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Monday, September 19, 2005

The German election

It isn’t often that I agree with Anatole Kaletsky, the Thatcherite economist. But his column about the election in Germany is the best analysis I’ve seen so far.

As we have often said around here, the change in conservative doctrine post Thatcher is that it has merged with the radically Keynesian project of pumping up demand by all means possible. This means, in effect, liquidating savings to the extent that this is possible. The old fashioned Tories would be appalled to see what the new fangled Tories are up to.

In Germany, this hasn’t happened. The CDU has adopted those portions of the Thatcherite program that are straight out class warfare – making the template for all legislation the penalizing the poor and the rewarding the rich. However, while it is true that the Anglo-American rightwing penalizes the bottom economic percentile, the story is more complex as consumer power increases. Shifting the responsibility for welfare to the individual, that longterm, invisible project, would be roundly rejected if it wasn’t coupled with increasing the money supply and easing up credit markets – which directly effect even the lower middle income families. In the short term, then, the appearance of prosperity far down the line can be engineered, even as wealth shifts towards the top wealth percentiles. Health care, transportation and the rest of it can be put on the credit card; there are easy terms for buying houses; and while wages stagnate, two wage households disguise the real deflationary pressure on wages.

Kaletsky makes this point in another way:

“The whole eurozone, in fact, is in denial about one of the clearest lessons of modern economic experience, which is that tough structural reforms of the kind promoted by Germany’s new government will work only amid rapidly expanding demand. This was the lesson of the Thatcher and Reagan eras, when tough labour market policy began to be successful — and politically acceptable — only from 1985 onwards, when interest rates collapsed, the pound and dollar were devalued and economic growth and consumer spending moved from bust to boom.
However, the link between expansionary monetary management and structural reform was not just an isolated experience of the 1980s, as demonstrated by a fascinating study published in the summer by the OECD (The Effects of EMU on Structural Reforms, OECD Economics Department Working Paper No 438, July 2005). This study looked at more than 100 episodes of major economic reforms in OECD countries and tried to assess the interaction between reform processes and constraints on monetary policy independence. Although the econometric research could not, by its nature, be definitive, the balance of evidence suggested a clear conclusion: “The absence of monetary autonomy seems to be associated with lower reform activity.”
Writing from the perspective given by this mixture of an economic war against the working class and easy money policy, Kaletsky bemoans the economic proposals the CDU brought into the election and has a nicer view of the Lafontaine’s party than any other ‘respectable’ press commentator:
“Looking at the realistic options for political realignment, Germany’s economic performance seems bound to get worse, not better, in the year ahead. This is because the policies that all Germany’s establishment politicians seem most firmly to believe in are the ones that will do the greatest damage to economic activity, employment and consumer demand. The worst of these policies is the 2 per cent rise in VAT identified by Angela Merkel as her top economic priority. In a country suffering from the world’s slowest consumption growth, this is almost literally an insane proposal, hardly mitigated by the plan to spend half the proceeds on cuts in employers’ social security contributions, which are designed to lower labour costs. These social security reductions may be desirable in principle, but their first-round effect simply will be to increase already very ample profits and they will contribute nothing at all to the growth of demand.”

And this is what Kaletsky has to say about the Left party:
“Meanwhile, the outcasts of German politics, the post-communist Left Party, had a broadly sensible policy to boost the economy’s demand-side, but none at all to improve supply.”
Kaletsky is an enemy I respect.

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