Today, the Eurozone's mantra is that the deflation of wages increases the productivity and competitiveness. But since all countries are addressed on the same pattern, the only result is the recession for all.
As we enter the fifth year of the American crisis after the crash of Lehman Brothers, the analysis of its origins has deepened and got to be more convincing. It is not enough to call it major financial crisis. All serious crises have a financial nature. It’s by now clear that income inequality played a key role. Incomes‘ polarization creates a small circle of the wealthiest, and a much larger group of the poorest. Furthermore , the wages stagnation slows down consumption and, consequently, the investments.
This in principle . But over the last twenty years, the growth in the U.S. continued despite the stagnation of wages. It was not a miracle. The stagnation of wages was offset by a soaring household debt. The debt tied to subprime mortgages was only the tip of the iceberg. According to Jeff Faux: “The thirty year flattening of incomes drove consumers to take on more debt..In 1980 debt was about 70% of their disposable income. By 2007 it was almost 140 percent.(The Servant economy, 2012, p.61).
Households got into debt to cope with health care costs increased between two- three times the inflation and for sending to college the children (now the students‘ college debt got to a trillion dollars), while insufficient revenues brought the use of countless credit cards. It is not a coincidence that the refinancing of home mortgage, offered by banks with low initial rates and without special guarantees, has often been used to repay other debts with higher interest rates.
What is the origin of such inequality? The standard explanation talks of market and financial globalization and (alternatively or both), of the computer revolution which rendered traditional skills obsolete. Yet this explanation doesn’t explain the dramatic and socially devastating inequality of the last decades.
Labor productivity grew at an average around 1,6% over the last thirty years. If productivity gains were evenly distributed ( as was the case in the first decades of the second post-war period) real wages would have risen by about 50 percent. Instead, new wealth has been concentrated in the hands of a very limited number of the richest .
“The labour market has been creating much more inequality over the last thirty years, with the very top earners capturing a large fraction of macroeconomic productivity gains”, writes Emanuel Saez of Berkley (Striking it Richer: The Evolution of Top Incomes in the United States, 2012). While the real median wage stagnated, the top percentile went up from about 9% during the 1960s-1970s to almost 23.5 % by 2007. And on the eve of the current crisis, “in the economic expansion of 2002-2007 the top 1 percent captured two thirds of income growth”. The crisis has also pointed up the trend: “the top 1% captured 93% of the income gains in the first year of recovery” (ibidem).
This striking imbalance is the result of a dramatic shift of power in the industrial relations. The working class bargaining power has sharply declined. In the private sector, only about seven percent of workers have union representation. Social conflict is turned off as all power is in the hands of the companies. It is a matter of fact that the relentless policy of shrinking of workers’ collective representation in the working places and the unstoppable disruption of the bargaining and counterbalancing power of the unions is un indisputable , even though generally underestimate, reason of the devastating inequality in the US.
Barack Obama has tried t tackle the economic and social consequences of the crisis, supporting the hyper-expansionary monetary policy of the Federal Reserve; trying to reform healthcare to repair the absence of insurance for almost 50 million Americans; extending unemployment benefits usually limited at 26 weeks; saving the auto industry through a bold financial recapitalisation of G.M. and Chrisler.
However, this has not been sufficient to bring unemployment to levels acceptable in the US, nor to deal with the growing poverty (45 million Americans survive with food stamps), or boost public investment, which was key point of his election program. So Obama pays the uncertainty and shortcomings of its policy with the risk of losing the presidency, leaving the White House in the hands of Mitt Romney, the heir of Reagan and the two Bush.
This is the questionable outcome of Obama’s way to manage the US crisis. In Europe, the Berlin-Frankfurt-Brussels axis has no uncertainties, but just a unique, unquestionable as well as harmful approach: the neo-liberal politics based on '"expansionary austerity" and “structural reforms”. The disruptive results of this politics are now universally recognized, but not by the the German government, which dominates the political scene of the eurozone.
While U.S. monetary policy has been, and still promises to be, hyper-expansive, the ECB monetary policy, under the overt pressure of Bundesbank and the hidden control of the German Government, remains tied to austerity programs and structural reforms. Historians will be amazed at this blindness. In the name of austerity, Greece lives in the fifth year of recession with a huge unemployment of about 25 percent, while the public debt, whose reduction should to be the objective of the tough deflation imposed by Brussels, rose from less than 120 to 160 percent. It is hard to imagine a more foolish stance. The result is a country on the brink of civil war.
The same myopic eurozone’s policy is overthrowing Spain, despite it had one of the smallest public debt of the eurozone. Not differently from Greece, the unemployment hits 25 per cent of the labour force, while the worsening of the crisis threatens to break up national unity.
Italy lives in a kind of spell produced by Mario Monti’s technocratic government, quietly sinking in the deepest recession of last decades, while unemployment raises, dismissals are eased and pensions reduced. Sovereign debt inevitably increases due to the lethal mixture of high interest rates and tough recession.
Yet the point is not just the European monetary policy, strikingly different from the American one. The paradox and the self-destructive vocation is more easily apparent in the policy of so-called structural reforms , which have two main objectives: the reduction of wages by destroying the bargaining power of trade unions and the reduction of the welfare state, that is , pensions, education and health care.
The neo-conservative mantra is that the deflation of wages increases the productivity and competitiveness. But since all countries are addressed on the same pattern, the only result is the recession for all , as it is happening now.
In other words, the rightwing eurozone’s policy repudiates the example of the US expansionary monetary policy, while choosing the American social model of workers’ reduced bargaining power, trade unions’ marginalization, firing freedom, retrenched social spending, along the pattern of growing inequality that was at the origin of the current crisis.
Is it possible to find out an alternative to these blind and self-defeating choices? The overhaul of the current German politics risks to be a wishful thinking. It 's very hard to guess an effective reversal of the current policy in view of the elections of next autumn in Germany.
In any case, to make, in the best case, a political change possible, the first change should come from the countries in trouble. From Spain and Italy first, as well as from Greece and Portugal, but unfortunately they are currently ruled by a sort of viceroys in the service of Berlin. And possibly should come from France, where President François Hollande is inspired by good intentions, but its efforts do not result so far in an actual commitment to an effective change of the Germany's European policy.
Changing the current German policy is undoubtedly a hard task, but accepting its blind hegemony is going to result in a disaster for the countries in trouble and for Europe as a whole.