MORE EMPLOYMENT NEEDS A DIFFERENT DISTRIBUTION POLICY

By the Alternative Economic Policy Study Group

[This memorandum is translated abridged from the German on the World Wide Web,  http://www.memo.uni-bremen.de/docs/memo06-kurz.pdf.]


I. A Backward Step in a Worried Environment

After a brief phase of insecurity and confusion, the economic- and social policy in Germany in the spring of 2006 stabilized on the line of the last two legislative sessions: renunciation on total economic controls, social cuts and redistribution from bottom to top. The first signals of unconventional political initiatives for growth and social-political balance quickly proved to be verbal exaggerations or conscious deceptions. The 25- billion Euro investment package passed with an uproar is a subsidy program that will not bring any essential growth- or employment stimulation. The “balance” between spending cuts and higher taxes in the budget consolidation deepens the old imbalance to the burden of lower income sectors. The strain on lower income persons through cuts of social benefits – for example, the 20% cut in unemployment benefits II for jobless under age 25 – will increase even more through the 2007 sales tax hike. Where new members of the German government offered rational ideas with the innocence of common sense – like the necessity of massive wage increases to strengthen domestic purchasing power -, they were buried under the shocked and enraged protest of business associations and the majority of the media and academia. Sometimes they disappeared.

The German government couples this fatal economic continuity expressed in the latest annual economic report with an adventurous economic perspective. The report obviously hopes the still powerful world economy will raise the revenues of export world master Germany. This should more than balance the continuing weakness of the domestic demand and give the economy a little stimulation. At the same time, this stimulation if it occurs could be brutally strangled by the sales tax increase. The constellation of increasingly unequal income distribution, weak economic growth and higher unemployment is fortifying again. This constellation can only be broken by energetic economic counter-measures. The new German government is as little ready for this as the old.

No grounds for optimism exist even if the great neoliberal projects like abolishing termination protection or joint determination in the new government coalition are not imminent. The state policy of counter-reform continues. This is complemented by increasingly brutal business strategies. Despite a brilliant profit- and stock market year in 2005 expected to continue in 2006, business and financial investors threaten to close or transfer plants, press personnel and unions and demand wage renunciation, longer working hours or both. All this is done by referring to adjustment pressures from globalization that threaten the international competitiveness of Germany,

The state and private enterprise policy of job destruction, social cuts and disciplining increasingly meets disapproval and unrest in an ever-larger public and protest and resistance of those immediately affected by this policy. Employees resist threatened plant closures. Unions demonstrate and strike against longer working hours in the public sector. Pay rounds become harder. Social protest against privatization of hospitals and against the Europe-wide deregulation of services has increased and achieved some success. General unrest has also reached the German parliament and – despite the great coalition in the Bundestag – provides new perspectives supporting the demand for a democratic economic policy to strengthen the welfare state…

1. Export World Master in the Distribution Trap: The Economy in Germany

2. Low Wages – High Unemployment: Distribution as a Core Problem

3. Low Wages – High Exports” World Economy as an Engine

4. East Germany: Dependent and Written Off

…The essential weakness of the East German economy lies in the unfavorable business structure, not in inadequate modernization…

This policy must be corrected since the catch-up process has not succeeded. The Alternative Economic Policy study group urges a solidarity pact III to prevent financial collapse in East Germany.


II. A Backward Step on the Demand- and Supply Side: Critique of Economic Policy

5. Labor Market and Labor Market Policy: Disciplining instead of Training

The presentation of the current jobs situation in unemployment- and labor market policy is a veiled presentation. The fact that the number of registered unemployed rose again in 2005 and reached the highest level in German history at 4.86 million is reported with a positive mood – “Everything is getting better.” The increase to over 5 million in January 2006 triggered only short-lived excitement.

