Great article showing how the German economic recovery stalled after a big round of budget cuts and the reason why it did not have the stimulus effect anticipated. That basic reason is that cutting spending (reducing the deficit) helps bring interest rates down. Problem is that interest rates are at 0%, so reducing the deficit won't actually stimulate the economy and could lead us into a German-style failing recovery. It seems Obama is making a mistake here if he gives into Republican pressure to cut deficits too early. http://www.nytimes.com/2011/02/23/business/economy/23leonhardt.html?hp Remember the German economic boom of 2010? Germany’s economic growth surged in the middle of last year, causing commentators both there and here to proclaim that American stimulus had failed and German austerity had worked. Germany’s announced budget cuts, the commentators said, had given private companies enough confidence in the government to begin spending their own money again. Well, it turns out the German boom didn’t last long. With its modest stimulus winding down, Germany’s growth slowed sharply late last year, and its economic output still has not recovered to its prerecession peak. Output in the United States — where the stimulus program has been bigger and longer lasting — has recovered. This country would now need to suffer through a double-dip recession for its gross domestic product to be in the same condition as Germany’s. Yet many members of Congress continue to insist that budget cuts are the path to prosperity. The only question in Washington seems to be how deeply to cut federal spending this year. If the economy were at a different point in the cycle — not emerging from a financial crisis — the coming fight over spending could actually be quite productive. Republicans could force Democrats to make government more efficient, which Democrats rarely do on their own. Democrats could force Republicans to abandon the worst of their proposed cuts, like those to medical research, law enforcement, college financial aid and preschools. And maybe such a benevolent compromise can still occur over the next several years. The immediate problem, however, is the fragility of the economy. Gross domestic product may have surpassed its previous peak, but it’s still growing too slowly for companies to be doing much hiring. States, of course, are making major cuts. A big round of federal cuts will only make things worse. So if the opponents of deep federal cuts, starting with President Obama, are trying to decide how hard to fight, they may want to err on the side of toughness. Both logic and history make this case. Let’s start with the logic. The austerity crowd argues that government cuts will lead to more activity by the private sector. How could that be? The main way would be if the government were using so many resources that it was driving up their price and making it harder for companies to use them. In the early 1990s, for instance, government borrowing was pushing up interest rates. When the deficit began to fall, interest rates did too. Projects that had not previously been profitable for companies suddenly began to make sense. The resulting economic boom brought in more tax revenue and further reduced the deficit. But this virtuous cycle can’t happen today. Interest rates are already very low. They’re low because the financial crisis and recession caused a huge drop in the private sector’s demand for loans. Even with all the government spending to fight the recession, overall demand for loans has remained historically low, the data shows. Similarly, there is no evidence that the government is gobbling up too many workers and keeping them from the private sector. When John Boehner, the speaker of the House, said last week that federal payrolls had grown by 200,000 people since Mr. Obama took office, he was simply wrong. The federal government has added only 58,000 workers, largely in national security, since January 2009. State and local governments have cut 405,000 jobs over the same span. The fundamental problem after a financial crisis is that businesses and households stop spending money, and they remain skittish for years afterward. Consider that new-vehicle sales, which peaked at 17 million in 2005, recovered to only 12 million last year. Single-family home sales, which peaked at 7.5 million in 2005, continued falling last year, to 4.6 million. No wonder so many businesses are uncertain about the future. Without the government spending of the last two years — including tax cuts — the economy would be in vastly worse shape. Likewise, if the federal government begins laying off tens of thousands of workers now, the economy will clearly suffer. That’s the historical lesson of postcrisis austerity movements. The history is a rich one, too, because people understandably react to a bubble’s excesses by calling for the reverse. When Franklin Roosevelt was running for president in 1932, he repeatedly called for a balanced budget. But no matter how morally satisfying austerity may be, it’s the wrong answer. Hoover’s austere instincts worsened the Depression. Roosevelt’s postelection reversal helped, but he also prolonged the Depression by raising taxes and cutting spending in 1937. Only the giant stimulus program known as World War II finally ended the Depression. When the private sector is hesitant to spend, the government has to — or no one will. Our recent crisis serves up the same lesson. Germany isn’t even the best example. Its response to the crisis has had some successful features, like an hours-reduction program to minimize