The end of an era: What comes after financialisation and what will be the consequences for labour?

Ekkehard Ernst

The global financial crisis that started in 2007 is marking the end of an era. This era has been characterised by deepening financial markets, a growth process driven by the accumulation of household debt and the international financial dominance of the North. The disruption of financial markets and the shake-up of the world trading system, however, are likely to undermine this economic model permanently. As a result of the crisis, new regulation may be introduced, political and economic power is likely to shift from North to South and new actors will be entering the scene. Most importantly, the legitimacy of earlier policy prescriptions which have led to a rising trend in social inequality has been significantly undermined. Will this ring the bell of a new high era for labour as during the Fordist period? Or, in contrast, will distributional battles stiffen? What will be the new sources of growth and who might benefit from them most? The jury is still open as we are in the middle of the battle storm, but some new trends are already emerging that will shape the future ground for global governance.

To understand the dynamics of the recovery and get a better grasp on different exit strategies from the crisis, it is useful to widen the scope and take a politico-economical perspective. The main actors in this play are financial investors and their lobby groups, employers and employers’ associations as well as workers and trade unions. In the post-war era with its large companies and relatively uncontested markets, benefits from growth were shared between employers and labour, often at the expense of financial investors. This changed when power shifted during the era of financialisation to financial investors as a result of freer international capital flows and more open goods markets, and led to an erosion of labour’s bargaining power. Some of the factors that triggered that shift are still at work today. What has changed, however, is the legitimacy with which the community of financial investors has argued in the past for less stringent regulation and freer international capital flows: The crisis has undermined this position even in the eyes of the most favourable observer and this might result in a rebalancing of power and sharing of future benefits from growth.

Shifting power will be shaping the crisis exit and recovery on two levels over the coming years: At a first, immediate level, governments and lobby groups will clinch over how best to regulate financial markets in order to restore some sense of medium-term stability. This may imply stricter rules for banks to hold larger stocks of regulatory capital or additional taxes to fund a – government-sponsored – financial safety net. It may also entail new rules to curb international capital flows, in particular the more volatile, short-term speculation on currency markets, and to limit or prohibit the use of certain types of financial products, deemed particularly dangerous for the stability of the system. Quite naturally, the banking industry and financial sector lobby groups resist any attempt to such regulation or make only minimal concession. The absence of a single international coordinating body that could produce a new international regulatory framework – the Bank for International Settlements is only a voluntary body and the International Monetary Fund does not have a mandate wide enough to cover all of these aspects – helps such lobby groups in limiting governments in their regulatory ambitions. In addition, governments are increasingly constrained by financial markets in their quest for new financial sources to fund their rising public debt. Even though deficit ratios are likely to go down with the economic recovery, existing debt has almost doubled in size in some countries and will need to be (re)financed in the future, creating favourable margins for political lobbying by financial investors.

At a second, more remote level, different actors will strive for new sources of growth. Such a trend was already visible before the global crisis as several larger economies showed signs of exhausting earlier productivity gains. The debt-driven recovery during the 2000s was temporarily hiding these structural problems but is unlikely to be an acceptable or feasible source of growth in the future. New growth patterns require investment, however, and different views on what constitutes sustainable long-term growth will compete for scarce funds. One particular fault line will be whether these new growth drivers must be sought domestically or internationally, intensifying the use of export-led strategies. Clearly, a more sustainable long-term recovery of the world economy would require a stronger balance between domestic and foreign sources of growth. Strong interest groups, however, particularly in those countries heavily relying on external demand, have already started to push for policies to restore (price) competitiveness for faster export growth. Strengthening domestic sources of growth, on the other hand, would require reorienting private and public investment towards new sectors, such as environmentally–related industries (“the green economy”) or care services. To be fair, both sources – domestic and international – are not incompatible but the coming regulatory changes – especially regarding international financial transactions – will have implications for their relative importance in the recovery and over the medium-term.

What does this mean for labour? Will employment recover to previous levels? Can labour markets provide sufficient jobs to absorb a rising world labour force? And under which conditions can this be achieved? The different forces that are shaping the path to recovery from the crisis give rise to four scenarios that are conceivable on the basis of these two lines of conflict:

In a first scenario, finance wins on both accounts: Financial regulation will be minimalistic and international capital markets remain wide open. Governments are constrained by their lack of additional funding, making any attempt for reorienting the growth process towards new, more sustainable sources difficult if not impossible. In this scenario, job volatility will remain high, employment growth may recover to earlier rates but with the heightened risk of new periods of financial instability and crashes.

