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Mr. Flassbeck, former director of UNCTAD, discusses growing up in a US-dominated Germany and his opposition to the birth of neoliberal economics. This is an episode of Reality Asserts Itself, produced July 25, 2014, with Paul Jay.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network, and welcome back to Reality Asserts Itself. This is the beginning of a new series of interviews about the global economy and the state thereof. We’re told we are in a recovery sort of. But how real is it? And if it isn’t that real and in fact it won’t be long before there’s another meltdown, how come there’s so little discussion about it and, it seems, so little being done to prevent or mitigate it?
Now joining us to talk about all of these issues is an economist that we’re fans of and have interviewed many times on The Real News Network, Dr. Heiner Flassbeck, who for the first time joins us in the studio.
Thanks for joining us.
DR. HEINER FLASSBECK, FMR. DIRECTOR, UNCTAD DIVISION ON GLOBALIZATION AND DEVELOPMENT STRATEGIES: Thanks for inviting me.
JAY: So, Heiner was until recently the director of the Division on Globalization and Development Strategies at UNCTAD, the United Nations Conference on Trade and Development; and after, from 2003 to 2012, he was the director of the Division on Globalization and Development Strategies. Since then, he’s now director of Flassbeck Economics, a consultancy for global macroeconomic questions. And you can find that at Flassbeck-Economics.de. Before that, Heiner was employed at the German Council of Economic Experts in Wiesbaden between ’76 and ’80; followed by the Federal Ministry of Economics in Bonn until January ’86; chief macro economist in the German Institute for Economic Research in Berlin between ’88 and ’98; state secretary (which is a vice minister) from October ’98 to ’99 at the Federal Ministry of Finance in Bonn; and responsible for international affairs at the E.U. and the IMF–a rather illustrious career, and one where you have been not quite on the same page as many of the places you worked at.
FLASSBECK: Yeah, well, I’ve worked at a number of places, and I was always a bit the odd man out or the one who had a critical view on the mainstream economics. But nevertheless, I think in all these different places there were still a discussion, there was an open discussion about different opinions, different approaches to economics. And even up into the UN and UNCTAD we had this open discussion. Only at the very end, when we’re approaching 2012, even after the crisis, then the climate got much more militant, so to say, and the people were really trying to prevent UNCTAD from thinking critically and to give a second opinion to the global affairs.
JAY: ‘Cause UNCTAD took a position quite, you could say, opposed to prevailing economic theory, which is there needs to be a profit-led recovery and trickle-down economics, more or less, and kind of classical economic fundamentalism, some people call it.
FLASSBECK: Yeah, absolutely. We really had–it was our approach, our mandate, even, given from all the countries of the world. So UNCTAD has a conference, and that is why it got a mandate from all countries that are members of the UN, and the mandate said we should be critical, we should be critical towards the mainstream, we should give second opinion. But this was not taken well by the Group B, what we call Group B, which is the industrialized countries, and they tried to prevent that, they tried to prevent the second opinion, the only one opinion that was there outside the IMF and the Washington institutions. So this is really a funny situation, that in the world, on macroeconomics you should not have two opinions in this world, you should only have one.
JAY: And you were calling for things like higher wages, much more serious curbs on speculation, and such.
FLASSBECK: Right, all these things. And I think looking back with hindsight I can say we were right, we were right on all these things. And the fact that we’re not going out of the recession or stagnation and that we’re going into deflation now in Europe and that we have all these problems overcoming the crisis, the protests after 2008 to overcome the stagnation and recession, this shows that something fundamentally is wrong in capitalism today. But this is not–people are not willing to accept it and people are not willing to look at it seriously.
JAY: Okay. In the course of this series, we are going to try to look at this seriously. But before we do that, and as people at home know, usually on Reality Asserts Itself we start with some personal biographical information. So we’re going to do that with you, and then in the subsequent segments we’ll kind of dig into these issues.
So you’re born in West Germany in 1950, and this is, one could say, almost ground zero for the Cold War. This is just five years after the end of World War II. Give us a sense of what growing up is like in that–what did it look like and what was the kind of vibe of the time?
FLASSBECK: Yeah, yeah, I can give some ideas about the region where I’m coming from, and many Americans know it. Many Americans know Baumholder. Baumholder is a very famous place were many American soldiers were after the war. Everybody knows–even more people know Ramstein. Ramstein is 30 kilometers from my hometown. So I was growing up very much in an Americanized society, so to say, and American soldiers were a normal part of our life in my youth. And so we got very much associated to the American style of life. We went to shops like the–what was it? The–no, I don’t remember exactly what it was, the–.
JAY: The shops that sell just to soldiers.
FLASSBECK: The shops that sold for the soldiers. We were invited there to go there to buy things. And we went into clubs where American soldiers mainly went.
JAY: And how did that feel as you grew up? Because I know I was there in the 1980s, and even then it felt almost like an occupied country. Like, everywhere I went, there were American troop carriers going places back and forth.
