In the aftermath of the financial crisis, fiscal rules have become more popular to force politicians to keep a balanced budget and/or limit the increase of debt/GDP-ratios. Recently, these rules have come under scrutiny again after Germany’s constitutional court struck down the 2023 government budget because it violated the debt brake introduced in the German constitution. This is indeed a major problem for Germany because it forces the government to introduce significant austerity measures right when the German economy is in recession and needs added investments to reorient its economy away from Russian gas and Chinese demand. And lo and behold, the German Council of Economic Experts that advises the government
This one is controversial, Joachim ! In my humble opinion it all comes down to questioning a first principle : can you make sure / prove that unelected technocrats have got better / decoupled incentives from politicians ? This to me is far from obvious looking at the way monetary policy has evolved since 2008 ... but I'm happy to be educated here :)
I know it is controversial, but I firmly come down in favour of technocrats and quantitative rules, not democratically elected politicians. But then again, I assume you think monetary policy since 2008 was a failure, while I would say it was a great success. We managed to avoid a major recession and created a strong recovery post 2009 and we managed the European debt crisis very well. And finally, the economy recovered very quickly from the biggest economic shock in 100 years (aka the pandemic).
Arguably, the high inflation of 2022 was a monetary policy failure, but that is one failure after three major successes.
Now compare this to the performance of elected politicians since 2008. Brexit was a miserable failure of generational proportions. Trump is in my view the worst President of the US since the Civil War, politicians all over Europe are completely inept in running their countries and the failure to keep autocrats like Putin at bay leads to more and more wars and conflict. Thanks, but I will go with technocrats anytime.
But I know this is a minority position and generally an unpopular one.
Hmm. Cautious dissent. Elected people are accountable, even if only every 5 years; and we have constitutional limits (America’s best hope if Mr Trump is elected).
ZIRP 2009-21 caused artificial inflation of asset prices, and increased wealth discrepancy. The financial panic in the pandemic involved incontinent ‘confetti money’ (mainly Government fault) and inflation.
Cautiously I suggest we need a combination of techno skill & democratic accountability.
I agree with your last statement. We need technical rules plus electoral accountability. But given that Trump is likely to be the next President of the USA, I would say my belief in electoral accountability is being pretty shaken right now. And what makes you so sure that at the end of his second term Trump won't decide to run for a third one and openly break the constitution?
As for the ZIRP leads to asset inflation and inequality argument, I know that is the case, but what was the alternative? In the 1930s we tried the alternative and kept on pursuing sound money policies by the central bank. Consensus today is that this made the Great Depression significantly worse. So, yes, the outcome of post-2008 monetary policy was not great, but better than what could have been had we followed old monetarist arguments.
‘Rules are for the guidance of wise men and the blind obedience of fools’.
Traditionally Germany & Switzerland hate debt, have limits and usually do not reach them - because the limit is known. Italy has no limits and does not care.
The UK is unusual in delegating little to Local Authorities and having central control. We see the weakness when LAs cannot pay for social care and other essential services. The future may be: give LAs spending authority but with both guideline and hard limits.
Yes, that is already what is happening in both Germany and Switzerland, where the states and cantons have much bigger spending authority but also clear spending limits.
Why have centrally impose spending limits on local projects. Simply impose local borrowing limits akin to those imposed on individuals who, say, wish to purchase a house. Have those limits voted through locally. Its very obvious that the further we are from a decision, the worse it generally is for the individuals affected.
Good to see that you are finally narrating the drawback of too much socialism (all forms of it). Politicians OR bureaucrats who promise to ..."fix" ...."issues" should be approached with extreme scepticism. Allowing them to take on long term debt with no responsibility for its repayment is simply a way to encourage their enthusiasm for the task. The only mystery is why more of the electorate don't see the constant accumulation of debt incurred by these never ending confidence tricksters.
While northern Germanic prudents (DE, FI, NL, AT) guard their fiscal home-Thermopylae, there is another path, leading south (its spiritual home since 2010) and then turns back north ending in Brussels. Its appointed Ephialtes is at the moment named Lagarde.
not at all convinced. As Carville famously quipped, the bond market is the most powerful entity, more so than bureaucrats or politicians. Hence, a debt brake will be reassuring for those who like to add suspenders to their trouser belts (and we all know what that tells you about a man). But it will not do anything the bond market is already doing -- only worse, because the debt brake is strongly pro-cyclical and does not discern between useful debt and unproductive debt.
The problem with Germany is low public investment, little sustainability (in demographics and for climate), combined with high spending on social. The debt brake makes all that worse, because social has political and legal capture. Germany already has a neo-mercantilist economy; becoming more so is the last thing it needs.
Germany: We have strict rules and we stick to them
UK: We have some rules, which are really just general guidelines, which we sort-of follow most of the time - but let's not look at things too closely, nobody's perfect.
USA: We're like the UK but trying hard to be more like Germany rules-wise
I would not even bet you 50/50 that Pres Trump will not crash something. No-one seems to believe he will do what he has promised eg rule by Executive Order.
The arguments over Austrian monetarism, MMT, etc have been rehearsed extensively. I take no view beyond caution.