In a second scenario, finance dominates the regulatory process but sources of growth will be sought domestically. This may happen when protectionist reactions take over during the recovery phase. World trade will not return to earlier rates of expansion and global growth may remain below pre-crisis rates. In this scenario, employment may lose out on two grounds: Economic dynamics is lower and – due to the financial market dominance domestically – job volatility will remain high.

A third outcome might be that financial market regulation stiffens substantially but that international market openness continues to uphold. Such financial regulation may follow today’s best practice countries (e.g. Canada) and banks may be required to hold higher reserve margins or to participate in a country-wide stabilisation fund. Markets for goods and (financial) services remain open but the more restricted financial sector activity at home and the domestic quest for new sectors of growth improves the bargaining power of workers and creates new opportunities for employment. Destruction of jobs in declining industry may remain high but so will job creation in new sectors. In this scenario, transitory job and worker flows are likely to be large and governments will need to make sure they put policies in place to help this process.

Finally, a last scenario might be that governments manage to impose a search for new domestic growth drivers. World trade is gradually being scaled down both as the result of a more restrictive international financial regime and due to – possibly environmentally-related – tariff barriers. Bargaining power shifts back to labour, employment creation intensifies and profits will be shared more directly between firms and their workforce instead of being distributed to financial investors.

We are at the beginning of this process and it can only be considered a Herculean task to evaluate the likelihood of any of these scenarios. Being aware of them, however, can shape current and future policy debates so as to make sure that only those outcomes might be sought that promise the highest benefits to the real economy and ultimately translate into more and better jobs. What is emerging from these four scenarios is that domestic financial sector regulation is key for governments to shape the process of future growth. Even in the absence of international coordination, governments can gain the upper hand through carefully managed regulatory changes that reorient financial sector activities to support the real economy.

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Ekkehard Ernst is a Senior Economist at the International Institute for Labour Studies. He has previously worked at the OECD and the European Central Bank. His work focuses on the interaction of financial and labour market dynamics.

New challenges for labour as growth prospects fade away

Cédric Durand

With the current crisis, economies and societies are entering a period of institutional shake up which occurs in initial conditions that are much more disadvantageous to labour than during the crisis of the 1970s. At the same time, a paradigm shift is emerging as growth prospects are fading away in advanced economies. The onset of this dispensation poses serious challenges to the labour movement and progressive political economists; this article attempts to address them and to stimulate debate.

The great contemporary crisis takes place in an environment which is radically different from the great profitability crisis of the 1970s. On the one hand, the post-world war period had allowed labour to build a strong bargaining power position. On the contrary, since the 1980s, neoliberal policies have successfully weakened its position. The combined disciplinary effects of a growing reserve army of labour, new managerial principles of controlled autonomy reinforced by IT, increasingly heterogeneous employment norms, spatial splintering of production and an increased exposure to multidimensional competitive pressures have sapped labour combativeness. Rising inequalities in favour of a thin layer of super rich and the dramatic decrease in the number of strikes are symptomatic of the retreat of labour in rich countries.

On the other hand, the post-war boom appears in retrospect to have been a golden age for capitalist accumulation when, contrastingly the past thirty years represent an age of decline. The average annual growth in high-income economies has fallen from 5.5% in the sixties to merely 1.64% during the first decade of the new century (figure) when the investment rate is also slowing, from 25.1% in the seventies down to 20.5% in the 2000s.

« high income OECD » WDI-WB and, for 2009, « Advanced economies » WEO -IMF

The parallel trends of labour retreat and capital decline in advanced economies suggest that what is at stake beyond the crisis is not only the conditions of the recovery, but the shaping of a new socioeconomic path where the promises of unlimited progress in wellbeing through growing mass consumption would not be pertinent anymore. Of course, the dynamics at play in developing countries are different; processes associated with ‘catching-up’ still allow some important margin for growth. However, focusing on the advanced economies is important to capture this paradigm shift which takes place at two different levels.

First, the world economy is locked in a neoliberal institutional configuration that hinders accumulation. The rise of new industrial countries and liberalization of trade led to structural excess capacity and cut-throat global competition in core industries which is exemplified by the emblematic case of the automotive industry. In addition, the short-term financial returns required by market investors deprive firms from the financial resources required to invest. Finally, depleted labour income and recurrent financial crises tend to depress demand and increase uncertainty, both of which also weaken the incentives to invest. In short, the competition regime, corporate governance structures and demand dynamics together produce a sluggish accumulation regime. Theoretically, significant changes in economic policies allowing a more coordinated and stronger growth path are perfectly feasible. Politically, things are far more complicated: such changes would require a significant shift in the balance of power to the detriment of financial interests and a coordination of government policies at the regional and global levels in order to adjust accumulation paths and limit structural excess capacity.

