Hysteria In The Kindergarten.

Someone must have put something really bad in their lemonade. I am at loss for words about the hysteria that the ongoing German class struggle has become (for more information see the comments to my last entry). It’s like a gang fight in kindergarten.

While Nobel Price laureate G?nther Grass (literature, not economics) made headlines with his important realization that even German MEPs are not living in a dimension of their own, and thus – in spite of the constitution’s stipulation that their decision’s are only subject to their conscience – are often subject to pressure from “a ring of lobbyists”, Guido Westerwelle, chairman of the German Liberals, thought he was missing out on all the fun and – in a truly surprising move – lashed out against trade unions, apaprently calling them ‘a plague upon the country’ and ‘traitors of the interests of employees’.

The latest, and most bizarre, development: In what is apparently an attempt to amend Godwin’s Law [“As a Usenet discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches one.”] , the Jewish German historian Michael Wolffsohn compared the SPD’s chairman Franz M?ntefering’s statement about ‘Financial investors that descended upon companies like locusts’ to the anti-jewish agitation of the Nazi era and demanded that Mr. M?ntefering apologize to all affected by the Nazi dicatatorship.

According to a report from the Frankfurter Neue Presse he wrote among other things (translation mine) –

“…a boycot of companies is called for. And that should nor remind me, as a historian and a Jew, of January 1, 1933? ‘Don’t buy from Jews’ they said back then and just as now it was allegedly all for the good of the people and the simple man against the “greedy capital”, which was called “Jewish capital” then.”

Paul Spiegel, Chairman of the Central Council of Jews in Germany, hurried to tell the press that he finds it absurd to allege antisemitic motives for M?ntefering’s statements, but added that comparisons of humans to animals were generally hapless.

Hapless. Quite right. Like the entire debate. At least now I know that Germany really needs more kindergarten teachers…

16 thoughts on “Hysteria In The Kindergarten.

  1. “compared the SPD?s chairman Franz M?ntefering?s statement about ?Financial investors that descended upon companies like locusts? to the anti-jewish agitation of the Nazi era”

    I must admit the use of the expression “swarm of locusts” did set alarm bells ringing in my head. It is definately reminiscent of a pre-WWII rhetoric and in this sense – as you indicate – highly depressing.

    The reference that came to my mind rather than the Nazi one was a work published in 1910 by the Austrian economist Rudolph Hilferding: Das Finanz Capital, which contained ideas which may well have formed roots in German socialism via one Karl Kautsky. As you suggested in the earlier post the minimal acceptance that “markets are ‘one coordinational mechanism among others'” would have lead one top think that all this had been left behind light years ago.

    Clearly all this revolves around political rhetoric rather than actual policy, but still very lamentable.

    Two questions. Firstly it is often pointed out that traditionally corporate life in Germany has been driven more by internal financing, interlocking directorships and arrangements with large banks than has been by equity markets which are more characteristic of the US/UK financial culture. Then more recently we have had the internet driven surge and slump in equity values, which probably also forms some of the backdrop to the current debates. Are M’s declarations any reflection of these historic divisions?

    Secondly, and thinking in terms of political appeal, are such sentiments any more likely to be better received in the regions of the old GDR than in the area of the former federal republic?

  2. “The latest, and most bizarre, development . . :”

    “A Berlin man has gone on trial for murder in an attack which his lawyer says was inspired by the high-profile case of a cannibal killing in Germany. Ralf M admitted stabbing a music teacher with a screwdriver. He said he was motivated by cannibal fantasies which he thought he had under control. The prosecution said he stored body parts in a fridge, but did not eat any. . . ”
    http://news.bbc.co.uk/2/hi/europe/4510931.stm

    All of which should remind us of what George Santayana wrote: “Those who fail to remember the past are condemned to repeat it.”

    Vote No in referendums on the EU Constitution.

    Personally, I’m more likely to remember this: http://www.rense.com/general26/dutch.htm

  3. Firstly, to be fair to Mr. M, he now has made concrete suggestions. To summarize:
    http://www.n-tv.de/527341.html

    1. impose German wages on foreign service providers in Germany
    2. cheaper credits for small business
    3. disclosure of management wages
    4. harmonized corporate taxes throughout the EU

    To #1: He surprised everybody. So probably only he himself knows. However, credit has become harder to get and interest rates are too high. The stock market is traditionally something for bankers. He’s extremely likely to look at jobless numbers and economic growth, not the stock market.

