Analysis. The de-regularization craze is apparently over. A look at international stimulus packages.

"This time we are not dealing with a normal recession, but with a crisis that is relevant for the system as such, a crisis so huge and containing the power to change and destroy structures in a way that does not allow for it to simply let it go on.... We now notice that all the theories of the last years have led to misery." The one to notice all this now is Jürgen Rüttgers, prime minister of the German federal state of Northrhine-Westphalia, a conservative who in the past was one of the protagonists of the neoliberal theories.

Recession, depression, a lost decade - the terms to describe the future we are facing are becoming ever more dark. And the ones using those terms often are the very mainstream economists who, a mere year ago, were hailing the power of free markets and dreaming of a long-lasting boom. The craziest of them even saw the coming of a new economic miracle.

And indeed, what is starting now is beyond comparison - at least if you take the last 60 years. The direction, however, is much different than what the term "miracle" implies. An economic downturn of up to 4% for the German economy is predicted for this year alone, the entire eurozone is predicted to shrink by 2%. Dramatic numbers also on the other side of the Atlantic Ocean. If one does not take the surplus of goods on stock into account, the US economy has already taken a downturn of 5.1% in the last quarter of 2008 - despite all the tricks usually used to euphemize the US growth numbers. Predictions for 2009 are dim. Also in the emerging market economies the capacities for growth are exhausted. The IMF is expecting, at best, stagnation for the global economy.

But how else could it be? The international banking system is practically bankrupt, bank lending is frozen, purchasing power is decreasing. Unemployment, short-time work and poverty are rising quickly. Two million working places in the US alone have been destroyed in the last four months, almost three million people have been involuntarily forced into part-time jobs. In 2009 a cut of 3-5 million more jobs is to be expected. Already in September 2008 31.5 million people in the US were living on food aid - an all-time high ever since this program was started with the intention of saving those who have reached rock bottom from starving to death. And also in Germany the crisis is starting to be a job killer. And here, too, due to the social cuts of the last years there is not much of a social net any longer to cushion off the fall. A dangerous spiral to the bottom is looming.

Safeguards for the rich

Against the background of this hopeless situation, by now even the most remote study halls of the neoliberal theory of the law of supply have come to realize that capitalism somehow does not work without a certain amount of demand, and that at certain times it is only the government that is able to create demand. "I simply cannot understand why that many segments in economics are now changing their positions diametrically. Have they all lost their minds?" Thus spoke in despair in Germany´s leading news magazine Stefan Homburg, university professor and one of the last of Germany´s devoted neoliberals who defend unregulated free markets even in times when they are not to the benefit of the ruling class.

If you look closely, however, in reality the sudden turn-around in teaching and politics Homburg is complaining about does not exist. It is still the same master that is being served. It is only that this master, now that he has become weak and fragile, needs care and warm tea instead of wild parties and love for sale. If you put it more pragmatic: If yesterday it was the free market that provided the upper class with money and wealth, they now need the state in order for them not to lose the yields of the great years. It is only logical that the concept of a lean state has become history and that now it is back to "big is beautiful" when it comes to public spending.

5 billion euro more for new streets and new paint for schools? Or 18 billion for a bank? Or 20 billion in tax gifts? It is really stunning: The same state that was - and still is - ready to fight with any person on social welfare about 10 € in benefits, has no problem with handing out billions.

Not only in Berlin, even more so in Washington, Beijing, and Tokyo, huge sums are pumped into the economy in order to keep it from dying off slowly. And in the same way the money that is dripping into the black hole of the financial sector is growing more and more by the month, also the economic stimulus packages are increased. The stimulus package of US President Obama amounts to an unprecedented 787 billion dollars. The Chinese stimulus package which aims at preventing the economic downturn by increasing public investments and social programs, amounts to 580 billion US dollars. Japan is spending more than 100 billion dollars. Also in Europe those countries that can afford it have put together stimulus packages. Great Britain is spending 20 billion pounds, France 26 billion euro, and Germany is spending 50 billion euro. Even the neoliberal economic newspapers are starting to get worried: "Slowly one is starting to lose an understanding of the high numbers", one of them wrote.

But it is not only size that counts, and the plain numbers do not explain too much. What is important is the amount of time in which the money is to be spent. Whereas about ¾ of Obama´s stimulus package are intended for the next 18 months, it is only in 2010 that large parts of the German stimulus are to take effect. Plus there is a lot of manipulation going on with the numbers: Investments that have already been planned all of sudden appear as a part of the stimulus package. The Italian government for example has been particularly creative when it comes to euphemizing the stimulus package it has worked out and which is presented as being worth 80 billion euro. EU Commission estimates, however, regard it to be 6 billion euro only. The same was true for the first German stimulus package in 2008. It was officially held to be worth 30 billion euro, in reality, however, it amounted to barely a third of that sum and for this reason was rightfully soon forgotten.