However, even a significant restructuring of global governance will probably not be sufficient to initiate a new economic boom in advanced countries. First, an ageing population, rising environmental costs and the increasing scarcity of key natural resources are triggering an appreciation of input prices that will constrain growth through reduced profits and/or wages. Second, these economies have not been able to find a successor to the techno-economic paradigm of the ‘golden age’ that would be compatible with the pursuit of a rapid expansion of capitalism. On the one hand, the promised wave of expansion associated with innovations in IT collapsed in 2001 and has not since found a way to take off again. This stalling has to do with the specific characteristics of knowledge: there is a deep contradiction between, on the one side, the defence of intellectual property rights in the name of profit which hinders the diffusion of knowledge and, on the other side, the fact that societies need and want to take advantage from the highly beneficial dynamics of knowledge diffusion whose cost is close to zero. On the other hand, the demand associated with social needs is more and more oriented towards services such as healthcare; education and leisure where the prospects for productivity gains are scarce, unlike in manufacturing.

Growth prospects in advanced industrial countries are seriously fading because, on the one hand, of the contradictions of neoliberalism and, on the other hand, of rising inputs costs, the inconsistency of the IT techno-paradigm and the evolution of social needs (and associated demand). Such a diagnosis has tremendous implications for labour, in particular the likely intensification of its antagonism with capital. During the post-war era, many factors contributed to the diffusion of social benefits, from regular wages increases to the reduction of inequalities typical of Fordism. But rapid growth was the necessary condition for – as well as a result of – this configuration, which was relatively favourable to workers. On the contrary, in an era characterised by low growth and by dull prospects as far as the employment rate is concerned, the distributional conflict between wages and profits is getting tougher while the bargaining power of labour has deteriorated. Moreover, in order to escape exhaustion tendencies, over-accumulated capital is exploring further forms of ‘accumulation by dispossession’, cutting or limiting the public’s access to resources, spaces, public services while socializing losses through recurrent bail-outs.

The labour movement needs to reposition itself in order to face these serious challenges. Assessing the possible trajectories out of growth is a new frontier for political economy, appealing for a progressive revival of the issue of the stationary state – i.e. the end of capital accumulation – discussed by the classical economists. In this context, union claims also need to evolve. A massive rollback of inequalities and a broadened access to common goods have to be achieved in order to render fair and acceptable a renouncement to the permanent objective of rising wages combined with a large-scale transformation of employment (destruction of non-sustainable jobs, new jobs in care sectors, reduction of working-time, etc.). Finally, unions, social movements, political parties and NGOs need to enter a phase of substantive re-articulation. Because of the dramatic retreat of shop-floor labour bargaining power, the centrality of class conflict « à la Marx », namely located in the production site, is likely to be further challenged and will not be sufficient to obtain a post-growth economic settlement favourable to labour. But a greater importance of class conflicts « à la Polanyi », i.e. broader forms of resistance against the macro and social forms of capitalist domination, may help to achieve such a desirable outcome. At the local as well as at the global level, unions need then to engage more systematically in broader alliances with social and political actors to promote effectively labour interests throughout the emergent post-growth paradigm.

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Cédric Durand is currently Associate Professor at Paris 13 University and a member of the Centre d'Économie Paris-Nord (CEPN) and of the Centre d'Études des Modes d'Industrialisation (CEMI-EHESS). He participates in the editorial board of the critical review Contretemps (www.contretemps.eu). Cedric wrote his Phd on the trajectory of the metallurgical sector during post-soviet transformation in Russia; he has published several articles on post-soviet capitalism and on the internationalisation of the retail industry.

Global Financial Crisis 2.0

Raymond Torres

Recovery prospects are being seriously hampered as a result of risk of a return to pre-crisis policy settings. By the end of 2009, the world economy was slowly recovering, aided by stimulus measures implemented by governments since the onset of the crisis. However, recent pressures for a return to orthodox policies in the context of an unreformed financial system threaten these fragile achievements.

