German Stimulus Plan: Too Little, Too Late?

It’s over: they caved. Maybe some of us had been looking forward to a real-world macroeconomic experiment with Germany boldly carrying the banner for that strain of economic opinion – that is still out there, loud and boisterous – according to which massive government spending is the wrong way to counter the current economic crisis. But now, with the €50 billion Konjunkturpaket II it just announced, the German federal government has hopped on the mega-spending bandwagon with everybody else. It seems it’s just too hard, even for Germans, to be prudent and thrifty in front of the voters when you face a general election later in the year.

The FAZ gives a good summary of what is involved – as you would expect from the FAZ: The main points of the Konjunkturpaket: Car turn-in premium, debt-limitation, and rescue-shield – and at its core lies the usual combination of infrastructure investment and tax-cuts, just this time auf deutsch. Most of the infrastructure investment will go into schools; to help the auto industry, people will get a payment of €2,500 if, upon buying a new car, they turn in their old one; and there will be set up to assist small businesses finding it hard these days to get credit a counterpart to that “Soffin” we’ve discussed here so much lately, i.e. the government-run fund for bailing out troubled banks.

(It does also seem from the FAZ article, though, that the government considered but then rejected a proposal to raise the income tax rate for top earners. Before you get too enthusiastic, though, remember that this is still Germany: that rate may not be going up to 47.5%, but it remains at 45%.)

Coming from the world’s #3 or #4 economy (depending on how you choose to calculate GDP), this is obviously very significant news, and of extreme comparative relevance to the new American administration about to come into power which has all along planned the same sort of thing, only massively larger. Indeed, the German combination of infrastructure spending and tax cuts is all the more interesting considering that the initial plans from the Obama team included only the former, but now have come to include the latter as well – something that has predictably provoked its own storm of objections.

But back to Germany, early reviews of this second Konjunkturpaket are mainly negative from the influential Financial Times Deutschland crowd. The main complaint seems to be that, for some reason, it seems structured almost by design to have its economic impact only after a very unacceptable delay. Now, infrastructure-investment projects unavoidably involve some delay since some time is required to get them going (e.g. make the plans, hire the people) in such a way that can actually be relied upon to produce a useful end-result. It’s the tax cuts that, while usually of a lesser economic impact, can be hurried-up into place. But that’s not the approach this new German plan takes with, for example, the planned reductions in the mandatory contributions to the national health insurance for both employers and employees which are only scheduled to go into effect as of 1 July of this year. In fact, as Peter Ehrlich points out in his commentary-piece A lot of money, little logic, German citizens will initially see their required health insurance contribution rise during the first quarter of 2009, then of course falling from 1 July, but only back to the level where it already was in December, 2008. It’s only the car turn-in premium that will start to be available immediately, together with the €100 bonus per child for households with children.

The influential FT columnist (for both English and German editions) Wolfgang Münchau also faults the tardiness of so many of the new stimulus program’s components (Shoving-off for the time afterwards), but on rather different grounds. In his view, all such programs need to be implemented as fast as possible – indeed, he wishes this latest one could have been put into action last October or November – whether the recession they are designed to counteract turns out to be of short or long duration. In the former case, you run the big risk of actually having the economically-stimulating effect of all the spending occur when conditions are already recovering, so that you end up over-stimulating and provoking inflation; in the latter, well, a longer recession is by definition a more serious one, so you still want to start counteracting it as soon as possible. As Münchau reminds us, “. . . stimulus programs are ultimately not cost-free. They raise the State deficit and possibly also long-term interest-rates.” Here, at least, the famous German parsimony – that notable reluctance to spend massive amounts of money on absolutely anything – lives on.

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