Free Markets, Free People

German recovery, part II

I discussed this earlier with a post about Paul Krugman and Gary Becker, explaining why the German approach – essentially getting government out of the way while providing incentives to businesses for expansion and hiring – was superior to the tried and consistently failed tactic of huge amounts of government deficit spending as a "stimulus". Krugman and others waved away the German recovery as simply an upsurge in exports, nothing more.

E21 has an excellent article out today in which it takes exception to the Krugman claims (note too that E21 refuses to call Krugman and economist but instead refers to him as a “commentator”):

U.S. commentators, like Jonathan Chait and Paul Krugman, have taken issue with holding out Germany’s economic recovery as a success story – one that contains lessons for U.S. policymakers. Contrary to their claims, Germany’s recovery does not appear to just be about trade flows and global demand for their manufactured goods. 50% of their second quarter GDP came from private sector consumption and investment growth.

Private sector growth – what a concept, no?

Here is an extended excerpt which is probably one of the best explanations I’ve seen. The last line is so irony laden that it almost makes you wince.  Also, as you read this carefully you will again note the obvious – “this ain’t rocket science”:

The contractionary effects of deficit-financed stimulus were highlighted by European Central Bank (ECB) President Jean-Claude Trichet at the Jackson Hole conclave. While many commentators in the U.S. still depict the debate over stimulus as pitting sagacious “pure” economists that favor more deficit spending against the politically astute economic illiterates, Mr. Trichet explains that the Franco-German technocrats in Frankfurt view the economic literature as counseling steep budget cuts in the current environment. Many U.S. economists speak of the need to increase deficit-financed public expenditure to avoid a Japanese-style “lost decade”, yet it is precisely the exploding public debt ratios that Mr. Trichet identifies as the real cause of Japan’s malaise and the greatest risk to Western economies today. To those who believe sharp reductions in public expenditure are too risky, given overall economic weakness, Mr. Trichet responds that deficit-financed stimulus is unlikely to provide any measureable boost to demand in the current environment because the government purchases are offset by reduced private expenditure. And on this point, Mr. Trichet even goes even further:

“There is the additional argument positing that credible fiscal deficit reductions through expenditure cuts lead the private sector to expect a lower future tax burden, especially when the nature of the cuts make future tax reductions more likely. This can generate higher consumption expenditures and more investment.”

Lest anyone believe Mr. Trichet was talking about modest cuts to public expenditure to assuage irrational markets, he went on to suggest that cuts to government spending should be sufficient to reduce debt-to-GDP ratios by 30 percentage points over the medium term. Mr. Trichet cites numerous examples where cuts of this magnitude have resulted in improved short-run economic performance. That it takes a French lifetime bureaucrat to travel to the American West for these words to be spoken at a U.S. policy symposium says something fairly profound about the current state of policymaking in the U.S.

Again, as I mentioned in the first post I’ve cited, the proof is in the pudding.  Germany is back to pre-recession unemployment rates and excellent GDP growth.   And where, again, is the US during “recovery summer”?

Perhaps now you can understand the reason Mort Zuckerman has referred to the economic policies of this administration as our “economic Katrina”.  At this point we’d better hope the worst we suffer is a lost decade like Japan’s.



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27 Responses to German recovery, part II

  • Come on…  Is any of this really arguable any longer?
    We have tons of empirical data, collected over at least 80 years.  We have model after model of what happens when you LEAVE MARKETS to do their magic, and we have model after model of the wreckage resulting from “brights” trying to make decisions that don’t belong to them.

  • Yet another example of a “social cascade” in action.
    One is left to presume that between sessions most of the attendees drink the “Kool-Aid”
    I am left to believe that economics should be handled only by retired business-persons who actually have a grasp of the effects of their actions on people outside of DC, rather than the “expert incompetences” that hail from academia.

  • I am left to believe that economics should be handled only by retired business-persons…

    Why the HELL would we trade the largest, most successful “team” of decision-makers (we call it the “market”) for a few…or worse…ONE decision-makers who CANNOT have enough information for their work.
    Assume you have absolute saints.
    Assume you have the smartest people in the world.
    You STILL wind up with inferior results.
    AND, those decisions do not BELONG to others, but to us.

    • I was thinking that perhaps Presidential candidates should be required to have executive experience.
      In the back of my mind was a op-ed by George McGovern about how he saw government completely differently after he tried to run a business himself (a hotel).

      The second lesson I learned by owning the Stratford Inn is that legislators and government regulators must more carefully consider the economic and management burdens we have been imposing on U.S. business.

  • In fact “socialist” Europe has been quietly making pro-market reforms since the ’80s. I think some people would be shocked to know Swedes have school vouchers, private retirement accounts, etc.
    It must be noted, however, that Germany had a nice boost from the Euro falling from 1.50 to 1.20 for a time in the 1Q. That may have goosed export growth.

    • Another, very clear, model is India.  Socialist since Independence, they languished in grinding poverty.  Since turning…even tentatively…from that corrupt system, they have been realizing an explosion in their standard of living.

      • So, Obama is getting us in the right direction after all: socialism, grinding poverty, etc,. all setting us up for explosive growth when they are reformed!

        • I say we skip the grinding poverty part, and throw the bastards out.
          Then we go to the explosive growth thingy.