Fiscal stimulus measures helped put a floor on the global crisis…

The crisis led to a significant policy response by governments and monetary authorities. In advanced countries, interest rates were drastically reduced and have been maintained at a low level. Massive rescue packages to avoid a collapse of financial institutions were implemented – mainly in developed countries. And most countries that had a budget space implemented fiscal stimulus measures in the form of discretionary tax cuts, higher government spending or a combination of both. These fiscal measures were crucial to revive the economy given the weakness of monetary policy tools in a context of “deleveraging” in the private sector and among financial institutions. According to ILO estimates, the fiscal stimulus measures amounted to around 1.7% of world GDP.(1)

Overall, the measures have succeeded not only in supporting the economy but also in avoiding further significant job losses. Estimates are for an increase in world unemployment by over 20 million workers between the fall of 2008 and the third quarter of 2009, for the 51 countries for which data are available.(2) This is less than what had been feared at the start of the crisis.(3) For instance, in EU countries, the employment effects of falling GDP have been much less than was the case in earlier recessions.

This relatively favourable outcome reflects, first, the rapidity of the policy response. Research shows that, by adopting stimulus measures soon after the start of the crisis, countries could expect a significant positive impact on employment by mid-2010 (ILO, 2009). By contrast, a postponement of the measures by 3 months would delay employment recovery by 6 months –illustrating the disproportionate costs of inaction for employment.

Second, the fall in employment has been cushioned by the nature of the policy response itself, consistent with the ILO’s Global Jobs Pact(4) :

• In the majority of cases, crisis responses have focused on stimulating aggregate demand. In particular, an effort has been made to enhance social protection (Brazil, India), extend unemployment benefits (Japan, US), avoid cuts in minimum wages and adopt other measures for low-income groups. These interventions, by sustaining the purchasing power of low-income groups, have effectively boosted aggregate demand while alleviating somewhat the social costs of the crisis.
• In countries like France, Germany and the Netherlands, short-time working arrangements have been aided by government subsidies. In other countries like Australia and the US, part-time employment has surged. These policies have helped reduce job losses. In the face of growing credit constraints, an effort has been made to support otherwise sustainable enterprises (e.g. in the Republic of Korea). 
• Finally, in the face of growing long-term unemployment, an effort has been made to enhance active labour market policies.

Recourse to inward-looking solutions has been limited so far. A generalised use of protectionist measures has been avoided, thereby reducing the risk of a collapse of international trade and investment, which could have a detrimental impact on developing countries. Importantly, there was a risk that countries would engage in a spiral of wage cuts and worker rights curtailing in order to improve competitiveness. This would have been a self-defeating and indeed counter-productive policy, given the global nature of the crisis and the need for greater aggregate demand. In addition, attempts to make workers pay for a crisis which originated in the financial system and was preceded by a significant increase in income inequalities and falling wage shares would have been reduced public support for recovery packages.

In short, the global policy response has succeeded in kick-starting an economic rebound and the policy response had also succeeded in attenuating job losses.

… but a policy mistake was made by leaving financial systems unreformed, carrying the threat of a return to fiscal restraint and policy orthodoxy

Unfortunately, the policy response did not tackle the key factor behind the crisis, namely a dysfunctional financial system. The result is, first, that the practices that developed before the crisis will inevitably re-emerge, unless action is taken. In particular, a large share of the increase in profits has accrued to the financial sector – the financial sector’s share of total corporate profit reached 42% before the crisis, up from about 25% in the early 1980s. And the profits of non-financial firms serve to pay dividends rather than invest in the real economy. During the 2000s, less than 40% of profits of non-financial firms in developed countries were used to invest in physical capacity, which is 8 percentage points lower than during the early 1980s. Ever growing pressures for more and better returns have adversely affected wages and job stability in the real economy.

Second, the lack of financial reform is reducing the room for pursuing the job-centred stimulus measures. Indeed, insufficiently regulated financial systems make it more difficult to channel credit to the real economy –so, other things equal, the amount of fiscal stimulus needed to achieve economic recovery is greater than in the presence of a well-functioning financial system.

At the same time, insufficiently regulated financial systems tend to penalize governments that run larger fiscal deficits. As a result, there is a growing risk that governments prematurely remove the fiscal stimulus measures that helped avoid a deeper recession. Governments may feel they have to reduce quickly fiscal deficits in order to appear as credible as possible in the eyes of financial markets and reduce the risk of speculative attacks. This is illustrated by recent events in the Euro area: even countries with much lower public debts than Greece have had to adopt in haste fiscal packages that reassure markets. Importantly, an unpublished study by Reinhart and Rogoff on “growth in a time of debt” suggests that such moves lack economic foundation in countries where public debt is significantly lower than 90 per cent of GDP.

