AFTER THE END OF THE BOOM

More and More Citizens are Interested in the Economy and Read the New Books by Joseph Stiglitz, Paul Krugman and Lester Thurow

By Reinhard Blomert

[This article originally published in: DIE ZEIT 19/2004 is translated from the German on the World Wide Web,  http://zeus.zeit.de/text/2004/19/ST-_85konomen-neu.]

In Germany more than any other country, there is a strict separation between readers of entertainment pages and readers of the economic section. A mutual contempt prevented any casting of bridges. This camp confrontation seems to be slowly dissolving – through the tracts of the deceased new economy with which money was taken from the pockets of some naïve savers and the managerial advisory literature justifying savings measures in all areas of society. Economic arguments have a certain weight that readers of entertainment pages can no longer evade above all on account of the existential crisis of the social state and the criticism of the global justice camp in the “terror of the economy”. The astonishing successes of solid economic literature on the book market may be interpreted as a sign that grappling with economic arguments is becoming self-evident (cf. www.globalizing-world.net).

This new interest is undoubtedly a gain for civil society. Economic measures that evade judgment by citizens create a dangerous democracy deficit and allow an uncontrollable entrance for illegitimate interests. Instruction now occurs through the numerous translations of popular books by US economists like Joseph Stiglitz, Kevin Phillips, Paul Krugman or Robert Shiller since a learned German-speaking economist can hardly be found who can explain the different economic options of our society to a broad public like Werner Sombart.

These economists are valued on account of their connection of expert knowledge and explanatory power and on account of the authority from their positions. Three new books by leading economists have now appeared in German: The Roaring Nineties by Joseph Stiglitz, The Great Unraveling by Paul Krugman and The Future of the World Economy by Lester Thurow.

The brilliant analysis of the Telecom-boom of the roaring nineties by the Nobel Prize winner Joseph Stiglitz shows that rules on American financial markets cannot be suspended for the sake of short-term competitive advantages without causing serious social dislocations.

IN THE SWAMP OF BANKRUPTCIES AND UNINHIBITED ENRICHMENT

Stiglitz describes why the new economy had to breakdown and lists the particular deregulations that led to the collapse of the market. Institutional protective walls against insider-deals were dismantled. Independence was taken away from analysts who should have objectively evaluated the stock exchange for public investors. Unnoticed by the public, these analysts were integrated in the marketing campaigns of investment banks. Auditors lost their indicator function when they were dismissed and suddenly had to haggle with clients for fees. No one was surprised that the audits were not worth anything any more. Deregulated Wall Street sunk into the swamp of cronyism or nepotism. Dirty tricks and the bankruptcies of Enron, Tyco and Worldcom and thousands of smaller Internet firms triggered the collapse of the economy.

With Stiglitz, we can look into the workshop of politics since he was the chairperson of the economic advisors of the Clinton administration. Clinton’s basic strategic error was accepting the agenda of the financial markets. With deregulation, he wanted to prove that the “new” democrats were not fixated on the state. Democracy suffered, as Stiglitz writes, because when everything is subordinated to the discipline of the financial markets, there is no longer “discussion of alternatives that have different effects on diverse social groups”. The collapse of the stock exchange demonstrated that financial markets only consist of interest groups.

With his collected newspaper columns that can now be read in “The Great Unraveling”, Paul Krugman, economist at Princeton University, has become the prophet of doom of American democracy. He meticulously uncovers the interlocking interests that drive the policy of the Bush administration. From the Enron connection to the weapons trade and uninhibited enrichment with tax funds, Krugman shows that nothing is sacred to this administration beside the interests of its own clientele.

LESSONS FROM THE DISASTER OF DEREGULATION

The assumption of power of the Bush administration began with an election falsification and preparation for falsifying the coming election could already be underway. Krugman reveals that the tabulating equipment to be used do not leave behind any paper trail so no one can verify the count. The owner of the manufacturing firm announced his full support for Bush’s election. If Krugman is right, some patriotic zealots are already outfitted with instructions for hackers to influence the election outcome.

Paul Krugman points to the imperial goals that always remain the same amid changing justifications. The same pattern appears in domestic policy. While a torrent of public funds came down on the airlines impacted after September 11 and benefiting General Motors, selected financial services and Texas energy firms, the airline employees went away empty-handed. Unemployment assistance was refused 800,000 Americans at Christmas.

