How much would German stimulus raise the steady-state return on private capital?

I have been following a bunch of Twitter discussions around this topic, but I would like a firm estimate — if only your guesstimate — how much more German spending on infrastructure would boost general rates of return.  One side question is whether such a policy might drag Germany out of its current negative yield equilibrium.

There is (I think) general agreement on a few magnitudes, noting that the moving averages may be more relevant than last year’s numbers:

Government consumption in Germany is modestly below 20% of gdp.

Total government spending in Germany is modestly below 50% of gdp.

Germany could and should spend another 1% or 2% more of gdp boosting its infrastructure.

The current German unemployment rate is about 3%.

Germany runs large trade surpluses, relative to gdp, so the aggregate demand shortfall there cannot be biting too hard.

It would be good for the Eurozone as a whole if the ECB were to adopt a more expansionary monetary policy, at least under some conditions (so no need to reiterate that in the comments).

OK, so here is the thought experiment. Let’s say Germany spends 2% of gdp more a year on roads, better internet speed, upgrading airports — whatever is best.  And they do this each year for “as long as it takes.”

As we approach the new steady-state, how much higher is the private return on capital?  (And what is then the implied rate of return on fiscal policy?)

Note that the higher taxes, even if you postpone them through debt, will involve some deadweight loss and output restrictions sooner or later.

And what is the chance that brings Germany out of negative yield territory on its government securities?

Inquiring minds wish to know.

Addendum: Keep in mind that most government projects these days are not direct output, rather they are inputs toward selling or producing further private sector outputs.  So you build a better road so more people can get to the store, and the journey of the supply trucks is easier too.  That means when the private sector activity shows constant returns to scale, while the greater output will be desirable, the private rate of return on those activities won’t be going up at all, not in the steady state.  So a big chunk of the government spending, while it may boost consumer surplus, won’t increase rates of return period.

According to this study (its p.8 source is official but I cannot verify “according to the author’s calculations”) the rate of return on private capital in Germany in 2013 was slightly below four percent.  But say you have a capital share of output at about fifty percent and a four percent yield on that.  Capital then is giving you an extra 2% a year of gdp, it would seem.  Say that by spending 2% of gdp on infrastructure you could double the rate of return on all that capital (which seems implausible to me I might add).  You are then spending about 2% of gdp a year to get…about 2% of gdp a year.  I am sure those are not the correct, exact numbers but…what is the better non-question-begging way to think about the problem?

Your best bet of course is to invoke project durability.  Say you spend 2% of gdp for seven years (Germany isn’t so quick at building things), and you get infrastructure that lasts say twenty years before needing another upgrade.  Years 8-20 it is pure bonanza (except the higher taxes may be kicking in then).  That is indeed why I think the spending is a good idea.  But that is hardly “stimulus.”  It is much closer to “we forgo valuable output for a bunch of years and much later people are better off with better roads and yes long-run growth is important.”

Of course that explains why the current government is less than enthusiastic to do this “stimulus.”  The Merkel government isn’t stupid, it simply has a limited time horizon, and it doesn’t assume that demand-side economics is a free lunch at three percent unemployment.

And by the way, that spending is not, over any time horizon, likely to actually double the private rate of return on capital.

Along the way, how are the negative yields supposed to disappear?  In year eight, when the net benefits finally kick in?  Reflected in the term structure now, for the arrival of year eight?  (Really?)  In the meantime, the German economy is modestly poorer.

If you disagree, please show your work.  No moralizing about austerity or surplus countries, please.  Show your work.


I'm not sure why Japan isn't discussed more often here because they seem to be farther along this road than anybody. Sure they don't have the level of immigration that Germany has, but the rest of the package is very similar. Low levels of unemployment, deflationary environment, zero interest rates, advanced manufacturing economy, less banking and finance oriented, export-oriented, trade surpluses, aging demographics, etc. If recent Japanese economic history is any guide, infrastructure spending won't be enough to do the job and Japan ran up their debt-to-GDP quite a bit. So I give low probability to Germany doing the same.