In addition, the type of fiscal restriction measures which are presently considered tend to focus on spending cuts, in particular in the area of social policy, rather than higher government revenues (including through vigorous fight against tax competition and tax fraud, and consideration of new revenue sources like green taxes). The risk is that welfare benefits, which proved so essential to ensure adequate income support to the innocent victims of the crisis, be cut. This would erode political support for the crisis response strategy, possibly leading to social unrest. In addition, by scaling back certain programmes, many jobseekers will be pushed out of the labour market, depriving the economy from valuable resources. Keeping well-designed programmes is in fact cheaper over the long term, given the favourable effects of these programmes on participation and skills.

Fiscal measures are still needed because the real economy is too weak to have gained an autonomous growth momentum, at least in developed countries where the process of “deleveraging” is far from finished.

In addition, countries also tend to move quickly to export-oriented strategies in order to improve the current account balance and build up foreign exchange reserves, thus reducing perceived risks for financial operators. The problem is that some countries have to import in order for others to export – and the US cannot remain the importer of last resort. Therefore, a quick return to export strategies would end up reducing the prospects for world trade and economic growth.

Altogether, we may be entering a new stage of the crisis where financial markets are adding pressure for an early exit from fiscal stimulus measures and for cuts in social protection and wages. This would strongly affect the world economy given the weak autonomous growth capacity of the private sector –partly due to continuously tight access to bank credit. It would also further prolong the employment recovery and erode social support for governments’ crisis strategies.

It is urgent to move ahead with the reform of the financial system while ensuring job-centred fiscal stimulus.

Rescue packages to financial institutions have reached unprecedented levels in countries where the crisis originated. The bill will be expensive for taxpayers and job losers. It is therefore essential to ensure that an end is put to those financial practices and irresponsible risk-taking that preceded the crisis. As noted by the BIS in its 2009 annual report, “a healthy financial system is a precondition for sustained recovery. Delaying financial repair risks hampering the efforts on other policy fronts”.

True, the financial industry has undertaken steps to modify its practices through the adoption of codes of conduct and other non-binding initiatives. But there is concern that new regulations will push the financial industry to other locations. The overall impression is that, unless action is taken soon, business-as-usual will prevail. In such an unreformed context, the practices that provoked the financial crisis will resume soon after economic recovery starts. The pressures would aggravate the situation in a deteriorated world of work, while raising the risk of later crises.

There are various options that can be considered in this respect. What is important is to address the root problems, in particular i) inadequate and incomplete regulation, and ii) inappropriate incentives for risk-taking and pay of bank executives and traders.

For the reasons outlined above, the approach should be as coordinated as possible –at least at the level of the G20. Otherwise free riding problems will inevitably arise. This, together with proper implementation of the Global Jobs Pact, will support economic recovery in the short run, while paving the way for a more sustainable world economy.

(1)ILO (2009), The financial and economic crisis: a decent work response, Geneva
(2)International Institute for Labour Studies (2009), World of Work Report 2009: The Global Jobs Crisis and Beyond, Geneva
(3)ILO (2010), Global Employment Trends, Geneva
(4)ILO (2009), Recovering from the crisis: A Global Jobs Pact, Geneva.

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Raymond Torres is the Director for the International Institute for Labour Studies at the International Labour Organization. He recently launched the World of Work Report, the new annual flagship publication from the Institute.

Putting employment security first will diminish demand - a warning from Germany

Heiner Flassbeck

The current global recession and fear of increasing redundancies has shifted the emphasis of the German labour movement from one concerning pay claims to employment security. Employment security has become the name of the game. Even the metalworker’s union IG Metall is openly putting employment security before pay claims in their demands. So wage rises and hour cuts can be foregone, so long as not too many heads roll in the workplace.

I would like to argue that this emphasis is a serious mistake and that employment security achieved through wage restraint is likely to have negative effects across the economy and retard Germany’s exit from the recession. While wage restraint may preserve jobs within a firm, this has knock-on effects that will only serve to deepen the recession through their impact on demand. The current crisis brings into stark relief the failure of unions in Germany to examine seriously the impact of working-time reduction and the associated wage reduction, or lesser wage increases, on demand in the economy as a whole.

