ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

A Crisis of Distribution

This essay examines the consequences of the global economic and financial crisis for income distribution. It first discusses the distributional background of the crisis, which is followed by an assessment of the impact, again on distribution, in different countries and then outlines the policy implications.

IMPACT ON LABOUR

A Crisis of Distribution

Özlem Onaran

This essay examines the consequences of the global economic and financial crisis for income distribution. It first discusses the distributional background of the crisis, which is followed by an assessment of the impact, again on distribution, in different countries and then outlines the policy implications.

A longer version of this paper was presented at the Global Labour University Conference, Mumbai, 22-24 February 2009. The author is grateful to Engelbert Stockhammer and the participants of the conference for comments.

Özlem Onaran (ozlem.onaran@wu-wien.ac.at) is at the Vienna University of Economics and Business Administration.

Economic & Political Weekly

EPW
march 28, 2009 vol xliv no 13

T
he aim of this paper is to analyse the distributional b ackground and possible distributional consequences of the current global economic and financial crisis.

1 Introduction

While public policy in the advanced capitalist countries concentrated on arresting the credit crash since the first onset of the c risis in the summer of 2007, the effects of the crisis on the real sector have just attracted the attention of policymakers as late as winter 2008. Although there is now concern about the possible employment effects, distributional consequences are still not on the agenda.

The failure to recognise or the ignorance of the distributional aspects of the crisis by policy reactions is no coincidence, when the mainstream analysis about the reasons of the crisis are kept in mind (e g, IMF 2008; OECD 2008; ECB 2008), which portray the crisis as a banking and financial sector crisis with implications for the real sector. However this analysis misses the important structural reasons behind the crisis that are related to the neoliberal macroeconomic policy choices of the post-1980s and the major redistribution of income at the expense of l abour as a consequence. Even if the European Commission (2007) is finally pointing at the falling wage share, it fails to connect that to the roots of the crisis, and handles the issue as a separate problem, mostly related to skill-biased technological change. Among the international institutions, ILO (2008) is the only exception to have built the link between the crisis and distribution.

The neoliberal policies and the deterioration in labour share created a fertile ground to sow the seeds of a major global c risis following the risky developments in the credit, housing, and security markets. Thus, what we are going through is a c risis of distribution; and similarly the policy reactions to the crisis are part of a distributional struggle, even if it is not so named. This also explains why the international as well as n ational institutions reacted to the accumulating risks only a fter they turned into a full-fledged crisis. Although the profits of this fragile growth regime were privatised, the losses and risks are now being socialised. What we understand from the s ocialisation of the costs, is not only the use of the working p eoples’ tax money for generous rescue packages in a narrow sense, but also the broader consequences of the crisis on i ncome distribution.

The following section discusses the distributional background of the crisis. Section 3 discusses the possible effects of the current global crisis in different countries. Section 4 concludes with p olicy implications.

2 The Crisis of Neoliberalism

Since the 1980s, the world economy has been guided by neoliberal economic policies such as the dismantling of government regulations in financial markets as well as goods and labour markets, and increased openness to trade, foreign direct investment and financial capital flows. These policies have reduced the role for macroeconomic policy interventions with the claim that free market capitalism would increase efficiency and growth and provide a fair distribution. The focus of macroeconomic policy has shifted completely away from full-employment towards mere price stability. The outcome was a secular deterioration in the l abour share since the early 1980s.

Figures 1a to 1g show the decline in labour share in the major advanced capitalist countries, the eastern European countries, and selected developing countries. There is a secular decline in the labour share across the globe ranging from developed countries to major emerging economies of Latin America, Asia, as well as eastern Europe, who have all shared the neoliberal policy guidelines. As an exception, in the last years in the Baltic countries and Czech Republic, the share of labour is back to the peaks at the start of the transition. However, data does not allow us to compare their current situation with the pre-transition phase. More over, it is well possible that the recovery will not be preserved during the current crisis. Although this global trend is very striking, these numbers hide another important fact: the very high wages of the top 10% or even top 1% of the wage earners, among which the CEOs as well as other top managerial income earners are located, are also regarded as part of labours share, but the share of these high income groups has increased dramatically at the expense of the rest of the wage earners in the last two d ecades (ILO 2008). For example in the United States (US), median real wages grew only by 0.3% per year during 2000-06, while labour productivity increased by 2.5% per year (ILO 2008).

The increase in globalisation, in particular, the mobility of c apital, and the stagnation in aggregate demand have been the central powers behind this pro-capital redistribution of income (Onaran 2008a,b). The stagnation in demand led to higher u nemployment and eroded the bargaining power of labour vis-a-vis capital. In the meanwhile, the increase in the mobility of capital has not only contributed to this erosion in the bargaining power of labour, but also increased the fragility à la Minsky built in the capitalist system via increased financialisation and speculation. There have been more crises in the post-1980s than in 1970s (Laeven and Valencia 2008). This, coupled with the tight fiscal and monetary policies, and a decrease in the share of labour in income, set the conditions for the vicious cycle of deficient a ggregate demand, low growth, low employment, and a crisis prone global economy.

