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.