Understanding German fiscal policy

by on June 22, 2010 at 2:34 am in Economics, History | Permalink

It is a common view that governments should run a deficit in bad times, and a surplus or balanced budget — if at all possible — in good times.

I have news for the people: according to the German view of the world, these are the good times.  Thus they want to run a surplus.  I don't see that perspective being rebutted.

The Germans see themselves as having made the necessary wage adjustments, in advance, and in a manner that Keynesian economics is skeptical of.  The Germans also see themselves as having produced and maintained true credibility about future fiscal policy (how many other countries can claim that?) by a constitutional amendment, a lot of tough talk, and a relatively robust real economy.  German bonds are a safe haven investment, even though Germany's numbers, such as the debt-gdp ratio, are not overwhelmingly wonderful.  That's a testament to German public sector management.

Did I mention that — after unification — the Germans tried (against their will, they had to) more than a decade of massive fiscal stimulus, and subsidization of consumption, starting with well under full employment, and yet with mediocre results?  That wasn't long ago.  

And yet somehow it is a mystery, or a strange annal in some long book of Dogmengeschichte, that the Germans are not more interested in Keynesian economics.

It is incorrect to argue that: "their high-savings export-oriented economy only works if someone else runs a high-debt economy and buys their stuff."  The Germans do just fine when they trade with current account surplus countries.  If Portugal and Greece were more like Norway or the Netherlands, the German trade surplus might well go down, but the total value of German exports likely would go up (Germany exports mainly "normal goods") and the German economy would do just fine.

The Germans are well aware that most of their neighbors have not managed their finances nearly as well as they have.  How should we expect them to respond, if we, and others, now tell them that, after all their careful management, it is now time to run up debt to spend more money in their neighbors' shops?  (And that is in addition to significant ongoing EU transfers from Germany to poorer countries.)  How would we respond to such a request?  Do we blame our own successful export sectors — such as aircraft and movies — for the troubles of the world economy?  Does Obama lecture Boeing and Hollywood for creating problems?

How do we speak to the much poorer Chinese?  Do we offer them aid or do we make demands on them?  In this matter, the Germans to me seem more reasonable than the United States.

The not-too-often-stated-but-often-thought German attitude is that if other nations are going to share in beneficial German and European institutions, some of them need a bit more discipline.  If they don't have that discipline, they need to step back until they do.  Is Germany doing either itself or the broader world a favor by lowering its policies and standards to meet the requirements of the less successful nations?

Here is my previous post on a related topic.

1 E. Barandiaran June 22, 2010 at 3:30 am

Tyler, just a simple question: How do you define a successful nation? Please be specific.

2 kary June 22, 2010 at 4:45 am

Regarding:
“It is incorrect to argue that: “their high-savings export-oriented economy only works if someone else runs a high-debt economy and buys their stuff.””

A high-savings export-oriented economy with trade surplus only works if the investment in other countries generates a good return over some years. The return on financing consumption & asset bubbles in other counties appears to be not the best approach in the long run now. Accordingly, the current increase of public debt saves the business model of a high-savings export-oriented economy with trade surplus so long this public debt appears to be safe.

However, the condition compounds a current account issue with the capital balance. High-debt economies need credit from other countries. Thus, investment decisions define debt or credit economies. The capital balance governs the trade balance according to Eugen von Böhm-Bawerk. A trade surplus is the result of many decisions but not a decision in itself. Especially, if there are not so many investments in Germany (“Berlin is ugly”) and not so many products from the high-debt economies worth to buy for a German (the Germans try to spend the money abroad: “If you are in Mexico, and you visit ruins of any kind, prepare to see disproportionate numbers of Germans.”), a trade surplus appears to be unavoidable.