I'm going to go off my usual script and say that America has forgotten what tyranny and liberty is. This is why Nazism, Nationalism, Fascism and other diseased 20th century ideas are making a comeback. To fix this, America needs to declare war against Red China. I am against most regime change but when you do it to Asian countries they become magically prosperous like Japan, South Korea, and unlike the Middle East. After defeating the thuggish regime of China, America will then experience another 1950-1960s style boom of comraderie, brotherhood (old fashioned idea but I like it), and economic prosperity like it did when it defeated Fascism in the 40s. War in victory will create a strong lifelong bond like no other. Oh, Captain Bolsonaro supports this action.

"US accuses China of acting as a ‘thuggish regime’"

End all government stimulus and cut taxes accordingly. Tax cuts always make the economy better and improve the quality of life.

Germany's level of immigration isn't that high either, and the birth rate dropped to Japan levels also.

Why don’t they just cut income taxes? Pay isn’t very high there, the 3% unemployment rate doesn’t seem to be helping. Germany just sucks in tones of workers willing to accept low pay from Eastern Europe so they never really see wage inflation.

'so they never really see wage inflation'

And German companies don't want it any other way.

The secret is, Germany is a tax haven if you're married (to a spouse who doesn't work). Then your income tax liability becomes laughably low until you earn ca. 80-90k/year . It's really only young single people who haven't married yet who get screwed.

That's a well known fact not a secret but it's fairly shit and I don't get the reason for that - Germany has a pretty low birthrate any way doesn't it? If that's the goal here it doesn't seem successful. Reminds me a bit of Japan - its a country that tries (or tried) to maintain this traditional "women stay home" structure and it sort of backfired because women were just like "if getting married/having a kid means I'm going to get shoved out of my job I guess I'm not going to bother getting married/having children".

As always, a bit of background can be helpful when talking about 'current' - 'The 10-year German government bond or Bund yield fell below 0% DE10YT=RR in March and is on track to spend 80 days in sub-zero territory, based on Reuters calculations of the number of days the Bund yield had a bid low that was negative.

This surpasses the 79 days the German 10-year bond yield spent in negative territory in 2016.

That was the last time they went negative as the ECB ramped up quantitative easing (QE) to fight deflation and Britain’s shock decision to leave the European Union sparked a rush into safe-haven, triple-A rated German debt. '

'The current German unemployment rate is about 3%.'

Wait, how can this be? Everyone in the U.S. knows that American unemployment is always less than in a place like Germany's. Especially since the American economy, with its extensive use of debt to fuel growth, is so much more dynamic. Why, half of Germans don't even use Facebook (probably because they don't have high speed Internet).

'how much higher is the private return on capital?'

Which also translates into how much of that government debt will be a transfer from taxpayers to the holders of that debt in the form of interest. Basically, America's current federal budget involves transferring 8.7% of that budget to debt holders as interest. Why would Germans want to emulate that model? Germans have a visceral disgust of what is called Finanzkapitalismus, after all.

The 3% is just German unemployment but doesn’t measure the real pool of German labor which includes not just Germany but Poland, the Baltics, Hungary, Serbia, Ukraine, Croatia, Slovakia, Greece, as well as Spain and Italy.

Serbia and Ukraine not so much.

And you left out France, though considering I live near the French border, that may be a regional thing.

"Serbia and Ukraine not so much"

Oh buddy you have no idea.

You may be right - but we also clearly live in very different parts of Germany. There are a large number of EU workers here, but not much of a night life sector, meaning that jobs for those without legal permission to work are not exactly common. It may also be that since this region tends to have a large number of very well paid workers - Mercedes is a major employer - that the opportunities for illegal workers are less. This most definitely extends to the major amount of harvest work done here in the capital of the Spargel harvest (at least that is how Bruchsal looks at itself) - workers that one can use year after year are considered very important when dealing with a high value crop (or crops - strawberries are big too).

And Pforzheim is regionally noted for its high Ausländer proportion, however you never hear anything about Serbs or Ukrainians.

Germany is not really a single country in most ways, it is highly regional, certainly in comparison to the U.S.

Who is talking about illegals? Germany is a low-wage society, they're very eager to suck up workers from across Eastern Europe willing to do jobs for far less. I also mean "professional" white-collar jobs as well.