    To #2: Apart from the immediate borderland, that is aimed at the west. You can protect only jobs you have in first place, can’t you?
    Secondly, the SPD has little chance to outcommunist the communists and he knows that. He’s definitely aiming at the west.

    To be frank, the east is second priority at present. The government is quietly moving to abandon the most hopeless parts and concentrate on what is salvageable.

  4. Mr. M?nterfering is an economic illiterate. Nazis were economic illitarates, too. That’s the connection.

  5. 1. impose German wages on foreign service providers in Germany
    2. cheaper credits for small business
    3. disclosure of management wages
    4. harmonized corporate taxes throughout the EU

    This is not exactly the death of capitalism, as Hundt et al. would have you believe.

    On point 1, I was quite surprised that Germany has no national minimum wage law. Even the much-maligned US social system features a minimum wage. If business leaders had much sense, they would get out in front of this issue.

    Point 2 is not so bad, although it is just one of the obstacles to setting up a business in Germany. Just about anything that encourages entrepreneurship ought to be done.

    Point 3 is good politics for the center-left and sheer greed and stupidity on the part of the managers of public companies, and cowardice on the part of their boards. If they want the pay of directors to be a private matter, then they should take their companies private. The corporate officers want the benefits of public investment and ownership, without public oversight and accountability. That won’t wash.

    Point 4 is trying to level the playing field by exporting your disadvantages. Not such a good idea.

    Munterfering’s statements can be understood as wishing for the cozy Rhineland capitalism of yore. But the world has changed. They may also be better received in the East and stanch some of the bleeding to the PDS. Since the election will be decided in the East again, solidifying things there a bit is not such a bad idea.

  6. Edward,

    #1. Whole heartedly – yes. A lot of Germany’s economic problems in the last decade can certainly be traced to important shifts in governance. A book called “The End of Diversity? – prospects for German and japanese Capitalism” by Wolfgang Streek and Kozo Yamamura is waiting on my bookshelf to delve a little deeper into this kind of question. The corporatist German social market economy that evolved after the war was born out of a specific coalition as well as limited free trade, esp. for capital, that allowed the government to some extent to reign into the capital yields and for payroll taxes to be passed on to consumers without being afraid of competition. And there is an interesting paper by Peter Hall and Robert Franzese about the consequences of the ECB’s necessary lack of corporatist coordination for the German labour markets (http://journals.cambridge.org/article_S002081839844044X).
    And, of course, the shorter term optimization of capital markets is obviously shaking a longer term economy like the German one. Future German MBA’s are still tought the mantra of “long term maximisation” while everyone knows that, in the long run, they will probably no longer be with the company. These are important shifts, just as rules like “Basel II” are having a more significant impact in less equity oriented countries like Germany. Given the dissolution of previous long-term-risk-taking decision making units, and the inability of the stock market to fulfil this function, there’s an obvious, and increasing, lack of compatibility between the German production mode and it’s governance. This alone, and I think, I’ve indicated this on afoe before, is significant reason for concern.

    Politically, there’s of course the – not entirely unjustified – realization that much of the “convergence” is not necessarily simply based on an increased efficiency of different modes of governance but the consequence of a dominant discourse that has yet to be challenged. And there are only few people able to challenge it on a level not reminiscient of 5th grade social science. In this context, it is interesting to see the opposition to the “leaked” possible nomination of German economist Peter Bofinger to the ECB directorate next year. He’s been called a leftist, but mostly I think he’s a clever guy who’s not afraid to contradict the mainstream where necessary.

    All this is important and interesting. And I don’t think too many people have given this kind of coordinational incongruency the appropriate attention.

  7. >On point 1, I was quite surprised that Germany has >no national minimum wage law. Even the >much-maligned US social system features a minimum >wage. If business leaders had much sense, they >would get out in front of this issue.

    Doug,

    it may not be called minimum wage, but there’s a de facto minimum wage that is determined by the social assistance – that is, since the establishment of HARTZ IV, about 30% below the average regional price for the required work. The lack of a legal minimum wage can be explained by the corporatist German labour market (just as the American one can be explained by the absence thereof) – as unionization was high, there was no need, and, in fact, it was usually opposed by the unions afraid to lose their role in industrial relations if there were a minimum wage. Their current attempts to institute one are actually thinly disguised attempts to institutionalise their recent wage agreements as “minimum”. I think you’re right that the employer organisation’s should support a minimum wage – a real one.

