Geithner/Soros/Summers: “Growth Now”

George Soros, an American stock investor and political activist, told German weekly Die Zeit that “German policy is a danger for Europe, it could destroy the European project”. “If the Germans don’t change their policy, their exit from the currency union would be helpful for the rest of Europe.” Soros reacted to plans unveiled by the German federal government earlier this month to make cuts of some 80 bn Euros over the next four years to make Germany’s deficit correspond with European limits. “Germany is globally isolated”, Soros said. “Why don’t they let their salaries rise? That would help other EU states to pick up.” Deflation was looming for the Eurozone, he warned.

Rather than merely focusing on reducing public debt, the banks should be recapitalized, Soros recommends. It was because of the bank’s tattered balances that they were no longer able to buy government bonds which added to the trouble in southern Europe. Soros also advocated higher wages in Germany – it could help other European countries to catch up with Germany.

I can’t see the use of helping banks to “recapitalize” with  further public money. The banks wouldn’t use the funding in a politically desirable way, but in a way which makes sense to their business. On the other hand, allowing wages in Germany to rise could make some sense – but only if that really helps to drive consumption, rather than further – understandable – savings for retirement. Germany is a country with an ageing population, and many people here feel a strong need to save money.

Leaving the Eurozone?  Germany actually benefits from the Euro in that a re-introduced national currency’s exchange rate would rise rapidly, thus damaging German exports. Germany is in a luxurious situation: the Euro, a weak currency if compared with a theoretical German one, pushes exports – and noone can blame Germany for currency manipulation, not even remotely. Germans who are nostalgic for the old Deutsche Mark would probably be stunned once they got it back. The Euro comes at a price, but we have little reason to despise it.

However, US Treasury Secretary Timothy Geithner seconds Soros’ demand for avoiding (untimely) budget cuts. “We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth”, Geithner and Lawrence Summers, director of the White House’s National Economic Council, wrote in an opinion piece posted today on the Wall Street Journal’s website. “Without growth now, deficits will rise further.”

I’m no political economist. But it’s certainly easy for US politicians – and investors, for that matter – to demand deficit spending. It would be easier for us to oblige if Germany owned a reserve currency, as the US does. And a cut by eighty billion Euros over four years as announced by the German government hardly amounts to fiscal starvation in a big economy – not to mention that some of the announced cuts may never materialize. The Financial Times‘ German edition wrote earlier this month that

This package has the enormous advantage that it probably won’t choke off the recovery which is only just beginning.

And Die Welt bitched that

The savings packet isn’t really big. The consolidation will amount to €11.2 billion in the coming year. That is less than 1 percent of the total government spending predicted for 2011 by the leading economic research institutes.

The idea of deficit spending comes from a school way different from the one in the 1970s which suggested that tax cuts would increase tax revenues. The idea was later adopted by the Reagan administration. The success of the measure was contested.

It is easy to see where uncontrolled deficit spending leads. Its potential advantages are looking rather theoretical. There is reason to be careful when political economists become creative.

Most big political concepts are less useful in practise, than in theory.  In 2008, Newsweek, reviewing Reaganomics,  wrote that

Prior to the 1980s, conservatives were fiscally conservative— that is, they were unwilling to spend more than they took in in taxes. But Reaganomics introduced the idea that virtually any tax cut would so stimulate growth that the government would end up taking in more revenue in the end (the so-called Laffer curve). In fact, the traditional view was correct: if you cut taxes without cutting spending, you end up with a damaging deficit. Thus the Reagan tax cuts of the 1980s produced a big deficit; the Clinton tax increases of the 1990s produced a surplus; and the Bush tax cuts of the early 21st century produced an even larger deficit.

Which policy is right for these times?

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Related

George Osborne defends plans to shrink state, Guardian, June 23, 2010
Hermit detects American Economic Occultists, Febr 14, 2009

6 Responses to “Geithner/Soros/Summers: “Growth Now””

  1. Why don’t we just print new money? Dept gone. And the Euro will be less valuable which strengthens our exports.

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  2. You are no political economist either, are you?! 🙂

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  3. No, I’m not. But let me point out the advantages…

    – The Euro would be less valuable, which would lead to increased exports.
    – The gap between poor and rich people would become smaller, as the money of the rich would be devalued.
    – We would get rid of our national debt.
    – More tourists would visit Europe, as visits will be cheap for them.

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  4. 1) Still increased exports? Then the Americans would brand us currency manipulators, and Congress would set volkswagens alight on Capitol Hill.
    2) Would only the euros of the rich be devalued? I’m afraid that the rich still have some assets other than euros, and more likely so than the poor. (This one reminds me of the nice old legend that in 1948, “we all started with fifty deutschemarks :-).)
    3) Umm… the Weimar Republic got rid of much of its war debts, too!
    4) Nice idea… but most of them will stay in and around Neuschwanstein and Heidelberg… that may benefit you people in the south, but not my hometown. :-/

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