'Who is talking about illegals?'

Well, considering that comparably few work visas are granted to Serbs or Ukrainians particularly compared to 100% availability of legal workers from EU countries, I thought you must be referring to the fact that a lot of Ukrainians (in particular) are doing anything to not be there. I can imagine there is a thriving community of young Ukrainians in a place like Berlin, for example.

And you do not seem to have been here over several decades. In the 1990s, German companies outsourced to a number of East European countries, in very large part due to what they saw as much lower labor costs. Then they came back a few years later, as it turned out that German production facilities, even accounting for higher labor costs, were more profitable. And really, Germany has been importing cheaper labor since the Gastarbeiter days of the 1960s.

It really depends on how one defines 'low wage' - even a McDonald's worker has a right to health insurance and 25 paid vacation days. As for a Facharbeiter, well, at least in this region, they are desperate to find such people. There are several reasons for this, but a major part is that the sort of people that are available for low wage work are not the sort of people that are considered Facharbeiter.

It is always fascinating to see people realize that Germany is neither the society nor the economy of popular American imagination. Or that German industrialists know all about how to play true hardball at multiple levels, In a way that makes American industrialists - those that remain - look like clumsy amateurs. Maybe it is time to change the tagline to Germany is a mercantilist hellhole - it is just about as accurate as the socialist hellhole one. Particularly as both are equally true in terms of German society when using American perspectives.

"Maybe it is time to change the tagline to Germany is a mercantilist hellhole"
I'm pretty sure that's been widely clear to a lot of people for a while now - you can see almost any informed commentary about Germany in the English language press - I mean Tyler Cowen is one of the only guys out there trying to defend German economic policy.

". In the 1990s, German companies outsourced to a number of East European countries"

This still goes on massively, what do you think all those professional service firms active in Germany, such as Accenture or Capgemini do? They fly in armies of IT workers Monday morning from Hungary, Poland, etc. to work for like 30K a year and fly them back on Friday evening. It's not outsourcing exactly because the work is done in German office buildings in Germany but it effectively is.
This is what I mean when I talk about what the German labor market really encompasses.

"Well, considering that comparably few work visas are granted to Serbs or Ukrainians particularly compared to 100% availability of legal workers from EU countries,"

Nah it's pretty easy for them to get visas actually, and they aren't over there picking asparagus.

'what do you think all those professional service firms active in Germany, such as Accenture or Capgemini do'

I believe we are familiar with very different parts of the German economy. My experience is with southwest German, mainly manufacturing, and mainly Mittelstand (though that does include companies with a few thousand workers, which tends to push the boundary). Companies that supply Mercedes with machine tools or robot arm attachments, for example. Or the sort of company that makes furniture. Or designs and manufactures medical equipment that other companies then slap their name on.

Once again you do realize my expertise is largely naval orientated. I am just explaining to you how things really work.

"but we also clearly live in very different parts of Germany"

Uhhh....I reside in the Pyrenees - didn't you get that from my name?

I thought the Commodore had received a promotion, and was no longer another commentor. I can be mistaken, of course.

My family was granted the Lord-Admiralty of the Pyrenees in 1715 following the War of the Spanish Succession to maintain the buffer between the two countries.

I think I can be forgiven for not knowing there is really a Lord-Admiral of the Pyrenees, especially when I associate admirals with maritime locations, and when most of the names on this blog are silly made up names.

Since others have engaged the troll, I'll point or where he's being misleading today. German unemployment dropped sharply after 2003 precisely because the country moved its labor market a few steps toward the American model. The Hartz reforms reduced benefits, increased flexibility in layoffs and firing, and above all, provided incentives toward part-time work. There is the inevitable grossing about the quality of the jobs, but as far as decreasing unemployment goes, it's been a significant triumph for the American model. (Which means it gets no attention).

'German unemployment dropped sharply after 2003 precisely because the country moved its labor market a few steps toward the American model.'

