I'm no Keynes, but Germany seems to have illogical economic goals

1. Nov 18, 2005

wasteofo2

http://news.bbc.co.uk/2/hi/europe/4449662.stm

I'm a teenager. There's obviously many things I don't know. Perhaps there are some principals involved with this that I'm not aware of.

However, this seems rather opposed to almost everything I've heard about economics.

Obviously, the two main ways to stimulate the economy are to increase govt. spending, or to cut taxes so as to increase private spending. Usually, as in the Great Depression, defecit spending has been preferred, since an already sluggish economy wouldn't fair well with higher taxes to fund the public spending. Spending cuts are usually proposed so that taxes can be lowered to encourage increased private spending.

So to me, the fact that the Germans want to hike taxes and cut spending, would seem to indicate that both Private and Pubilc expenditures will drop, and I don't see how this could be construed as a mean of revitalizing an economy.

I suppose that if the German government gets its defecit under control, interest rates can be allowed to fall, and firms might be more inclined to invest in Germany, since it's government has itself under control. Is that the angle they're working? Because if so, it would seem that this would really be a process that would take many years for any noticable change to take place.

Could someone more versed in economics explain if there's something I'm missing here, because it seems that the German government is just out of touch with basic economic principals to me.

2. Nov 18, 2005

kleinwolf

Right, to make economy, there is an apparently historical method that works well : just let everybody do what they want (how do you want to make the other way anyhow ? , there are crimes everyday I heard...) and raise military power on top...this is well working....

3. Nov 18, 2005

Art

This is the approach Clinton took in the US and it worked well. However I believe the key to his success was that less borrowing by gov't led to lower interest rates which meant a net income gain to the vast majority of the population resulting in higher spending and thus 8,000,000 more jobs.

Germany is more complicated as they do not have control over their interest rates as these are set by the european central bank. I don't know a lot about the details of Germany's economy but even without interest rate declines reducing the deficit allows for reducing the allocation for debt servicing which frees up money for investment. If tightened too much it can lead to a downward spiral and deeper recession so it is a delicate balancing act made more so by not having the cushion of increased income from lower interest rates to cushion the impact.

Supply side economics whereby gov'ts reduce tax and try to spend their way out of recesson has a dismal track record although that is what the US has done first under Bush snr and now under Bush jnr. Britain's attempts at following this model some years back resulted in them having to ask the IMF to bail them out.

Last edited: Nov 18, 2005
4. Nov 18, 2005

My own thoughts are that if you finance your current gov't expenditure with longterm debt you are heading for a major fall. for eg the costs of the war in Iraq ($00 billions so far) is being financed entirely by borrowings. Borrowing for investment is fine (provided the investments are sound) but using your credit card to feed the electricity meter is a dangerous path to take. Last edited: Nov 18, 2005 11. Nov 18, 2005 Art Yes I just had a quick look at your balance of trade statement for 2005 and it looks pretty good. Luckily for you the gov't is not following the supply side economists' advice. Their economic policy sounds very Clintonesque. http://www.dfait-maeci.gc.ca/eet/pdf/SOT-2005-English.pdf Last edited: Nov 18, 2005 12. Nov 18, 2005 loseyourname Staff Emeritus As far as I know, it isn't. Supply-side economics simply advocates that the revenue streams of suppliers of goods and services be increased (by not taking quite as much off the top), thereby allowing them to create more jobs and better products and services, which in theory should end up benefitting everybody. If we look at the government as being a supplier of goods and services, then cutting their own revenue stream does not constitute a supply-side approach. What they should be doing is handing the ball off, allowing private firms to provide goods and services that the government was previously providing. The only reason public spending increased under Reagan and the Bushes is because all of them also carried out wars which required massive military buildups. The only jobs being created by the government are for soldiers, arms dealers, and contractors that work to rebuild the countries that we occupy. You shouldn't mistake the fiscal stupidity of politicians for real economic theory. 13. Nov 18, 2005 Art That's why I added 'in practice' to my mail above. Gov'ts which follow half an economic plan and half a political plan are unlikely to succeed well on either count. However besides the numerous jobs created directly by gov't expenditure on defence there are also a huge amount of secondary jobs funded by the gov't in supplying for instance health care under the gov't health insurance plans and also of course in the businesses of those people supplying gov't agencies; Halliburton springs to mind As you say ideally (in theory) this expenditure and hence supply should be farmed out to private companies but there are 2 problems with that. Firstly the 'good' problem is private companies are motivated by profit only and so in areas such as health the most vulnerable in society get trampled on and secondly the 'not so good problem' is politicians like to be able to target large amounts of expenditure as it can be very handy when you are looking to win votes in a key marginal 14. Nov 18, 2005 Smurf *shrug* if you say so. They're not listening to traditionalists either. Like I said, their budgets are designed by lawyers. We'll see what happens with the New Budget (assuming it gets through) 15. Nov 18, 2005 Art I'm not endosing their policies as I don't know anything about them other than what I gleaned form the article I read but balanced budgets and positive trade balances sounds good. Do you not agree? 16. Nov 18, 2005 Smurf We have a balanced budget? :surprised When did that happen? 17. Nov 19, 2005 wasteofo2 That's false. Non-defense spending fluxuated under Reagan; some years it dropped, some years it rose. At the end of his term, nondefense discretionary spending had risen by$32 billion. However, with Bush, non-defense spending has been constantly rising. If you'd care to remember, during his first term, Bush didn't veto a single bill, so anything congress wanted to spend money on, he was alright with. During 2000, Clinton's last year as President, the nondefense discretionary spending was $319 Billion. In 2003, Bush and the new Republican majority had hiked it up to$420 Billion.

This chart is entitled Outlays For Discretionary Spending Programs: 1962-2009, check it out. At the bottom there's a sumation of all the nondefense discretionary spending that took place in any one year. http://www.whitehouse.gov/omb/budget/fy2005/sheets/hist08z7.xls

Last edited: Nov 19, 2005
18. Nov 19, 2005

Art

Have a look at the link I posted. I can't speak to it's veracity but the article says they work on balanced budgets.

19. Nov 19, 2005

Smurf

Yeah, they work towards a balanced budget alright. :rofl: :rofl: They balance it by dumping the surplus off the side of the road in Quebec. :rofl: :rofl:

20. Nov 19, 2005

loseyourname

Staff Emeritus
Okay, so I really haven't paid much attention to what money is being spent on by the government. Sorry for making a false statement. I guess I could have built an even stronger case that neither of these guys is actually a supply-sider had I done some actual research.