It just doesn’t get any more bizarre than this

From Reuters:

Chancellor Angela Merkel said on Tuesday Germany needs to stimulate domestic economic demand and urged opposition parties to stop blocking proposed tax cuts in the upper house of Parliament.

My working hypothesis for the last four years has been that the entire world went insane on or about Oct 1st 2008.  Is there anyone out there who still doubts me?  Seriously?



24 Responses to “It just doesn’t get any more bizarre than this”

  1. Gravatar of Scott Sumner Confirms My Own Hypothesis Scott Sumner Confirms My Own Hypothesis
    18. October 2012 at 07:07

    […] perhaps apropos, here’s Scott Sumner today: “My working hypothesis for the last four years has been that the entire world went […]

  2. Gravatar of Doug M Doug M
    18. October 2012 at 07:09

    What is the insantity?

    You have been saying that they have needed to stimulate domestic demand for as long as I have been reading your blog.

  3. Gravatar of cb cb
    18. October 2012 at 07:18

    if only there were some other way that demand in the eurozone could be stimulated. perhaps even some way that wasn’t limited to germany…

  4. Gravatar of StatsGuy StatsGuy
    18. October 2012 at 07:19

    “Is there anyone out there who still doubts me? Seriously?”

    Eugene Fama.

  5. Gravatar of Morgan Warstler Morgan Warstler
    18. October 2012 at 07:47

    Tax cuts are good for Germany, whether it is called Fiscal Stimulus or not.

    You really should do more to clear up the misconception routinely for non-economists.

    90% of political discussion occurs wherein Tax Cuts are not Fiscal Stimulus.

  6. Gravatar of ssumner ssumner
    18. October 2012 at 07:55

    cb, Yes, even better would be some policy that would help Germany, without adding to its debt, and would also help all the other European countries even more!

    Let’s see . . . what would do all those things . . .

  7. Gravatar of ssumner ssumner
    18. October 2012 at 07:58

    Statsguy, Even Fama would say: “If for some bizarre reason you want to boost demand, by all means do so with monetary stimulus, not fiscal stimulus.” Remember he claims the fiscal multiplier is zero.

    Even Fama is not as insane as what passes for conventional wisdom in Europe these days.

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. October 2012 at 08:29

    Not everyone in Europe is insane;

    Empirical evidence suggests that uncertainty tends to be detrimental to economic growth. The growth rate of output is negatively correlated with macroeconomic uncertainty. Our empirical analysis indicates that one standard deviation increase in uncertainty is associated with a decline in output growth of between 0.4 and 1.25 percentage points depending on the measure of macroeconomic uncertainty…. Policy-induced uncertainty is also negatively associated with growth. …policy uncertainty has increased to record levels since the Great Recession.

    Specifically, the increase in policy uncertainty between 2006 and 2011 was about five standard deviations.
    This sharp increase in policy uncertainty may have stymied growth in advanced economies by 2 and a half percentage points during this period ….The degree of economic uncertainty also appears to be related to the depth of recessions and strength of recoveries. In particular, recessions accompanied by high uncertainty are often deeper than other recessions ….

    Similarly, recoveries coinciding with periods of elevated uncertainty are weaker than other recoveries. The unusually high levels of uncertainty the global economy experienced since the 2007-2009 financial crisis and the associated episodes of deep recessions and weak recoveries play an important role in explaining these findings.

  9. Gravatar of Justin Irving Justin Irving
    18. October 2012 at 08:52

    Exact opposite right? Germany should be trying to harmonize its policy needs with those of Spain. Raise taxes, cut spending, move workers from BMW factories to bratwurst stands. Germany needs to hobble its economy down to the Spanish level so that the ECB can print everyone back up. This is the logic of the EMU.

  10. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    18. October 2012 at 09:08

    The Grand Bargain in Europe is for the ECB to print money and buy up German Bunds (plus some Dutch, Finnish, &c bonds, whatever they call them).

    Of course, neither Germany nor the PIGS would accept this.

  11. Gravatar of Major_Freedom Major_Freedom
    18. October 2012 at 09:25

    Tax cuts without equivalent spending cuts (such that the difference is made up by additional government borrowing) cannot promote saving and capital formation, and in fact undermines them further, even if the funds no longer taxed are overwhelmingly saved for investment purposes.

    It has to do with available savings being directed to either additional consumption activity by government, or additional productive investment activity by civilians. Each dollar borrowed by the government is a dollar less of savings available for the rest of the economy. This is the case even if there is no net nominal decline in private savings and investment from one period to the next, during which time government borrowing and spending increased. A dollar can only be used for one purpose at a given time. If it used for X, it cannot be used for ~X.

    Thus, even if a dollar less of taxes results in as much as $0.95 of additional savings, there is a significant net reduction in savings available for the rest of the economy, since the government borrows an additional full dollar on account of not reducing its spending, and that results in $0.05 less of savings for every dollar of tax cuts.