3 Henri Tournyol du Clos June 22, 2010 at 4:59 am

You only have one third of the story here (though an important one : the 20 years of ongoing and unsfiscal stimulus to East Germany). The missing parts are :

1 – the large fiscal or private (that will be turned to fiscal through bank bailouts) deficits in the rest of the Eurozone. This will turn one day soon partly into German fiscal spending. Most of the stimulus has already taken place. It is just the billing part that has to be straightened out…

2 – this is an economic policy matter. You of all people should know that rational economic policy is not coherent in time. For instance, it was perfectly rational policy for the B of E to proclaim that they would never bail out Northern Rock one day and the next actually take it over. We are dealing here with the same type of situation. As a matter of fact, Germany’s current fight is not over Greece (peanuts) or even Spain (our local Florida – we’ll get over it), but over French fiscal deficits, which have never been reined in since 1974, and which are out of control because 2/3 of “government” spending is in fact social benefits and local authority spending, two areas out of actual government reach.

Regards, Henri

4 Henri Tournyol du Clos June 22, 2010 at 6:27 am

Re : the above “unsfiscal stimulus” in my comment, please read “usuccessful fiscal stimulus” – I do not know how that #@[$*! typo got in there. My apologies. Henri

5 a June 22, 2010 at 7:23 am

“We don’t have the US growth potential due to demographic development. Therefore the deficits we run up now will hurt us much more in the long run than you.”

IMHO this is an important point which needs to be emphasized. A country whose population can grow 3% a year will be better able to handle any accumulated debt, because just with time passing the per capita debt will grow smaller. Germany’s population isn’t growing, if anything it’s the opposite.

Now some Americans might say the answer is for Germany to allow more immigration, so that it’s population can grow. But that seems to be a decision for the Germans, and no one else.

6 fx June 22, 2010 at 7:41 am

“the German trade surplus might well go down, but the total value of German exports likely would go up (Germany exports mainly “normal goods”) and the German economy would do just fine.”

This is indeed the problem. Nobody is aksing Germany to export less – but to import more. You can’t really expect all countries ot export more than they import…

7 LoneSnark June 22, 2010 at 8:41 am

I still don’t understand why the government needs to do the spending. If the problem is a lack of spending, why can’t the central bank print money without the Government borrowing it? Just print it and loan it to someone else when we need monetary expansion. Or, better yet, get out your helicopter and make it rain money. This would avoid distorting debt markets.

8 Indy June 22, 2010 at 9:01 am

It’s so nice that we have the stones to advise the disciplined, cohesive, well-managed economies whice have delivered prosperity and security to their populations and which have earned solid reputations in the markets – that it’s time to *be more like us profligates*!

Maybe in “restoring imbalances” – the surplus countries should be advising us about debt-financed consumption (which we would despise).

Alas – it is always easier to destroy than to build – and it is easier to splurge than to save. Bringing them down to our level is easier than bootstrapping ourselves. So we think we have the more reasonable and “likely-to-work” plan – even though it’s the worse one.

9 Detlef June 22, 2010 at 10:49 am

fx wrote:

“This is indeed the problem. Nobody is aksing Germany to export less – but to import more. You can’t really expect all countries ot export more than they import…”

Okay, so we Germans follow the US example and push consumption from 60% to 70% by reducing our savings.
Won´t happen but if it were…

What exactly are we supposed to import / buy?
More consumer electronics? That wouldn´t help Greece or Spain, only China. And of course resulting in an Eurozone trade deficit. Not to mention that most of us already have the essential things. And I don´t need a second TV or third computer.

Just what am I supposed to buy more from Greece or Spain?
(They are still traditional vacation countries for Germans.)

Or the USA?
10 copies of (unneeded) Windows 7 to help the US trade balance? 50 Blu-Ray Hollywood movies?
Actually I wanted to buy some English language ebooks (American publisher) on the Internet. Not available in Germany. I can buy the (paper) books in English or German without any problems but the ebooks…
Whick is one reason why I don´t have a Kindle or iPad. The electronic bookstores for Germany are missing lots of English language ebooks available in the USA.

10 Cyrus June 22, 2010 at 10:54 am

Germany has open borders with the other EU members. Unemployed Spaniards and Greeks are free to come anytime.

