Tuesday, January 31, 2012



Yesterday’s (i.e., Monday, 1/31/12’s Wall Street Journal, page A7) quotes German Finance Minister Wolfgang Schauble as saying, in response to suggestions, primarily from American observers, that Germany should pursue a more expansionary fiscal policy,

I don’t know how it’s done in America, but in Germany it works like this: If you want more private demand, you have to take people’s angst away.”

Given that Germany, despite the travails of its neighbors to the south, is still in the middle of its second, or third, post-war economic miracle and grew at a 3% rate last year, all of us would do well to reflect on this observation. While yours truly is not so enamored of Mr. Schauble’s focus on expanding demand, his statement is fraught with wisdom and worthy of contemplation on a number of fronts.

First, those who counsel against excessive austerity in the charity cases of Europe argue that austerity will slow growth, or lead to recession, which in turn will result in more fiscal imbalance. Mr. Schauble’s comments, and the credibility that Germany’s prosperity lends to them, may indicate that austerity, rather than slowing growth, may actually foster growth. Why? Because deficit spending, in addition to transferring resources and activity from the relatively efficient private sector to the relatively inefficient public sector, puts a drag on the economy as businesses and individuals assume future tax increases to cover the deficits, are faced with uncertainty regarding how the government will deal with its deficits, or both. Austerity and balanced budgets, rather than talk of austerity, balanced budgets, and such drivel as 0.5% of GDP limits on loosely defined “structural” deficits, remove or mitigates the uncertainty and at least one of the arguments for future tax increases.

Second, the same logic in the prior paragraph can be applied not only to Europe’s periphery but also to the United States. Politicians, and even some economists, tell us that it is too dangerous to talk of, let alone implement, austerity now while the economy is weak. Better, they say, to pursue expansionary policies (i.e., spend more money or cut taxes) now and compensate for today’s frivolity with sobriety in the future. Even if we could believe pols’ protestations that if you will let them spend today they will miraculously become penurious tomorrow, this argument may be questionable at best. The private sector would, in all likelihood, respond quite favorably to a government that is adult enough to address its problems now and thus provide a modicum of certainty to, or at least remove a touch of uncertainty from, economic decision making. We wouldn’t need spending from the government to provide a fiscal boost; such spending would come from an energized, and vastly more productive, private sector.

Third, note Mr. Schauble’s swipe at American policymakers. Some Americans might chafe at being talked to like that by the Germans. But we, or at least the geniuses we have elected and put in charge of our financial system, have brought such scolding on ourselves. The Germans are indeed in a position from which they, citing the mess we have made of the treasure our forefathers left us, can dismiss most, if not all, of what we say on things financial. So are the Chinese (See, inter alia, my 7/21/11 post LIKE THE CUBS’ PROVIDING ADVICE ON HOW TO PLAY BASEBALL and my 6/21/10 post LOOK WHO’S PULLING THE RICKSHAW NOW.) and any number of other countries that seem to have acquired skills and salubrious habits we have blithely tossed aside.


Reid said...

As we know, any good Republican must dismiss anything European or educated. So, this will be my left wing argument for austerity that may well be off base. I am seriously ignorant on this topic-- how do Germany's social programs compare to the US and European social programs? I understand the retirement age is higher, but I presume that they have wide ranging social programs like medicine and pensions. Is it also possible that austerity allows you to offer better functioning, long term viable and widely available social programs? It seems this would be better than underfunded, crumbling and transient programs seen elsewhere. Regardless of your political persuasion (deficit fighting republiceat or socially motivated democan), it seems the German approach benefits both the individual and the whole body politic much better in the long run. It has to be especially appealing to anyone living in the morass that is Illinois with its Governor who had the audacity to suggest spending programs.

The Pontificator said...

The Germans....

--maintain healthy, in a sense, social programs, what some would derisively call a welfare state, but...

--they keep taxes high by American standards, not necessarily by European standards,

--run the state, including the social programs, efficiently (It's in the Teutonic genes, I suppose),

--keep the population employed, and

--don't spend much on "defense," seeing no need to make the whole world do what the Germans demand that they do...for the world’s own good, of course.

Austerity, as you point out, does not have to mean what we assume it means over here. Even those on the left can be for austerity, done properly.

Thanks, Reid, for reading and commenting.