FLASSBECK: Yeah, we were an occupied country in a way. So Germany was not sovereign. Maybe some people say it’s today not yet sovereign. But at that time it was clearly a world dominated by the U.S., and the whole system that we had, the whole economic system, which we considered to be the normal thing, and the economic miracle all over the world, not only in Germany, but everywhere, was considered to be the normal thing for capitalism, for a market economy. But today we know that’s not true.
JAY: But at the time it looked there would be growth forever.
FLASSBECK: Yeah, it looked as it would be the absolute super stable system, the Bretton Woods system. But nobody had the idea that it was really created out of the desperation after the Second World War under conditions that will never come back and under the spiritual leadership of one person who did it, who designed it, namely John Maynard Keynes. He was the one who gave the direction, even if not all his ideas were realized in the end. But he gave the direction. And this was really a super stable system for 20 years.
And then it was overcome by the so-called neoclassical counterrevolution, a monetarist counterrevolution, with the stupid idea that to regain, so to say, the market power, to bring the market power back, and to drive back the state would solve all problems. We now know it’s not true. It’s not true at all.
JAY: So, getting back to your personal story–and then we’re going to dig into some of these issues–as I said, it’s just a few years after the war, and in terms of your own thinking, your own identity, your own political sense, how was it to grow up a young German after–I mean, Germany was so isolated. You grow up knowing about, you know, concentration camps and Hitler and fascism. What was the politics in your household when you grew up and your formation politically?
FLASSBECK: Well, personally, I have to say, fortunately, I grew up in a household where my father was rather old going into the Second World War. He was not a soldier in the Second World War. He was a soldier already in the First World War. So he was very critical towards Hitler and the whole regime. And so I grew up with this critical sense, and we discussed very much this question, and always in a critical tone. And that is why I started my political thinking in the middle of the ’60s.
JAY: Was he a man of the left? ‘Cause it was very–.
FLASSBECK: No, no, he was not. He had a small company. He was on his own. He was self-employed, so to say. So, no, no, he was not on the left. But he always had a critical sense. He had a critical approach to everything. Whatever it was, sports and politics, he had a critical approach. And maybe that is something that I inherited from him.
And when I started political thinking in the ’60s, then we were very much on–the question was Vietnam. Vietnam was the question. Nevertheless, I went to German military. But nevertheless I thought very much about these questions, and I came to the conclusion that my Americanization, so to say, of the first years was not the whole world and I had to distance myself from that, also to find my own way and to find–as a German it was really not simple to find a way and to accept what has happened in German history and nevertheless go forward looking ahead and to what would come and change things.
JAY: Perhaps even more than World War II, I would think what would have shaped a lot of your political thinking is what I said earlier: Germany was, like, ground zero for the Cold War. This is, you know, East versus West Germany. This was capitalism squaring off against Soviet communism or socialism. And as you said earlier, it’s like capitalism looked like it would never stop growing. I mean, did you grow up thinking that the Soviet Union was the villain of the piece?
FLASSBECK: Not the villain of the piece, but a misguided economic model. That was clearly my idea. I thought planned economy doesn’t work. And it doesn’t work. We know that it doesn’t work–in the way, at least, they tried it for a couple of decades. So we thought–really, when I started my studies at the beginning of the ’70s, it was absolutely clear that we would continue with that super-stable system, with a system that would be absolutely superior to any other form of government-driven system. So in the first years of my economic thinking, I was a liberal–in a neoliberal sense, even–before I realized how much you need the government and you need the intervention of the government in many, many places.
JAY: And when did that start to become clearer for you?
FLASSBECK: Well, when I started to work in the staff of the German Council of Economic Advisers. That was the high time of what was called supply-side policies.
JAY: What year are we in?
FLASSBECK: That was ’75. Seventy-five, everybody started to think about supply-side theory, supply-side policy. And the German Council of Economic Advisers was clearly–was the leader in that thinking.
JAY: Yeah, for people that don’t know, give a quick explanation what that means.
FLASSBECK: Well, they change–
FLASSBECK: –to supply side means exactly the opposite of Keynesianism, which means you’re not intervening on the demand side of an economy. You don’t care about demand. But you say–.
JAY: So it means you don’t care about wages and such.
FLASSBECK: You don’t care about wages, you don’t care about any kind of demand. But what you care about is that profits for companies, that the companies get proper profits, that taxes are low and wages are low and all this. And then, if you, so to say, shift income towards the rich people or towards companies, then you will get more investment and you will get automatic supply increase, and the supply increase would create demand, and then the whole system would be stable again.
JAY: And this became associated as Reaganomics or [crosstalk] Thatcher and
FLASSBECK: This later was then called, right, Reaganomics, Thatcherism. But it was a merger of the German approach, the English and the American approach that dominated in the ’80s indeed.
JAY: And did you more or less buy into this at that time?
