focus on concrete problems. In this point, Roosevelt clearly delimited himself from the cool-analytical stance of market-liberal politicians and economists… “Justice weighs the sins of the cold-blooded and the sins of the warm-hearted in different scales. Better the occasional faults of a Government that lives in the spirit of charity than the consistent omissions of a Government frozen in the ice of its own indifference” (from the speech at the Democratic Party Convention on June 27, 1935 – quoted in Smith, 2007, p.368).
Thirdly, Roosevelt spoke a simple language in which he expressed his attitude and his truth. Here is a well-known quotation from Roosevelt’s second inauguration from January 20, 1937 (http://historymatters.gmu.edu/d/5105/): “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”
His predilection for energetic and quick action – given the catastrophic economic situation and the depressed basic mood – won him the trust of many citizens (Roosevelt oriented himself in “Yes we act” instead of Obama’s “Yes we can”…).
Promoting entrepreneurship was another feature of Roosevelt’s politics (“if the country is to flourish capital must be invested in enterprise” – quoted in Smith, p.323). The common interests of businesspersons and employees was to be strengthened in an expansion of the real economy – on one side by limiting the possibilities of the financial sector and on the other side by encouraging private consumption and especially (public and private) investments.
At the same time Roosevelt addressed the antithesis between the interests of the large majority of small and medium-size businesses and those of “big business” and positioned himself as president for the overwhelming majority of citizens: “For too many of us political equality was meaningless in the face of economic inequality. A small group had consolidated into their own hands an almost complete control over other people’s property, other people’s money, other people’s labor - other people’s lives” (from the speech at the Democratic Party Convention on June 27, 1935 – quoted in Smith, 2007, p.368).
Roosevelt used this antithesis between his policy and the interests of “Wall Street” and “big business” in the campaign for his first re-election in 1936 to instruct the voters in a dialectical way: “Powerful influences strive today to restore that kind of Government with its doctrine that Government is best which is most indifferent. Never before in our history have these forces been as united against one candidate as they stand today. They are unanimous in their hate for me – and I welcome their hatred” (from the speech at the end of his second election campaign on October 3, 1936 – quoted in Smith, 2007, p.372).
The understanding of “freedom of citizens” dominant in classical liberalism and even more in neoliberalism as the greatest possible independence from state pressure (negative idea of freedom) is deeply anchored in American society as an immigration country (“everyone is the author of his or her own destiny”). Roosevelt countered this equation of freedom and independence with a positive idea of freedom: “Liberty requires opportunity to make a living – a living which gives man not only enough to live from but something to live for” (from the speech at the Democratic Party Convention on June 27, 1935 – quoted in Smith, 2007, p.368).
This positive idea of freedom includes economic and social security. “True individual freedom cannot exist without economic security and independence. People who are hungry and out of a job are the stuff of which dictatorships are made” (from Roosevelt’s “Economic Bill of Rights” presented in his “State of the Union Address” to the US Congress, January 11, 1944. Roosevelt named as the most important “economic rights: The right to a useful and remunerative job in the industries or shops or farms or mines of the nation; The right to earn enough to provide adequate food and clothing and recreation; The right to every farmer to raise and sell his products at a return which will give him and his family a decent living; The right of every businessman, large and small, to trade in an atmosphere of freedom from union competition and domination by monopolies at home or abroad; The right of every family to a decent home; The right to adequate medical care and the opportunity to achieve and enjoy good health; The right to adequate protection from the economic fears of old age, sickness, accident and unemployment; The right to a good education. All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.”) This perspective also implies a positive understanding of state action. The state is not primarily seen as the hostile “Leviathan” but as “our union” in the sense of Lincoln’s “government of the people, by the people and for the people.”
