German Politics, Germany

Way To Go: Germany On The Move

Sure, one has to be extremely careful when citing a sitting chancellor’s opinion that things are going well. But when Gerhard Schroeder opened today’s Bundestag debate by saying that “Germany is willing to change [economically], Germany is on the move” he is right.

It wasn’t his reform “Agenda 2010” in the sense that people think it contains the only possible measures to economically get this country back on track. They don’t know. And let’s face it, the government itself isn’t too sure about the specificities either.

What changed is the climate, the feeling that “this time, it’s for real”.

Suddenly, as I said about a month a ago, Germans seem to be willing to accept that the future is essentially unpredictable and that the governmentally created illusion that it were predictable was wrong all the time. Suddenly, the Jürgen Peters of this country are finding themselves on the wrong side of public opinion.

I don’t really know what caused the change in public opinion just now. But I am grateful that it finally did change.

compulsory reading, US Politics, USA

Conspiracy theories in the FT?

Quite to the contrary argues Paul Krugman in today’s NY Times oped piece – the FT is just waking up to the cold and scary truth of how America is being turned into a “Banana Republic” by a semi-feudalist governmental gang –

“The Financial Times suggests this is deliberate (and I agree): ‘For them,’ it says of those extreme Republicans, ‘undermining the multilateral international order is not enough; long-held views on income distribution also require radical revision.’

How can this be happening? Most people, even most liberals, are complacent. They don’t realize how dire the fiscal outlook really is, and they don’t read what the ideologues write. They imagine that the Bush administration, like the Reagan administration, will modify our system only at the edges, that it won’t destroy the social safety net built up over the past 70 years.

But the people now running America aren’t conservatives: they’re radicals who want to do away with the social and economic system we have, and the fiscal crisis they are concocting may give them the excuse they need. The Financial Times, it seems, now understands what’s going on, but when will the public wake up?”

It is difficult to assess the level of truth in his claims. But his interpretation certainly fits my perception of what’s going on. And if “those extreme Republicans” believe John B. Judis and Ruy Teixeira that demographic trends, especially increasing ethnic diversity among the American electorate, would inevitably lead to an Emerging Democratic Majority it would explain the hurry with which they are trying to grab for their constituency whatever they can get hold of as long as they are in power.

In a way, this is a long-run version of my initial interpretation of the Bush economic stimulus programme as bottom-up redistribution that signalled insecurity about the political consequences of the looming conflict in the Middle East and the prospects for a second GWB presidency (can’t access my archives for the link – I wonder when Blogger is going to be working normally again… the service has really been unreliable lately…).

compulsory reading, Economics, German Politics, Germany

Zeitenwende. End Of An Era.

It took some time and more of their money to make Germans understand.

It took more than ten years of subsidizing consumption and unemployment in a previously bankrupt former communist economy and virtual non-growth to make us see that it is not only necessary to think about the problematic long-term consequences of the current incentive structure in the German version of the continental model of the Welfare State but to actually change them.

It was no joke when, earlier this year, two people working in a zoo, who were fired for grilling the animals they should feed, successfully sued their former employer for a golden handshake. An extreme case, of course, but one indicating rather lucidly what’s keeping Germany from growing (possibly apart from too high interest rates, but that’s another story – albeit a connected one).

For ages, Germany’s consensus democracy was unable to get reforms going because, well, there was no consensus to speak of – whichever party was in opposition made a bet that it would pay off to block government reforms as far as possible because the electorate would not believe change was necessary. Sure, such a perception is partly a consequence of failed leadership. But only to a small part. Because they were right – the electorate did not want to see.

Then Schroeder won the 1998 election, largely because of the implicit promise that he would become the German Blair – that he could transform the German Social Democrats into some sort of NewLabour without the need for a Thatcher or a “Winter of Discontent”. But when he had just won his first power struggle and made the loony left’s star propagandist Oskar Lafontaine quit the finance ministry in March 1999, he realized that the internet bubble induced growth (weak, in Germany, but real economic growth nonetheless) would allow him to put off fundamental reforms and to mend relations with the loony left with even more rigid labour market reforms.

