We are ‘stuck in a rut’

By definition, ‘Stuck in a rut’ means “not being able to change a prevailing condition happening to you at particular time and as you try doing this you end up in the similar position/condition.” (www.ask.com)

Doesn’t this describe well the world’s response to the Global Financial Crisis of 2008 and the situation in most of the World in 2014? Our common answer to the crisis of 2008 has been to produce ‘more of the same thing’. More money! The Federal Reserve, Bank of England, Bank of China, Bank of Japan and European Central Bank have printed and keep on printing money, and are injecting this ‘artificial’ cash into their respective financial systems.

The Keynesian logic is that more cash would stimulate demand and jump-start the economy out of the recession. Well, isn’t that just like trying to cure drug addiction by giving more drugs to the drug-addicts. The main reason we got ourselves into trouble in the first place in 2008 was because the financial system (banks, other financial institutions) was making credit ‘too easy and too cheap’ for us to resist, handing out loans left and right without hardly any guarantees, causing too much debt driven consumption in houses, second houses, reconstruction, cars, cloths, travel, “you name it-we bought it“, etc.).

The consequences of the financial crisis have been felt around Europe. Some countries have coped better than others, mainly as a result of their overall competitiveness, better governance, social policies, tax base and social capital. In some Southern European countries, however, unemployment and poverty have reached historical highs.

According to recent European Commission estimates, the natural rate of unemployment in Spain increased from 10.9% in 2006 to 23.2% in 2013, and is estimated to increase in structural figures to 26.6% by 2015. (www.thecorner.eu) Youth unemployment in Spain reached a whopping 56.1% in 2013, according to Eurostat data. Only in Greece is there more unemployed youth, 62.9% in the summer of 2013. The talk of a “lost generation” is real, as tens of thousands of young Greek, Portuguese and Spaniards give up looking for a job or emigrate to better performing economies in Northern Europe, or emerging markets in Africa and Latin America.

A recent study shows that having completed tertiary education no longer lowers the risk of unemployment compared to having the lowest level of education. Unemployment and other forms of exclusion from the labour market and society lead to significant economic and social costs for the individual citizen and society as a whole. (www.eurofound.europa.eu) A dramatic fall in employment in the wake of the 2008 crisis is not a European illness. In the US, the state of Illinois has “380,000 fewer people employed now than before the recession” in 2008. According to the Bureau of Labor Statistics, unemployment is still up by nearly 200,000 people, and at least 185,000 people have given up and left the labor force.” (globaleconomicanalysis.blogspot.com) A shrinking base of working, tax-paying citizens cannot fund the same level of government public services and pension schemes. This simply does not add up, either public services must be cut or taxes increased.

But while we easily get bugged down in abstract and faceless economic statistics and austerity programs, the human and social costs of the financial crisis in Europe is a reality for everyone to see. Unless, we choose to deny what goes around us, of course. In 2012, the Hellenic Statistical Authority reported that 23.1% of Greeks were at risk of falling into poverty. The same figure in 2009 was 19.7%. This corresponds to almost one million households! And they are estimated to earn less than €12.000 per year, to house and feed two adults and two children under 14 years. And that is with 2014 food and utility prices! This statistic is even on the low side because it does not include traditionally marginalized groups in society, such the Roma minority, illegal immigrants, homeless people and institutionalized persons.

As a result of pre-crisis years of economic mismanagement, corruption, excessive borrowing and chronic tax evasion, followed by years of fierce austerity, the real social and economic hardship in Greece today come in many shapes and forms. Thousands of households live without electricity and water (closed due to unpaid bills) parents abandon their children due to lack of food (economic orphans), malnutrition is on the rise among school children, senior citizens beg in the streets to top-up their shrinking public pension, and so on. And this is in a country that has been member of the EU since 1981. It’s inexcusable how the leadership (political, economic, social, religious) of a country could succumb to such blatant greed, selfishness and short-term thinking, and to the belief that these values were the pillars of a new viable economy. It’s simply unbelievable.  (http://www.youtube.com/watch?v=wgVfxR-YhbI)

Still, true Keynesian theory states that, to get out of a recession, government’s should increase expenditures and lower taxes, and as a consequence stimulate demand. The opposite is taking place in Greece at the moment. Government is cutting expenditures, and hiking taxes. Why? Enter the national debt! Greece has lived beyond its means for many years, financing its public spending and private consumption through credit, and now the chickens are coming home to roost with unemployment and social despair soaring.

In a pre-euro area, Greece could have devalued its currency in an attempt to re-gain international competitiveness, and export its way out of the crisis. Inside the euro-zone, this is no longer an option. The only way to reduce its debt is to cut costs and generate more revenue through taxes. Both ways mean more pain for the Greek people, as they see their pensions and social benefits cut, salaries reduced and jobs lost. In such a situation of dramatically falling domestic purchasing power, where is the ‘stimulated demand’ that Keynes talked about, and where do we expect the seeds of economic growth and employment to emerge?