Well, I am not sure that the SPD and Greens would agree with that characterization, they being the coalition that introduced them. However, Hartz was only part of the SPD/Green Agenda 2010. However, you are right that the Social Democrats and Greens are the ones who can be considered responsible for modernizing the German labor market - along with other labor market reforms like improving maternity leave benefits.

I don't have an answer to your question but why be concerned about boosting the rate of return on private capital? Is Germany experiencing capital flight or in need of foreign investment? Is it risking a fall in the value of the Euro? I don't know the answers to those questions either, but wouldn't they be relevant in deciding if returns on capital needed to be increased?

'but why be concerned about boosting the rate of return on private capital?'

Peof. Cowen always becomes concerned when the rich are not getting richer enough.

' Is it risking a fall in the value of the Euro?'

Major German businesses pray every day for the euro to fall. As does basically all of the Eurozone, though not as fervently in the main.

This is not an attempt to answer the question but to question the question. Germans prefer to work, save, and use their high taxes for social programs instead of speculating in the markets like the Anglo-American economies do. Similar to other economies including Japan, this is a perfectly legitimate way to maintain your society. Your question could very well be a non-sequitur when approached from their point of view.

'Your question could very well be a non-sequitur when approached from their point of view.'

Or just confirmation that Prof. Cowen is on the side of Heuschreckenkapitalismus (locust capitalism - the term should not need further explanation).

Japan’s problem is economic stagnation. Deflation is partly to blame, but the underlying reasons are more structural (like the low birth rate). Germany should not want to emulate Japan.

That was meant for Henrik

Japan is economically stagnant? They are just behind the US and China for GDP. They make some of the most sophisticated products in just about every category and are the market/technological leader in many of them from cars to robotics to electronics. They also flourish in many cultural products including cuisine (more Michelin stars than France), gaming, and entertainment. Many countries would kill for this kind of 'stagnation'.

Absolutely true, but the growth rate since 1990 has been very slow, and people feel rates of change more than levels. They feel entitled to the level of living to which they're accustomed and expect steady progress.

Japan is in a sort of psychological depression without an economic depression. People don't want to have kids, they don't see much of a future for themselves or their country, and yet they don't want to emigrate like so many people in other countries. I generalize, of course; there are always exceptions.

I am going to say the net effect is approximately zero on increasing GDP. I believe any obvious infrastructure investment is already being funded, so the new projects would be marginal at best and the money used for those projects even if borrowed at negative interest rates is still taking money that would otherwise be lent to the private sector, where it might enjoy a slightly better risk adjusted return. There is also the moral hazard problem in that the public sector projects involved are highly likely to have their costs understated and their benefits overstated, which would further degrade the return. What would do if I were the German Government is to announce I was planning to borrow several hundred million Euros to reduce the corporate tax to zero, that should attract some investment in to the private sector.

I mean billions not millions of course.

The mechanism for raising the real interest rate is typically through crowding out. Real rental rate is the marginal product of capital, and if we have a decreasing marginal returns technology then reducing the capital stock (relative to some counterfactual) raises the real interest rate. In addition, with capital being used on the margin as a savings instrument, we usually get R = r + d where d is depreciation, r is rental rate and R is the real interest rate.

Tyler’s argument seems to (mostly) ignore the crowding out effect and instead focus on a direct effect where government capital is complimentary to private capital. This is also a potential mechanism (indeed it might be more effective in terms of raising real rental rate/interest rate since is reduces K and raises productivity conditional on K), but it is not necessary.

The bigger question isn’t so much what the theoretical mechanism is but rather on of (1) magnitudes and (2) distribution of ancillary benefits. (1) Should we think of Germany pushing along its own aggregate production function or pushing along a Eurozone-wide production function (or even a global production function). If the latter, we may think that a German-only stimulus won’t be enough to meaningfully shift capital stock along the MPK schedule. This is akin to asking what the crowd out for the US as a whole if California had a tax cut/spending program. Even if spending is big on the scale of Germany (California), this is still small relative to the relevant economy we need to push around (Eurozone / US).