This is only sort of true. Spaniards and Greeks are free to come any time, but Germany remains a holdout on permitting free movement of persons for nationals of the EU classes of 2003 and 2005. Permitting more free intra-EU migration would on the margin improve the picture for intra-EU capital imbalances, but of the newer EU states, only Poland is really large enough and young enough to make a meaningful difference.

11 adam June 22, 2010 at 12:06 pm

@Marian Kechlibar
The (independent) research office Nyfer did estimate the costs of immigration in the Netherlands at €7.2billion per year, and the cost for a 25-35 old male immigrant at €30k p.a., with much higher costs for a 65 year old. Of course, like elsewhere, bringing these numbers up in polite company tends to result in Larry Summer-ing.

@fh
“It happened in a highly regulated environment where firing somebody was not easy and everybody sat down to figure this thing out together. Collaboratively rather than confrontationally.”
Reality check please, see my previous comment on ‘Lohnmaessigung’. Most workers dont even know their wages are being kept across the board, they just accept what the elite tells them is the right thing to do. Ultimately, whether you see that as good (‘collaboratively’) or bad (corporatism) depends on your views on personal freedom.

12 Barkley Rosser June 22, 2010 at 2:20 pm

fh is near the point that somehow Tyler has not mentioned so far, despite apparently spending a bunch of time in Germany (what are you doing there and how long will you be there, anyway, Tyler?). While as has been noted, Germany has had a chronically higher rate of unemployment than many other countries, it had almost no increase in unemployment during this recession, probably less than any other OECD country actually. Much of this had to do with work sharing and coordinated hour reduction measures that were undertaken that one did not see in other countries. Given that, the political pressure for some kind of fiscal stimulus to preserve employment was much less there.

Richard Ebeling,

Yes, the multiplier certainly was low back in the 30s in Germany, but Hitler did get the country to full employment by 1939 after having had the highest rate of it of any country in the world around 1933.

13 Richard Ebeling June 22, 2010 at 5:00 pm

Barkley,

Your observation about German unemployment by 1939 is the same fallacy that Bob Higgs has pointed out about “solving” the unemployment in America by the early 1940s.

Conscripting millions of people into the military or employing them making tanks, planes and navel vessels is not what we normally mean by a sound and reasonable “full employment” policy.

Unless, that is, you agree with those who said back then, “Look, there is no unemployment in the Soviet Union, here in the 1930s. Everyone has a job as part of the ‘central plan,’ (including “healthy” outdoor work in the GULAG).”

Richard Ebeling

14 Don the libertarian Democrat June 22, 2010 at 5:34 pm

Tyler, I have a question: Does Germany want the Euro to depreciate?

15 Virgule June 22, 2010 at 7:37 pm

Adam: Urgs was talking about per capita GDP growth -the US population is increasing relatively quickly while the German population has been declining for some years now.

16 Firionel June 23, 2010 at 1:57 pm

@urgs, @adam:

I’ll atand by my assertion. Urgs, you ar ejust plain wrong. I fact-checked my memory using the Worlbank WDI tables and using data up to and including 2009 I can find nothing to back you up. [feel free to double check here here] There is no meaningful time period following 1991 in which German GDP growth (or German GDP pc growth) was higher than the same number in the US. Period.

The difference is much more marked using the raw GDP figures of course (about 1.6:1 on average) than using the par capita figures (about 1.1:1). Take out 1991, which was a boom year in Germany and a crisis year in the US, and things get even more lopsided.

17 TimK June 24, 2010 at 2:46 am

The one-to one and two-to one conversion of the East Mark to DM essentially destroyed East German industry and priced the East German worker out of the market (while making those who were holding cash rich – mostly the communist party and its leaders). The transfers from west to east were required just to keep the people in the east alive.

The effective wages in the east were (and maybe still are) higher than in the west making investments only attractive with government subsidies. The result was that masses of the young and talented easterners (mostly women) migrated to jobs in the west.

Tyler, to imply that this was all Keynesian economics would make him turn over in his grave. And the fiscal stimulus is still going on – over a trillion euros and counting.

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