Where to start? Well, one way would be to take a step back and contemplate if the actions taken and policies pushed since 2008 has done the world economy any good? The answer will depend on whom you ask of course. The economists will insist the bailouts and austerity programs are good things because without them things would have been even worse. The politicians will agree in order to hold on to power and avoid general elections (poorly performing Italy has a third non-elected government in a row now). The general population in the EU will disagree, as they have experienced a real fall in living standards and a growing disillusion with the political-economic system (or rather with the way national and EU politicians and bureaucrats mismanaged the good years before the crisis and showed complete lack of leadership in addressing the causes of the crisis afterwards). Again, the situation is not much different in the US characterized by political deadlock, sluggish economic growth, high unemployment and increasing poverty levels.

Now, the same group of international and national bankers, big business and politicians that got us into trouble in 2008, are at it again. Their solution is, again, for the state, companies and citizens to spend more, no matter that the money we are suppose to spend is not generated through work, but printed and borrowed like Monopoly money. But the citizens of the world are not taking the bait. They are careful, they are saving, because they remember what happened last time around. While the politicians, big business and bankers did not really ‘feel’ the crisis, as they were bailed out (remember the US car industry, TARP, etc.), the average Joe was not so lucky. He got stuck with his mortgages, and as he lost his job, he began the decline towards poverty.

According to the United States Bureau of the Census one of seven people in the USA lived in poverty in 2012. That’s 46.5 million people (or the entire population of Spain!) and the highest number of poor people since the Census started in 1960. Almost one out of sixteen people in the USA are living in deep poverty. This refers to people living on an income 50% below the poverty line. In 2012, 6.6% of the US population (approx. 20.4 million people) lived in deep poverty.

Now, if you were a member of a family, in the US or Greece, struggling to make ends meet, and there was a phone call from the bank offering you cheap credit. Would you take it? Probably not. The politicians, bankers and big business do not seem to have learned anything, but the households have. So, if the households will not jump back on the cheap credit band wagon, the hope of spending our way out of the crisis turn to the corporate world.

With the banks re-financed by the Central Banks of the world, and the interests at record low levels, the companies should be borrowing, investing and growing, right? Well, that does not seem to be happening either. Demand is simply not there in the market, which may be a natural consequence of households being more careful in how they spend their money or simply too poor to spend at all. So what do the banks do with all the ‘fresh’ money if the private sector is not requesting it? The rapid growth of the stock markets may give one clue to where the TARP and other government sponsored financial injections ended up. That’s not the economic growth we had all hoped for, measured in increasing sales and employment, that’s just another debt bubble ready to burst!

Back in Europe, where a recent report shows that the two sectors that contributed to the most dramatic reduction in employment during the crisis were manufacturing and construction. (“The social impact of the crisis”, www.eurofound.europa.eu) In the EU, manufacturing and construction lost more than 6.4 million jobs. Employment losses in manufacturing were evenly spread across countries, while construction sector fell the hardest and fastest in countries experiencing real estate booms, such as Spain and Ireland.

Perhaps manufacturing holds the key to turning the fortunes of Europe. One of the reasons unemployment is relatively low in Germany is that, unlike the US, Germany has hold onto and further developed its industrial base, rather than outsourcing it to China and other low-cost territories. A solution to reducing unemployment in Europe could be to re-invest in the continent’s established industries, support the emergence of new industries and perhaps even encouraging a return of manufacturing jobs from elsewhere in the World.

For production to return to Europe, industry must upgrade innovation, increase productivity and probably lower the cost of labour! “Decrease salaries, are you mad?” “What good will that bring, workers will leave and there will be deflation?” But wait, since when is deflation, meaning lower prices, a universally bad thing? And to whom? As a customer, we all like lower prices, it may even make us start spending again. Isn’t that what Keynes wanted?! However,  for the bankers, investors and the other Wolves of Wall Street, deflation means a risk of falling asset values, meaning falling profits and less bonuses for them! Hence the current full-out war on deflation!

In the real world, we should have gotten this deflationary slap in the face in the wake of the global financial crisis of 2008. Had we let the market take its course to correct the results of years of poor policy and business decisions resulting in too much debt, the overall economy would have shrunk, but it would have shrunk back to some kind of ‘normality’. Banks with too risky business models would have failed, and so would many poorly managed companies. This is a natural process of the free market. The same free market, based on principles we defended against egalitarianism and communism for almost 50 years.