(2) Leakage is also a problem. Insofar as demand and real interest rates are global, some benefit will accrue to foreigners. If Germany is only concerned with its own well-being, it would underinvest in stimulus relative to a Europe-wide optimal. (For EU as a whole, Germany is the best balance sheet to use to borrow at the moment from a pure fiscal cost/BOP view if we think some funds come from overseas). The argument for German stimulus has usually been mostly focused on EU-wise concerns. In this regard, we don’t want to reduce German unemployment using German demand but instead we want to reduce Italian and Greek unemployment using German demand. This is a good deal for Italy, but maybe a bad deal for Germany.

Finally, I would take issue with the “tax bite” argument Tyler makes. With interest rates so low we are likely in a r < g world meaning Germany can roll-over its debt without raising taxes and maintain stable or falling debt to GDP. No (extra) distortionary or household welfare-reducing effects needed. If taxes do rise, it’s because r goes up enough that we have to start planning to pay back the debt. But this is exactly the scenario Tyler thinks we aren’t in since he’s worried r won’t go up. In any case since r < g we have room to run on indulging some crowd out before we have to worry about debt feasibility.

Germany just has to take a wait and see regarding Brexit. If they do this right, they can become the friction-free financial capital of the EU. No wasteful spending needed.

Frankfurt is abysmally dull. The top bankers won't relocate there en mass. I really think it's underrated how much of firm location decisions are driven by where the bosses want to live.
Banking is an elite profession and Frankfurt is generally unattractive.

"UK economy shrinks for first time in almost seven years" says the FT headline. UK's pain could be Germany's gain. Brexit is the gift that keeps on giving.

Fun fact: California's economy is larger than the UK's.

Why isn't Germany actively campaigning to push Brexit then?

Tabarrok and Cowen have diverged, diverged on the most important economic issue of our time, namely, the savings glut. Tabarrok has acknowledged that the savings glut is at the heart of our current problems (the mismatch of desired saving and investment, rising asset prices, volatility, and financial instability) while Cowen insists that these are ordinary times with ordinary economic consequences and with ordinary economic models to explain them. And never the twain shall meet. Cowen is not alone. The Neo-Fisherians have been out in full force, continuing to insist that down is up and up is down; thus, Cowen's link to Stephen Williamson's screed against Powell and the Fed. Wishing upon a star; pushing upon a string.

Cowen seems more right to me. Negative real interest rates are as old as the hills; negative nominal rates are what's unprecedented but it's the real rate that equilibrates the supply and demand for capital.

Germany can get along quite well without any stimulus. What would actually benefit Germany would be for Germans to have more children. A 60% increase in fertility ought to cover it. You cannot maintain your civilization with imported personnel from Aleppo and Izmir.

Q: how much more German spending on infrastructure would boost general rates of return.
A: not at all!

German economy is currently at full capacity.
The building industry in particular is running in full gear.
(Try getting some craftsman or a building company for some repair of your Munich house. It's not even a matter of price. They just don't get the worker's to meet demand).

Even if the German economy is heading into a downturn (as seems likely) this downturn will be hitting manufacturing (particularly the car industry). But there is NO sign of slowing down for the construction industry.

Any additional government spending on infrastructure would therefore just be crowding out private spending.

Why isn't Germany getting more EU immigrants to work in construction and the building trades? The impression that I have gotten is that there are a whole lotta of people from Eastern and Southern Europe who moved to the UK to work in the building trades, and that is one of the things that the Brexiters complained about. Why can't German building companies just hire a bunch of construction workers from Italy, Greece, Spain, Poland, Southeastern Europe, etc.?

No one is talking about military spending. Germany has cut back so much, it couldn't invade Belgium.

Trump is rightfully angry that Germany and other NATO countries are not carrying their fair load on military spending, making the U.S. carry the load.

Germany can boost spending to honor its obligations. That would reduce the budget surplus, it would boost the euro, it might end negative interest rates, it would add inflationary pressure in the eurozone, it would reduce Germany's huge current account surplus (taking strains off of US-German relations).

It would send a message to Putin to behave himself. It is still a dangerous world out there.

Really, the case is fool proof.

I suspect that hostility toward the military among the George Mason crowd is the reason military spending wasn't raised as an issue.

Military conscription for the immigrants is a way to socialize them into German society. It worked in the US.