Here lie the two important long-term contradictions of neoliberalism. First, laissez-faire capitalism has generated higher profits for multinational firms, especially for the financial sector. However, the high financial returns have replaced profits from real activity in many cases. The investment-profit ratio shows a clear declining trend: higher profits do not automatically lead to higher investment. Thus in spite of higher profit rates, not only in the US, but also in the major economies (Germany, France and

172

Figure 1a: Adjusted Wage Share, Total Economy, EU and US (1960-2008) (Compensation per employee/GDP at factor cost per person employed, %)

60 65 70 75 80 1960 1966 1972 1978 1984 1990 1996 2002 2008 European Union (15 countries) Germany United Kingdom United States

Source: AMECO, online macroeconomic database of the European Commission’s Directorate General for Economic and Financial Affairs.

Figure 1b: Adjusted Wage Share, Total Economy, Japan (1960-2008) (Compensation per employee/GDP at factor cost per person employed, %)

60 65 70 75 80 85 1960 1966 1972 1978 1984 1990 1996 2002 2008

Source: AMECO, online macroeconomic database of the European Commission’s Directorate General for Economic and Financial Affairs.

the United Kingdom (Uk)), as well as some developing countries (e g, Latin America, Turkey), economic growth rates have been well below their historical trends.

Second from a macroeconomic perspective, the decline in labour share has also been a problem for the micro-level beneficiaries of these policies. Profit can only be realised if there is sufficient effective demand for goods and services. But the decline in the purchasing power of labour, given that the marginal propensity to consume out of profits as well as rentier income is lower than that out of wages, has a negative effect on consumption. This also further negatively affected investments, which are a lready under the pressure of shareholder value orientation.

Exactly at this point the financial innovations seemed to have offered a short-term solution to the crisis of neoliberalism in the 1990s: debt-led consumption growth. Particularly in the US, but also in UK, Ireland or even some continental European countries like the Netherlands and Denmark, household debt increased dramatically in the last decade. The increase in housing credits and house prices fuelled each other, then the increased housing wealth, thanks to the housing bubble, served as collateral for further credit, and fuelled consumption. However, the wealth effect is based on notional wealth, which cannot be realised collectively but only serve as collateral for consumers to accumulate debt; and beyond a point the wealth effect may even turn negative due to increased interest payments, and increased risk of default (Bhaduri et al 2006). The debt channel is a redistribution of i ncome from indebted low-income households to rentier households. Thus the positive effects of debt-led growth are destined

march 28, 2009 vol xliv no 13

IMPACT ON LABOUR

to be partially offset by the negative effects of redistribution on consumption.

It is important to note that without the unequal distribution income in the debt-led growth model would not have been necessary or possible. This debt-led consumption model created a current account deficit in the US that exceeded 6% of the GDP. This deficit was financed by the surpluses of some other developed countries like Germany and Japan, developing countries like China and South Korea, and the oil rich west Asian countries. In Germany and Japan current account surpluses and the consequent capital outflows to the US were made possible by wage moderation, which has suppressed domestic consumption and fuelled exports. Thus this is again an outcome of the crisis of distribution. On the side of the developing countries like China and South Korea, the experience of the Asian and Latin American crises stimulated a policy of accumulation of foreign reserves as a bailout guarantee against speculative capital outflows. Here the international dimension of inequality plays an important role: these countries, threatened by the free mobility of short-term i nternational financial investments, invested their current a ccount surpluses in US government bonds instead of stimulating their domestic development plans.

The deregulation in the financial markets and the consequent innovations in mortgage backed securities, collateralised debt obligations and credit default swaps facilitated the debt-led growth model. These innovations and the “originate and distribute” model of banking have multiplied the amount of credit that the banks could extend given the limits of their capital. The premiums earned by the bankers, the commissions of the banks, the high CEO incomes thanks to high bank profits, the commissions of the rating agencies all created a perverse mechanism of investments that led to short-termism and ignorance about the risks of

Figure 1c: Wage Share in Manufacturing Industry, Korea, Mexico, Turkey (1970-2006, %)

0 10 20 30 40 50 60 70 1970 1976 1982 1988 1994 2000 2006 21.6% 27.7% 24.8% 30.2% Korea Mexico Turkey

Source: OECD STAN for Korea and Mexico, and for Turkey Annual Survey of Employment, Payments, Production and Tendencies in Manufacturing Industry by the Turkey Institute of Statistics.

this banking model. In the short-run in the sub-prime credit segment, even if the risk of default was known, this was not perceived as a major issue: first, parts of these credits were anyway sold further to other investors, thanks to the generous ratings assigned by the rating agencies. Second, when there is a credit default, the houses, which serve as collateral, could be taken over and as long as house prices kept increasing, this was a profitable business for the creditor. However, this banking model led to a very risky economic model and a time bomb, which was destined

Economic & Political Weekly

EPW
march 28, 2009 vol xliv no 13

Figure 1d: Wage Share in Manufacturing Industry, Indonesia, Malaysia, Philippines

(1970-2003, %)