The crushing report on labor market measures Hartz I-III commissioned by the past German government – failures except for personal companies – caused more a shrug of the shoulders than a thorough analysis of shortcomings and strategic correction of the labor market- and employment policy. The real situation is trivialized and glossed over. The failure of the reforms is not admitted. The reference that part of the rise in the registered unemployed can be ascribed to Hartz IV regulations does not alter the fact that unemployment would have risen even without this effect. Distortions working in the opposite direction are ignored. The statement that the share of long-term unemployed has declined suppresses the fact that this only points to the rise of the number of new unemployed in 2005. Whoever is registered in the statistics cannot be long-term unemployed. The absolute number of long-term unemployed climbed again in 2005 around 7.5 percent to 1.81 million. The trifling rise of unemployment in East Germany (+1.1 percent) compared to West Germany (+16.7 percent) suggests a relief of the labor market through migration and more old age retirements from the labor market, not a better jobs situation in the new territories.

The deficient readiness and capacity of the old German government for a macro-economic policy promoting growth and reducing working hours is responsible for the deteriorating, not improving situation on the labor market. Even the narrower field of labor market policy has become a field of rubble. The functional change of labor market policy that has been occurring for a long time is accelerating: away from training the unemployed to promoting a low wage sector. The classical instruments that had a job-creating effect (job creation schemes, integration bonuses) were deactivated so they really have no significance any more. The placement offensives in personal service agencies (PSA) and placement certificates proved a flop and were discontinued. The seemingly successful instruments – personal companies and one-Euro jobs – led the promoted persons into precarious and insecure conditions in the low- and poverty wage sectors. The Hartz regulations work in this direction as many critics predicted. Hundreds of thousands of trained persons willing to work are forced to bankruptcy and thrown into poverty within a short time because policy didn’t stress creating sufficient jobs. If these persons had the opportunity of developing their abilities in regular working conditions, their personal situation would have greatly improved and the prosperity of society would have soared through the additional goods and services.

Beside the absence of an economic stimulation and instrumentalization of labor market policy to a low wage policy, the labor market policy of the public employer contributes to further intensification of the situation on the labor market. Instead of robustly reducing working hours and making way for the employment of the jobless, they raise the weekly working hours and thereby destroy hundreds of thousands of jobs. The resolved increase of the initial pension age to 67 goes in the same direction. As seniors actually work longer, jobs for younger persons are blocked and unemployment immediately rises. Private purchasing power is diminished and the labor market is negatively impacted to the extent that pensions are cut.

6. Finance Policy: Consolidating and Redistributing

With the greatly praised 25-billion Euro investment program for 2006-2009, the new German government tries to give the impression of a new monetary growth impulse. However the finance minister made unmistakably clear at the same time that the monetary priorities lie in “consolidation” of the public budgets. These priorities were dramatically confirmed by the resolution to raise the sales tax three percent from 2007. In addition, the tax rate for all businesses will be lowered to 25 percent from 2008 in a basic reform of corporate taxation.

The “investment program” includes several sensible proposals for public spending to improve the transportation infrastructure (4.3 bill. Euro) and private research and development (6 bill. Euro). These 10.3 bill. Euro could be termed genuine public investments. Since they extend over the whole legislative session, the annual sum total amounts to only 2.6 bill. Euro. This is much too little to stimulate the whole economy. A sum many times greater is needed. The rest of the “investment program” consists of tax subsidies for families (childcare), private households (craftsman bonuses) and above all corporations (regressive depreciations). The greater assistance for childcare can be welcomed for social-political reasons. However it would have turned out more effectively – and would not have especially favored the upper income sectors – if the earmarked funds had been used for establishing new kindergarten places and hiring more personnel. That it will have a positive effect on the total economy or employment policy is doubtful. The fiscal measures to relieve businesses included in the investment program are pure profit subsidies without any positive overall economic perspective. The investment program altogether is too little in extent and mostly misguided in its structure. It will not have positive effects on economic growth and employment. The danger exists that this fact will be used by market radical ideologues as proof for the incompetence of public investment programs.