Unfortunately, after the bubble burst, it was too late for reforms that would have paid off for the government in last year’s election. A fiscal expansion was impossible and, moreover, unwise given strained public budgets. So Schroeder had to play the hand he was dealt – rectal rapprochement to the trade-unions, exploiting the flood-disaster in East-Germany, and betting on the public’s opposition to the American stance on Iraq.

Having narrowly won last year’s election, Schroeder knew that he would have to deliver on his 1998 promise, even thought the economic climate was far worse than it was back then. And even if though delivering would probably lead to the most serious conflict the SPD ever had with trade unions which, for no obvious reason given the steady decline in their membership, still claim to be speaking for “ordinary Germans” when it comes to “social justice”. The readjustment of the social security system, as well as the “intellectual” separation of the Social Democrats from the unions – developments that will undoubtedly be beneficial to both the SPD and Germany as a whole – will be a lot harder now than they would have been back in 1994, under Kohl, or in 1998.

The difference is that now, for the first time, a growing majority of Germans seems to be willing to give up something for a risky future benefit – or put differently, a lot more people are scared by what they think could happen to them, their children, and this country, if the social security system is not dealt with right now. Let’s hope it remains this way for sometime. The tough reforms are still out there in the think-tanks waiting to be pasted into bills.

Of course, the loony left is barking and whining about its loss of discourse hegemony on “social justice”. But don’t we all know that dogs that bark don’t bite?

If only because they have lost their teeth.

compulsory reading, German Politics

Two Steps To The Left, And One To The Right.

Dancing is almost never easy for men. It’s not just that most male grown ups are too inhibited to just let themselves go. It also seems that male physical coordination seems to be far more adept in everything that involves less step-sequences more balls.

Unfornuately for Gerhard Schroeder, this problem becomes especially apparent when it comes to dances with German economic policy. It’s an intricate art, and Schroeder had tried his best to keep the corporatist dance going for the last six and a half years of his term.

But lately he realised that neither the powerful German trade unions nor the employer associations seemed to appreciate his moves. The former said, the two steps to the left weren’t enough for a real Social Democrat. The latter replied that one to the right is obviously too litte for a thinking human being in light of 4.7m unemployed (German official number).

So Gerhard was torn between his two lovers that simply weren’t able to get on with each other. Suddenly, all his dancing could not save the threesome he had originally envisioned – the Alliance For Jobs was dead.

Out there on his own, Gerhard felt the need to prove to the audience that dancing can be fun, even if you have to do it on your own. So he decided to tell everybody that he would give a special public performance. Everybody was invited to come and see how he had finally figured out the right economic policy moves just by himself.

His performance was scheduled for this morning. And dance he did. It’s just that people have not yet made up their mind if it was all that good. Here’s what the Economist thinks.

If you ask me – I’d say he bought himself time to practice some more. You can see his talent – it just needs some more refinement.

Economics, US Politics

Understanding The Bush Economic Stimulus Package. W’s getting scared.

I don’t know if I am understanding the package correctly. Most of those throwing their opinions in the ring certainly know American politics a lot better than I do.

Their predominant interpretation of the package is that it is not actually intended to stimulate the US economiy but to get Bush reelected in 2004 – that’s why he is handing out even more cash benefits to wealthy Americans not likely to increase their marginal consumption. The Economist tells us that

“[i]t certainly lays Mr Bush open to the familiar charge that he is favouring the better-off. One study has shown that the average annual benefit for people earning less than $10,000 a year would be $6, while that for those with million-dollar-plus incomes would be more than $45,000. Conventional economics suggests that the richer people are, the less propensity they have to spend each additional dollar of income. America might have a long-term need to boost savings rates, but that will not help stimulate the economy.”

Also check these two links [ 1 , 2 ] to Berkeley economics professor Brad DeLong’s blog, if you want.

