Angela Merkel’s German deficit spending

Angela Merkel’s cabinet is meeting on Monday to approve new borrowing of €356bn — equivalent to nearly 10 per cent of Germany’s gross domestic product — marking a new era in fiscal policy and a radical departure from Berlin’s long-held aversion to debt.

Here is the FT piece, but this is being covered everywhere.  (Imagine a day where this isn’t even necessarily the biggest story, and here we are.)  Of course the content of the spending matters a great deal, but this is in principle the right thing to do.  But here is the catch: out on social media, and in the old days of the blogosphere, there was so much Merkel hatred: “the austerity queen who killed thousands,” etc.  But now she has been vindicated.  We all can agree that a government should (on average) run surpluses in good times and deficits in bad times.  Well…2011-2012…those were the good times.  Yikes.

Merkel goes up in status with this, big time.  And of course it is no surprise that a bunch of Germans would have a better sense of what the bad times really can look like.


Is there any evidence that the surpluses she ran in good times has made the current proposed deficit any easier? Reality seems to say no. As counter intuitive as it seems, the US is about to embark on deficit spending that made the fiscal crises look like a walk in the park. The fact that the Trump administration spent its good years busting the deficit hasn't seemed to matter in the slightest.

"Trump administration spent its good years busting the deficit hasn't seemed to matter in the slightest."

Do you know the difference between a trade deficit and a budget deficit?

Yes and I'm talking about the budget deficit.

Government debt as a percent of GDP is a measure used by investors to gauge a country's ability to make future payments on its debt and affects borrowing costs and government bond yields.

German debt to GDP was 82% in 2010 and 62% in 2018. Adding 10 percentage points moves Germany to 92%, give or take.

Similar measures/source, the US debt/GDP was 91% in 2010 (Obama); 105% in 2016 (Obama); and 107% in 2019 (Trump).

Germany's ability to sell bonds at say 110 and repay at maturity at 100, while paying 0.01% interest, is a bonus.

NB: national debt is different from the annual budget deficit.

Numbskull! Germany debt load goes to approx. 72% of GDP, not 92%.

The correct measure to use is debt held by the public. In the U.S., this was 76.4% of GDP in 2016 and 79.2% in 2019.

The Central Bank, if it wanted, could make that metric as low as it wishes.

Government debt as a percent of GDP is a measure used by investors to gauge a country's ability to make future payments on its debt and affects borrowing costs and government bond yields.

Errr yea ok sure but not really. You're assuming these variables are not causal. This makes sense for an individual. If I owe $900,000 but make $80,000 a year, I'm unlikely to get a raise just because I have a lot of debt. If I'm applying for a loan, the investor (bank), will use this ratio to probably deny. On the other hand if I'm applying for a business loan, the bank has to understand my debt to income after taking into account the cash flow from the business the loan will create.

For investors in gov't debt, things are much more muddy. The gov'ts deficit may raise GDP, hence alter the ratio. Likewise debt may remain steady (balanced budget) but if GDP falls the ratio worsens. Right now since GDP is probably going to be collapsing, the ratio no doubt will be horrible no matter what surpluses were run for a few years leading up to it.

SO this brings me back to how exactly is Merkel vindicated by running a deficit now? Tyler would have us believe her prudent surpluses in the past now puts her in a good position to run deficits to face an emergency. But what evidence is there of that? The US ran deficits as she ran surpluses yet the US is about to run deficits much larger than ever seen before. No evidence seems to indicate the US is unable to do this because of its recent deficits.

So, there is no budget constraint?

No there is only an output constraint on the economy.

So what one borrows now does not have to be serviced in the future?

It does have to be serviced. But serving a bond in the future means also adding income to the bond holder in the future. Sorry the analogy of gov't deficits to some type of time machine that pulls income from the future to the present doesn't work.

Adding? You mean subtracting.

Any deficit, government, yours, mine, precisley pulls income from the future to the present. We just gotta pay people to push resources from the future to the present. They have things called surpluses. We pay them interest to convince them to lend us their surpluses. :-)

If an actual time machine existed would you feel guilty about going to the future to 'borrow'? I wouldn't. The future is pretty infinite compared to the present. Imagine it's 1890 and they could come forward and 'borrow' a few tons of toothpaste. Would we notice it? Nope, probably not. To them it would make a huge difference.