  8. Thanks for the lengthy response Tobias.

    Dug out one from my hard disk which might interest you. You should be able to download it here:

    http://www.bus.umich.edu/KresgeLibrary/Collections/Workingpapers/wdi/wp442.pdf

    It’s a paper comparing the performance of bank-based and market-based financial systems. The conclusion will probably interest you:

    “The results provide strong support for the financial services view: ie that overall financial development is strongly associated with growth…. Furthermore, while overall financial development is closely associated with economic growth, the degree to which financial structure is bank-based or market-based is not associated with growth.”

    ie both systems work.

    Your point that change needs time is well taken, and this component often isn’t ‘factored-in’.

    “there’s an obvious, and increasing, lack of compatibility between the German production mode and it’s governance.”

    Interesting.

    “I don’t think too many people have given this kind of coordinational incongruency the appropriate attention.”

    Couldn’t agree more.

    It’s like another well worn chesnut: which is better “first mover advantage” or “second mover advantage”.

  9. Point 1:
    Both unions and employers want the government out of wages. M.’s proposal goes farther. He wants no minimum wages, he wants the actual wages according to agreement paid.
    But I can’t see how this is supposed to work in the long run. If the workers can’t come the jobs will go. And immigrants, temporal or not, at least pay taxes. It might work as a temporal measure, but how realistic is it that in 8 years
    or so Romanian wages are high enough to solve the issue?

    Point 2:
    Mandated loans? If that isn’t an illegal subsidy under EU law, I’d be very surprised.

    Point 3:
    I agree.

    Point 4:
    He will find allies for that in France. However, I guess the actual response of those this is aimed at (eg. Slovakia) will be a creative suggestion involving female relatives and domestic animals.

    It seems to me quite like a leftist version of Peronism. However it is not really thought through. And if you think it through, you arrive at tarifs.

    Thirdly, if you look here:
    http://www.infratest-dimap.de/sonntagsfrage/default.htm
    You will see, that he has a western problem, quite obviously. An election can be won in the east only if the west is close.

  10. Tobias:

    Here’s another one along similar lines:

    http://www.vanderbilt.edu/Econ/faculty/Crucini/Chakraborty.pdf

    The paper is Shankha Chakraborty and Tridip Ray: Bank-based vs market based financial systems, a growth theoretic analysis.

    “Two countries may have different financial regimes, yet enjoy similar rates of economic progress; what matters for growth is the efficiency with which a country?s financial and legal institutions resolve agency problems, rather than the type of system it relies upon.”

    “In recent years, policymakers have been advocating a shift toward financial markets, particularly in Latin America and Eastern Europe where financial systems similar to those in the US have been proposed (Allen and Gale, 2000). It is, however, unclear why marketbased systems necessarily dominate bank-based ones. As Levine (1997, pp. 702-703) points out, ?we do not have adequate theories of why different financial structures emerge or why financial structures change…we need models that elucidate the conditions, if any, under which different financial structures are better at mitigating information and transaction costs.? It is precisely here that the chief contribution of our paper lies.”

    Levine was the author of the previous paper I linked. The paper essentially makes the same point: ie having a mature financial services system and legal framework (and as you are suggesting broader ‘culture’) is essential but this being said it doesn’t seem to matter to much whether the emphasis is market or bank, there a pluses and minuses either way.

    I mean one way of putting this might be as you say whether you look mid or long term to consider your investment strategy. Clearly there will be cases were the former wins and others where the latter does, the interesting thing about indeterminate processes of technological change is that there is no way of knowing in advance which will be your case.

    What’s this all about? lets get down to anecdotal basics. My companion works for a pharmaceutical company. It’s German, and it’s family owned. It makes a lot of money, but it does virtually no fundamental research: it’s buys up other people’s discoveries when they have proven themselves to some extent, hence they don’t need the larger quantities of money they could borrow (and lose) on riskier research projects if they were quoted in the stock market.

    This is why I mentioned first and second mover advantages. Ideology won’t solve this. Pluralism and diversity theory probably will: it’s probably collectively better in the long run to have both kinds of structure and types of institution at a global level.

  11. Fascinating posts. The study of compatative financial systems and modes of labour market regulation is sadly underplayed in modern economics courses. Nice to see some intelligent discussion here. Heartily endorse Tobias’ reference to Streeck’s work – lots of insights in his stuff.

  12. “lots of insights in his stuff.”