layoffs, and Germany’s turn to austerity has not been radical. Britain’s has been radical, with a tax increase having already taken effect and deep spending cuts coming. Partly as a result, Britain’s economy is now in worse shape than Germany’s. “It’s really quite striking how well the U.S. is performing relative to the U.K., which is tightening aggressively,” says Ian Shepherdson, a Britain-based economist for the research firm High Frequency Economics, “and relative to Germany, which is tightening more modestly.” Mr. Shepherdson adds that he generally opposes stimulus programs for a normal recession but that they are crucial after a crisis. The trick is finding the political will to end the stimulus when the time comes. That is not easy, especially for Democrats, given that stimulus programs tend to include policies they favor. But the wave of recently elected Republicans, in Congress and the states, will no doubt be happy to help summon that political will. For the sake of the economy, the best compromise in coming weeks would be one that trades short-term spending for medium- and long-term cuts. Beef up the cost-control measures in the health care overhaul and add new ones, like malpractice reform. Cut more wasteful military programs, like the F-35 jet engine. Force more social programs to prove they work — and cut their funding in future years if they don’t. By all means, though, don’t follow the path of the Germans and the British just because it feels morally satisfying. E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt
http://forexnewsnow.com/top-stories/germany-heads-economic-activity-in-the-euro-bloc Germany led the 27-member in the bloc as its manufacturing sector and Ifo Business Climate grew at a record high. Spending cuts and slower growth abroad in the Euro bloc’s largest economy hasn’t reduced business morale in Germany as it increased for the ninth consecutive time to 111.2 this February compared to economists forecast that it will remain unchanged at 110.3 from January. The currency reading is actually the highest since records began for a reunified Germany in 1991 with last month’s data being the second highest ever registered. According to Carsten Brzeski “(Ifo is) reaching for the stars. German business confidence surprised once again and continued its impressive performance of the last two years, increasing to another new record high.” This strongly suggests that the German economy remains intact as it holds on to momentum to continue a strong rebound. Foreign trade would be an important growth factor for Germany and this will most likely benefit other members of the Euro Zone as well. http://www.industryweek.com/articles/german_business_confidence_hits_record_high_23946.aspx German Business Confidence Hits Record High World's second exporter after China is rebounding nicely By William Ickes, Agence France-Presse Feb. 22, 2011 As analysts cheered the results and hailed an exceptional rebound in Europe's top economy, German business confidence hit a third straight record high this month, the Ifo institute said on Feb. 21. ... Following the deepest recession in more than six decades in 2009, the German economy has bounced back strongly as global demand for its goods has revived. For this year, Berlin expects growth of 2.3%, dipping slightly to 1.8% in 2012. Cheering the results, Economy Minister Rainer Bruederle said: "The German economy has left the crisis behind and is now in top shape." http://www.finfacts.ie/irishfinancenews/article_1021686.shtml Consumer sentiment in Germany has remained on the ascent in February By Finfacts Team Feb 22, 2011 - 7:13 AM Consumer sentiment in Germany has remained on the ascent in February. Income expectations have increased noticeably, whereas economic expectations and the propensity to buy have recorded slight decreases, but remain at a high level. The overall indicator is forecasting a value of 6.0 points for March, following a revised value of 5.8 points in February.
These stats don't really help your argument very much. You may want to re-read them. Also you may want to have an argument too.
http://online.wsj.com/article/SB10001424052748703529004576160033612392352.html?mod=googlenews_wsj Geithner Backs U.K. Austerity Push LONDON—U.S. Treasury Secretary Timothy Geithner said he doesn't believe a controversial austerity program embarked on by the U.K.'s coalition government will hurt Britain's economic growth.
Perhaps you should inform Germany's Economic Minister, then. What are your credentials compared to his?
spending cuts will necessarily lead to a "worse" economy (as defined by lower GDP figure) in the short run, but a bigger one in the long run. unlike the amount of paper money that is capable of being printed, the factors of production are not unlimited. you can't spend what you haven't first saved.
http://www.irishtimes.com/newspaper/breaking/2011/0221/breaking19.html Last Updated: Monday, February 21, 2011, 09:18 German manufacturing growth at record Record growth in Germany's manufacturing industry powered a strong expansion of its private sector in February, a purchasing managers' survey showed today, defying fears the recovery could be easing. The flash estimate from data compiler Markit showed a reading for the manufacturing sector of 62.6, an all-time high for the series, which began in April 1996. Readings above the 50 mark denote expansion and those below it point to contraction. "Exports are driving growth in the manufacturing sector, but there is also gathering momentum in the domestic economy," said Chris Williamson, an economist at Markit.