          • I keep seeing this scenario in the back of my mind …
            Take a look at the equity markets .. all beat up such that many folks have now fled to bonds (of all things paying nothing).  The fed had the cost of money at near zero.
            Exactly what is to stop some big bank from buying the equity markets low with near zero interest rate money from the fed ?
            Talk about making the rich richer.  Of course, they won’t get rich until the Republicans show up, but it will have been setup by the Democrats.

  • McQ[W]hy the German approach – essentially getting government out of the way while providing incentives to businesses for expansion and hiring – was superior to the tried and consistently failed tactic of huge amounts of government deficit spending as a “stimulus”.

    I suggest that The Dear Golfer would argue that his policies ARE “providing incentives to businesses for expansion and hiring”… when the GOP isn’t obstructing things, that is.  So what are the Boche doing that they weren’t doing before?  I’m guessing that they haven’t dismantled their nanny state, that taxes are still quite high, etc.

    It seems to me possible that Germany’s good performance is due to a few other factors:

    1.  Lousy economic performance in the US and elsewhere in Europe, which tends to RELATIVELY boost Germany’s performance;

    2.  An inherently robust economy and manufacturing sector;

    3.  Most importantly, a STABLE economic environment.  I think that a big problem for the US economy at the present time is uncertainty about the future: what will tax rates be in six months?  What will the costs of ObamaCare really be after all the commissions and boards get done setting policies?  Will cap and tax make it through the Congress in some form?  Will the EPA mandate it by bureaucratic fiat?  Even if Uncle Sugar wasn’t spending money like a drunken sailor, all these unanswered questions must be causing a great deal of caution among businessmen and investors, which leads to sluggish growth and little hiring.  In contrast, the Germans (I suspect) have a pretty good idea what the future holds because it won’t be much different from the past.

    • I suspect you are right, but any reduction in state spending would help things. It is also a signal of the government’s intent.

      • “Goernment’s intent” is pretty important.  I gather that Berlin has been signalling the intent to help businesses by making their way a bit smoother.  Washington, on the other hand, has signalled little but outright hatred of businesses.

  • This is not the first time Germany acted smart economically. It is my understanding that in the 50s, the Germans moved forward with free market reforms, which kick started their economy, and in fact produced impressive economic growth. They did this against the advice of New Deal-raised Americans. So what we are seeing now is history repeating itself.

    Many think that Germany was rebuild by the Marshall Plan. In fact, Germany was not an initial recipient of the Marshall Plan, which sent most the money to rebuild England and France and other allies. Germany was added on later, but the Plan did not really fully offset reperations Germany had to pay (and they also had to pay for the occupation). All added, Germany operated at a net loss, as did the US which gave money to England/France directly via the Plan, and indirectly (via Germany). England and France got the $$$, but they adopted socialism so it availed them little. Germany did well because it adopted free markets, although the Plan did prevent reperations from destroying Germany.

  • It’s generally accepted that Japan’s problems are the result of a political decision to pretend that their banks were solvent. And while I think their theory of never ending government stimulus is wrong, at least they can point to actual physical assets (roads, trains, airports, bridges etc) as an outcome.
    Our elites are suffering from the same delusion. We are suffering through a balance sheet recession. Until our political leaders accept that, we are going to be spinning our wheels.

    • Unfortunately, those roads, trains, airports, bridges etc only account for less than 10% of the stimulus

  • For those of you who have not been to Japan lately, I have to say for them that they have the best road system I have ever seen – even if they do drive on the wrong side.  They have outstanding inner city metro bus and subway systems.  And their intra-city rail system is the envy of all who are familiar with it.

    Having said all that, it came with a price.  10 years and tens of trillions of yen of taxpayer money plunged into the infrastructure not for the real purpose of the upgrades they are so proud of today but for the purpose of jump-starting a sluggish economy.  And the result today?  Unemployment stagnant around the 8.0% mark and GDP creeping along at 1.5-2.5% annually.

    And this is the model Krugman and others of his ilk are so proud of!?!?!?!?!?

    • They  are also a dying society.  Somebody will inherit all that cool stuff.  The Japanese have decided it won’t be their children…since they are not having them.

      • Just like the Muslims will inherit Europe, and the central Americans will inherit the USA.

        The big human truth is that affluence causes huge drops in birth rates. Although granted the Japanese are an extreme example.

  • Mr. Loeb’s views, irrespective of their validity, point to a bigger problem for the economy: If business leaders have a such a distrust of government, they won’t invest in the country. And perception is becoming reality.
    Just last week, Paul S. Otellini, chief executive of Intel, said at a dinner at the Aspen Forum of the Technology Policy Institute that “the next big thing will not be invented here. Jobs will not be created here.”

    I see this every day .. my employer is only hiring in India and China.
    I don’t expect this to change while Obama occupies the White House, and by the time he goes off to permanently play golf, it may be extremely difficult to turn around.

    • I was thinking about this yesterday and I am wondering if we won’t see a serious move in the USA until lawyers start getting outsourced to India. Then, there will be hell to pay and a serious look at making our nation competitive again. Or to put up some additional barriers for lawyers at least.

  • History repeats itself.  By the mid-30’s, the recession they experienced was a memory for Western Europeans.
    Meanwhile, FDR’s New Deal kept the American economy stumbling through a series of recessions we now call the Great Depression.