0 10 20 30 40 1970 1974 1978 1982 1986 1990 1994 1998 2002 Philippines Malaysia Indonesia Thailand

Figure 1e: Wage Share in Manufacturing Industry, Argentina, Brazil (1970-2003, %)

Source for Figure 1d and e: For Brazil, Philippines, and Thailand, the UN manufacturing data 10 20 30 40 1970 1974 1978 1982 1986 1990 1994 1998 2002 Brazil Argentina

is combined with the World Development Indicators (WDI) database of 1993, which report manufacturing wages and employment, and for Argentina, Indonesia, and Malaysia WDI data is combined with the Economic Intelligence (EIU) database based on percentage changes.

to explode eventually. The bad news from the sub-prime markets triggered the explosion eventually, and first the market for c ollateralised debt obligations (CDOs) and then the interbank market, and finally the whole credit market collapsed at a gl0bal scale.

It is interesting to ask why it took so long for the time bomb to explode. The reason is the endogenous evolution of expectations: as the debt-led growth model produced high short-term growth and profits optimism was stimulated via self-fulfilling prophecy, and risks were more and more underestimated even by those who could be more conservative at the beginning. In Keynes’ words, this resembles trying to bet on the winner of a “beauty contest”, where what you think is unimportant; what matters is correctly guessing the opinion of the members of the jury, i e, the other players in the market. In a world of coerced competition (Crotty 1993) even those who see the risks are forced to take risky positions if they are to keep their jobs as dealers, bankers, or CEOs, since the burst of the bubble is a matter of time, and it can take longer than the short-term evaluation of the profits by the shareholders, who fail to value careful behaviour. Just a couple of weeks before the big collapse in July 2007, the ex-CEO of Citibank, Chuck Prince, had said “when the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance” (Elliott 2007). An example of a bank analyst, who lost his job because of realism is Michael Mayo, who “said in 1999 to sell banks stocks and has not wavered from that call, which cost him his job at Credit Suisse and friends on the Street. That year he said banks relied too much on asset-backed securities, and that if home prices fell we would see a self-fulfilling prophecy of lower home prices and lower collateral, not to mention unique political fallout” (Fortune 2008).

Figure 1f: Adjusted Wage Share, Total Economy, Eastern Europe (1990-2008) (Compensation per employee/GDP at factor cost per person employed, %)

40 50 60 70 80 90 1990 1993 1996 1999 2002 2005 2008 Czech Republic Hungary Poland Slovenia Slovakia

Source: AMECO, online macroeconomic database of the European Commission’s Directorate General for Economic and Financial Affairs.

Figure 1g: Adjusted Wage Share, Total Economy, South-Eastern Europe and Baltic Countries (1990-2008, Compensation per employee/GDP at factor cost per person employed, %)

30 40 50 60 70 80 90 1990 1993 1996 1999 2002 2005 2008 Estonia Latvia Lithuania Bulgaria Romania

Source: AMECO, online macroeconomic database of the European Commission’s Directorate General for Economic and Financial Affairs.

In the coerced competition environment the banks as well as the credit customers increased their leverage. This has increased the fragility of the economy and created a systemic risk; and when the shock came, credit crunch and the collapse of the debt-led growth model was inevitable.

Although it was not possible to say when and how deep the crisis would be, it was always clear that the crisis would hit as suggested by a number of political economists (e g, Brenner 2003; Palley 2004; Baker 2006; Crotty 2007; Godley et al 2007; Onaran 2007; Stockhammer 2008), and several prominent New Keynesian economist (e g, Stiglitz 2008; Shiller 2000, 2008; Roubini 2006). In the mainstream camp, there were also warnings about the problem of US current account sustainability and its consequences for the global economy (Goldstein 2005; Mussa 2005; Edward 2006; Obstfeld and Rogoff 2005). The mainstream e conomic institutions like the US Federal Reserve, International Monetary Fund (IMF), Organisation for Economic Cooperation and Development (OECD), or European Commercial Bank (ECB) as well as many mainstream economists nevertheless ignored the risks.

IMF (2006) was still defending that the new financial instruments were distributing the risks and creating a more “resilient” financial system. In the US policymakers also failed badly in f oreseeing the problems. In Fortune’s words (2008) “Greenspan’s legacy is tarnished by his decision to keep interest rates low while watching the housing bubble expand. Bernanke predicted this February that the economy and markets would be fine, after s aying in 2005 that housing prices would see ‘a moderate cooling’, but not a collapse. And just days before recommending radical measures to get money to Fannie Mae and Freddie Mac, Paulson said they were adequately capitalised” (Fortune 2008). It is interesting that Bernanke, who was very aware of the Great Depression as well as the deflationary experience of Japan in the 1990s (see his speech in 2002 at the Fed), was nevertheless not alert enough to prevent the risk of a great crash. UNCTAD in the World Economic Situation (2006) and Bank of International Settlements (BIS 2006) were the only exceptions among the international institutions to warn about the imbalances in the global economy. Given that the BIS is the umbrella body for central banks, the ignorance of the FED and the ECB is all the more s triking (Elliott and Atkinson 2008).