But yet the idea you're pushing would say to the person in 1890 don't let there be a deficit because the people in 2020 with their Playstations, Internet, iPhones, and until recently ample toilet paper would become worse off?

Here's the problem, there is no time travel. You can't 'pull resources from the future' by running a deficit. Deficits pull resources from the only place that can exist in a universe without time travel, the present.

Never said there should be no deficit. Said the trick is knowing when to stop.

You’re arguing with an idiot.

Boonton believes in an AOC inspired fantasyland of MMT.
He believes we can borrow infinitely and indefinitely without consequence and fund it via the printing press.

Weimar, Zimbabwe and Venezuela simply didn’t print enough cash

Weimar, Zimbabwe and Venezuela all are examples of countries that tried to exceed their output constraints.

I think the point is that whatever surpluses Merkel ran over the past few years, while large, are nothing compared to what they now need to spend and so it is a big question as to if they actually did set Germany up to being able to spend more now. It doesn’t square with Tyler’s claim they Merkel has been hugely vindicated. It doesn’t seem like those surpluses are going to make much difference now.

In other words the budget constraint doesn't seem to really exist. I'm not sure how it can and surpluses not making much difference can both logically exist in the same universe.

Germany does not have the advantage of issuing debt denominated in the world's reserve currency. Imagine if Germany had a debt-to-GDP level comparable to Italy's.

The reserve currency consideration is a red herring. Demand for reserves is not unlimited and is sensitive to cost.

Otherwise, the Breton Woods system would not have broken down.

That is, those were the years with budget surpluses.

Very useful website.

With basically zero interest rates, the German government is borrowing money for free. Sounds kind of clever, in the face of such economic dislocation.

High unemployment, go to deficit. Low unemployment, go to surplus. When crises come you can borrow your head off.

All Alex Hamilton, JM Keynes, Milton Friedman, and the Germans! Put differently, sound public finance, in case anybody remembers.

It's about damn time.

"Merkel goes up in status with this, big time": no good. Her reputation was ruined permanently when she invited an army of invaders into her country.

From the post, "And of course it is no surprise that a bunch of Germans would have a better sense of what the bad times really can look like."

The surviving WWII Wehrmacht, etc. troops would be in their 90's.

In addition, the other day I saw her quoted as saying this is war and Germany got through war before. Think WWI and WWII. Not sure she or Dr. Cowen sees the dark irony.

Well, to be fair, she is right: Germany has got through war before. Even if it did not win the two world wars, it still counts as institutional experience. We do not know what will happen in Germany and elsewhere. At this point, she has nothing to offer but blood, toil, tears and sweat. Let the Germans us therefore brace themselveselves to their duties, and so bear themselves, that if the German nation and its Republic last for a thousand years, men will still say, "This was their finest hour."

You also missed the dark irony.

The surviving WWII Wehrmacht, etc. troops would be in their 90's.

And how old are their children and grandchildren?

I'm not seeing how Tyler is supporting his conclusion that Merkel has been vindicated by running surpluses during her 'good times'. If she had run deficits or simply balanced the budget letting surpluses be zeroed out by spending and tax cuts, would today's decision to borrow be different? I don't think so.

I live in Seattle. I and a good number of the people I know might have had it what I took to be was a bad cold with a cough that went on for about 10 days. It would be great to know if it was a cold or if I'm less of a hazard to other people then I would otherwise be. Testing testing testing.

You made this point upstream in the top post. It's a fair point. The only advantage Germany has over the USA, which also is scheduled to spend 10% of GDP (about $2T) for fiscal measures is that Germany's Debt-to-GDP ratio will be lower than the USA's, roughly 70% or so to the USA's 100% or so. Does this mean Germany is better off? I wish I knew. Conventional theory says yes, but, nowadays with the US dollar being the reserve currency of the world, it seems the US can enjoy 'deficits without tears'. I predict someday however Debt-to-GDP will actually matter, but that seems to be down the road.

May matter someday doesn't sound like much of an economic theory to me. The MMT folks have a point here, after decades of scolding the deficit folks need an actual theory that evidence supports.