    Yes, I’ve just been reading one of his papers on welfare reform (which can be found here:
    http://www.mpi-fg-koeln.mpg.de/pu/workpap/wp05-2/wp05-2.html).

    I immediately feel the need to correct something I said earlier: my sympathy for Schr?eder is now rather reduced.

    I didn’t know that the last Kohl government explicitly introduced a ‘demographic factor’ in their pension reform and that the first Schr?eder government explicity undid the reform and removed this component. The is little pardon for folly like this. Of course the more general ‘sympathy’ for the entire German political class still holds since they are evidently swimming against a block of problems which are just much too big for them to handle all at once.

    Germany is undoubtedly stuck in what economists tend to call a ‘bad equilibrium’ (although the equilibrium here is undoubtedly economic and social). There is a need to increase domestic demand, there is a need to create employment, and there is a need to strengthen the lower parts of the demographic pyramid.

    Creating employment involves structural reforms in the labour market, and reducing ‘non-wage’ costs. Following this through effectively reduces demand both at the level of personal consumption (as realm wages drop) and at the level of government spending as revenue is affected. At the same time the only realistic way to prop up the pyramid is through substantial immigration, which would of course be highly unpopular with four million plus people out of work. Certainly a ‘vicious’ and not a ‘virtuous’ circle is at work here.

  13. I wouldn’t go too far with sympathy for the late Kohl governments. The then-government’s mantra of Die Renten sind sicher (pensions are secure) did a lot strengthen the bad socio-political equilibrium Germany needs to break out of. (In fact, whenever German audiences ask me how Americans can possibly believe there were WMDs in Iraq, I say Die Renten sind sicher and Deutschland ist kein Einwanderungsland [Germany is not a country of immigration], two obvious falsehoods widely repeated by governments and therefore widely believed.)

  14. Yeah, Kohl did too little far too late, and he did so against fundamental oppposition from just about everyone. That’s why the SPD had to so this – without a SPD government, they would still be in opposition and we would have been “debating” capitallsm for a couple of years now. The removal of the demographic factor that was included earlier was stupid but an election promise. Not doing it would probably have weakened Schroeder in the power struggle with Lafontaine in the early months of his first term. I think, with hindsight, that things might have become even worse with Oskar Lafontaine as finance minister. Plus, given that Schroeder took office during the “new economy” boom he probably believed that he could get away doing it a little later (and not doing other things at all).

    I share your general assessment though: Bad timing for structural reforms, but given the insitutional (and cultural) inertia of German decision making, there is no way to do it differently. Even worse, those who want to push reforms need to create a climate of “necessity” where everyone believes in impending doom. Such a climate clearly has unfortunate consequences in many other respects. I’m just hoping the HARTZ IV reforms will be able to reduce unemployment to some extent (about 300,000-400,000 reform-attributable real jobs)in the west rather quickly. That would certainly make people feel better. And let’s hope we win the world cup in 2006 ;).

  15. I’am afraid Mr. Schr?der did it the wrong way. As a part of a package of deregulation cuts in unemployment benefits (Hartz IV) are necessary.
    However his other reforms, health care cuts & tax funding of pensions, did not lower contributions of workers, it just stabilised them. His reforms of labor laws (Hartz I-III) did not deregulate the labor market as such, but created a second labor market. His tax cuts were too reluctant.
    As a consequence, he drives drown wages, but not enough, and drives up saving because people are now really afraid of losing their jobs. He’s trying to jump an abyss in two leaps and did the smaller leap first.

  16. “and drives up saving because people are now really afraid of losing their jobs.”

    As Tobias and others are well aware I have long been arguing that the impact of the reforms will be deflationary on demand in Germany (see eg my “Who is Elga Bartsch post: http://fistfulofeuros.net/archives/000499.php) but I think it needs to be pointed out that this is not the only – or even the main – reason that saving is on the rise. This is also a tendency in Switzerland, Italy, Japan among others. What I would argue is common to all these is the demographic factor. I was somewhat heartened to see that the ‘Feds own’Ben Bernanke has recently come round to this point of view, but more on this in another moment.

    While I stand by my “Who is Elga Bartsch” arguments one of the advantages of my recent ‘lay-off’ is that I have had time to think about many of these things and I am sure I would now put some things slightly differently.

    “And let’s hope we win the world cup in 2006 ;).”

    Now don’t lets not go too far. There is also a guy called Ronaldinho knocking about :).

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