Take, for example, what has become a classic case. The Daimler company goes into the red. So, in agreement with the unions, it makes a 10 per cent uncompensated cut in the hours of those employees who are not already on short-time working arrangements. The positive trade-off is that there are no redundancies. In effect, Daimler’s wage bill for the 90,000 employees affected is reduced by 10 per cent. At an average monthly wage of €4000, that means the firm saves more than €400m. This represents a very significant reduction in Daimler’s expected losses!

But for the economy as a whole, the sums look rather different. Assuming that Daimler workers maintain relatively stable purchasing patterns, the 400 million saved by Daimler will reduce demand for other firms’ products by the same amount, as Daimler employees tighten their belts. In effect, the expected losses of other firms will increase by the same amount as the reduction in Daimler’s expected losses. This simple example shows how the savings measure taken by one company and its unions will not spell out improvements at all, even at the outset. Further, if other firms who bear an increased burden from falling demand associated with Daimler’s cut backs follow suit, this could have a disastrous and far reaching impact across the economy. Suppose the wages of the ten million employees in all of Germany’s industrial workplaces werereduced by 10 per cent over the course of the next year. Once again assuming that the employees’ saving habits remained unaltered, this measure alone would cut demand across the economy by about €50 billion.

What are firms in general going to do when they notice that their loss predictions are systematically wrong, because demand is continually weaker than anticipated? Go back to the unions again in hopes of negotiating a 20 per cent reduction? Firms may also try to maintain their market share at a time of falling demand by passing on the cost reductions as price reductions. If only one firm does this, the situation of all the others will get even worse. If they all do it, prices may fall by so much that the workers regain their previous purchasing power. So in real terms, they will be pocketing as much as before for working less. The outcome will then be not a cost reduction, but deflation. This is turn will lead to sluggish consumption, as people expect prices to drop even further in the near future.

So what are the unions to do? It has become a common perception that unions cannot go on making the same demands as they had prior to the crisis. I disagree and would argue that they can. In fact, campaigning for and winning wage increases in line with productivity gains can lead workers to act together to overcome this crisis quickly. The great majority of consumers in Germany are workers or pensioners. Only if they can expect their incomes to rise at the normal rate despite the crisis, i.e. in line with the medium-term productivity growth trend of around 1½ per cent plus the European Central Bank’s target inflation rate of 2 per cent, only then can Germany pull out of the crisis under its own steam.

Such a campaign is likely to be met with great objection as firms face shrinking profits and find themslves at overcapacity. It should however be remembered that many firms’ profits skyrocketed in the years just before the crisis, particularly as regards foreign trade. Nonetheless, the logic of macroeconomic theory informs us of no alternative solution to the one outlined above if Germany wishes to exit the crisis and get on to a stable growth path in the not too distant future.

In contrast to previous experiences, hopes of export-led growth prompted by falling costs ring hollow this time around. The euro has already risen strongly. It would appreciate even further if the biggest national economy in the Eurozone staked everything on a foreign trade surplus, as it did from 2005 to 2008, thus relying on the other countries shouldering new foreign debt. Also, both consumption and investment are very weak in Europe and the US, Eastern Europe is still in deep financial crisis, and the countries of Asia are themselves going all-out for export surpluses.

It follows that there is only one reliable way out of the crisis. The state must once again, by contracting even greater debts than already planned, give the economy a boost that will enable firms to do the right thing in terms of wage setting for the economy as a whole. This would be the most effective way of boosting demand and accelerating economic recovery. Tax cuts, as planned by the German government, are not an appropriate way of achieving this. 15 to 20 per cent of the money will simply vanish into savings accounts, and the much-hymned “performance incentives” are simply a liberal pipedream.

In contrast to debates in Germany, the issue of wage-induced consumption effects has been recognised in the United States. This is evident in the agressive deficit policy currently pursued by the American government. In order to sidestep the wage reduction trap, into which a market economy will automatically fall without state involvement, the American deficit this year will be proportionately around three times bigger than the German one – about 12 per cent of GDP. Over there, they have learned from the experience of Japan, which for almost 20 years now has been unsuccessfully striving to escape from the deflationary wage policy that came into being after a great speculative bubble burst at the end of the 1980s. For Germany, the choices ahead are clear: Either it will learn the Japanese lesson now, or it will have to learn it in face of stagnation and deflation later.

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Heiner Flassbeck is currently the Director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development (UNCTAD). He is the principal author and the leader of the team preparing UNCTAD's Trade and Development Report.