How can the economy be stimulated when the disposable incomes earmarked for consumption of households are cut? Krugman asks. Bush only recognizes the democratic order when it benefits his clientele. The neoconservatives play an insidious game with professional journalists’ naivety and faith in the fairness of others. A Bush advisor declared publically: “Lying is part of the press’ business.” The evidence supporting Krugman’s ideas is in no way hidden. One only has to look for this evidence.

This is not the perspective of Lester Thurow. The advisor and economist at MIT in Boston regards crises and economic inequality as natural characteristics of victorious American capitalism and extols the competition of the nations freed from all institutional fetters. He is proud that the US as the most successful and richest nation is at the top of the world economy. This dominance should continue. Thurow relies on US control over the “key technologies of the 21st century”, computer technology and bioengineering.

However computer technology after the end of the speculation bubble has fallen to standard applications and bioengineering is no longer in fashion. Experimental genetic therapy and stem cell research are dying out. Professors at Californian biotechnology institutes cannot sell their research results any more. Biotech startups prefer to sell their old medicines with new labels or licensed products of the mammoth pharmaceutical corporations in order to concentrate on their best sellers. Even Thurow admits that successes only “appear unbearably slowly and with great costs”!

The incorporation of the two technologies by the financial markets does not function any longer. As a result, Thurow in his book develops the concept of the knowledge officer who shows corporations and governments the importance of key technologies. Such a knowledge officer is a kind of secret service man who furnishes information about authentic markets and powers and wages “patent wars”.

The US already has an instrument for these wars, the echelon of the American NSA (National Security Agency) that monitors all Internet communication of the earth and helps business espionage. Patents must be sued for. Otherwise they don’t bring any money and hegemony is over. Thurow’s greatest worry is protection of intellectual property rights. His second greatest concern is more serious, the trade deficit of the US that is suddenly changing into a dollar devaluation.

The trade streams must be reversed since the US will soon turn out as an import nation. To avoid a world economic crisis, Japan and Europe should abandon their export orientation and import more American goods. This concept obviously requires wealthy consumers. Thurow rejects the proposal of the German council of experts for lower wages. When the growth of the US slackens, Japan or Europe should help out. At the same time, these three should cooperate as a “troika”. How this can function remains a mystery if all three adopt the American model while simultaneously uncoupling from one another in assuming the locomotive function. Thurow scatters many proposals but all of them are not thought out.

What does this mean for German conditions? The orientation of policy in the interests of the financial markets is obviously a wrong way. That is the lesson of the 1990s. The lesson from the disaster of deregulation must be to strengthen the balance of the respective systems instead of weakening them through deregulation. The policy of strengthening the stock markets inscribed by the European finance ministers on their banners without great public debate must be reversed in favor of the three-tier universal banking system that draws its strength from the connivance and long-term joint-responsibility of the banks and joint-determination of the unions. Since the universal banking system is an insider system, new rules against “insider rings” are not needed but rather emphasis on business responsibility and institutional competition between private and public banks to reach an equalizing balance.

The pressures of financial markets repudiate politics and seriously injure its respect by depriving politics of its privilege of weighing the conflicting goals between different interests. Democracy gains new respect when an increasing economic competence of the citizens enriches public debates on the spectrum of social possibilities. A problem results from the fact that economic knowledge is now often drawn from publications of American authors. The awkward Europeanization process and the systemic differences of the respective national economic orders are not thematicized. Much of the charm or attraction of economic knowledge is lost.

Stiglitz’ plea for decentralization and freedom of choice goes in the right direction since all questions need not be settled uniformly worldwide. A country need not be forced to allow capital imports and profit exports. Every country does not need the same administration, the same banking structure or pension insurances since this would make the international finance system more delicate. While international standards are offered in environmental protection and questions of the treatment of prisoners of war, local and national concerns should be solved locally and nationally.

One can only agree with Stiglitz. However the problems first begin for us. How uniform must Europe become? How far can the market be extended? How intensely can nation states be restricted without becoming ungovernable and without leaving behind destroyed societies? A balance must be reached between freedom of choice and political freedom on the local and national planes without abandoning the lower third of society to continuous poverty. The narrow gauge or small-time economy is not enough for governing European societies. Europe urgently needs enlightenment with a broad socio-economic background. This enlightenment cannot be borrowed from the world power America any more than the cake recipes of governing.

Joseph E. Stiglitz, The Roaring Nineties. The Demystified Boom, 2004
Paul Krugman, The Great Unraveling. How the Bush Administration Ruins America, 2004
Lester Thurow, The Future of the World Economy, 2004