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Austerity and Regulation vs. Stimulus: The Latest Transatlantic Squabble

Ahead of the G-20 summit we are witnessing rising German-American disagreements. Germany wants to reform the financial markets and deal with the debt crisis, while US academics and the president prefers economic stimulus plans and criticize the teutonic export champion. Spiegel International:

Krugman is far from alone with his concerns about German and European austerity packages. Last week, US President Barack Obama sent a letter to other G-20 countries in which he fired a not-so-subtle shot across Berlin's bow. "I am concerned about weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses," he wrote in a clear reference to Germany. He also warned against reversing economic stimulus policies too soon. "We worked exceptionally hard to restore growth," he wrote. "We cannot let it falter or lose strength now."

Germany and France were hoping that the G-20 summit would focus on measures aimed at reforming global financial markets. In particular, Merkel would like to see an international tax on financial transactions as well as a mandatory bank levy, which would go towards a fund to be used to bail out banks in future crises. But opposition to both proposals has been stiff. And the US, in particular, is hoping to use the G-20 to push for more economic stimulus rather than less, given ongoing high unemployment at home.

Personally, I am not sure, if the US and Europe really need and can afford more stimulus plans right now. They make the long-term debt crisis worse. Besides, tax cuts do not lead to more consumer spending, when citizens are smart enough to realize that the economy and government finances are in trouble and consider tax cuts for what they are: desperate measures to stimulate growth. In those cases citizens use the tax cuts to save more money to prepare for the worst. Of course, stimulus is more than tax cuts.

ENDNOTE: I am sorry for the lack of blogging. In the last six weeks, I learned quite a lot of stuff the hard way: First, a new bike with strong front wheel breaks is not necessarily a good thing. Second, I cannot fly. Third, a broken elbow joint requires two surgeries, the second one kept three doctors over four hours busy. Fourth, doctors and nurses are nicer and more caring than I thought. Even the hospital food was good. Our health care system is still okay. Fifth, even if only the elbow is broken, fingers don't work (typing etc.) very well. Regaining full flexibility apparently takes months. Sixth, one can get quite a lot done with just one functioning arm. Now "I'm a graduate of pain." Yeah.


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Pat Patterson on :

Condolences. Something like 75% of non-fatal bike and skateboard accidents result in breaks to the arms and hands. Even though we intellectually know better we still stick our hand out to break the fall.

David on :

Joerg, If you are still in pain, come to Maine where we just approved the use of marijuana "for medicinal purposes". Besides, it is the most beautiful state in the summer.

Pat Patterson on :

That certainly explains Maine's voting pattern however a fall off a bike is not, as the law identifies, a "...Chronic or Debilitating Medical Condition." Now maybe if you showed up to the doctors in dread locks and a knit cap of red, yellow and green that might also suffice.

Zyme on :

Gute Besserung! :)

Joerg Wolf on :

Pat, David, Zyme, Thank you!

Joe Noory on :

Why go to Maine when all you need to do is hang around Savigny or Oliverplatz for a little while? Sheesh. As to all of the "squabbling policy difference" business, it's a load of hooey tossed up in advance of the G20 summit, for the digestion of people who think anything meaningful actually happens at summits. Think about the fact that 5 of the 8 in G-8 are representing the EU. Right off the bat that should indicate that the event's only purpose is to crane neck for the camera and pretend to not be one notch above irrelevant.

John in Michigan, US on :

Some thoughts: 1) On this issue, Europe is right, and America is wrong. If one were mean-spirited, one could say that Obama has returned us to rogue nation status, as least as far as economic theory is concerned. 2) Keynesian economics hasn't been mainstream economics for a long time now. In the US, it hasn't been taught (except critically or as part of history) in top universities since the 70's. Bill Clinton's economic team understood that deficits matter. 3) "Krugman is far from alone" Name 10 prominent economists who think a) the 2009 stimulus is working b) we achieved a 1.5 multiplier c) we should have another stimulus. Krugman is exhibit A for why the Nobel Prize in Economics ought to be abolished. The scientific consensus (outside of Paul Krugman's office) is that Keynes was wrong on several important points. Apparently, consensus only matters on global warming, other allegedly quantitative sciences can be disregarded when politically convenient. 4) Size matters. Even Krugman must admit, in his rare moments of honesty, that the current talk of stimulus is nonsense. If the US economy is so bad that nearly $1 trillion in stimulus couldn't prevent unemployment from RISING, it follows from basic math that a much smaller stimulus (100-200 billion is being discussed) will have a very small impact. It would take spending equivalent to WW II (adjusted upwards for inflation, population growth, and GDP growth since then) to make a noticeable difference. [url=]I discussed why this is true here[/url]. Krugman and the other fakers know that, as long as the global debt bubble doesn't burst, the economy will recover even if they take no action. But, they can only take credit for a recovery if they keep passing stimuli, which they can also use to purchase votes. ENDNOTE: Get well soon, Joerg! And get back on that bike!

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