Economics and politics - comment and analysis

Why democracy will ultimately fail

I already described in my last piece that it is almost impossible nowadays to bring an indisputable fact to the attention of the people in such a way that even politicians feel compelled to question all too simple views and also to go against the economic prejudices of the majority for once. This is true for many challenges that this society has to face now and in the future. But everywhere one sees the same picture: excited tweeting from all camps, but never even an attempt by those with political responsibility to take the lead in a debate not only with power but also with spirit.

The much-vaunted pluralism becomes a problem precisely where it prevents serious debate on the substance, because ultimately everyone has to be right somehow. Exemplary of this is the inflation issue, which, if policymakers react inappropriately, has the potential to set large parts of the world back years again immediately after the Corona shock, which has not yet been digested.

For nearly two decades, the Western world has puzzled over why mere inflation rates are so low; indeed, one has heard repeated fears of deflation. Central banks struggled to prevent deflation, “flooding” the money markets with liquidity at interest rates that were zero or even below. From the beginning, there was a simple explanation for this deflationary tendency, which was also well supported empirically, but no one wanted to hear it. With the “flexibilization” of labour markets high on the neoliberal agenda (including the Agenda 2010 of the German comrades), pressure was put on wages and the unions could not resist because unemployment was high and their members’ willingness to fight was low. In Germany, Red-Green had also laid the foundation for this with the neoliberal agenda and the Hartz legislation.

As I said, the unions did not want to hear this simple explanation, because they would have had to admit that it was they who signed agreements that did not lead to jobs in Europe, but to downward pressure on prices. Employers also had to reject this explanation because, of course, in their imaginary world, fewer rising or falling wages immediately create new jobs, which rules out the possibility that wages have anything to do with prices. After all, the academically trained economists could not admit that prices have anything to do with wages, because then their beautiful model of the labour market would have become untenable.

The sleepwalkers on deflation and zero interest rates from all political camps were only awakened when prices suddenly rose. Now it seemed as if the bad dreams of the “lots of money” that the central banks had created were suddenly coming true. But all that money was no good as an explanation for the sudden changes. After all, anything that had been around for a long time before could not explain why prices suddenly rose that had not risen for years.

Obviously, the turnaround from “deflation” to “inflation” had nothing to do with wages either, because they are – in Europe at least – still moving at a very moderate pace even in 2022. Now one should have thought for a moment to come to a simple solution. If it wasn’t wages that led to rising prices, then something new must necessarily have happened to explain this price surge.

Temporary price shocks…

Finding out specifically what happened wasn’t particularly hard either. There were undoubtedly some shock-like changes in the world economy that could explain the fact that some markets experienced supply problems, real shortages, and speculation in commodities. I will spare myself to enumerate that again. If you were to look now, you would see that most of these prices have already peaked or are even falling, with some almost back to pre-shock levels.

Now there is one tiny little thing missing to reach a clear conclusion. One still needs to know that inflation always means a rate of increase. The price level can be and remain significantly higher after such a shock, but the inflation rate (i.e. the change in the price level) can easily drop to zero or even fall. In order to arrive at the conclusion that the inflation rate will remain high, one must necessarily assume that there will soon be further shocks of the same magnitude as those behind us. But this is an absurd assumption from the outset, because it is precisely the characteristic of such shocks that no one can predict them.

The result of these considerations is simple and perfectly logical: We are dealing with temporary price increases! Even if there are temporary price increases again in the fall because of the gas levy or some other factors in Germany, this does not change the fact that all these factors have only a temporary effect. The price level next year will be higher than this year, but it is unlikely or simply unknown that there will be new price increases of a comparable magnitude. One-time payments by employers or one-time relief for low-wage earners by the state are consequently a serious solution.

