Frum: More focus on the economy, not the deficit

Commentator David Frum.


Kai Ryssdal: Twenty years ago this coming Sunday -- Oct. 3, 1990 -- is the official date that marks German reunification. For all the celebrating there was at the time the budget for this year's anniversary party isn't as big as it might be. There's the recession, for one. And also the fact that over the past two decades, bringing East and West Germany together is thought to have cost as much as $2 trillion.

Commentator David Frum says yeah, that's a lot of money -- but there is more to think about.

David Frum: Was it inevitable that German reunification must cost so much? Some economists argue "no." These economists argue that German unity could have been achieved more cheaply if the German central bank had been less panicky about the risks of debt and inflation.

If correct, their argument carries important lessons for the United States today. Here goes: In the first three years after reunification, Germany spent some 350 billion Deutsche Marks in the East. That was a big check, but not impossibly big: The extra spending pushed Germany's budget deficit only up to about 3 percent of GDP.

But Germany's famously austere central bank was shocked by the deficit. The central bank pressed the government to change course -- or else face rising interest rates. Beginning in 1992, the German government raised taxes and cut spending. But something went wrong: Instead of emerging from deficit, Germany tumbled deeper into deficit.

Why? Germany boomed in the first two years of unification. But as budget austerity bit, Germany's growth slowed. Eastern Germans still wanted goods and services from the West. Western Germans still wanted to sell to the East. But the cash that could have financed these transactions had been subtracted from the economy. And the economy stalled. As spending in East Germany actually declined, the budget deficit jumped.

Yet as it hastened to solve the non-problem of an affordable budget deficit, Germany ignored serious structural problems, like its rigid labor markets.

The American parallels are suggestive. It's more important to focus on the economy than the deficit. It's OK to borrow during a once-in-a-lifetime crisis. In bad times, government should focus on improving productivity -- a richer economy of tomorrow can more easily pay the debts of today.

These may be the hard lessons of Germany's recent past. Let's hope they do not become the even harder lessons of America's near future.

Kai Ryssdal: In younger days, David Frum was a speechwriter for the second President Bush. Today he's the editor of FrumForum. Next week: Robert Reich.

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I was delighted to read Mr. Talbots response of 10-6, it was intelligent and insightful. We are in a major, dare I say it, �Paradigm Shift� in America. The problems with structural labor changes cannot and will not be fixed with traditional tools. Large highly efficient corporations with sophisticated logistics have created a smaller world. This has permanently and structurally changed labor needs and income distributions. The most emblematic changes are in Retailing where big chains like Wal-Mart have brought the cost of goods down about 10%. As a byproduct the average income of all but the top 1 % in a community had to decrease 20%. This is a very bad trade without a remedy for the changes in income distribution. Solutions are well beyond this single blog posting, but most of them have two characteristics: changes in educational patterns, and very different governental blends of taxes, incentives and disincentives to support, or soon if we do not respond, create a healthy middle class. It astounds me that pundits cannot see the patterns; Mr Talbot came close to describing what is, a clear and present danger to the social and economic fabric or our democracy!

Why, Mr. Frum it would seem, when push comes to shove, a reasonable human being after all? Dare I say, is there actually something that conservatives like Mr. Frum and liberals like Mr. Krugman can agree upon? Is this the beginning of a more reasoned dialog in this country? We can only dare to dream...

"Focus on productivity?"

Garbage. We are making productivity an economic end in itself to congratulate corporate America for outsourcing offshore and downsizing faster than revenue shrinkage and calling this a positive economic result. Productivity is meaningless: profit is the only motive of capitalized business (at least when public stock is traded on the business value and expected returns). Right now it profits yes PROFITS companies to literally shut down US operations or scale back to skeleton staffs to avoid public blame and collateral legal damage because:

(a) the actual inflation rate in the USA is SKYROCKETING and is being suppressed by clever misrepresentations of commodity, energy and food cost substitutions. Transportation costs, increased property taxes and fees and insurance premiums have gone up 20-30%, electricity and gas for home heating by 20%, water charges by 20% and most other services by 10-20% in the past 6 months nationwide but are not reflected in inflation stats.

(b)the US consumer will NEVER return to his/her profligate 2007 ways because there are no jobs, no inflated home equity and no sloppy credit card policies to fund this. US retail is dead, dead, dead unless we wake up and learn that "globalization" means poverty for us and our children.

The USA has completely lost its mind in the face of retail discounters and is now quietly but clearly inflating its currency as a stopgap to lower its total debt load. The little guy (for which read 99% of US citizens and all small retailers and manufacturers) is getting stomped out of home, future, medical benefits, education entitlements and pension benefits. The endless palaver about retraining the US workforce in new technologies (e.g. "productivity") is just hooey. I can program in PERL, Oracle, J Script and others and I can tell you that my only chance of decent temporary employment now is in DC working for the Democratic machine or in Hyderabad working for one of the programming sweatshops I used to employ.

The productivity line is a lullaby meant to put organized labor to sleep, and it isn't going to work any more.

Man the barricades, folks. The correct historical reference is not 1946 or 1932 or 1907: it's the panic of 1837 when all liquidity stopped and the powerless, impotent USA depopulated its eastern seaboard as an answer to mass starvation after Andy Jackson destroyed the BUS and his pet banks' inflationary currency printing folded with scarce silver and a "global" cotton glut.

The problem with "It's OK to borrow during a once-in-a-lifetime crisis." is that as humans we see that once-in-a-lifetime crisis as being whatever problem we're dealing with at the moment.

No one is arguing that a little borrowing in a crisis is a bad thing, so long as you're solvent to begin with. The trouble is, the United States was wobbling closer and closer to bankruptcy before this crisis began, after only two years of Democratic control of Congress, and what Obama, Reid, Pelosi, and company proposed was not "a little" temporary borrowing but permanent policies that guaranteed unprecedented deficits for the foreseeable future.

"It's OK to borrow during a once-in-a-lifetime crisis."
At it's heart, Frum's comment is about fiscal policy (not budget policy). It's correct, but the US has decades of accumulated borrowing that has made the current "stimulus" spending impotent. US citizens should be angry that we have deficit spending with no plan, no promise, to ever repay the debt.

Point well taken. It is refreshing that he accepts the necessity to focus on the economy instead of the deficit, but the comments about German labor markets are standard conservative fare.

I am not as certain that David Frum's thoughts in this piece are "conservative cant." His point that it's more important to focus on the economy than the deficit right now and it's ok to borrow during such a deep crises is not what I am reading and hearing from most conservatives right now.

Alas, Frum is reverting to form, conservative cant. Germany's "rigid labor markets" involves having labor representatives on corporate boards, which has meant almost no strikes in that country, better oversight of their activities, and admirable economic growth that has taken off again far earlier than America's. America could learn something from this sort of "rigidity."

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