MMT is less a theory than a state of mind! If one were to take them seriously, one would have to believe that the demand for money is infinite.

They are implicitly equating the present situation with the Great Depression, when there was one hell of a demand for money, and for good reason.

I see that demand AT THIS TIME world wide, but only on account of the Corona virus.

Discount freely, and yes, give resources away, temporarily! :-)

A theory is defeated if its predictions turn out to be failures. Germany had good times and ran surpluses per the traditional theory. The US had good times and ran deficits, even doubled down on them under Trump.

If deficits matter where is the evidence that they matter? It's acceptable to say that deficits sometimes matter but then you're hinting that deficits mattering is a special condition much like Newtonian mechanics mattering is a special condition of general relativity.

Unlike relativity, though, it's quite possible the 'special condition' where deficits matter is actually pretty special rather than the normal day to day life in advanced economies.

The US has had good economic times in the face of deficits. The debt is accumulated deficits. The debt/GDP ratio has grown [alas, in good times]. In cannot do so forever.

When the day of reckoning will come I cannot tell you, but I can tell you where: In the financial markets. There will be a spike in interest rates, and then more spikes, and then people will stop lending to the government unless taxes are put on a path to service the debt.

Or GDP grows, in which case the ratio reverts. One of the problems many countries had with austerity is that it refused to work. Attempts to stem debt-to-GDP by spending slow downs or tax increases were swamped when GDP fell even faster putting the ratio back where it was or even worse.

Of course there was a slight of hand there you tried to pull off. Tyler didn't say decrease debt to gdp during good times, he said run a surplus. You can reduce debt-to-gdp in good times even with a deficit that's growing as long as GDP grows at a good enough clip.

But where's the evidence Germany did anything for itself by running its surpluses? I'm not seeing it and claiming their ratio fell doesn't do it either.

Japan's debt/GDP is nearly double the US so it is much further along. The yen is also not a reserve currency so if your idea is true we should see market panic there first.

But Japan is the world's top creditor nation, which makes its debt more manageable. And deficit spending in Japan has failed to boost growth, so loose fiscal policy is not necessarily any better.

Countries running persistent trade surpluses help to encourage the US to continue to run budget deficits. This is where Germany’s persistent trade surpluses and the policies that support them become distorting. Where do you think all those excess savings go? They go to purchase assets in the US such as US government bonds.
This is why Tyler ignoring (not understanding) the reasons for the concern with Germany’s fiscal tightness.

Forgot to add...
“Makes his arguements for Merkel’s vindication ring hollow for me.”

Or, if she had not imposed austerity on the whole of Europe for a decade the economic growth that resulted from basic Keynesian policies would have placed the continent in a much stronger position to weather this storm.

Let's take "basic" keynesian policies to mean fiscal deficits. Germany hasn't had influence over other countries' fiscal policies for about 75 years.

As for monetary policy there's this thing call the ECB which makes it.

Perhaps the rational core of a call for German fiscal deficits is that future generations of Germans would have to service that debt, rather than future generations of other Europeans. That's called Versailles! :-)

Everybody knows Germany dominates and basically calls the shots in the ECB. This has been well covered, I'm not sure who you're trying to kid.

Dominates is an elastic word. Decisions at the ECB cannot made by any one country in isolation.

Sophistry, yes she needed allies in similarly neoliberal governments in countries like Spain at the time, but its pretty clear she was main the architect of most of the austerity of the past decade.

This is what Tyler was referring to when he talked about people saying she was responsible for murder, its well conceded that she and her government were the main force behind austerity on the continent and things like what happened in Greece.

Again, who are you trying to kid?

"Main force" is like "dominates", a word made of rubber.

Not too long ago, when the Greece problem was still more or less current, I heard a talk by an economist, not some international relations type, in which it was claimed that FRANCE and Germany together ripped off Greece [and perhaps Ireland, too]. That may or may not be true, but no one country can pull off anything alone.

Besides, if it were too costly to live under anybody's yoke, one could drop out. It's all voluntary.

EU nations in order of population:

Germany 83 million
France 65 million
Italy 61 million and falling
Spain 47 million
Poland 39 million
Romania 21 million
Netherlands 17 million
Greece 11 million

Looks to me like all those nations who are victims of austerity and tight money together slightly outweigh the population of Germany. Are they not allowed to talk to each other?