While the “beauty competition” argument can partly explain the indifference of the mainstream international institutions to risks, a more important explanation is the distributional aspect behind this risky model: the prevention of the crisis required the solution of the distributional problems behind the debt-led growth model, i e, redistribution of income and wealth. However, the powerful global elite, which has influence over global policymaking through their nation states would not agree to this solution. Therefore, the policy institutes hoped for a “soft-lending” that would correct the bubbles without effectively touching the distributional conflict. Only in 2007 did mainstream economic institutions began to publicly express worries about the possibility of a financial crisis (IMF 2007; ECB 2007). On the other hand if we consider that in late 2008 German Finance Minister Steinbrück had named it an “Anglo-Saxon” crisis just a few days before the bad news about the German banks’ balance sheets r egarding their write-downs due to the CDOs, it is also clear that the supervision and signalling mechanisms were not properly working well.

3 Possible Effects of the Recent Global Crisis

The current global crisis forms the biggest policy challenge since the Great Depression given that this is a global not a regional crisis; it originates from the core and spreads to the periphery; there is a global credit crash; more innovative financial system means more risk and a wider contagion; export market contraction will make recovery harder; and as the previous imbalances of debtled growth is now being corrected, it is unclear where the recovery will come from. What will be the effects of the current global crisis in different countries? We need to distinguish four different groups of countries:

(1) The developed countries seem to be responding to the crisis differently from the developing countries in their crises of the 1980s and 1990s, thanks to their fiscal capacity to somewhat better weather the shock. The immediate decline in interest rates, credit lines to domestic banks, counter-cyclical fiscal policy (albeit at a lower degree than the financial rescue packages) are measures that were formerly denied to the developing countries by the IMF as well as the core countries. Indeed, in the developing countries, the conditionality credits of the IMF had made use of the crisis to impose further measures of liberalisation. However despite this crisis management, the real effects in the developed

march 28, 2009 vol xliv no 13

IMPACT ON LABOUR

Figure 2a: Unemployment Rate, Selected Countries in South-East Asia (1980-2007)

0 2 4 6 8 10 12 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Republic of Korea Indonesia Malaysia Philippines Thailand

Figure 2b: Unemployment Rate, Selected Countries in Latin America and Turkey

(1980-2007)

0 5 10 15 20 25 1980 1982 1984 1985 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Mexico Argentina Brazil Chile Turkey 2001 2001

Source: ILO online database on he Key Indicators of the Labour Market (KILM).

countries are much stronger than the previous stock market or banking crises of the 1980s. The size of the future effects depends on the size of the fiscal stimulus plans, but some patterns emerge. The effects of the credit crash, particularly in countries with high household debt (e g, US and UK), will be severe. The multiplier effects of the credit crash as well as the decline in consumption have already started to affect investments. The pessimistic expectations will amplify the decline of both consumption and investments. In countries like Germany or Japan with a high degree of dependence on export markets the contraction will also be rather severe, and the reliance on low wages to expand export markets will prove to be a curse. In the European Union (EU), some countries’ ability to respond to the shocks will also be constrained by their fiscal capacity. Furthermore, there are strong real and nominal divergences within the EU-15 as well as EU-27, which are now facing even more major problems in the face of the crisis. These differences are also being priced by the financial investors, who demand higher interest rates on the government bonds of countries like Italy, Greece, Spain, or even Austria due to its “eastern E uropean” exposure compared to the interest rates on German bonds.

Broadly speaking the negative effects of the crisis on labour in the developed countries will work through demand, bargaining power, and path dependency channels. The decline in the wages in the emerging markets, which will suffer from the global crisis, will also add further pressures. Other additional channels of negative effects will be through housing debt, which will have strong distributional consequences for the indebted households. Differences with respect to skill levels and further dispersion of within labour distribution are also to be expected, e g, the temporary

Economic & Political Weekly

EPW
march 28, 2009 vol xliv no 13

workers losing their jobs first, and the more qualified workers being hoarded. However, some skilled workers in the automotive or metal industry or finance have already been the first to be a ffected. Furthermore the future cuts in governments’ social e xpenditures, if they experience financing pressures, will also asymmetrically affect labour. Two differences to the former crisis in the developing countries can be expected:

