Cowen is right. That´s why most of the Latin American and European countries are wary about running high deficits. They know the results, unlike Paul Kurgman and Dean Baker.
http://www.nytimes.com/2010/07/18/business/18view.html?_r=1&ref=todayspaper What Germany Knows About Debt David G. Klein By TYLER COWEN Published: July 16, 2010 Facebook Twitter Recommend Sign In to E-Mail Print Reprints Share CloseLinkedinDiggMixxMySpaceYahoo! BuzzPermalink IN many countries, including the United States, there are calls for the government to spend more to jump-start the economy, and to avoid the temptation to cut back as debts mount. Germany, however, has decided to cast its lot with fiscal prudence. It has managed rising growth and falling unemployment, while putting together a plan for a nearly balanced budget within six years. On fiscal policy and economic recovery, Americans could learn something from the German example. Twentieth-century history may help explain German behavior today. After all, the Germans lost two World Wars, experienced the Weimar hyperinflation and saw their country divided and partly ruined by Communism. What an American considers as bad economic times, a German might see as relative prosperity. That perspective helps support a greater concern with long-run fiscal caution, because it is not assumed that a brighter future will pay all the bills. Even if this pessimism proves wrong more often than not, it is like buying earthquake or fire insurance: sometimes it comes in handy. You cant judge the policy by asking whether your house catches on fire every single year. Keynesians have criticized fiscal caution at this point in the economic cycle, arguing that fiscal stimulus will give economies more, not less, protection against adverse events. But is that argument valid? Certainly, in Germany, the recent history of fiscal stimulus wasnt entirely positive. After reunification in 1990, the German government borrowed and spent huge amounts of money to finance reconstruction and to bring East German living standards up to West German levels. Millions of new consumers were added to the economy. These policies did unify the country politically but were not overwhelmingly successful economically. An initial surge was followed by years of disappointing results for output and employment. Germanys taxes remain high, and overall West German living standards failed to rise at the same rate as those of most other wealthy countries. Persuading former East Germans to spend more as consumers turned out to be less important than making sure that they had the skills to mesh with the economic expansion of the country. It is no surprise that many Germans are now skeptical about debt-financed government spending or excessive reliance on domestic consumers. In recent times, Germany has shown signs of regaining a pre-eminent economic position. Policy makers have returned to long-run planning, and during the last decade have liberalized their labor markets, introduced greater wage flexibility and recently passed a constitutional amendment for a nearly balanced budget by 2016, meaning that the structural deficit should not exceed 0.35 percent of gross domestic product. Amid the sluggish economies of much of Europe, Germany has booming exports and is nearing full capacity utilization. And many of its workers are postponing vacations to produce, and earn, more. The unemployment rate in Germany is 7.5 percent below that of the United States and falling. Far from embracing this social democratic model, American Keynesians have criticized it for relying too heavily on exports and not enough on spending and debt. Yet it is not just the decline in the euros value that supports the German resurgence. Most of the other euro-zone economies are not having comparable success because they did not make the appropriate investments and reforms. Moreover, the euro is still stronger than its average value since 2001, which suggests that the recent German success is not attributable only to a falling currency. In any case, the Germans are exporting much quality machinery and engineering (not just glitzy autos), which can help other nations recover. It is an odd state of affairs when the relatively productive nations are asked to change successful policies because of an economic downturn. The German government is also making credible long-term commitments to reduce its debt. Germanys ratio of debt to G.D.P. has been hovering in the unhealthy range of more than 70 percent, and the country has one of the lowest birth rates in the developed world, which raises the question of how to pay for future pensions. Yet many investors consider German bonds a haven, in part because the government has a reputation for addressing fiscal issues promptly and responsibly. It is working to cut government spending, although not in crucial long-term areas of research and education. Germany is likely to continue having a higher relative level of government spending than the United States. But the German civil service has a stronger hand in writing legislation a role that limits the sort of waste and short-term thinking that Congress injects into American law. It is also well understood in German political discourse that tax cuts need to be paid for. THE German economy is far from perfect. In addition to high taxes and a low birth rate, there are potential solvency problems in German banks, and these institutions lack transparency. Furthermore, poorer countries may need a looser monetary policy from the European Central Bank than Germany wishes to support. Nonetheless, its a common German attitude that adding debt, whether private or public, will not solve those problems. In fact, debt can provide the illusion of relief and thus postpone their resolution. Increased spending is a quick fix for what are very often more fundamental difficulties. The point is not that Americans can or should copy Germany. But are German policy makers so wrong in their long-term orientation? We can lecture, or we can listen. The choice is ours. Tyler Cowen is a professor of economics at George Mason University. ------------------------------------ -------------------------- Want to discuss this topic? Head on over to our discussion list, [email protected]. -------------------------- Brooks Isoldi, editor [email protected] http://www.intellnet.org Post message: [email protected] Subscribe: [email protected] Unsubscribe: [email protected] *** FAIR USE NOTICE. 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