We Are All Marxian Now

As the crisis  goes on, it becomes evident that the European “Fiscal Austerity “ was just the foreplay. The real game ahead is "Competitiveness " ( especially in the Southern  periphery countries).

Fiscal Austerity is an accepted dogma in Europe and its implementation   is already depressing demand (ex. Spain unemployment to 22+%) . “Competiveness” is the private dimension  of a restrictive economic policy with its support for  wage cuts as a prerequisite to restore balance in the Continent (with the obivious implications on consumption and demand). However many economists, including some who dissapprove the Public Austerity policy, support the wage reduction policy as a substitute for "internal devaluation" in order to restore the economic European balance.

Lets see a few quotes

Diverging competitiveness among EU nations: Constraining wages is the key Mickey  Levy , Chief Economist of Bank Of America
“..The policy implications (for Europe EF)  are clear. Realigning real wages with productivity in Greece, Italy, Portugal, and other EU nations is as important, if not more important, than required fiscal austerity. However, this will be easier said than done.” 
(http://www.voxeu.org/index.php?q=node/7536 


Interview with W. Buiter City´s Chief Economist
“ The only thing Spain can do is radical reforms, a more flexible labour market and much lower real labour cost”. These are the clear terms   expressed by Mr Willem Buiter, City`s Chief Economist   about the reality of the Spanish economy, on which he openly speaks about in pessimist terms..."   (Translated from “El Mundo January 29th 2012)   

The message is clear: “Realignment,” “Reform” "Lower labour costs" with the objective to gain Competiveness. This is a serious challenge : we are not dealing with  a proposal  coming from an interested part (such as employers) which can dismissed as a "Class warfare" statement. The proposal carries the seal of professional, neutral  economists  and as such should be analyzed with analytical tools .

First comment : The analytic  focus on labour ALONE is deeply wrong from a 21-century economic perspective ( it is RIGHT from a Marxist perspective... we´ll deal with that later ) .  Past Economists like 19 century D. Ricardo developed the concept that prices (the basis for competitiveness, as in the end you compete with prices and costs) are the sum of   production factors. Back to Econ 101? 

 Labour+ Capital (Earning included) + Land= Cost  

 Therefore those who claim that the Spanish economy (in our case) is not competitive should present a comprehensive analysis of the cost and efficiency of ALL production factors. Otherwise, it is a partial and misleading analysis.

Second Objection :  Even if we maintain the  focus on labour, the actual figures simply do not corroborate the conclusion of our  Economist. Lets have a look on figures taken from the OECD statistic database  (2010)

Item	Unit	Spain	Germany	Ratio (Germany/Spain)
GDP	Million  Euros	1,062,914	2,476,800
Work Force	Thousands	18,890	38,471
Overall Labor  Compensation	Million   Euros	516,799	1,261,380
Ratios
Productivity ( GDP / Workforce)	k Euros	56.3	64.4	1.14
Average Wage (Labor Compensation / Workforce)	k Euros	27.4	32.8	1.20

As can be seen from the table, the German average worker is more productive than his Spanish counterpart by 14%, but he also earns more, app. 20% more. In other words, if comparing the labour component, the Spanish employee can be competitive with the German worker, and she got a 6% edge on  cost level. So how it comes that Germany is considered more competitive than Spain?   

First of all, we should analyze the relations between both the countries and the rest of th world . Second, we just analyzed the labour component in price, so  in order to get a comprehensive picture we must add Capital (and Rent) . The result might be that the Spanish problem is a too high CAPITAL return in comparison to its productivity and not Labor. 

This is the big TABOO nobody wants to deal with , as it is always easier to accuse the working people for being non productive or earning too much (which in our case fits with racist stereotypes…) . 

Least and not last:  The assessment which considers labour as the main cost generator (as the above economist do) , THE real engine behind values, and  as such THE “key to competiveness” is nothing new to the Economic analysis. . As a matter of fact this is an updates version of the “Labour Theory of Value”, the 19^th century idea developed up to its most “pure” level by  …Karl Marx!.

The idea that Labour is the sole value generator of the commodities (including Capital) became under Marx’s   hands a tremendous analytical tool he used to develop a deep social criticism. I doubt that this is the intention of the Wage Cut advocates, but in a certain way they could claim that after decades of ideological debates, WE ARE ALL MARXIAN NOW.    

