Monday, December 15, 2008

Crass Keynesianism

As Paul Krugman reports, Germany's finance minister has accused the British of engaging in "crass Keynesianism" - refusing to support a stimulus plan for Germany. Even better, Peer Stienbruck has denounced the collective policy of a European stimulus plan. Awesome.

What does Krugman have to say about this? In a typical disingenuous manner, Krugman characterizes the German leaders position as "seem[ing] to believe that their own economy is in good shape and in no need of major help. They're most certainly wrong about that."

Krugman is wrong. In fact, the Germans may be the only ones talking any sense at all. Prior to the statement quoted by Krugman, Chancellor Angela Merkel said that she was "deeply concerned" by the policy of cheap money and massive government stimulus being pursued in the United States, and that such actions could cause the very problems that caused the economic crisis.

Don't get me wrong, Frau Nein is no angel. Mekal is (weakly) politically constrained by efforts to rein in public dept and has already approved some public spending projects. It just so happens that her 4 billion of public spending plan is much, much small than the stimulus in other countries.

Which brings me to the last point - the coordinated fiscal stimulus policies of the EU and beyond. If I didn't convince you that the Germans may at least have the sense to be concerned by all of this government aid, spending, and inflationary policy -- consider Germany as a free rider in a costly situation of collective action and public goods provision. If capital flows relatively freely and the US and EU counties are pursuing massive inflationary spending policy, it pays Germany to maintain a relatively more stable currency and allow the markets to correct. These are outcomes which require a longer time horizon, and democracies do not incentivize politicians to take action which does not reap short term benefits. However, the faster the other countries act, the more politically feasible it becomes for Mekal to drag her heals (letting the market rebound) and free ride in the short run.

The recent events of the "financial crisis" (or as I like to call it: the outcome of government policy) have led me to reread Democracy in Deficit: The Political Legacy of Lord Keynes. Buchanan and Wagner provide a much more convincing explanation of the political economy within which these policies unfold. I would be interested to hear Krugman's thoughts on the book. Aside from the more obvious public choice reasons, how is it that the idea that the rules of private finance don't hold in the public sphere is so persistent?

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