Roosevelt’s strategy in its entirety consisted in gaining the broadest approval of the population through measures of his New Deal and the understanding of his motives and goals among “white collar workers” in businesses and among farmers. “Cultivating” opposition to “Wall Street” and “big business” strengthened the extensive “New Deal coalition.” The success of this strategy appeared in the 1936 election. Roosevelt won in all states except for Vermont and Maine, altogether 61% of the votes and 98.5% of the electors (the greatest victory of a president in the history of the US – Roosevelt was reelected in 1940 and 1944 with a lower percentage of voters, in 1944 the share amounted to 53%).
THE NEW DEAL IN MACRO-ECONOMIC PERSPECTIVE
… Roosevelt did not follow a policy of “deficit spending.” The state deficit remained nearly constant up to 1936 and even turned into a surplus in 1937.
The main causes for the recovery consisted in Roosevelt’s struggle against the social-psychological depression, in the “turning” of the basic mood of hopelessness into confidence, in combating (youth) unemployment and especially in changing the economic “game instructions” by encouraging business activity and limiting financial speculation. The significance of these three factors intensifying each other is reflected in the enormous increase of real investments of businesses and households (+140%).
Both aspects are ignored in the economic analyses of the New Deal published in the past decades even in those that conceded the positive effects of Roosevelt’s policy (the New Deal was obviously harmful for the analyses of “mainstream economists”).
Keynes’ “General Theory” was published in 1936 and had an effect in economics and politics. Roosevelt’s policy concentrated on Keynes’ two main messages largely repressed by the “scientific community”: firstly, the importance of (in-)security and the influence of emotions on the individual plane (“animal spirits”) and on the social plane (“state of confidence”), secondly, the necessity of radically limiting the possibilities of financial speculation (“euthanasia of the profiteers”) and giving precedence on all planes to the “steady stream of enterprise” over against the “steady stream of speculation.”
Conversely Roosevelt rejected that recommendation of Keynes (mis-)interpreted by the “scientific community” as his main message, the necessity of an anti-cyclical fiscal policy, especially of a “deficit spending.” In his “General Theory,” Keynes did not make explicit what theoretical insights and political-economic recommendations were most important. The interpretations on “what Keynes really meant” are correspondingly varied.
In my reading, the systematic lessening of (avoidable) insecurity, the permanent consolidation of the “state of confidence” and fighting all kinds of financial speculation were for him the most important prerequisites for stabilizing capitalism. As intermediate steps on the way to the “euthanasia of the profiteers,” Keynes proposed a transactions tax for containing stock speculation, a new world monetary system to eliminate currency- and raw material speculation and stabilization of interest rates at a low level to limit loan speculation.
I assume Keynes regarded the self-commitment of governments to an anti-cyclical monetary- and fiscal policy as an essential component of stabilizing the “state of confidence.” Only the trust of businesspersons in such a policy could stabilize the fluctuations of investments and employment so strongly that a marked anti-cyclical policy would not be necessary as long as the financial markets were stabilized. For Keynes, the instability of free financial markets and the variations of “market sentiment” were the most important causes of economic fluctuations and serious economic crises.
Postwar history confirms this way of looking at things. With regulated financial markets in the 1950s and 1960s, there were no appreciable economic fluctuations and no necessity of an anti-cyclical policy. Conversely the recessions since then were triggered by turbulences on the financial markets – from the dollar-devaluations and “oil price shocks” of the 1970s to the stock crashes of 2000/2003 and 2008/2009. At the same time an anti-cyclical policy under “finance-capitalist” framing conditions increasingly loses effect. Such a policy can even have “counter-productive” effects. So the low interest policy of the last years stimulates financial speculation, especially with stocks, and not real investments.
Roosevelt clearly adjusted his policy according to the following mail goals: “creating confidence and trust,” “fighting unemployment with all our strength” and “subordinating the financial sector to the real economy.” In that way he followed the most important recommendations of Keynes’ “General Theory” even before its publication to a greater extent than any other later politician.