It is probably right that Bush had his reelection prospects in mind when designing the tax-cut [ ok, he did not do it himself ;-) ]. But I believe, the package’s design also reveals something else: His team is already getting scared. They’re not too sure they’ll be able to supervise the already announced tax-breaks in 2006 to 2010. So he’s delivering to his constituency now as the promised tax-cuts could be repealed later on. Timing is the keyword here. W clearly remembers the fate of his dad back in 1991. He lost the Presidency to Clinton in 1992 because of the post Desert Storm economic slump. As another Iraq war does seem to become increasingly unavoidable from his team’s hawkish perspective, the US administration realises that it could cost W the presidency in 2004 should the possible war’s timing be unfortunate. If things go “well” (again, from a hawkish perspective), it could be over this summer and economic consequences could be bearable. This is the scenario most strategic planners in financial institutions apparently believe to be the most probable.

However, Murphy’s law looms large over all armed operations and things could very well turn out differently. And there are enough military people in W’s administration to remember good old Murphy. That’s why I think this tax break shows the Bush administration is starting to believe their man could lose in 2004. The big question will be – to whom?


Laffer’s back.

This week’s “Der Spiegel” is concerned with the increasingly problematic relation between nominal tax rates and actual fiscal revenues in Germany. The Cover-wide headline asks “Why the state is asking ever more money from its citizens but gets less and less of it”? Its a good question – one with a simple theortical answer (that, at least, is something) but a fearful complexity in practice. The simple answer looks like the curve below.


It’s the famous “Laffer Curve”, named after Arthur Laffer who was the theoretical support behind Reagonomics. The relationship the curve depicts is pretty straightforward: If you increase the (overall national average) tax rate (t) from 0% the tax revenue (T) will first increase to a maximum (T*) before finally declining back to zero once the tax rate reaches 100%.

The general assumption is that taxes are a disincentive to economic activity and once a certain level of taxes is reached – where the tangent to the curve is parallel to the axis – econmic activity will either stop or be transferred to black (and therefore non-taxed) markets. In both instances, the overall effect for a tax collecting state will be declining revenues.

Thus, if a polity actually knows that it is currently on the right hand side of the Laffer curve, the only reasonable action would be to reduce taxes as it would both increase legal economic activity and the fill the coffers of the state. That’s what Reagan argued. That’s what never happened (that is, if there was any effect at all, the lag was so large attributing it to Reagan became a Republican exercise in epistemolgy in the late 1990s). As so often with a convincing and simple theoretical point, reality is not a friend of those trying to implement such a strategy. There simply is no way of really telling which tax rate would constitute a Laffer maximum.

The Laffer curve is a nice explanatory and propaganda tool, but is not actually helpful in construing useful fiscal policy.

Economics and the people making individual decisions simply are too complicated to easily devise policy around a general idea like the Laffer curve. Check this document for a more technical analysis of the curve and some implications. This is also where I found the beautiful illustrations.

So, knowing about the curve, we can suggest a closer look at tax rates as the simple theoretical answer to the question posed by “Der Spiegel”. But we also know that it is by no means clear it is the right suggestion in the fearfully complex economic reality. Too bad.

Economics, US Politics

More about the 19% of millionaires mentioned below

(Link) I don’t know what kind of organisation the group “citizen’s for tax justice” are. So I would not rely too much on the information – but in case they are reporting correct figures for the averge US income (and the ranges seem not implausible – note: not GDP/capita but income per working person) on this website that I found today, then it would be even more astonishing that 19% of Americans believe they are in the top 1% income range and another 20% believe they will be there at some point.

According to the figures reported on the page, the average income for the top 1% of tax payers in the USA in 2001 was 1,028,000 USD. Thus given the usual outliers, I think the top 1% will start somewhere between 400,000 and 500,000 USD, as the avergae top 5% income is 204,000 USD. The general average is 56,500 USD – again, according to this source.