April 16, 2015
The NYT gave Germany’s finance minister, Wolfgang Schauble, the opportunity to lay out his government’s position on austerity in a column today. I don’t have time to go through the piece in detail (there is not much new here), but I will make a couple of points.
First, Schauble touts the reform record of Spain and Ireland, Germany’s star pupils. It’s worth noting that, rather than being spendthrifts, both countries had budget surpluses before the crisis and had debt to GDP ratios well below Germany’s. Nonetheless they are still being forced to pay an enormous cost. The I.M.F. projects that both countries will first exceed their pre-crisis level of per capita income in 2018, that’s a performance considerably worse than the United States in the Great Depression. Even then, Spain is still projected to face an unemployment rate of 18.8 percent. Both countries have seen enormous cuts to public services and faced large tax increases. And, these are Schauble’s success stories.
The other point concerns the impact of structural problems on growth. In fact, many labor market protections have little or no impact on growth, but even where regulations lead to inefficiencies they do not necessary prevent an economy from having healthy growth. An obvious example is the health care system in the United States, where protections for doctors, drug companies, medical equipment suppliers and other providers may add as much as 8 percentage points of GDP to our health care costs (@$1.4 trillion a year). These distortions obviously slow growth, but they have not prevented the U.S. from having a relatively good economic performance over most of the last four decades.
The same is likely true of many of the distortions that have Schauble upset. Some of these may in fact slow growth in Greece, Spain. and other crisis countries. However, they would not prevent them from having functioning economies, if German did not insist on macroeconomic policies that strangled growth.
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