THE REACTION OF POLITICS IN EUROPE TO THE GREAT CRISIS SINCE 2008
This reaction was the opposite of Roosevelt’s strategy in all important problem areas. A “more of the same” was prescribed to mitigate the “mega-problems” of state indebtedness and unemployment. In other words, therapies were derived from that (neoliberal) navigation chart that slowly led to the great crisis since the beginning of the 1970s.
The austerity policy, particularly the reduction of unemployment benefits and other social transfers and massive wage cuts made southern Europe skid into a depression. Poverty spread. Politics intensified hopelessness without strengthening confidence. Simultaneously state indebtedness rose most strongly in those countries that pursued the most radical austerity course: Greece, Spain, Portugal and Great Britain.
The possibilities of the “financial alchemists” were not restricted. Rather they could even expand them through the new “game” of speculation against states. The concept of a financial transactions tax – the only potentially effective measure against speculation considered by politics – was shriveled under the pressure of the financial lobby into a stock exchange tax that will not even be realized (national financial lobbies successfully made their interest appear as the interest of the respective national economy – Schulmeister, 2014).
In general the concepts of politics are based on the abstract model of neoliberal economic theory, not on concrete and sympathetic thinking. This “navigation chart” paved the way into the great crisis since the 1970s. However this was not seen. Otherwise the elites would have had to see themselves as partly responsible in the unhappiness of millions of people.
The deepening of the crisis over four decades is another reason for the learning resistance of the elites. The slowness of this process gives it the appearance of a “practical constraint” or in Margaret Thatcher’s phrase “there is no alternative.” A thought experiment makes this clear. If the rise of unemployment only occurred in 4 years since 1973 (e.g. 1929/1933), a much larger share of the elites would have been pressured to seek new ways than is the case today.
This “chronic” process of crisis deepening up to 2008 and accelerating since then developed in interaction with the dominance of the neoliberal worldview first at the universities, then in the media and lastly – for 20 years – in politics. More than a generation of economists was trained in this worldview. The influence and power of this professional group were never greater than today.
The collaboration of all these factors makes it impossible to understand the main systemic cause of the crisis, the neoliberal economic theory and the derived navigation chart of politics. This “perception refusal” is clear in the dominant understanding of the two main problems unemployment and state indebtedness.
From the view of the economic “mainstream,” the two problems have very different causes and therefore are independent of one another. The long-term rise of public indebtedness was caused by excessive state spending. Rising unemployment was caused by excessively high wages and regulations that hindered the market forces from harmonizing supply and demand on the labor market.
In a systemic perspective, the development of state indebtedness and employment has a common determinant (Schulmeister 1998): the attractiveness of real accumulation relative to financial accumulation. If the incentive conditions steer the pursuit of gain to real economic activities, the business sector could change the savings of households into real capital and jobs. The state would have an approximately balanced financing situation. The state indebtedness rate falls with a negative interest growth differential and unemployment simultaneously declines (e.g. the 1950s and 1960s).
If the pursuit of profit shifts by changing the framing conditions to financial accu8mulation, real investments and economic growth fall while unemployment and state indebtedness climb as since the 1970s.
In this approach, the attempt to combat the problem of state indebtedness independent of the problem of unemployment does not make any sense. A policy oriented primarily in budget consolidation will increase unemployment to such an extent that the consolidation goals will be missed again and again as long as the systemic character of both problems and the incentive conditions for real or financial investments are not considered. Experience with the austerity policy in southern European countries and in Great Britain since 2009 and the close long-term connection between unemployment and state indebtedness demonstrate this.
LEARNING FROM THE CRISIS: A NEW DEAL FOR EUROPE
Another “crisis push” is a prerequisite for a profound learning from the crisis. Stocks, pension capital and the financial investments of businesses have recently been devalued. Households will lower their demand. The crisis will deepen if EU states do not take counter-measures. When the number of unemployed climbs to 40 million in the EU, even more youths will be degraded and the advance of rightwing-populist parties escalates, a chance exists that the elites will put their worldview in question.