But the few and the powerful would not let the economy shrink, because they would loose billions in their inflated assets, so they turned to their elite friends in governments and international financial institutions to help them, in their own words, save the world economy from apocalyptic disaster and revolution. What happened next was the return of communism, but in capitalist cloths. Political elites throughout the Western world unleashed waves of financial stimulus packages and rescue packages to save ‘strategic industries’. Oddly enough, Sweden, a country ridiculed in the US for its left-leaning policies, decided not to bail out SAAB (a car brand), while the US government gladly spent American taxpayers money to bail out everybody in Detroit. Or as one Swedish minister so elegantly put it: “If GM cannot make money out of SAAB, what do you expect from us the Government, we are not in the car making business”. To continue with SAAB, a long story short, GM sold its shares in SAAB to a Chinese consortium, and in 2014 production is back at the SAAB plant in Sweden. And that without the injection of Swedish tax payers money! Lesson learned: if there is value in the asset (SAAB as a brand and automobile) somebody in the private sector will buy it. If there is no perceived value, and hence no buyer, well then we should let it go and deal with the consequences.

By not biting the bullet in 2008, and dealing with the consequences we simply kicked the can down the road hoping that nobody would see and talk about it anymore. But it’s not so easy as putting our heads in the sand and hoping that the debts, unemployment and social misery will just go away by themselves. Deep down we all know that sooner or later we must deal with them. Unfortunately, it appears that we are stuck with a political-business elite, and bureaucracy, that are set on protecting their accumulated wealth and power above everything and everyone else.

Again, change of values and the way we function as a society is not on the table. It’s not in the public debate. Again, it’s just more of the same medicine. If they were true leaders, our current Political-Business-Bureaucracy elite would lead by example. They could start by lowering their own salaries and benefits. They could start by trying to explain what ‘really’ went wrong in the pre-2008 era, and do it in terms that we all can understand. The business elites could act by paying more taxes, as argued by Warren Buffet (http://money.cnn.com/2013/03/04/news/economy/buffett-secretary-taxes) or go the Bill Gates’ way and donate large chunks of their fortunes for good causes around the World.

The few, rich and well positioned at the top of society has to do a better job in sharing the pain. Clearly, there is room for maneuver and income cuts in times of crisis, if for no other reason than showing solidarity with those who have lost it all in and after the financial crisis. Call me naïve, but it just sounds like the right thing to do! But then you would have to act like your job dependent on somebody’s democratic vote.

Let’s assume that a large, multinational corporation agrees with the unions to reduce salaries of managers and staff alike, by say 15%. The lower salary will be agreed upon, on the pre-condition that (1) the final sales price of the product/services will be lowered, making the company’s products significantly more competitive on the world market, and (2) if/when sales volumes increase, and there is a demand for additional production, more staff will be employed in the existing plant or a new factory will be built in the EU! Earnings will increase as a result of higher participation in labour market. Furthermore, the public financial costs, transfer payments through welfare state, will decrease. Good things all around!

On the negative side, the managers and workers will now have to put in the same labour for less pay. Theirs, the politicians and bureaucrats’ purchasing power will decrease a little. But what if their short-term material sacrifice created a greater common good and a healthier local community? Is this a completely revolutionary thought and the ultimate destruction of the capitalist system as we know it? Probably not. It’s more likely the natural correction of the free market that was not allowed to take place in 2008. We would all have seen our salaries and wealth reduced, but within a real economy. Instead, as it played out with the state entering the market with tons of printed money, the very few saw their asset value grow, while the large majority (99%) saw their steady salaries and pensions eaten up by inflation or their jobs lost, and all this within a bubble economy.

If we feel threatened by less income, it must be because we have become very limited in our way of thinking, shaped in our appreciations of life by the forces of consumerism. What happened with the virtue of saving for a rainy day? What if by lowering our own salary, we could open up financial space for a young person to enter the labour market! The same way we expect higher salaries in good times, should we not sacrifice ourselves for the common good in the bad times, and accept lower wages? When did we become so unrealistic about the unavoidable ups and downs in life? Was it when we gave up farming (when our fortune dependent on external factors such as weather and climate) or when we left the closer knit community life of the village? Or was it when we no longer could make out the difference between money earned through labour, and money received on credit?

And what sacrifices are we really talking about, as a person living in Western Europe or North America in 2014, and not falling in the poor category (as mentioned above), should our monthly income fall by 15%? We would perhaps be ‘forced’ to live in a smaller house, drive a smaller car, cook at home more often, be more efficient in our use of electricity and water, travel less often to distant lands, don’t get a new smart phone every year and we might even time our purchases around retail sales offers. We would not starve, we would stay healthy, we would just simply buy less stuff!

Perhaps then, we will engage the thought of finding value in other ‘things’ in life, such as helping other people (volunteerism), sharing rather than taking, spending more ‘quantity’ time with family (no child invented the concept of ‘quality’ time with parents), reading books from the public library, walking the dog in the forest or drinking tea and having a laugh with friends. Remember that ‘time’ is the only asset we cannot get more of, so why waste it only on work?!

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About Jakob Modéer

22 years of corporate and international investor experience as well as private sector development project management, consultancy in private sector policy and business advisory services, and direct consultancy to companies in South East Europe (and now a blogger on socio-economic issues)
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