In reality, the explicit priority of budget consolidation is the announcement of massive cuts in state public spending. Reducing the state to its core functions, dismantling bureaucracy and strengthening personal responsibility is the label. Behind this sympathy-evoking marketing label is a program to massively cut public services whose deregulation and privatization relieve the state of political and social responsibility and give it new one-time revenues. The persons dependent on social benefits and good public provisions because they cannot afford essential goods and services on account of low income will be the persons mainly impacted by this policy. The finance minister adopts the strategy of the EU that initiated a new deregulation- and privatization campaign under the mantle of de-bureaucratization and “more grassroots orientation.” In this connection, the admonition from Brussels to streamline the public German budget is a “pressure from outside” to the finance minister like the threat to intensify deficit proceedings against Germany.

The resolved increased sales tax should give the impression of balance. Budget consolidation should occur through tax increases, not only spending cuts. Nevertheless the higher sales tax together with the spending cuts will lead to an additional strain of the domestic demand. The diminution of private consumer demand by cutting real income is added to the decreased state demand through spending cuts. This tax increase partly utilized to lower new indebtedness and largely shifted to prices weakens purchasing power and private consumption. For 2007, a relatively drastic collapse of the economy is pre-programmed. The social effects of “consolidation” and a higher sales tax go in the same direction. They take away social income and public services from the neediest. These neediest persons are the persons most impacted by the higher sales tax on account of their high share in consumption. Given this perspective for 2007, the hope that a true consumer shock could catapult the economy to a path of self-supporting growth testifies to the incredible ignorance about the capacity of people to preventatively increase their consumption by leaps and bounds.

The counter-productive effects of German finance policy are reinforced by European monetary policy. The European Central Bank (EKB) has already announced it will raise interest rates in March to counteract the rise in prices threatened by higher oil prices. That a higher interest rate will destabilize the fragile total economic development in the Euro zone and the European Union altogether forcing growth below the modest level of 2005 and drive unemployment upwards again does not interest the EZB. The EZB is only committed to price stability.

7. Education Policy in the Knowledge Society: Social Division and Economic Inefficiency

That neoliberal policy theoretically fades out and practically ignores overall economic demand is well known. That this policy cannot form supply conditions according to its own notions is astonishing and remarkable. This is especially true for education, which is one of the most neglected and misguided areas of policy. Education has a twofold task. Education should enable young persons’ development to independent personalities able to participate in social life on a broad solid foundation of knowledge. In addition, education must also give persons the special knowledge necessary for competent professional training and the basis for high increasing productivity and technical, scientific and social progress. Education policy in Germany has not done justice to these two claims for a long time. Finally, education policy holds to the traditional separation of public education and private upbringing hostile to education. Secondly, it stabilizes and depends the social division in education. Thirdly and lastly, neoliberal economization and austerity policy contributed strongly in the last years to drastically narrowing the perspective of education to availability and prevent a broader development of education potentials.

Separation of Upbringing and Education

Social inequality. The German education system fortifies social inequality and strikingly violates the right to the public asset education that should help overcome social inequality… The massive violation of the welfare state command and the human right to equal opportunities in education prompted the human rights commission of the United Nations in February 2006 to launch an investigation of Germany. Because of the social selection in the school, the social composition of students at universities is marked by a dominance of the higher income- and status sectors. In 2003, 81 of 100 students from the higher social group graduated compared to only 11 of 100 students of the lower social groups. This social differentiation has become considerably greater, not smaller, in the last 20 years. The share of students from “higher” groups has more than doubled in 20 years while the share from “lower” groups was cut almost in half.

The neoliberal education policy of the last two decades cannot and will not correct this social division. This policy follows the twofold tendency of economizing education on one hand (“education as a commodity”) and orientation to immediate and direct vocational usability on the other hand. Deregulating and privatizing education occurs without increasing education spending. This is reflected in the German universities. The subjection of all age groups in the strict Bachelor-Master corset in short semesters turns the large majority of students into mere functionaries for the economy and administration. It restricts access to independent scholarly work to a little layer of top students for whose further promotion excellence centers and elite universities are designed. In this selective way, the actual potential of society is neither comprehensively developed nor exhausted.

