Heiner Flassbeck: It’s the (Macro) Economy, Stupid!

Without a macroeconomic plan, the social agenda of European progressives simply cannot be achieved, however sensible it might be. But it is right-wing bullies who do not fear challenging the dogmas and predominant economic orthodoxy—says professor Heiner Flassbeck in an interview with Jakub Dymek.

JAKUB DYMEK: Do you think, Professor, while we’re speaking of all the economic problems that Brexit, US-China relations, the uncertain eurozone budget and so on entail, that there’s something we are overlooking—some bigger picture we are still unable to see?

HEINER FLASSBECK: Of course! The big- ger picture here is the lens through which we look at the problems at hand. It’s totally wrong! The lens of the dominant economic theory is dark and so we don’t see what’s happening. That’s our problem. Most economists have their dogma, their theory and they’re completely unwilling to abandon it, even when everything goes wrong. And that’s why we cannot accomplish anything. Many of the current dilemmas have been around for years and the mainstream economy didn’t even get close to solving them.

You’re arguing that even more than ten years after the crisis of 2008 there hasn’t been much of a change in thinking?

Less than none… We still don’t even understand what the crisis was about, that is was a failure of financial markets—of a disoriented and misguided financial market. And right after the crisis itself we’ve started saying things like it was “a government debt crisis” or “a banking crisis”. No! The crisis arose because the financial market misunderstood the information available and proved not how effective, but ineffective, they really are. And despite that fact, the lesson wasn’t learned and the dogma of market efficiency is still with us.

However, don’t you think that the so-called “populist wave” we’re witnessing helped shift these gears a little?

I don’t like the term “populist”—I don’t think something the majority of the population wants is necessarily bad [laughs].

Well, I’m not especially fond of the term either, but that’s what we have.

Look, all the new governments—from Brazil to Hungary—are the practical results of our failure to solve economic problems in a way that’s visible [to societies]. This is clearly the case with Trump, who is a product of rising inequality and the feeling of many people that they’ve been left behind. Of course he’s not doing anything to realistically solve these problems, he’s not the guy to find the solution, obviously.

But people are desperate for change, desperately looking for something “new”, and here we are. Wherever you look—Poland, Hungary… all these move- ments, call them what you like, gained traction because of the failure to address economic grievances soon enough and in a visible, concrete way. It’s a pan-European disaster! Poland least of all, actually, but elsewhere it’s a walking catastrophe.

What about trade then? We’ve seen, since 2016, the failure of TTIP and TPP, a more assertive stance on trade throughout the world generally, and mostly because of Donald Trump’s position on trade there’s been a certain shift in how international trade is perceived.

You know what? Trump’s right. I would never thought I’d agree with him on something. Sure, he’s an idiot in so many ways, but in this respect he’s right. People don’t have a clear idea what “free trade” means anymore. We still use the language of “comparative advantages” although it is Ricardian theory which is 200 years old and described conditions of the nineteenth century! Among many things we have not taken into account is that we now have massive amounts of direct investment which totally changes the equations and distorts the supposed “laws” of trade.

Most economists have their dogma, their theory and they’re completely unwilling to abandon it.

And that’s just one of the many, many things that have changed since the wonderfully simple world of nineteenth century theories. What we’re made to believe and take for granted is nonsense! Trade shows—and thank you for that question—how far the debate is detached from the real problems of today’s world.

Many of the current dilemmas have been around for years and the mainstream economy didn’t even get close to solving them.

But does thinking of trade as a simplistic zero-sum game, as Donald Trump seems to do, really bring us any closer to any reasonable conclusion?

Let’s say I’m interpreting what Trump says in a favorable way. He’s talking about “free trade” and “fair trade”—and by the latter, he means a balanced trade. Trade without huge surpluses like Germany has and without huge deficits like the United States has. And in that regard this really is a zero-sum game—deficits and surpluses are balancing to zero. Trade as such isn’t a zero-sum game although, everybody agrees that when trade is efficient, if it works, it actually is a “positive sum game”.

I’m wondering what kind of political actor should be responsible for bringing such an equilibrium back. We’re witnessing diminishing results from international bodies, so rather naturally it has to be a nation-state, right?

Maybe the era of international institutions is not definitely over yet, but the idea is in troubled waters, so to speak. We have so far failed to introduce institutions or regulations that would work as a referee or an arbiter between different countries. I myself was working for UNCTAD for many years and we’ve achieved very, very little. These [international] organizations lack leadership and, in the end, their efforts are blocked by politics, especially by politics on a national level. So, yes, in some sense the conclusion is it may have be a nation-state that—when the right leadership assumes power—takes the lead.

It seems that the political left still doesn’t have a viable answer for such a shift, do they?

It does not. And that seems to me as one of the biggest political problems we have. And that has much to do with macroeconomic thinking or Keynesianism that was adopted by the left as their dogma in the field of political economy after World War II. At the time the left had both the social program and the economic blueprint, Keynesian model. Sometime in the 1970s they gave it up and since then the left only has the social program. Regardless, however, of what that program might be, it cannot be realized without a macroeconomic policy. And that’s what’s missing.