And Britain is not on the list. Did it drop out?

Pop in an oak only supplies population data. With the next update, Pop in an oak 3.2 will be capable of rendering graphics relating to population as well as rendering down population deemed surplus to requirements.

Britain was never on the euro.

You're not even addressing the argument anymore, its becoming pure sophistry.

However you want to define Merkle's role in the ECB, as 'main force' or 'dominates' or something else, that role and its effects in enforcing austerity is what Tyler was defending and that is what I was criticizing.

Stop wasting both of our time. Don't you realize that these kind of tactics do more to discredit your side than otherwise?

I take the post as being about economic principles, nothing more and nothing less, and I argue such.

We attack hypotheses, not people.

I try to avoid the personal, but if someone is being consistently and obviously dishonest in their arguments its necessary to call it out. That is what you were doing, its called sophistry.


The ECB is a monetary authority, not a fiscal one, and sure they should have looser monetary policy after the recession; and all of Southern Europe shouldn’t have idiotically run massive deficits (and lied about their budgets to EU) during the good times, putting themselves in a fiscally precarious situation when the bust came. That people keep trying to blame it all on the Germans confirms that some countries will never learn, and maybe the responsible northern ones should cut their losses and break of and form a separate union.

Perhaps the rational core of a call for German fiscal deficits is that future generations of Germans would have to service that debt, rather than future generations of other Europeans. That's called Versailles! :-)

Counterfactual. Suppose German cut taxes to maintain a balanced budget rather than surpluses. "future generations" would have more bonds to service than they do otherwise (since surpluses retire bonds). But then those future generations would have grown up in the last decade in families that had more disposable income. It's a wash.

Except for the real rate of interest, real! :-)

And the kids will pay it, not the parents!

Well if you grew up in a household that had, say, 5% more income due to tax cuts or whatnot wouldn't you have had a better childhood? Would not your parents have likely left you more of an estate than they did? So if today you are 'paying for' deficits from 1984 it's hard to see how you have a bum deal.

That’s not the point you were trying to make above. If I borrow and spend today, true, I’ll have to service my debt in the future, but in the future I will have had more disposable income in the past. Does that sound like a nonexistent budget constraint? No, no it doesn’t.

And for it to actually be a wash, what the borrowed money is being spent on today must be as productive as what would’ve been done with the money that will be spent servicing it.

I would say this only would come into play if the borrowed money today directly shifts output. I would say almost none of the post 2008 deficits shifted present output, hence there's nothing to pay back.

When people say taxes or interest rates are higher to make up for past deficits, ask when exactly did you get taxes to pay for, say, the first Gulf War? The Reagan tax cuts and military buildup? Or for that matter WWII? The US ran huge deficits for WWII but the few surpluses since never came close to paying that debt off. When was WWII paid for exactly?

Criticism of Merkel's austerity stance was always directed towards here treatment of other european countries.

And it is important to put into perspective that the euro crisis striked some countries (especially greece) almost as hard economically as the Corona crisis will now strike most countries. 30% unemployment and 30% GDP loss in some countries were definitely not "the good times"!

Therefore, the previous criticism of germany's austerity politic was sort of understandable, even though it is not precisely clear if Merkel was the right person to criticize here.

No! The issue with Merkel’s fiscal policy was always that German consumer demand was too low and that was fueling these persistent, and distorting trade surpluses. So good that she’s doing something now but this doesn’t vindicate her at all.

What is the difference between a distorting trade surplus and a non-distorting trade surplus?

It’s all distorting when you run them persistently over many years becoming a sinkhole for demand.
The criticism was completely right and she is not at all vindicated. It once again demonstrates that Tyler Cowen does not pay close attention to the actually arguments being had in this and many other topics he enjoys pontificating on.

In my yute I ran persistent deficits over many years; in my dotage I run persistent surpluses. What in God's name do we have a financial system for?

Or maybe TC is simply not convinced by the argument that Germany should have pursued a loose fiscal policy. That argument was never obviously true.

