U.S. borrowed and stimulated big; Germany went small & won

American economists accused German policy makers of risking a long depression. The German finance minister, Wolfgang Schäuble, countered, “Governments should not become addicted to borrowing as a quick fix to stimulate demand.”

The two countries followed different policy paths. According to Gary Becker of the University of Chicago, the Americans borrowed an amount equal to 6 percent of G.D.P. in an attempt to stimulate growth. The Germans spent about 1.5 percent of G.D.P. on their stimulus.

This divergence created a natural experiment. Who was right?

The early returns suggest the Germans were. The American stimulus package was supposed to create a “summer of recovery,” according to Obama administration officials. Job growth was supposed to be surging at up to 500,000 a month. Instead, the U.S. economy is scuffling along.

The German economy, on the other hand, is growing at a sizzling (and obviously unsustainable) 9 percent annual rate. Unemployment in Germany has come down to pre-crisis levels.

Results from one quarter do not settle the stimulus/austerity debate. Many other factors are in play. For example, Germany is surging, in part, because America is borrowing. Essentially, we Americans borrowed from our kids, spent some of that money on German machinery, and ended up employing German workers.

But the results do underline one essential truth: Stimulus size is not the key factor in determining how quickly a country emerges from recession. The U.S. tried big, but is emerging slowly. The Germans tried small, and are recovering nicely.

The economy can’t be played like a piano — press a fiscal key here and the right job creation notes come out over there. Instead, economic management is more like parenting. If you instill good values and create a secure climate then, through some mysterious process you will never understand, things will probably end well.

As bond vigilantes press Greece, Spain, Portugal and UK, Roubini regrets they're letting U.S. off

April 29 (Bloomberg) -- Nouriel Roubini, the New York University professor who forecast the U.S. recession more than a year before it began, said sovereign debt from the U.S. to Japan and Greece will lead to higher inflation or government defaults.

Almost $1 trillion of worldwide equity value was erased April 27 on concern that debt will spur defaults, derailing the global economy, data compiled by Bloomberg show. German Chancellor Angela Merkel and the International Monetary Fund pledged to step up efforts to overcome the Greek fiscal crisis, after bonds and stocks fell across Europe in the past week.

“The bond vigilantes are walking out on Greece, Spain, Portugal, the U.K. and Iceland,” Roubini, 52, said yesterday during a panel discussion on financial markets at the Milken Institute Global Conference in Beverly Hills, California. “Unfortunately in the U.S., the bond-market vigilantes are not walking out.”

Credit-rating cuts on Greece, Portugal and Spain this week are spurring investors’ concern that the European deficit crisis is spreading and intensifying pressure on policy makers to widen a bailout package. Roubini’s remarks underscore statements by officials such as Dominique Strauss-Kahn, managing director of the IMF, that the global economy still faces risks.

“The thing I worry about is the buildup of sovereign debt,” said Roubini, a former adviser to the U.S. Treasury and IMF consultant, who in August 2006 predicted a “painful” U.S. recession that came to fruition in December 2007. If the problem isn’t addressed, he said, nations will either fail to meet obligations or see faster inflation as officials “monetize” their debts, or print money to tackle the shortfalls.

Roubini, who teaches at NYU’s Stern School of Business, told attendees at the Beverly Hilton hotel that “Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems.”

Is China more capitalist than the United States?

From American Thinker

"Why is GM, a capitalist firm, so successful in Communist China and a failure in Capitalist USA? Apparently, the Chinese learned from the economic failures of socialism while the US Congress learned nothing and actively intervenes in the decision-making of American capitalist firms, imposing environmental restrictions few of which would pass the economic test that benefits should be equal to or greater than cost. It subsidizes energy-saving activities like insulating buildings, buying energy-saving autos and even light bulbs, none of which would survive the light of day as producers of net benefits. It orders banks to make bad loans, e.g., the Community Reinvestment Act. Through the EPA, it regulates factory emissions. It proposes a socialist solution to health care. It has declared its policy to replace fossil fuels with renewable alternative fuels. It pays a large portion of the costs of wind turbines and solar panels."

(snip)

"We have urged China to join us in our quixotic attempt to prevent global warming. She has refused, arguing that her per capita consumption of energy is the lowest of any industrial country. Except for the leftist economists, economics tells us that we should let the prices of different energy sources determine when a new source is ready for development. No subsidy would be required if we let the market make the decision. Totalitarian China accepts this approach; free market U.S. takes the Soviet prescription."

(snip)

"Then, to top it off, we invite foreign governments to socialize our economic system in order to serve their purposes. We let the Chinese government fix the price at which the dollar is exchanged for the yuan at a rate that allows their producers to steal market share from ours. And we give foreign governments a tax break (no tax on interest or dividends earned) when they buy ownership in American businesses and thus turn our businesses into socialist enterprises serving foreign governments.

China learned the lessons of socialism's failure in Russia and is prospering. Congress did not."