Negative German Yields and Eurospecticism

 From the Wall Street Journal

"In an auction Monday, Germany sold €3.9 billion ($4.96 billion) of six-month bills that had an average yield of negative 0.0122%, the first time on record that yields at a German debt auction moved into negative territory". (WSJ website  , “Germany yields south of Zero" , January 10th , 2012)

A nominal negative yield is very rare event, and for a good reason: As an alternative to the investment the purchaser  can always store her cash in a current account, or just keeping it in a safe with all the possible advantages: Cash is   safer, it offers  100% liquidity and in that case there is no dilemma as  , that case, it earns more money than the alternative investment ! ....(1)
So from an economic logic, (whatever weird theory is built on that matter) there is no point to buy such obligations that FOR SURE will yield less money than the original outset.

Deleveraging , Debts and Distribution

Most economists are already convinced that years of massive stimulus spilled on the economy yielded just minor economic results: In any case far from what can be regarded as “Recovery”. Why? Many are the obstacles the economy is facing, though it is widely acknowledged that the private sector heavy indebtedness and its "Deleveraging" .....

Europe is Heading the "Right" Way

The landslide victory of the Conservative “Popular Party” in Spain ( a couple of weeks ago ) should be analyzed not only from a national context but from a rather wider perspective . In other words, I claim that the Spanish return to the Right is just another brick in an almost completed Conservative European wall . The following paragraphs will try to show that this is not just a mere “feeling” but an almost unprecedented event.

I’ve run a very simple test to understand the magnitude of the Right wing European orientation:

On Competitiveness and Salaries - A European Note

Most mainstream economists agree that the deteriorating condition of the Euro is the outcome of the differences between the EU countries . The perception the Union as it was formed actually deepened the structural economic “imbalances” between a thrifty “North ” and a profligate “South," while lacking the correspondent policy tools which counterbalance those deficiencies .

The "imbalances" and the proper short run policy response have generated a heated debate among the political and economic circles in Europe. Needless to say that any outcome from the European deliberations will have an impact not only on the Continent but on the global economy. However, there is almost no doubt that for the medium and longer run , the “South” must restore its “competiveness” in order to avoid a second round of economic imbalances. So “Competiveness” is THE core issue to be resolved.

What is competiveness all about? The idea behind the “competiveness” theorem is that the last decade brought about excessive wage increases in the South which eventually caused the loss of a competitive edge vis a vis the North and the rest of the World. The result was the formation of unsustainable massive deficits , private and public as well. . Therefore , as we are told , THE logical solution is to reduce wages and / or improve productivity to avoid these deficits and financial crisis. Is it's so? Are really wages and salaries the real reason for the crisis?

One way to analyze the issue is to compare identical products and see their costs structure and selling prices : A product is sold for a price and the cost is divided between labor and capital and profits ( 50, 50). If Labor cost increases, lets say to 60 , and you want to maintain the 50 profit, the price must increase to 110 . (In that case the RELATIVE weight of labor also increases).

The same logic applies to the national economy: GDP, the “product” of an economy is roughly split between its "costs" i.e. Labor in the form of wages and Capital in the form of interests, amortization and profits . If the labor share increase, it means that in relative terms the worker take a bigger slice of the economy ( and vice versa) .

The following graph which compares two representative countries ( Spain vs. Germany) i.e. the typical “North” and “South” Economies in terms of salaries and labor share speaks for itself

Based on data extracted on 07 Dec 2011 from OECD. Stat ( Annual Income Share real ULC)

The interpretation of the graph is very simple. Any competitive misalignment between the two countries cannot be attributable ONLY to the Labor costs. I will make use of a simple numerical example to illustrate the point: Suppose that in the 80 a German and a Spanish car car were both sold at 10 k Euros. In such case workers got Ap. 7500 Euros ( “labor share”) of it and Capital got the balance, i.e., 2,500 E . If there was no change in the relative prices, in 2007 workers received only Ap. 6,400 Euros and capital 3,600 . Now, if Spanish cars became more expensive and lost competiveness, lets say 11k, part of the blame for the price increase MUST be attributable to Capital as they got for sure more than 3600 ( in our case 3960 E)

In other words, what the figures tell us is that any competitive loss, if there was any such phenomenon of the Spanish economy was necessarily, among other factors the outcome of higher profit rates. Therefore the burden of any alignment process should be bear ALSO by Capital. The calls to reduce salaries in order to restore competitiveness are economically wrong and morally flawed, as Capital enjoyed a 30 years period of a genuine Bonanza.