    The principles above very rarely get through to central planning oriented pundits, such as Keynesians and Monetarists, because of the insane belief that as long as there is unemployment and idle resources, inflation (nominal demand) is somehow insufficient. From what standard? It differs from person to person of course, but the key is a desire for more money and spending and a belief that inflation can solve economic problems.

    Does Merkel intend to reduce government spending in Germany dollar for dollar with the proposed tax cuts? If not, then the opposition is in the right (not that they would even understand why).

  12. Gravatar of Nick Nick
    18. October 2012 at 09:35

    Well under the “central bank targeting” theory,
    she wants fiscal stimulus in Germany in the hopes
    that the ECB will offset its inflationay impact
    by further monetary tightening. I guess to show
    those profligate southern Europeans a lesson?

    The beatings will continue until morale improves

  13. Gravatar of Adam Adam
    18. October 2012 at 10:15

    Maybe the entire world turned German? Bundesbank and the Bundeskartellamt and probably other German institutions are known for some, shall we say, interesting idea.

    (Yes, I just mentioned the FCO because I love it’s name in German)

  14. Gravatar of Jonathan M.F. Catalán Jonathan M.F. Catalán
    18. October 2012 at 11:51

    MF makes a good point that I think should be recognized: in terms of the use of real resources, tax cuts without spending cuts maintains the public-private conflict for real resources.

    But, apart from that, is it really fair to rate tax cuts based on your opinion on the fiscal multiplier? Personally, I think the multiplier is negative once you incorporate opportunity cost. But, tax cuts are different, in that the idea is to stimulate private economic activity. Activity guided by the market process is fundamentally different from activity guided by the redistribution of income.

  15. Gravatar of Britonomist Britonomist
    18. October 2012 at 13:39

    Scott Sumner, don’t you think you’re going a little post-modern with monetary policy? I still don’t understand why you think that buying bonds is a potent stimulant of demand at this time. Not to say nothing called monetary policy can do it; my policy of ‘RBNMFG'(thing I emailed you about a while back), which doesn’t rely on complex bank behaviour, can still be called monetary policy and unambiguously increases demand.

  16. Gravatar of Benny Lava Benny Lava
    18. October 2012 at 14:56

    And people in America will continue to talk about those thrifty hardworking Germans and the lazy PIGS and talk about how horrible more money would be in Europe because think of the poor Germans.

  17. Gravatar of Major_Freedom Major_Freedom
    18. October 2012 at 18:49

    Jonathan M.F. Catalán:

    …in terms of the use of real resources, tax cuts without spending cuts maintains the public-private conflict for real resources.

    This is especially pertinent when discussing Reagan and Bush “voodoo economics” with liberal and progressive types who view all tax cuts as evil, and point to these administrations as evidence that laissez faire policies don’t make people better off. Both Reagan and Bust cut tax rates, but they did not cut government spending, and thus they undermined savings and capital formation.

  18. Gravatar of Saturos Saturos
    18. October 2012 at 19:13

    Doug M, this was a facepalm moment. Merkel’s banker Weidmann has been throttling the continent to death for years with tight money (via the ECB), and now she wants stimulus?

    Fact about our world: a lot of people who claim to know what they are talking about really don’t:

  19. Gravatar of Saturos Saturos
    18. October 2012 at 20:32

    I’m raid things just got more bizarre:

  20. Gravatar of ssumner ssumner
    19. October 2012 at 05:33

    Britonomist, I don’t think bond purchases are very powerful, unless permanent. Do you disagree?

    Saturos, So does that mean Germany agrees to the bailout, but Spain promises not to ask before the German election?

  21. Gravatar of Britonomist Britonomist
    19. October 2012 at 06:01


    “Britonomist, I don’t think bond purchases are very powerful, unless permanent. Do you disagree?”

    Yes, even if permanent I don’t think it’s as powerful as you think it is, I don’t think it so strongly affects NGDP linearly and predictably such that you can act as if the Fed simply controls NGDP itself as a direct lever while ignoring the specifics of monetary policy.

  22. Gravatar of Doug M Doug M
    19. October 2012 at 07:51


    The structure of the EMU encourages every coutry to “beggar thy neigbor.” Stimulus in Germany / Austerity everwhere else is competely fitting.

  23. Gravatar of mnop mnop
    19. October 2012 at 11:17

    Sometime in the year 2000 we entered into one of those weird alternate universes from Star Trek/BTVS, a Hellverse of war and plutocracy and bad monetary policy. Unfortunately we’ve been stuck there ever since.

  24. Gravatar of Jim Crow Jim Crow
    20. October 2012 at 07:14

    I blame my built-in USA bias but between the UK, Europe, and Japan we do seem to be the lesser of idiots right now. I leave China out simply because comparing their q-on-q GDP numbers with their y-on-y ones results in my laptop freezing up. I figure we’ll know more after the leadership change and the new guard gets a shot at policy.

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