Introduction of tuition and the more rigorous selection of students by the universities will deepen social inequality and strengthen the university as an institution of elites reproducing themselves. This structure also has a considerable influence on the conceptions and themes of training. This is nowhere seen so clearly as in economics.


III. MORE EMPLOYMENT NEEDS A DIFFERENT DISTRIBUTION: ALTERNATIVES OF ECONOMIC POLICY

In many memorandums, we have shown that the real problems of the German economy lie in a total economic interlocking of growth weakness, rising unemployment and misguided distribution, not in inflexible labor markets, overflowing state debts or parasitic social security recipients. These central elements of an economy going downhill reinforced one another and are not overcome through more flexibility and deregulation. Whoever wants to overcome them must intervene in the polarizing dynamic of the markets and create politically the economic and social proportions joining sustainable growth, more employment at acceptable conditions and social justice into a new type of growth.

Economic policy can start at three central problems. It can give stimulation through public investment and employment programs and influence their direction. Even with unchanged growth rates, economic policy can directly reduce unemployment through reduced working hours. Finally, economic policy can influence mass purchasing power through introduction of a legal minimum wage, a basic security protecting from poverty, and strengthening public social security systems. All three areas go beyond a distribution problem. How should public investments and employment be financed? Who bears the costs of shorter working hours, the legal minimum wage and a basic security protecting from poverty? In all cases, the answer goes beyond the necessity of redistribution: to the burden of higher incomes, assets and profits and to the favor of higher tax revenues and mass income. The long overdue normalization of excessive business profits would counteract the danger of speculation. The distribution question is the core question of democratic economic policy.

The example of the Scandinavian countries shows that a social economic policy oriented in employment is possible today. As everybody knows, these countries received excellent marks for their education policy in the PISA-studies. These results are neither accidental nor isolated from the whole context of Scandinavian social- and economic policy. The quality of life of the population was maintained at a comparatively high level during the past decades through state care and provisions despite globalization and the economic crisis of the EU countries. Sustainability and job security have a high priority. In the Scandinavian countries, the state accepts responsibility for the well being of society. This is also reflected in finance policy. The state- and tax shares are at a level appropriate to the development state of progressive economies in Western Europe. Current expenditures are financed from current (tax-) revenues. Public indebtedness is not a problem for the Scandinavian countries – as the OECD noted. In 2004, Finland for example realized a state budget surplus of 2.1 percent of its gross domestic product and Sweden 1.6 percent of its gross domestic product. In contrast, Germany had a deficit of –3.7 percent of its gross domestic product.

Scandinavia demonstrates convincingly that clear alternatives to the disastrous neoliberal course are possible in a technical-economic alternative. The “soft” factors of policy, namely the social morality of a country, raise a very different question. Egalitarian cooperation, the high measure of solidarity in the Nordic societies – for historical reasons – is one of the outstanding qualities of these communities. People there are ready to pay relatively high taxes to finance cohesion and sustainability.

8. A True Investment Program

We criticize the 25-billion Euro investment program of the German government because firstly it is much too small and secondly it is mainly a tax subsidy program without any employment effects. As an alternative, we urge a much larger program with genuine public investments that will have immediate employment effects. Theoretical models and empirical investigations give evidence that genuine public investments create more jobs than tax subsidies. Therefore we propose a public investment program reaching the height of 75 bill. Euro in the course of three years and then continuing at that level for five years. This program amounting to around 3 percent of the gross domestic product could bring the overall economic growth to a higher level and improve its structure and quality and would not be irrelevant. Its focal points include investments in ecological conversion and ecological rehabilitation (30 bill. Euro), a solidarity pact III for East Germany (15 bill. Euro) and an education- and culture promotion program. The needs for these investments are mainly on the national and community planes.