  • (a) the dimension of the initial recession might be more moderate, but given that we are facing a global recession, the recovery in economic activity can last much longer, bringing in worries about an “L” type of recession, but much stronger than the J apanese experience of the 1990s, given the global dimension of the crisis. Thus the negative labour market effects could be less s evere at the beginning, but might persist and increase at an i ncreasing rate, with high and persistent unemployment rates.
  • (b) An inflationary shock will not accompany the credit crisis in the developed countries, which may offset the other negative effects on real wages in the first year. Dramatic increases in inflation in the case of the developing countries had been due to the collapse of currencies. Nevertheless, in case the recession persists longer, the pressure on real wages and the bargaining power of labour will intensify. The worst case scenario of deflation can bring further major risks to these economies as can be seen from the case of Japan in the 1990s and 2000s. Real wages declined first moderately and there have been even real wage increases in some years, but overall in most years the difference between the wage and productivity change was always negative, leading to a continuous decline in the wage share (Figure 1b, p 172).1
  • After the recession, the institutionalised wage coordination mechanism also almost broke down (Uemura 2008). The employment system has also evolved in the Japanese economy since the recession. As a measure against labour hording in large Japanese firms, the number of non-regular workers increased dramatically; there has also been a shift towards unstable services jobs (Uemura 2008). All these developments have led to a weakening of the bargaining position of unions and the suppression of nominal wage growth. In the meantime, employment in the Japanese economy first stagnated during 1992-95 and after a slight recovery decreased in absolute numbers during 1997-2003, and unemployment increased from 2.1% in 1991 to 5.4% in 2002 (Onaran 2009a). These adverse developments in unemployment took place despite a strong decline in male as well as female labour force participation rate, which declined from 64.1% in 1992 to 59.6% in 2007 (Onaran 2009a). While the currency crises of the developing countries come with inflationary effects, the issue in Japan’s crisis was deflation.

    The other important difference is the duration and the size of the shock: in most of the developing country crises, the recession was a very deep, but one-year-long phenomenon, whereas during the Japanese slump the initial shock to growth was moderate. However, the recovery took more than a decade. As a consequence, the developing country crises lead to sharp decline in real wages, whereas the deflationary environment creates moderate real wage declines or even some minor increases particularly in years of deflation. However strikingly, the cumulative effect is in both cases a dramatic pro-capital redistribution.

  • (2) During this global crisis, many developing countries with a former crisis history are once again experiencing a crisis led by speculative capital outflows, despite significant differences in the fragility of their economies. Speculators seem to fail to distinguish between countries like South Korea and Argentina, which do not have significant current account deficits or even have current account surpluses, vs countries like Turkey with a high current account deficit, and dependency on capital flows.
  • While the former developing country group is suffering from a crisis, which they have not created, the countries with current account deficits (e g, Turkey, South Africa) might suffer through a deeper bust, due to the accumulated fragilities during the speculation-led boom cycle. The labour market effects can be expected to be quite similar to the previous experiences: a radical and long lasting decline in real wages and the wage share, and a sharp hike in unemployment (Onaran 2009b). In many of the developing countries, wage share and unemployment rates have still not recovered after the recent crises of 1990s and 2000s (F igures 1c-1e, p 173 and Figures 2a and 2b, p 175). The currency crises often lead to stronger distributional effects due to the inflationary shock that follows high rates of depreciation. Although with alternative policies, this destiny can be reversed, as of now in those countries with current account deficits (e g, Turkey), which apply for IMF credit, the IMF policies are again much more restrictive than what IMF finds appropriate for, e g, Germany. Capital controls to avoid speculative outflows are not even mentioned.
  • (3) The emerging markets of eastern Europe are also being threatened by a credit crash and capital outflows, and a possible currency crisis accompanying the banking crisis. After a decade of restructuring and high growth following the initial transition shock, these countries will once again face the costs of integration with unregulated global markets. For these countries learning from the experience and the policy mistakes of the former crises is extremely important. It is also important to learn from the crisis management techniques of countries like Malaysia through capital controls. The degree of imbalances accumulated regarding current account deficits, exchange rate appreciation, and private indebtedness in particular in foreign currency will determine the differences in the depth of the effects among these countries.
  • Hungary, Bulgaria, Romania, Serbia, Croatia, Baltic countries, Ukraine, and Russia are more exposed than Poland, Czech R epublic, Slovenia, and Slovakia. But even the latter group might suffer from the contagion effects, the slowdown in global demand, the decline in FDI inflows, and the contraction in remittances. Excessive dependence on export markets and as in the case of Slovakia a dangerous specialisation in the automobile industry will turn out to be a major risk. In the more fragile case of Hungary it is yet to be seen whether the huge international rescue package will remain in the economy, or whether it will in the f uture turn into bailing out the international investors.

    The problematic pegs of the Baltic states and Bulgaria require even larger international rescue packages in comparison to the size of the economy, which might not be possible if the EU funds contract due to problems in the core countries. The results for non-EU countries like Ukraine, Russia, or the south-eastern E urope can be more devastating. Russia, also with a former crisis record and a more intense reliance on market-based finance, is already under the pressure of devaluation.

    When capital outflows accompany a financial crisis, the d istributional effects are also expected to be heavier, as was the case during the Asian or Latin American crises. The contagion effects in the region would also be dangerous. The ability of p arent banks to maintain the credit booms in the region is e xhausted, and even without further capital outflows, the region will suffer from a deeper recession than in the west. The s pillovers from c urrency depreciations, and increases in nonperforming loans will further affect the parent banks’ approach to the eastern affiliates.

    (4) For other developing countries like China, India, and Brazil, although the contagion effects and the slowdown in global demand will be an important problem, and the myth of decoupling of demand in these countries proved to be a case of wishful thinking, these countries could manage the crisis based on their large domestic markets, if they could make a policy shift away from pure dependence on export orientation based on low labour costs. The recent state expenditure programme in China is an i ndicator of its ability to intervene, but the results are yet to be seen.