FLASSBECK: No. No, not at all. I would say there I was very critical, because I followed very closely all these discussions and I saw how much ideology is in these discussions. They were not–intellectually they were not honest. This was my first feeling. When I distanced myself from that, I said, this cannot be true; they’re changing–they’re moving the facts, they’re changing the facts in a way that fits their ideas, and all under the umbrella of the general ideology, which was strengthened by monetarism, so the idea that you should have an independent central bank and a central bank should steer the money supply–again a supply-side concept–and that money supply would hold inflation down, all this. These nice ideas were merged into this whole concept of neoliberalism. And my feeling from the very beginning is that this is not fair, this is not an honest intellectual approach. So I started to study more the Keynesian ideas. And then I realized, no, it cannot work like this.
JAY: And why do you think these ideas became dominant? And what changed? You talked about this moment after World War II that was kind of desperate, and so, you know, the elites around the world bought into this Bretton Woods idea. What changed?
FLASSBECK: I think the main thing were the oil price explosion, what is called the oil price explosions in the middle of the ’70s and the end of the ’70s, where we had hikes in inflation all around the world, in the industrialized world, in the United States and Europe, everywhere. Inflation went up because wages were on the rise. There was full employment everywhere. So the unions were strong about pushing for higher wages–.
JAY: But inflation also went up because oil prices went way through the roof.
FLASSBECK: Yeah, yeah, but in–the second round was–this is really what economists call a second-round effect. And they were right at that point of time that wages were creating a second-round effect for inflation, and this was a lasting effect on inflation. And then monetary policy stepped in, and monetary policy harshly broke, so to say, this circle of rising wages and rising inflation.
JAY: By raising interest rates through the roof.
FLASSBECK: And then raising interest rates through the roof, and then by creating unemployment. This was the time when unemployment, so to say, entered the Western world. This was the first time.
And this conflict between inflation and unemployment was taken by the monetarists, by the neoclassical economists, to say, you see? Keynesianism is wrong because Keynesianism always produces inflation; in the end they produced inflation. It was good with high employment for a time, but then it overshoots. So we need more objective steering of monetary policy. We should not allow these bouts of inflation, and we should stop it early on, and this can only be done by an independent central bank. And then–so monetarism took over. And academically they were also quite successful at convincing, so to say, most economists that only a neoclassical theory, a neoliberal theory, would be a scientific approach to economics.
JAY: But weren’t they right in terms of the levels of inflation? Weren’t they right?
FLASSBECK: No, no, for the moment they were right. For a moment it was right. If you take Europe or Germany or the United States, it was right at that moment of time: it was not correct and it was not reasonable to increase wages in response to the higher inflation that came from oil price explosion. This is, so to say, a supply-side effect, this is really a supply-side effect where inflation rises, and this cannot be taken from the companies at home, because we have to give that income, so to say, to the producers of oil. We have to send it over to Saudi Arabia. So it was no longer there. And then to fight for something that is no longer there, that’s not very reasonable. That leads to inflation. But that was only the first round. In the second round, the second oil price explosion, wage increases were much lower, much lower. But nevertheless, monetary policy–.
JAY: But the wages had to go up to keep up with the inflation from the oil prices.
FLASSBECK: Yeah, but that’s a very open question. There I’m not of that opinion, because what happens if–what you should get always: you should have wages following, so to say, a normal inflation rate. But if the inflation rate, for external reasons that you cannot influence (something like the oil price hike), increase, then the internal fight doesn’t make sense, because it’s gone. This income is gone. The inflation, the higher rate of inflation shows that income has gone elsewhere.
JAY: But the question is who should pay the consequences of that,–
FLASSBECK: Who should pay, yeah. But [crosstalk]
JAY: ‘Cause [crosstalk] workers wages should pay that, then in theory you could have taken it out of the pockets of the rich.
FLASSBECK: Well, as long as we had a market economy, as long as they try to get it, the inflation rate will rise, because the employers always have this instrument at hand to increase prices. Then this is unavoidable.
JAY: And they tried. There was an attempt at wage and price controls in places like Canada. It didn’t work. There was talk about–.
FLASSBECK: Well, there I’m not a fan of price and wage controls. In principle we should have guidelines. We should have strong guidelines. Maybe we’ll come to that a bit later. We should have strong guidelines for wages to rise in a reasonable way. But it should not include such inflationary effects that come from the supply-side effect like oil or commodities price rise, because, as I said, this creates a struggle about income that is no longer there and that doesn’t exist.
JAY: Did it ever–I mean, in your thinking about this and as you’re developing as an economist, did you ever think about that maybe both sides don’t work? One side leads to inflation, and the other side leads to recession and even deflation. Like, neither of these strategies work.
FLASSBECK: Yeah, yeah. No, no. What you need is coordination. What you need is–exactly at that moment of time, you need coordination between monetary policy and the wage development. So you need concerted action or whatever you [incompr.] roundtable, where all the people, the participants come together and say, so what can be reasonably disputed?
JAY: So you want a reasonable, rational capitalism.
FLASSBECK: Well, at least we have to try to do it. And we got it for some time, so we have to try to get it again, which is not very simple in this world of plutocracy that we are entering. But this is a rational way to do it, at least. Yeah.
JAY: So we’re going to continue this discussion in our series of interviews. So please join us on Reality Asserts Itself with Heiner Flassbeck on The Real News Network.