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Frum: More focus on the economy, not the deficit
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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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