    4 Policy Implications

    The answer to Hyman Minsky’s question on whether a crisis like the Great Depression can happen again in an unregulated financial economy, proved to be yes. The only reason why it may not reach the dimensions of the Great Depression is that the states have been called into action with rescue packages of unforeseen amounts. The neoliberal economic thinking and policymaking is going through a deep legitimacy crisis. Indeed the generous bank rescue packages are a confession about the failure of the neoliberal economic policy. Even the CEO of the Deutsche Bank, d eclared that he has lost trust in “the self-healing abilities of the financial system”. Alan Greenspan, ex-chief of the US FED has said “I have made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders’ and their equity in the firms”.

    As the dimension of the crisis becomes obvious, the call for a more relevant fiscal policy response is also getting stronger, e g, by Bernanke as well as IMF Managing Director Dominique Strauss-Kahn. The insistence of Germany on the requirements of the Stability and Growth Pact on budgetary discipline is being criticised even by the IMF (Schrörs and Pache 2009). However other than some concern about the CEO pays, and bonus structures, nothing is being said about the solution of the distributional dimension of the problem. In order to formulate the correct policy response to the crisis, it is again important to remember the big picture behind the crisis: This is not just a crisis of i mproperly regulated markets, but also a crisis of unequal distribution, and it should be asked why labour should go on paying the costs of this crisis further. The major crisis calls for a major policy restructuring:

    (a) First fiscal policy has to incorporate a public employment programme, and a distributional policy to reverse the negative

    march 28, 2009 vol xliv no 13

    IMPACT ON LABOUR

    demand effects of the crisis. Public expenditures in labour intensive services like education, childcare, care homes, health, as well as in public infrastructure and green investments are good areas of target.2 These are also areas to redirect the economy towards a sustainable as well as solidarity-oriented development. The gender aspect of the public employment programmes should also be carefully designed to not only avoid disadvantages for women but also increase female employment. Otherwise a typical outcome of crises is either declining labour force participation by discouraged women or high female unemployment rates due to increased need to work as a secondary breadwinner in the household in a period of low job chances.

    Preventing ‘Socialisation of Costs’

    As part of the employment programmes it is important to avoid the “socialisation of costs”, i e, to prevent the working people and more importantly unemployed from paying the costs of the irresponsible behaviour of global capital. Particularly some firms might be making use of the crisis to implement their long-term downsizing strategies. Other firms are using the “short work” regulations to preserve their profits, while workers suffer from loss of income because of the shorter work hours and the public sector pays part of the lost income as a transfer to the workers.

    The prevention of the “socialisation of costs” requires strict measures to avoid layoffs: in firms that are in a position to distribute dividends, the logical thing would be to ban layoffs. F urthermore “no layoffs without a public restructuring and employment plan” should be imposed as a condition to banks that enjoy the funds of the bank rescue packages. Also such banks should be obliged to extend credits to priority sectors and firms under conditions set by the government through transparent and participatory mechanisms. Such firms that receive credits through such conditionality channels should be asked to stop layoffs as well. In cases of sectors that are under the threat of mass layoffs, like the auto industry, socialisation of firms should be considered. In such sectors, if it is clear that there is an overcapacity, restructuring of these public firms as part of a mediumterm plan should be considered, e g, in the auto industry a shift of focus towards the production of public transport vehicles in the existing firms, and a gradual transfer of the human capacity t owards new innovative sectors.

    The tax rebates/subsidies on low-income groups or extension of unemployment benefits to those workers who are unable to access unemployment benefits are important short-run solutions. However this is not a substitute for the requirement to correct the overall deterioration in labour share. This is not only an egalitarian but also macroeconomic concern. The usual wage moderation of the European macroeconomic policy mix can indeed only worsen the demand deficiency problem now. The risk is not the excessive budget deficits but rather the persistence in the low wages in some countries like Germany.

    For the finance of an extensive stimulus package, budget deficits are in the short run reasonable. But in the medium run more progressive income and wealth taxes, higher corporate tax rates, inheritance tax, tax on financial transactions are the only responsible way to pay for the costs of crisis. This is also the only way to

    Economic & Political Weekly

    EPW
    march 28, 2009 vol xliv no 13

    avoid future budget cuts in social expenditures, education, health, child and elderly care.