Nothing, nothing in the world would make us in the Visegrad 4 more happy, optimistic and positive about the future like our German neighbors building of Arab, Afghan and Somali batallions. Nothing.

End of sarcasm. Fortunately are the Germans so pacifist that they will not even think about arming the young Muslim men.

Germany should spend MORE on infrastructure? I go to Germany almost every year, and typically visit a friend in NRW and then travel with him to some other part of Germany (last year, Hamburg). It's hard to imagine how much swankier Germany can get - though I haven't spent as much time in the east as I might. Maybe they could spend proportionally more there.

Our blog host has an elevated level of concern about airports that I find to be a little unexpected. If the airport is more efficient there will be more sales people harassing private sector decision makers more often. That's supposed to represent a boost to private capital returns. A suitable vacation might be 13.5 days instead of 14.0. The self-employed will work a little more but not the entire private sector. Roads? road efficiency is in diminishing importance to the economy as it becomes less physical. Better internet? This isn't the government's domain anymore. Example:

I would be more sympathetic to boosting German infrastructure if the examples were not airports, internet, and roads.

Microsoft-faccebook are going to run fiber to not just every slum shithole housing unit in the US, but to every hut in shithole Africa, Latin America, Asia?

The fiber factories and fiber installers are certainly in favor of Microsoft Facebook paying them to install fiber, along with all the workers, whether in the telco unions, or not.

I remember reading somewhere that Germany's port infrastructure could use an upgrade. Perhaps their freight rail could use some upgrades as well, and I do remember reading about how the Rhine's levels fell so low this year that it was (almost?) unusable to transport goods. And of course, Germany could spend some money to put its nuclear power reactors back into use, although I am not sure how cost efficient this might be (seems like it could be, because you have fully built power plants sitting idle, but the cost of making them operational again might be more expensive than building new power plants, or the costs of operating them might be more expensive than other forms of power.

It will get swankier when they tear down Tegel. The trains could run on time (they do in Italy) and they have a newfound crime problem. But I enjoy Germany and Germans tremendously.

Do economists think that there are equations that can calculate an answer to these questions? Hubris.
Better to challenge the premises -
Are current negative rates reflecting market forces or the results of multiple layers of central planner interventions - in both fiat money and banking systems?
Would the German economy be better off thinking of innovative ways of privatizing more infrastucture? Certain airports and container terminal operators have been privatized already - given massive progress in personal electronic devices, why aren't more roads being privatized, better connecting supply and demand? Frankfurt Airport, btw, is a publicly listed company. The profit motive encourages them to invest, and it is already a far more pleasant place to go through than most state-run airports, regardless of how much "% of GDP" some planner allocates.

Is driving on German highways, causing the need for infrastructure repair spending to reverse the damage considered "consumption"?

I'm a Keynesian who believes in the following statement by Keynes:

"This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision."

Long run, everything is consumption in an efficient economy. Capital formation is balanced by equal capital consumption.

Yes, everything is consumption. Everything is services; manufacturing is a fake concept.

An important difference is that it's harder to get large loans for consumption, traditionally defined. A consumable commercial building or consumable airport is easier to finance with a loan.

It's a little hard to read Keynes when I'm more accustomed to the terms, depreciation, amortization, "cost" of capital, SG&A.

Let's not reinvent the wheel. See

I take opportunities like this to promote my own work: "Can We Recover from the Public Debt Crisis? Of Course We Can,"

I don't know enough about the state of German infrastructure to be specific to it, but the vast majority of government infrastructure spending in the United States is never profitable. It's eaten by the maintenance costs of the poor decision-making process which build infrastructure no one actually needs because someone (usually the Federal or State government, giving a grant) is willing to pay for the upfront costs. The result is miles of empty roads, bridges to nowhere, low density commercial developments, sparsely populated residential suburbs, none of which will ever be worth the maintenance, because they don't produce more than the maintenance cost during the maintenance time period.

Shouldn't have to mention the concept of spending at the margin on this site, but if the Germans aren't already purchasing this infrastructure because they don't actually need it, how likely is it that spending 2% of GDP on marginal-to-worse projects is going to garner a positive return?

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