Maybe the era of international institutions is not definitely over yet. We have so far failed to introduce institutions or regulations that would work as a referee or an arbiter between different countries.

Conservatives, for example, still have their economic philosophy of prudence, austerity and savings—saying, you have to be conservative in order to be social. And so on… They, in a word, have a social program or vision of social order matching their economic program. There’s nothing the left can put forward to counter that.

And such a program exists, you believe?

Of course it does. Firstly, you have to tackle the dogma of international trade. Secondly, you have to tackle the dogma of government debt. It’s simply ridiculous. The most glaring example—for the last ten years, the business sector, the companies, is a net saver. Not an investor, not a debtor. Logically, it means that it is the government who has to be the debtor, right? Because when somebody saves, somebody else has
to borrow. And countries would rather refuse to be the debtor, apart from the United States. Germany certainly doesn’t want to be one. So it’s creating debt in all the other countries to balance its savings. It’s absurd, because it follows a doctrine, namely mercantilism, that is 200 years old… Look at Macron, that poor guy, sitting in Paris, not knowing what to do. In order to really make some change, he’d have to challenge the German approach, and he’s unwilling or unable to do it. But who is? Trump. Or Mr. Salvini in Italy, like him or not. It’s these right wing bullies, only them, who are willing to take issue with German domination.

Let me shift away from Europe for a second here. “The focus on China is wrong—there already has been a lot of pressure on China”, you’ve said in an interview with Bloomberg last year. Why is that so and do you still think the China question is still being answered in the wrong way?

The predominant view of the “problem” here is wrong. For the last thirty or more years, western countries have been investing in China like there’s no tomorrow. There was total dominance of western manufacturers inside China, the majority of China’s exports was actually by western companies of western products.

These people who had a great time doing business in China and who made tons of money out of it are now panicking and saying “never let China invest in the West, no no!”. Now, when China has some money and it’s willing to invest it elsewhere, we—like in Germany—are passing laws and creating barriers not to let China anywhere near “our” companies.

It’s Sinophobia—“Oh! China is going to crush us! Oh! China is buying all of our companies!”. And this is coming from people who dominated the Chinese market for decades, owned whole production chains, who are now complaining, because the Chinese are buying a few companies here and there. A single German factory—it’s ridiculous!

The left had both the social program and the economic blueprint, Keynesian model. Sometime in the 1970s they gave it up and since then the left only has the social program.

Is it only about irrational phobias though or is there also a high-stakes political game involved?

The Chinese have been behaving perfectly rational all these years. They had a huge surplus on their accounts ten years ago and under the pressure from the West they have reduced it to a reasonable size. Only the big bilateral surplus with the United States remains—and that is why Donald Trump is fighting with the Chinese.

But overall, China is not a threat to the world, it’s an opportunity. Look for example how many German automobiles the Chinese are importing. Without them, without the Chinese market, the German automobile industry would have had a huge, huuuuge, problem from 2008 to 2010. It was the Chinese who saved them and provided a way out of the crisis. And now they’re complaining about China? Not justified at all.

Assuming that this is how it looks from the perspective of the German economy, is it safe to assume that smaller economies—Polish or Czech or Latvian, let’s say—are not in the same position. They’re not, for example, net exporters to China, and especially not in advanced, technology-intensive sectors.

But bad economic policy isn’t the fault of the Chinese entering and integrating themselves with the world market! The economic policies that failed in Poland or elsewhere in Eastern Europe are us failing to create “catching up” mechanisms. The Polish growth isn’t the accomplishment of the Polish business class, Polish business- men as we would like people to believe, but a function of global markets—when things are going up, they’re going up, when they’re going down elsewhere, they’re going down in Poland too. And the Baltics? The Baltics are the punching bag of the world economy—they never had a chance to develop their own economies. Why? Because of the idea of opening and doing everything to integrate into the world markets was wrong, openness and free trade didn’t solve anything for these countries. And the Chinese…

When somebody saves, somebody else has to borrow. And countries would rather refuse to be the debtor. Germany certainly doesn’t want to be one. So it’s creating debt in all the other countries to balance its savings.

Took a reverse approach?

Exactly. How is that a country ruled by the Communist Party and the communist elite is the most successful in the world economy of the last 30+ years? What a surprise that is [laughs]. This is a surprise especially for my Polish friends who believed that it is only the markets and it will always be the markets who solve the economic puzzle. They’ve never understood what the market is. Unfortunately.

Heiner Flassbeck

is a German economist, publisher, author and public intellectual. From 1998 to 1999
he was State Secretary in the German Federal Ministry of Finance where he also advised former finance minister Oskar Lafontaine on the reform of the European Monetary System. He became the Chief of Macroeconomics and Development of the United Nations Conference on Trade and Development (UNCTAD) and served there from 2003 to 2012. He publishes current and commentary opinion at Flassbeck. His latest book in English is “Against the Troika. Crisis and Austerity in the Eurozone” co-authored with Costas Lapavitsas and published by Verso in 2018.

Jakub Dymek

Jakub Dymek is a columnist and author. His book about the rise of revolutionary political right in USA, Poland and Russia entitled “Nowi Barbarzyncy” (“The New Barbarians”) was published in 2018 by Arbitror Publishing.

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