  • (b) In order to fundamentally solve the problems of this crisis, economic policy must most of all solve the distributional crisis. A new socio-economic and political paradigm is required, focusing on full-employment, productivity-led wage growth, and a shortening of work-time. This process should also question which sectors are critical for society, in which the ownership rights cannot be left to the private sector and the private profit motive. The crisis has indicated that the finance and the housing sectors are clear candidates for public ownership with democratic and transparent control mechanisms of all the stakeholders. The energy crisis indicates that the energy sector and alternative energy investments also require public ownership. The problems with not only the private pension funds but also education, health, and infrastructure are also showing that social services are too c ritical to be ruled by private profit motives. A creative and p articipatory public discussion should question which other s ectors exist, in which public ownership would produce more egalitarian as well as more efficient outcomes. This is not meant to praise the public sector as such, but calls for the participation and control of the stakeholders (the workers, consumers, r egional representatives, etc) in the decision-making mechanisms within a public and transparent economic model. Such a shift in d ecision-making also facilitates economy wide coordination of important d ecisions for a sustainable and planned d evelopment based on solidarity.
  • (c) Next the redesign of the financial sector is urgent, on which most of the alternative literature is also focusing. However regulation is important but not enough; the financial institutions have an amazing capacity to avoid regulations through new innovations. Thus, there is need for a large public finance sector to foster stable growth.3 The crisis has shown us that large private banks are exploiting their advantage of being “too big to fail”. The large private banks should be broken down and converted into publicly useful units. The financing of the activities through the capital markets should be limited. But these are not enough; the challenge is the finance of socially desirable large new investments, e g, in the energy sector. This requires a detailed historical analysis of the benefits that had been received from large development and investment banks as well as regional, cooperative banks. Again, here it is important to emphasise that stateownership alone is not the solution; the participation of the workers and other stakeholders to decision-making and the transparence of the accounts are important. Based on this structure, the f ollowing financial regulations can be pursued further to deliver s ocially desirable outcomes: full regulatory oversight for all fi nancial institutions, full accountability of decision-makers, counter-cyclical capital requirements, a public auditing agency to m onitor also the release of new financial products; the elimination of o ff-balance sheet instruments (see, e g, Crotty and E pstein 2008; A TTAC 2008 and for details of an alternative r egulatory framework).
  • (d) Last, but not least the crisis has important policy implications for the global dimension. Labour in the North and the South (or East and the West) has more common ground than they
  • currently exploit. Thus, redefining the rules of the game, coordi-agents who have interest and the potential to push for such a shift nating the institutional setting of the global economy is the only in policy at the global level. The main cornerstones of a new soliway to readjust the playground back to conditions that are fairer darity oriented global economy are trade and industrial policy to labour. Nevertheless, creating a consensus around these tar-consistent with development, a new global monetary regime with gets in the North as well as the South also requires a systematic fixed exchange rates, and controls on capital flows. The latter is global policy on international redistribution and development. not only about the shutting-down of off-shore tax heavens, but How or whether the North supports the South in weathering the also includes a tax on all financial transactions as well as quancurrent global crisis will also be important in creating positive tity controls on capital flows. The tax revenues from financial signals for global cooperation. This defines new roles and tasks transactions can also serve to build up a fund for the global for the trade unions in each country, since they are the political investments for facilitating convergence.

    Notes

    1

    SS
    ee
    e Oe O
    nn
    aa
    rr
    aa
    nn
    ((
    22
    00
    00
    99
    aa
    ) o) o
    nn
    tt
    hh
    e ee e
    ff
    ff
    ee
    cc
    tt
    s os o
    ff
    tt
    hh
    e re r
    ee
    cc
    ee
    ss
    ss
    ii
    --
    on in Japan on labour market outcomes and distribution.

    2 See Pollin (2008) for a detailed outline of employment programme for the US.

    3 See Euromemorandum Group (2008) as an exception in the literature on policy alternatives, which also emphasises the nationalisation and democratic control of a relevant part of the banking sector, not only for the already “nationalised” part of the sector during the crisis, but in principle.

    References

    ATTAC (2008): “The Time Has Come: Let’s Shut Down the Financial Casino”, http://casinocrash.org/ wp-content/uploads/2008/10/attac-financecrisis-15_10_2008.pdf

    Baker, D (2006): “Recession Looms for the US Economy in 2007”, Center for Economic and Policy Research, November.

    Bank of International Settlements (2006): 76th Annual Report.

    Bernanke, B (2002): “Deflation: Making Sure ‘It’ Doesn’t Happen Here” (Washington: National Economists Club), 21 November.

    Bhaduri, A, K Laski and M Riese (2006): “A Model of Interaction between the Virtual and the Real Economy”, Metroeconomica, 57, 412-27.

    Brenner, R (2003): “The Boom and the Bubble, The US in the World Economy” (Verso: London).

    Crotty, J (1993): “Rethinking Marxian Investment Theory: Keynes-Minsky Instability, Competitive Regime Shifts and Coerced Investment” in Review of Radical Political Economics, 25(1), 1-26.

    – (2007): “If Financial Market Competition Is So Intense, Why Are Financial Firm Profits So High? Reflections on the Current ‘Golden Age’ of Finance”, Political Economy Research Institute Working Papers 134.

    Crotty, J and G Epstein (2008): “Proposals for Effectively Regulating the US Financial System to Avoid Yet Another Meltdown”, Political Economy Research Institute Working Papers, 181.

    Elliott, L (2007): “After the Orgy, Let’s Clean Up”, Guardian Weekly, 3 August, p 18.

    Elliott, L and D Atkinson (2008): The Gods that Failed (London: The Bodley Head).

    EC (2007): “The Labour Income Share in the European Union”, Chapter 5 in: Employment in Europe (Brussels: European Commission).

    ECB (2007): Financial Stability Review (Frankfurt: European Central Bank), December.