It’s obviously true that Germany was running persistent trade surpluses for years acting as a drag on global demand. The budget surpluses contributed to this as well as a host of other German policies designed to suppress domestic wages. TC doesn’t talk about this because he misrepresents/does not understand what the arguments were for looser fiscal policy.
I don’t care if TC is not convinced I’m not a TC cultists like most of the people who read this blog and think TC is anything but a pettifogger. TC has long been a Merkel fan and is looking for any excuse to vindicate her policies and he’s just taken this up.

Didn’t they have a surplus?

I can't agree that the government should run surpluses in good times. So leave me out of 'we all'.

Bad times / Good times... The analysis in terms of supply shocks and demand shocks, and how fiscal/monetary policy can be useful against the demand shocks, but not the supply shocks seemed more subtle.

Yeah. What we have now is a demand shock AND a supply shock. All our fiscal and monetary stuff can alleviate the demand shock, but nothing can be done about the supply shock.

Intertemporally, the best that can be done is to prevent too many bankruptcies and personal hardship so that when the virus is gone economic activity can resume right away.


Policy A: Millions of people get a check for $1500. They pay their rent, the landlords get paid and turn around and make their mortgage payments. Banks record cash goes up, accounts receivable goes down.

Policy B: Gov't declares no one has to pay rent this month and landlords don't have to pay their mortgage payment. Banks book a loss but QE adds cash to their balance sheets.

Both policies seem to bring the economy to the same endpoint. Which is a demand policy? Which is fiscal which monetary? Which is spending?

And it will most all be spent in Germany.

I thought China was the flavor of the month! :-)

Good deal for a US investor if Germany buys the stock and corporate debt.

I didn't think the Germans were that dumb. I don't know how they can avoid benefitting foreign investors.

Another way to look at it is this: Volkswagen has plants in China. China goes into recession. Germany bails out Volkswagens business in China. China wins.

Not sure this follows. Say it remains profitable to build Volkswagens in China. If the company goes bankrupt, whoever buys it in reorganization would keep the plants open. If it isn't profitable, Volkswagen may be bailed out but they aren't going to keep their plant in China. China only wins if Germany bails the company out on the condition that they keep their plant open in China, which seems like an odd thing.

Spending it on what? Germany is in lock down, no one is transacting.

OK, I have a stimulus for you.
The federal government currently pays 2.5% on existing debt, higher than the ten year rate which is currently at .85%. It is the back log of debt that kills us, the debt we borrowed when rates were 3% and our favorite economists said that was cheap. So borrow at the current .85% and refinance the old debt, lower total interest costs.

If the bonds are callable, that might work, if you have to buy them on the open market, then you won't save much if anything.

Where are all the freshwater economists arguing that this is a Netflix and Disney plus recession. All unemployment is voluntary. When is Tyler going to blog about video games causing this spike in unemployment? Or is he just an intellectually bankrupt conservatard?

HAHAHAHA yeah remember that?! Another example of how anyone taking TC seriously is a fool.

It's amazing
That none of the above comments
Pointed out that
The money is being used to
Acquire corporate equities and bonds!

Austerity for the average German
and when it does open the wallet
Spending and underwriting corporate debt and buying German Stock.

Of course because the entire policy of German governance, from-top-to-bottom is to keep the trade surplus going and that always meant supporting and enacting policies that benefit exporters everyone else be damned.

In Australia my parents are getting nearly $1,000 US in cash. Business is getting temporary tax cuts and increased depreciation. Low interest loans are being made available. Apprentices and trainees get half their wages paid by the government for 9 months...

That is working, that's the way you do it, money for business and trainees half free...

Nope. the stimulus have been increased by an order of magnitude. From 0.9% of GDP to 9.7%. My parents are getting their pension doubled.

Actually Merkel's status goes up because Germany is the only major western country capable of large scale testing. Germany has 22k known cases and 82 deaths, the USA has 26k known cases and 345 attributed deaths and only sporadic and limited steps to slow infection... if you see deaths as a trailing indicator of infection and you can remember senior school math, that should make you very worried if you live in the US.

I don't but it makes me fear for you.

More deficit spending during the "good times" would have made the European economy as a whole stronger as a whole, not weaker. German fiscal policy isn't constrained to its borders because of the Euro.

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