This graph also tells us something about the importance of adopting a cross borders perspective. If the European working people adopted a pan European perspective, for example by advocating the increase of labor share in each and every country instead of adopting a sort of national perspective, all the working people, including the Germans ( and the rest of economy as well…) could gain from such common stance. But let´s leave that for another blog ….

European Lessons ( Part II )

In a previous post http://enriquefleischmann.blogspot.com/2010/09/european-lessons-for-middle-east-part-i.html) I´ve tried to present an historical perspective for Mid East Peace Process, a lesson that the peoples and their leaders could learn from the European history while dealing with the “Peace Process” . Very briefly, the main message was that Mid East peoples should learn how try to avoid the European bloody path to Peace: Europe and its people managed to achieve a relatively calm and prosper era (since 1945) after waisting millions of human lives during hundred of years of wars and conflicts which devoured an infinite amount of economic resources. For us, the younger generations a peaceful Europe sounds a banality but remember that the last 60 years are an exceptional long period with no serious violent confrontations in the Continent . For the record, the last 300 years yielded wars in 1939-45,1914-18, 1919, 1870, 1866, 1805-1815, 1763, 1711, .. just to name a few).Middle East people should understand that the way to prosperity is 180 grades opposed to war , while the alternative is paying the expensive REBBE GUELT ( “Teacher´s Salary” in Yiddish) with their own blood.

Being conscious that the former analysis might sound discouraging ( which is not the case !!) I decided to make use of the same “Raw Material” in order to develop a somewhat more encouraging and hopeful conclusions.

The first step would be to arrange history in a more accurate perspective in three aspects : Casualties, Time and Space.

Casualties : The Mid East conflict has yielded app. 101-115 thousands casualties ( Wikipedia) , WWII 60 Millions, WWI 20 millions ….the death toll table (http://en.wikipedia.org/wiki/War) is a sad reminder of our dubious humanity . Before proceeding , I would like to stress that each and every casualty is a terrible loss, and any statistical “comparison” is misleading from a human point of view. But if the depth of hatred is highly influenced from the level of collective suffering, than a rough comparison can give a ray of hope. As I said before, the comparison is aimed to show that even after terrible bloodsheds human beings are able to understand that an ongoing and endless cycle of vengeance is useless. History teaches us that victims do not necessarily turn into the eternal combustible that feed the flame of hatred .

Time : Our high speed era can hardly cope with an historical perspective, since events are not viewed in a wider context abd so they loose their meaning within a very short period of time. Instead of eternity we became used to think in “short time eternities” . However, if we just maintain a bit longer run perspective, time becomes another dimension that should be considered in our "European" lesson : France and England maintained a 100 years war, the border line between Germany and France was a main focus of hostilities for centuries, the 30 years war was a devastating experience of Europe, let alone the long run Reconquista in Spain.... so the Mid East few dozens years struggle is undoubtedly too long but not extraordinarily long in historical terms. Our generations were condemned to spend their entire lives surrounded by the “Conflict” , an experience which brings some of us to sad conclusions of NO HOPE. History tells us that a different coexistence is possible, and history provides strong evidences that even the longest conflicts eventually end .

Space or Clash of Civilizations : The last last point is less related to Europe and more to “enmity” between Jews and Arabs/ Muslims. The Conflict is sometimes described as part of an unavoidable “Clash of Civilizations” ( Why that “clash” occurs now? Why it did not take place before? ), so as a “byproduct” of that “clash” the conflict can be solved, if at all, only as part of a wider global arrangement ( or after an Armageddon style battle) . That perspective leaves very little place for any solution : the more complicated and confused an issue becomes, its solution becomes further ( in economic parlor : additional imposed constraints just remove further an optimal solution) . However, from historical perspective Jews and Arabs got along much better than European and Jews, so the Conflict can hardly be considered as a mere product of a phenomenon that hardly existed before the foundation of Israel (Note : Zionism never saw itself as a colonization movement in a European sense). Therefore if the KISS principle ( Keep It Simple , Stupid) is applied and the conflict is confined to a strict political , national and territorial arena, expelling external “noises” both sides might be able to find a practical solution , a “second best” solution much faster .

As I said in the beginning, there is still hope that both people are able to advance with the process before it gets too late. History shows that it is possible, but we should not forget that “Time is money” especially in its special local meaning ( in Hebrew the word DAM or DAMIM means “Blood” but also “Money”).