The question that really decides the effectiveness of a stimulus package, however, is not only how much and how quickly. It is: Who gets the money? If it is people who are relatively wealthy and who save much, the effect is not reached. Or is it people who have little and who will enjoy spending extra euros? In that case supply and demand indeed increase.

The most efficient and workable way of getting the economy going would be a radical re-distribution of wealth and income from top to bottom. This would do away with the problem of demand. After all it is not the case that today there are no unfulfilled wishes and needs that have not been met. In fact, it is only what is socially just which today is economically sound.

But we are not dealing with sensibility and crisis management. It is crisis management under the premise of keeping up the ways in which distribution is taking place so that in the future high profits will again be possible. This is the only reason why the capitalist elites want to overcome the crisis: They want to keep and retain their income and wealth. This is why they have a big interest in economic recovery - but only in accordance with their own conditions! It is the contradiction between an increase in demand and profit interests which is typical for the stimulus packages that have been started in the last months. The capitalist elites have no simple task. They have to increase demand that neither today nor tomorrow is to be unbeneficial to capital exploitation. This is not all that easy.

Keynesian crisis management

Former apologists of an uncontained free market are slowly noticing that capitalism without demand does not really work. To sum it up roughly, all stimulus packages consist of three components: public spending on investments, measures to gear up private consumption, and direct aids for stumbling enterprises like loan guarantees or cash injections. Additional public investment is a standard Keynesian measure and it is usually helpful. Especially in a country like the US where due to the neoliberal de-regularization craze streets have been rotting, bridges more often are blocked off instead of being repaired, schoolhouses are crumbling down, and public libraries are neglected, an economic state intervention program would have been overdue even without a crisis. The same is true for Germany where local authorities were forced to neglect the public infrastructure due to lack of public funding.

The major part of Obama´s programme is to provide for public investment. The billions are to contribute to doubling the production of alternative energies within the next three years, and they are to modernize streets and schools. Similar matters are planned by most European countries, also in the German stimulus package. The latter one, however, with a meagre additional 9 billion annually for investment purposes, appears to be only a minitiature version of Keynesian anti-crisis politics. In order to generate a serious effect on the economy much more would be needed, and the lack in public investment is neither going to be abolished through it. After all the German government would need to boost investment by 25 billion € more annually only to meet the European average.

And not all investments are the same. It makes a huge difference in economic effect whether an investment is assigned to enterprises with a high or low profit margin and with high or low work intensity. The more money, e.g. in the construction sector is channelled not only into the renovation of crumbling facades but also into the renovation of the profit rates of the enterprises, the lower is the multiplication of income and thus also the effect on economic activity as a whole. Another question is the concrete content of the investment. There is no doubt that refurbishing badly smelling school toilets makes sense - refurbishing the facades of military barracks as is also foreseen in the German stimulus package, however, is nothing else but a clandestine increase in military budget.

With regard to the second component of stimulus packages, increasing private consumption, it is the distribution effect alone that is decisive. The two ways at the center of the debate are consumption checks and tax cuts. Tax cuts favor almost always those who are better off because they pay more taxes. Low income earners, the unemployed or those who work in black labor - i.e. the very people who are most in need of money - do not profit from tax cuts, which makes these cuts pretty senseless from an economic point of view. Taking the political interest into account, however, it is tax cuts that form part of the neoliberal measures, and it is especially times of crisis that provide a good opportunity to push through measures that could not be enforced in boom times.

Flash in the pan

And indeed, the US stimulus package includes high tax cuts. It is for a good reason that US nobel peace prize laureate Joseph Stiglitz criticizes: "Way too many tax cuts that will not have much of an effect and will neither lead to more investment nor will they be aimed at those people who are going to spend the money." In the German stimulus package public money is also wasted by means of tax cuts. The lowering of the tax exempt amount and the initial tax rate plus a diversion in tax rates will cost about 9 billion € annually. Adding to it is the decrease in health insurance rates which is of little benefit for the employed but of much benefit for the enterprises. The German government has been quite open as to the distributionary effects of the tax cuts. People earning up to 10.000 € annually will be receiving a meagre 0,15 billion euro of the tax present. Those earning more than 53.000 € annually will be making a profit of about 1,45 billion euro. This may be a consolation for the rich for sad days at the stocks; apart from that, however, nothing is gained.

A special type of tax cuts has been tested by the Brits, i.e. the lowering of VAT by 2.5%. Since indirect taxes have a regressive effect meaning that those earning less are affected disproportionally, at first sight the lowering of such taxes seems to make sense. The problem, however, is that lower VAT rates are usually not passed on to prices but are used by enterprises to brush up their balance sheets. The British government in the meantime has also realized that the measure which is going to cost them 14 billion € in 2009 has been a non-starter.