A new navigation chart is necessary for a change of course. Its guidelines are oriented in Roosevelt’s New Deal: combating all forms of financial alchemy and concentrating the pursuit of profit on the real economy. In addition, strengthening the common interests of business persons and employees and focusing on the most oppressive problems like (youth) unemployment, existential endangerment of many businesses, rising state indebtedness, poverty and general social inequality are vital.
Thus politics is conceived as a linkage of (mega-) projects with the goal of concrete and gradual conquest of partial social crises (instead of demanding “structural reforms” for the n’th time). A modern New Deal for Europe must declare improvement of the environment and strengthened European cohesion as main goals (cf. the detailed presentation of the total concept in Schulmeister 2010).
The most important presupposition for shifting the pursuit of gain to the real economy is as follows: the “fundamental prices” mediated between the real- and finance economy – in exchange rates, in the time of interest rates – must be stabilized by the political system. This is similarly true for the prices of depleted exhaustible and ecological harmful resources, particularly crude oil.
1st project: Transformation of the Euro-Bailout fund into a “European monetary fund.” This will make available funds by issuing Euro-bonds to Euro-countries. Awarding credits to individual Euro countries will be tied to conditions that are not necessarily restrictive… Low-interest Euro-bonds are attractive for investors. The markets would no longer play off Euro-states against each other.
2nd project: Exchange rates between the most important four currencies (dollar, Euro, Renminbi and Yen) could be stabilized by agreements between the four central banks. The currency market is organized in a decentralized way. Speculating against declared exchange rate goals of central banks is senseless.
3rd project: Reduction of turbo speculation by introduction of a general financial transaction tax.
4th project: Transition to auctions on the stock exchanges. Its goal consists in financing businesses corresponding to “basic factors.” One to three electronic auctions per day would satisfy this goal… The overwhelming part of the transactions comes from computer-controlled speculation systems that completely ignore the basic factors. This de-stabilizing speculation would disappear with the transition. This model would also stabilize bond prices and raw material prices.
5th project: Stabilizing the long-term development of the price of oil by introducing an EU-wide tax that skims off the difference from the respective world market price. According to economic theory, the price of crude oil must constantly rise more strongly than the price level altogether, firstly because crude oil is an exhaustible resource and secondly is the main causal agent of climate change. An investment boom in higher energy efficiency would be the consequence with regard to the higher annual price of security.
6th project: Establishing a European rating agency as an independent public institution (like an audit office). The service of such an agency would be a public good. Its construction instrumentalized by private businesses had to lead to conflicts of interest.
To strengthen the real economy, such projects will be forced that were ignored but had to be overcome sooner or later in the neoliberal age. The tasks extend from environmental conditions, the infrastructure, the educational system, the integration of (young) persons with migration backgrounds, the development-chances of youths, particularly in work and housing up to fighting poverty (sketched in Schulmeister’s book “A New Deal for Europe – in the Midst of the Great Crisis”).
Two projects could markedly soften the consequences of the crisis continuing for several years and be carried out autonomously in Austria (and elsewhere).
Firstly, the thermal revitalization of the housing stock in Austria. Over a time period of 10 years, 100,000 jobs would be created per year, environmental conditions improved and energy costs clearly lowered.
Secondly, the mega-project of a redistribution of the volume of working hours from seniors to youths. A campaign that emphasizes the advantages of this strategy is necessary. Older employees would earn more per working hour if they worked only 30 hours instead of 40. The volume of hours “made free” would enable more youths to work in “normal” jobs. Businesspersons would profit from their greater “energy” and better knowledge of new technologies and the state would save in paying unemployment benefits. Such a major project could not be implemented without mobilization, expansion of AMS-activities for across-the-board “mediation” of working hours and coordination between social partners, (older) “overtime workers” and young unemployed or precarious employees.
Stephan Schulmeister, “Ten Theses on the Crisis,” 2010
Stephan Schulmeister, “In the Whirlpool of Deregulation,” 2014
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10 Jul 2014
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Being a broad, Italy 1951.