Programs to expand and improve public services will affect employment more quickly and directly than traditional investments in infrastructures, buildings and other production facilities. In many cases, public investments in the traditional sense are only sensible when additional personnel are hired. However the state has played a pioneering role in destroying jobs. The state has cut over 800,000 jobs between 1996 and 2004. The consequences for total employment and the availability of public goods are serious. Those who depend on public services on account of low incomes or weak social positions are made more vulnerable. For them, job destruction in the public sector is often intensified by social cuts. The Alternative Economic Policy study group proposes that the public sector in a new democratic economic policy be the main foundation for new jobs and an upgrading of the public sector. Around a million new jobs could be created with 30 bill. Euro per year: in childcare, schools, universities, retraining and public health- and nursing services. At the same time, the public sector should be de-bureaucratized and democratized so it becomes more transparent and accessible to the general public.

The funds for financing a large-scale public investment and employment program – as we also showed in detail in the 2005 memorandum – can be raised by a more effective and just tax policy. Tax policy can be more efficient when economic criminality, tax evasion and intensive tax shifts to offshore centers are combated. Tax policy becomes more just by reviving the principle of taxation according to output, increasing the top tax rate for high income, reintroducing the property tax and reforming the inheritance tax instead of undermining it through a higher sales tax. In addition, a successful employment policy will lead to more tax- and income revenue and thus to considerable relief of the public budgets. State spending could be pre-financed by public debts and paid back later from the higher tax revenues. This is a common procedure in the business sector. Private households also mainly finance their homes with credits paid back later from income. The demonization of public indebtedness fomented again and again as “life at the expense of the children” is irrational and economically false. Politically this represents an ideological attack on an intervening and politically creative welfare state and on the goal of full employment.

In this connection, we propose radically revising the distinction between investive and consumptive public spending. The criterion of long-term potential improvement of the economy and increased public tax- and social security revenues on the basis of higher deficit-financed spending is true for expenditures for teachers, doctors and scientists to a greater extent than for roads, administrative buildings and mega-airports. The criteria of distinction should be changed so the absurd situation does not arise that debt financing of freeways is regarded as safe while debt financing for more teachers is deemed unconstitutional. The overdue correction of this division can occur by setting new criteria for distinguishing consumptive and investive state expenditures. Contribution for the sustainable development of society must be central. This speculation can occur through a simple administrative instruction of the finance ministry and does not need a change of the law.

9. Shorter instead of Longer Working Hours

The claim that longer working hours will lead to more employment is one of the absurdities of the economic metaphysics of neoliberalism. The more this obviously contradicts all economic logic, the more propagandists of this prescription emphasize that the public believes politicians and economists seriously offer absurd and screwed-up arguments. In reality, the facts of the case are simple and clear. The more work hours individuals work, the fewer employees are needed to do a certain amount of work. When extending working hours goes along with cutting wages, Christmas- or vacation money, the demand for consumer goods falls – on account of lower purchasing power of people – and fewer persons are employed. In the public sector, what is involved is the dismantling of 250,000 jobs in state savings campaigns, not “18 minutes more work per day.” The attempt to represent civil servants forced by law to longer working hours as victims of an inequality compared to employees defending a 38.5-hour week is particularly insidious.

In contrast, the Alternative Economic Policy study group proposes that governments on all levels cut the working hours of public servants to 35 hours without restricting the public services and increasing the strain of employees. In this way, a half-million jobs could be filled again relatively quickly whose financing would not cost more than 15 bill. Euro.

Preventing further extensions of working hours in private businesses is also important. Here the development runs in the opposite direction with extremely harmful consequences. Unemployment increases as well as the stress for those still employed. The mathematical potential of a ten-percent reduction in working hours is enormous with the 30 million employees in private enterprises: three million jobs. The effect of this measure would remain very great even if this potential – different from the public sector – were only half realized owing to entrepreneurial rationalization- and other evasion strategies. To counter these strategies, working hours should be reduced in large steps that cannot be quickly vitiated.

The positive aggregate economic effect of reducing working hours depends on preventing a corresponding income loss of the employees. Otherwise the real incomes of employees lower for years anyway would sink further. This is unacceptable. In addition, the increasingly scarce supply of work would match the increasingly scarce consumer demand. This would negatively impact growth and employment.

