JOHN MASON: Deutsche Grundlichkeit


Deutsche Grundlichkeit

Germany just keeps going along.

Guy Chazan writes in the Financial Times:

“Germany is in the midst of a protracted boom, with industrial output, retail sates and disposable income all rising and employment at around its highest level since reunification in 1990. Ministers expect the economy to grow at a healthy clip of 2.1 percent this year.”

Furthermore, total government debt in Germany is falling and has just dropped below €2 trillion for the first time in years.

One could argue whether or not the 2.1 percent economic growth is “a healthy clip.”

President Trump certainly would not think so.

But, in this day, that rate of growth is nothing to look down upon, especially as the inflation rate remains as low as it is.

In addition, although the United States posted a 2.8 percent, year-over-year, rate of growth in the second quarter of 2018, economists don’t expect this rate of growth to be sustained. And, over the full nine years of the current economic expansion in the United States, the annual, compound rate of growth in America has been only 2.2 percent.

The remarkable thing is that over this nine-year period, the amount of government debt in the United States has risen and the United States trade deficit has widened.

Also, the growth of labor productivity has been barely above zero.

Germany has run a trade surplus, labor productivity has continued to grow at a reasonable pace, and the government has actually been able to keep its debt under control, especially since 2014 when it ran a balanced budget every year to the present. And, the current finance minister plans to continue this discipline through 2021 when a new parliament is elected.

This is sharp contrast to the United States where deficits are increasing and the US government is boosting it debt issuance.

Also, I have recently written for "the Peak":

“Over the next ten years, the federal debt will rise to equal nearly 100 percent of GDP… its highest level since the end of World War II.”

Again, the contrast with Germany is startling. As Mr. Chazan writes,

Germany’s finance minister “has boasted that Germany will finally fulfill the Economic Union’s Maastricht criteria next year, when public debt drops below the mandated threshold of 60 percent of economic output. The debt ratio is expected to fall to 58.25 percent, down from 61 percent this year. As recently as 2012 it was at 81 percent of GDP.”

What is the model for the future? Continue on the undisciplined budget management method as the United States has done for almost sixty year years, or, pursue a much more disciplined approach as has been done by Germany.

I must note here that the United States did have a period when it produced a budget surplus or two and that was during the administration of President Bill Clinton when Robert Rubin was Clinton’s Secretary of the Treasury. It should also be noted that during the time of budget discipline, the US economy produced a strong record of economic growth without excessive inflation.

The United States began using its federal budget to stimulate it’s economy in the early 1960s during the presidency of John F. Kennedy. Whereas the earliest ideas argued for budget deficits that offset over the full business cycle resulting in a cyclically balanced budget, some economic research argued for continuous budget deficits, citing a trade-off between the inflation rate and unemployment. If the economy accepted a little more inflation due to the government’s stimulus, it could achieve lower levels of unemployment.

This latter approach gained the full acceptance of the government during the administration of President Richard Nixon when he claimed, “We are all Keynesian’s now!” and the government moved into a policy stance that I have referred to as one of “credit inflation.”

The problem with credit inflation is that people came to expect continuously rising levels of credit and sophisticated and/or wealthy individuals came to take advantage of this credit inflation. Even in the early 1970s one came to see people directing the credit that was being created to make money on rising housing prices, rising gold prices, and the rising value of art.

The financial innovation that followed only helped to produce greater opportunities for these “investors” to make money, but it also tended to result in the credit that was created go more and more into the “financial circuit” or the economy and less and less into productive activities.

In the 2000s we have seen that very little government stimulus goes into the production of physical investment, while most of the credit created goes into assets, physical and financial. Thus, rather than investment booms, which result in the creation of jobs, the economy produces asset bubbles that sooner or later must be collapse.

Very little is done to increase labor productivity, which means that the growth in labor productivity becomes almost nil.

And, the level of government debt increases, and increases, and increases.

Of course, the question is, “how long can this picture be sustained?”

Germany, on the other hand, has rally prospered in recent years as its budget discipline has taken charge. And, the German economy has continued to grow, and unemployment has fallen, and productivity, both labor productivity and capital productivity, has increased. Consumer spending has continued to rise.

The most important thing in all this is that German products are very competitive in world markets. The emphasis upon keeping inflation under control and building up labor productivity has produced tremendous benefits for German business. These results have kept Germany as a leader in Europe, but also it has resulted in the continued presence of Germany in the world.

Which approach is the model for the future?

In my mind the German model has more going for it over the longer-run.

The US model, based as it is on credit inflation, can only continue to exist as long as credit inflation is maintained. But, this means fewer resources go into productive activities, productivity decreases, and the sophisticated and/or wealthy take home the pie. The growing income/wealth inequality in the US over the past sixty years speaks to this.

The German model can be sustained. The US model must continue to be pumped up….


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