    – (2008): Financial Stability Review (Frankfurt: European Central Bank), December.

    Edwards, S (2006): “America’s Unsustainable Current Account Deficit”, NBER Working Paper, No 11541.

    Euromemorandum Group (2008): “Democratic Transformation of European Finance, a Full Employment Regime, and Ecological Restructuring – Alternatives to Finance-driven Capitalism”, http://www.memo-europe.unibremen.de/ downloads/Euromemo2008_English_fin.pdf.

    Fortune (2008): “Who Saw the Crisis Coming...” (6 August).

    Godley, W, D Papadimitriou, G Zezza (2007): “The US Economy: What’s Next?”, Strategic Analysis, April, The Levy Economics Institute of Bard College.

    Goldstein, M (2005): “What Might the Next Emergingmarket Financial Crisis Look Like?”, Institute for International Economics, Working Paper Series, No 05-7.

    ILO (2008): “World of Work: Income Inequalities in the Age of Financial Globalisation” (Geneva: ILO).

    IMF (2006): Global Financial Stability Report (Washington: IMF).

  • (2007): “Spillovers and Cycles in the Global Economy”, Chapter 5 in: World Economic Outlook 2007 (Washington: IMF).
  • (2008): “Global Financial Stability Report” (Washington: IMF).
  • Laeven, L and F Valencia (2008): “Systemic Banking Crises: A New Database” (Washington: IMF Working Paper, No 08/224).

    Mussa, M (2005): “Sustaining Global Growth While Reducing External Imbalances” in C Fred Bergsten (ed.), The United States and the World Economy (Washington: Institute for International Economics), 175-207.

    Obstfeld, M and K Rogoff (2005): “Global Current Account Imbalances and Exchange Rate Adjustments” in William Brainard and George Perry (ed.), Brookings Papers on Economic Activity, 1:67-146.

    OECD (2007): “OECD Workers in the Global Economy: Increasingly Vulnerable?”, Chapter 3 in: OECD Employment Outlook 2007 (Paris: OECD).

    – (2008): “OECD Economic Outlook” (Paris: OECD).

    Onaran, Ö (2007): “International Financial Markets and Fragility in the Eastern Europe: Can It Happen Here?” in J Becker and R Weissenbacher (ed.), Dollarisation, Euroisation and Financial Instability (Metropolis-Verlag: Marburg), 129-148.

  • (2008a): “The Effects of Globalisation on Wages, Employment, and Wage Share in Austria”, Wirtschaft und Gesellschaft, 34(3), 337-60.
  • (2008b): “Life after Crisis for Labour and Capital” in Yeldan E, A Kose and F Senses (ed.), Neoliberal Globalisation as New Imperialism: Case Studies on Reconstruction of the Periphery (New York: Nova Scientific Publishers), 171-95.
  • (2009a): “From the Crisis of Distribution to the Distribution of the Costs of the Crisis”, Global Labour University Conference, Mumbai, 22-24 February.
  • (2009b): “Wage Share, Globalisation, and Crisis: The Case of Manufacturing Industry in Korea, Mexico, and Turkey”, International Review of Applied Economics, 23(2).
  • Palley, T (2004): “Asset-based Reserve Requirements: Reasserting Domestic Monetary Control in an Era of Financial Innovation and Instability”, Review of Political Economy, Vol 16, 1, 43-58.

    Pollin, R (2008): “Congressional Testimony on a Green Economic Stimulus Program”, http://www. peri.umass.edu/

    Roubini, N (2006): “The Descent”, Interview with New York Magazine, 24 September. Shiller, R (2000): Irrational Exuberance (Princeton: Princeton University Press).

    – (2008): Subprime Solution: How Today’s Global Financial Crisis Happened and What to Do about It

    (Princeton: Princeton University Press).

    Schrörs, M and T Pache (2009): “IWF Will an Steinbrücks Kasse Ran”, Financial Times Deutschland, 23.1.2008:9.

    Stiglitz, J (2008): “The Financial Crisis of 2007/2008 and Its Macroeconomic Consequences”, Meeting of the Initiative for Policy Dialogue Task Force on Financial Markets Reform, June.

    Stockhammer, E (2008a): “Some Stylised Facts on the Finance-dominated Accumulation Regime”, Competition and Change, Vol 12, No 2, 184-202.

    Taylor, L (1998): “Lax Public Sector, Destabilising Private Sector: Origins of Capital Market Crises”, CEPA, WP-6.

    Uemura, H (2008): “Growth, Distribution and Institutional Changes in the Japanese Economy”, Annual Conference of Evolutionary Political Economy, November, Rome.

    Unbound Back Volumes of Economic and Political Weekly from 1976 to 2008 are available.

    Write to: Circulation Department,

    Economic and Political Weekly

    320-321, A to Z Industrial Estate, Ganpatrao Kadam Marg, Lower Parel, Mumbai 400 013. Circulation@epw.in

    march 28, 2009 vol xliv no 13

    Dear reader,

    To continue reading, become a subscriber.

    Explore our attractive subscription offers.

    Click here

    Comments

    (-) Hide

    EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

    Back to Top