…and the power and impotence of the unions

This is where Frank Werneke comes in. The man is the chairman of one of the largest trade unions in Germany and Europe, namely ver.di. Frank Werneke is quoted on the home page of ver.di with the words: … we are dealing with prices that are likely to rise permanently. These must be compensated for with permanently effective collective wages. Anything else will lead to a loss of real wages. That’s why we are clearly entering the current collective bargaining negotiations with the goal of ensuring that a collective wage increase offsets the price trend.” In an interview, he also said:

“We currently have to assume an 8 percent price increase this year and another 5 percent price increase next year. That is the reality that people are facing. No one believes that prices will go back down again. We need permanently higher wages. One-time payments are not enough.”

In addition, he notes that in the service industries, higher energy costs are mostly passed on in full to customers. Many companies also took advantage of the opportunity and immediately added a little more to their prices. He therefore sees no reason for wage restraint.

As I said, there is nothing to suggest “permanently rising prices”. All the effects we know of are temporary, no matter how many there are in detail. However, if the German unions base their policy on such an “analysis”, that is precisely when there will be permanently rising prices. In macroeconomic terms, wage costs are by far the most important cost. Those who want to increase them should know what that means. In the wake of permanently rising wages, there will be massively rising unemployment, because the ECB will simply not allow permanently rising prices. It will forcefully bring the economy to its knees with high interest rates and tremendous consequential damage.

To play their role appropriately, the unions do not really need a clear analysis, they just need to be clear about what they can and cannot push through politically. Unions can try to avoid real wage losses with a deal on the order of eight percent this year. Let’s assume (unrealistically) that they succeed. Then what Frank Werneke clearly recognizes would happen with energy costs would certainly happen with wages: employers would pass on rising wage costs in full to customers. The result would be an inflation rate of at least eight percent next year – with the prospect of further rates of this magnitude in subsequent years, because the unions would surely take to the streets again next year against a loss of real wages.

Even if it were possible to avoid a real wage loss for once (which is highly unlikely), this would be bought with the certain prospect of a tangible recession in which workers would again be by far the biggest losers. What’s the point? Any union boss who talks about raising wages without talking about what the corporate response will be is playing a dangerous game and is lying to his own members. Even if unions fail to avoid a real wage loss, but wage settlements are well above what the ECB considers to be in line with stability, workers will get one hundred percent of both: Real wage losses and unemployment.

The complete inability to think clearly

This is by no means the only way things are going in the economic sphere. More and more, it seems to be becoming the hallmark of our democracies that it is impossible to think clearly in many areas. In the polyphonic and agitated chatter of our days, in which the powerful lobby groups are heavily involved, the ability to make an unagitated diagnosis and to take appropriate political measures on this basis is being lost more than ever. While we consider democracy to be the superior form of government, we do not give a second thought to whether there is any way at all in which democratically legitimized chatter on the one hand and powerful lobbying on the other allow proper decisions to be made.

There is always talk now about the new system competition, about the comparison of democratic orders with dictatorial regimes, and of course it is assumed that our system is superior. But this is not true, as China’s economic success story proves. If – for whatever reason – the ruling clique has a halfway suitable world view, it can easily beat democracy. Beyond any liberal dogmas, the Chinese leadership has from the beginning relied on state intervention in its form of market economy whenever the situation required it. This has proven successful. However, if the clique’s worldview is wrong, it can also lead the country completely astray, as seen with the Corona policy.

But the chattering democracy is not only losing system competition; more importantly, it is losing more and more of its citizens. The recurring flare-up of fascism à la Trump or Bolsonaro should be a clear warning. It is precisely because fascism radically ends chatter and posits “solutions” that it is gaining appeal in the eyes of many people. Fascism is no longer about asking what exactly happened or even why something happened, but only about what the ruling clique wants to impose based on its prejudices and its own interests.

Democracy and pluralism are not superior per se. When democracy loses the ability to hold serious discussions on serious issues, it provides a wide open flank for its opponents, who, like Donald Trump, intuitively see the weaknesses and are able to systematically exploit them. In Italy, at the end of September, there is a real danger of such a regime establishing itself in the middle of Europe.