Reducing working hours is an indispensable but insufficient condition for a permanent increase of employment with the increasing productivity of labor. For the desired positive aggregate economic effects, the greatest possible equalization of income is necessary. This means redistributing national income in favor of wages and salaries and to the detriment of profits. This will not please businesses even though the increased mass consumption with greater employment will benefit them. The question of working hours is also a question of distribution.

10. Legal Minimum Wage against Working Poor

In Germany, there are over six million employees whose wages or salaries do not allow an independent life in dignity…

Beside high mass unemployment, decline in work income contributed to the weak economic development and social polarization since the middle of the 1980s. To stop their continuance, we support the introduction of a legal minimum wage of 1500 Euro per month which corresponds to a net wage of 1000 Euro slightly above the threshold of 60 percent of the average net wage fixed by the European Union as the lower limit for wages averting poverty. With regular working hours of 168 hours a month, this corresponds to a gross hourly wage of 8.93 Euro or 9.87 Euro with the proposed reduction of working hours to 35 hours per week or 152 hours a month. This is neither a luxury nor comfort but a level materially guaranteeing a somewhat tolerable life.

Legal minimum wages exist in 18 of the 25 member states of the EU. The experiences are mostly good. Their introduction in Great Britain in 1999 improved the income of over a million persons. Contrary to the massively expressed fears, the legal minimum wage has neither pulled the average wage- and salary level down to the minimum wage level nor hindered increased employment and lowering unemployment.

Legal minimum wages are not a magic formula. They cannot solve the income-, employment- and growth problems in Germany. But they are a correct and important step to prevent the further free fall of work income and bring about a turn at the lower end of the income scale. In this way, they contribute to demand stabilization. They could take away part of the pressure and existential fears from employees and also give businesses the security of not being forced to wage dumping at home or abroad. Legal minimum wages contribute to the overall economic stabilization and counteract a further social polarization.

11. Basic Security Preventing Poverty

Even if work incomes are made secure from poverty by introducing a legal minimum wage and regular senior citizen incomes through minimum pension. The poverty risk would not be completely overcome, as it should in a democratic welfare state. The large group of unemployed and other non-working persons remains. The security gap must be closed by a need-oriented basic security making possible a life in dignity free from poverty to everyone without an adequate income. Traditional income support does not fulfill welfare state demands. The benchmark of 345 Euro (cf. Hartz IV reform) is much too low…

In contrast, we propose the introduction of a need-dependent basic security of 940 Euro for the head of households. This amount is 60 percent of the need-adjusted net equivalent income and below the net-amount of a legal minimum wage of 1500 Euro per month for full-time employees. Additional household members from 14 years of age would receive 470 Euro and children under 14 would receive 282 Euro…

Payment of the basic security is connected with the expectation and obligation that recipients accept reasonable paid work. The reasonability-criteria should be radically revised. The pressure to accept any work would be abolished with such a regulation in a need-dependent basic security. The basic security would be labor-centered. Acceptance of a reasonable work – a paid job relation obligated to social security – is justified and cannot usually be refused. Social reasons (including child care) cannot stand in the way. Cuts in basic security are only possible when this happen.

12. Resistance and Alternatives

In the last three decades, the global attack of neoliberalism gravely damaged and tore down social pillars of the democratic welfare state in Germany. Its agenda reaches much further. Neoliberalism aims at opening all areas of society to the capitalist profit-economy – as the executor of worldwide practical constraints – and organizing these areas according to the rules of competition. As a rule, this is determined by the rule of the strongest corporations. All people should submit in free “personal responsibility.” To this end, the material, political and conceptual means of resistance are taken from them as a precaution.

This strategy meets resistance worldwide, in the European Union and in Germany. The social environment has become aroused and unruly. A broad public questions the assurance that the government policy is good for everyone and that there is no alternative. The interests of powerful minorities behind policy are becoming visible. Protests develop. Alternatives to neoliberal policy are discussed in a large public. This is not a breakthrough but a step contributing through criticism, enlightenment and convincing alternatives to a social and political mobilization able to carry out a democratic economic policy against the resistance of the corporations.