Remain the consumption checks, this means gifts a government may hand out to every citizen or to certain groups. At least as far as consumption checks are given to low-income households, they should directly be reflected in increasing consumption. The problem lies in the fact that consumption checks which form part of the stimulus packages of Japan and France among others, are usually only distributed once thereby only stirring up a little fire that is put out soon again. This is probably one of the reasons that Obama did without this type of stimulus - his predecessor George W. Bush had already handed out gifts like that in the last year - to no effect. Germany´s 100-euro-payment per kid, or the scrapping premium for old cars belong to this category. A global economic crisis is not going to be curbed by this.

Social abstinence

What would be an effective measure, however, would be to increase lower wages - for example by initiating or increasing minimal wages -, or to increase social transfer payments. Only 7 billion euro would have to be spent by German public money in order to increase the unemployment and social welfare payments by 100 euro per month. This means 7 billion euro that would directly be converted into consumption. If Germany were to introduce a minimal wage of 8,71 euro per hour like France has it this would immediately lead to an increase in purchasing power of 13 billion euro. But - measures like that are not favored by capital owners. It is probably due to this very dislike that the helpless idea of consumption checks was ever born.

When setting up the German stimulus package special care seems to have been taken in order to have as little a social component as was possible. The only thing there is is an increase in the minimum subsistence level for children - something which a verdict of the Federal Social Security Court in Germany had already called for. In the US an increase of unemployment and health insurance benefits as well as an increase in food aid is included. This, too, is anything but lavish, and it is definitely not the least attempt at correcting the shameless redistribution in wealth of the last years - after all 96% of all increases in income in the US since 2001 have benefitted the upper 10 percent of the rich only. Social abstinence is one thing that almost all of the stimulus packages have in common, and it is precisely because of that that they can be predicted to have only a limited effect.

The third component, namely providing enterprises with direct money aid, increases the distributionary insanity even more. There is no doubt that it is more expensive to provide entrepreneurs of stumbling enterprises with money to continue with their businesses, instead of continuing with jobs and production in a business that has been changed to be of public ownership or in which the ownership lies with the employees. In that case it would be the capital of the old owners that would have to be used first to pay for the liabilities of the enterprise before the government steps in. And afterwards only the job wages would have to be earned, and not the dividend payouts to the shareholders. And, thirdly, it is only then there is a chance for a profound change in business model: No more hunt for yields and high dividend payouts. This is the only way of avoiding the craze from happening all over again in the next economic boom.

After all it is now in particular the automobile sector and their suppliers which are the ones to profit from the billions in taxpayers´ money. This is a sector that in most countries did extremely well in the last years and that spent incredible amounts of money on re-buying their own shares and paying dividends. It is therefore at least as brazen to spend public money on paying for the losses of those money-bathed shareholders as it is to use public money in order to create waste disposals for toxic bank papers.

What interest lie behind the stimulus packages becomes apparent when taking into account that they are always intended to benefit the local enterprises. This, as well as the growing tendency to have protectionist measures, are infallible signs of proof that the national relation has not lost its significance even for enterprises that work globally. Despite all hymns in favor of globalizations the capital owners know very well when push comes to shove what country is to take care of them. For Germany even the fact that the stimulus package is relatively moderate has to do with sentiments in the upper floors of the German enterprises. Since most of Germany´s big enterprises live off exports - and thus profit from the stimulus packages of other countries -, spending too much tax money on stimulating demand at home to them is nothing more than a waste of money.

Debt spiral

Those who spend much must earn much - or they must indebt themselves without inhibitions. The different countries are doing the latter at present. The US government is expecting a public deficit of 1.2 billion dollars for this year - this is equivalent to 8% of BIP. Europe is not much better off. Even though the Maastricht Treaty which has served as a gathering point for neoliberal austerity fanatics for more than 15 years, is calling for a maximum budget deficit of 3 percent of BIP, Ireland for example is expecting a deficit of 11 percent in 2009 and even 13 percent in the upcoming year. France and Spain are expecting a deficit of 5.4% and 6.2% respectively. In Germany it is very likely that is going to amount to more than 4 percent.

Of course it is of no harm if the Treaty of Maastricht is finally turned into a waste paper, however an excessive budget deficit is no good solution, not even if all expenses from the first to the last euro were to make sense. After all also a public debt cannot be increased indefinitely without eventually leading to bankruptcy, which means that today´s debt will almost in all cases serve as a pretext for future severe cuts in public spending. The only alternative lies in having those who were responsibly for the crisis and who benefitted from the party in the past, pay for it. The means are available - like a millionaires´ tax. But it is defintitely not going to be economic reasoning on the side of the ruling but only massive pressure on the side of those who are being ruled that is going to foster a solution. A general strike like the one in France on January 29 could be one of the starting points.