Well, first off, I know that Real GDP growth and some consumer/business confidence indicators do not measure the same thing- a skill that you appear to lack. But a throwaway statement from a finance minister expressing confidence in his economy - as they all do, I mean ****, that's some deep sh-t right there brah. What is your argument? Do you have one here or is it just linkapalooza? You bored? Is something wrong at home? Normally you're smarter than this - and your signature isn't as obnoxious/annoying. Oh and btw, since you're quoting the Irish Times- I suggest you check up on their austerity program.
If we were to fall into another slump, export driven countries with account surpluses will definitely feel it as well. As our trade deficits haven't shrunk by a large margin, their individual successes are still contingent upon American consumer and government spending.
Actually Germany's economy has been helped greatly by the falling euro and by their Greek buddies, that's what happens when you're almost entirely export dependent. What I find difficult is that so many people, see, e.g. Mr. Clutch, have such a difficult time conceptualizing the paradox of thrift, I mean we don't need Germany to know that limiting consumption of goods and services reduces demand, it's common sense - yet even the very idea sends him running to Fox news, bolding away. Bizarre.
Please try to explain 1) what time period you are referring to when you speak of "the falling euro" 2) how "their Greek buddies" supposedly helped the German economy Thank you in advance.
Cut the defense budget, stop giving giant tax breaks to corporations and wealthy people. Problem solved.
Do you see that? It's exports, not the domestic economy. It's the U.S. and other countries' rebound that's driving growth. The German GDP still hasn't reached it's pre-recession levels by a lot. The U.S. GDP has already SURPASSED pre-recession marks. Which country had a big stimulus and isn't benefiting from exports to build growth? U.S.A. baby.
Since 2008 the euro has fallen against the dollar (although recently its picked up, but its still down pretty far overall) If you compare the euro to Purchasing price parity or any similar index, its way overvalued at the moment. The Economist magazine does a relatively simple measure comparing mcdonalds prices across countries to determine their price in relation to the exchange rate and found the euro to be 28% overvalued in relation to the price of a bigmac. I expect as the economy picks up, the euro will go down even more. Also his point is the Greek collapse helped put some extra downward pressure on the euro and as Germany is an export driven economy any decline in your currency is a disproportionate boost for your economy. Germany should be rooting for the value of the euro to fall. (well all of europe really since the eurozone as a whole as been a protracted slump since 2001)
The ironic thing is that, as demonstrated here, most Germans are too dumb or stubborn to believe otherwise since it's a prized article of pious teutonic faith, based on old newsreels of Wemar republic wheelbarrows, that overvalued currency = good, even if it flies in the face of econ 101.
I do not think a good argument can be made that in the short-term the reduction of government spending will help grow the GDP more than an increase in government spending. In the short-term we would be better off with another round of stimulus. Our government should not focus on the short-term at this point. We should be focusing on the long-term and in the long-term we must reduce government spending. Most of the discussions are on drops in the bucket (but those drops are still important) but we need to tackle defense spending. Additionally, we need to look at improving Medicare/Medicaid, which will soon become a big problem, and social security, which will eventually become a huge problem. Unfortunately, we will probably punt the ball.
Hmmmm..the ol' Royale with Cheese index. But couldn't the difference be due to the metric system, Vincent?
Are you aware of the system of guarantees and transfer payments within the European Union? You are only looking at one aspect of the impact of currency fluctuation and of the Greek economic crisis. I would like to know what ScamFisher's (and geeimsobored's) credentials are to be talking from a high horse. For comparison, I hold an MBA from the University of Chicago. ScamFisher, please let us know what qualifies you to talk like you actually understand economics...at all. Thank you in advance.
You can't even spell Weimar. Please - share your credentials on economics with us, ScamFisher. Eagerly awaiting your response.