Amen and amen! I read the other comments and I’m reminded of the innate human desire to try to make something just a little better. If the last 20 years in the US have proved nothing else, it is that there is so little accountability for politicians who overspend. The federal debt has gone from what, $3T to over $30T? And this is one of the core reasons there is so much unrest in the US. I don’t trust them and they don’t trust me with the purse. So much turmoil from the way “they” spend “my” money. A balanced budget amendment would make so much right. Perfect? No but who so naive to think perfect is attainable. I’ll be happy with just “real good.”
This one is controversial, Joachim ! In my humble opinion it all comes down to questioning a first principle : can you make sure / prove that unelected technocrats have got better / decoupled incentives from politicians ? This to me is far from obvious looking at the way monetary policy has evolved since 2008 ... but I'm happy to be educated here :)
I know it is controversial, but I firmly come down in favour of technocrats and quantitative rules, not democratically elected politicians. But then again, I assume you think monetary policy since 2008 was a failure, while I would say it was a great success. We managed to avoid a major recession and created a strong recovery post 2009 and we managed the European debt crisis very well. And finally, the economy recovered very quickly from the biggest economic shock in 100 years (aka the pandemic).
Arguably, the high inflation of 2022 was a monetary policy failure, but that is one failure after three major successes.
Now compare this to the performance of elected politicians since 2008. Brexit was a miserable failure of generational proportions. Trump is in my view the worst President of the US since the Civil War, politicians all over Europe are completely inept in running their countries and the failure to keep autocrats like Putin at bay leads to more and more wars and conflict. Thanks, but I will go with technocrats anytime.
But I know this is a minority position and generally an unpopular one.
Hmm. Cautious dissent. Elected people are accountable, even if only every 5 years; and we have constitutional limits (America’s best hope if Mr Trump is elected).
ZIRP 2009-21 caused artificial inflation of asset prices, and increased wealth discrepancy. The financial panic in the pandemic involved incontinent ‘confetti money’ (mainly Government fault) and inflation.
Cautiously I suggest we need a combination of techno skill & democratic accountability.
I agree with your last statement. We need technical rules plus electoral accountability. But given that Trump is likely to be the next President of the USA, I would say my belief in electoral accountability is being pretty shaken right now. And what makes you so sure that at the end of his second term Trump won't decide to run for a third one and openly break the constitution?
As for the ZIRP leads to asset inflation and inequality argument, I know that is the case, but what was the alternative? In the 1930s we tried the alternative and kept on pursuing sound money policies by the central bank. Consensus today is that this made the Great Depression significantly worse. So, yes, the outcome of post-2008 monetary policy was not great, but better than what could have been had we followed old monetarist arguments.
‘Rules are for the guidance of wise men and the blind obedience of fools’.
Traditionally Germany & Switzerland hate debt, have limits and usually do not reach them - because the limit is known. Italy has no limits and does not care.
The UK is unusual in delegating little to Local Authorities and having central control. We see the weakness when LAs cannot pay for social care and other essential services. The future may be: give LAs spending authority but with both guideline and hard limits.
Yes, that is already what is happening in both Germany and Switzerland, where the states and cantons have much bigger spending authority but also clear spending limits.
Why have centrally impose spending limits on local projects. Simply impose local borrowing limits akin to those imposed on individuals who, say, wish to purchase a house. Have those limits voted through locally. Its very obvious that the further we are from a decision, the worse it generally is for the individuals affected.
Good to see that you are finally narrating the drawback of too much socialism (all forms of it). Politicians OR bureaucrats who promise to ..."fix" ...."issues" should be approached with extreme scepticism. Allowing them to take on long term debt with no responsibility for its repayment is simply a way to encourage their enthusiasm for the task. The only mystery is why more of the electorate don't see the constant accumulation of debt incurred by these never ending confidence tricksters.
As I always say, I am a radical centrist. I don't like socialists or libertarians.
While northern Germanic prudents (DE, FI, NL, AT) guard their fiscal home-Thermopylae, there is another path, leading south (its spiritual home since 2010) and then turns back north ending in Brussels. Its appointed Ephialtes is at the moment named Lagarde.
not at all convinced. As Carville famously quipped, the bond market is the most powerful entity, more so than bureaucrats or politicians. Hence, a debt brake will be reassuring for those who like to add suspenders to their trouser belts (and we all know what that tells you about a man). But it will not do anything the bond market is already doing -- only worse, because the debt brake is strongly pro-cyclical and does not discern between useful debt and unproductive debt.
The problem with Germany is low public investment, little sustainability (in demographics and for climate), combined with high spending on social. The debt brake makes all that worse, because social has political and legal capture. Germany already has a neo-mercantilist economy; becoming more so is the last thing it needs.
Germany: We have strict rules and we stick to them
UK: We have some rules, which are really just general guidelines, which we sort-of follow most of the time - but let's not look at things too closely, nobody's perfect.
USA: We're like the UK but trying hard to be more like Germany rules-wise
Italy: What are "rules"?
Thanks for reply, JK.
I would not even bet you 50/50 that Pres Trump will not crash something. No-one seems to believe he will do what he has promised eg rule by Executive Order.
The arguments over Austrian monetarism, MMT, etc have been rehearsed extensively. I take no view beyond caution.
https://www.moaf.org/events/general/2024-03-19-mark-j-higgins-on-investing-in-us-financial-history-understanding-the-past-to-forecast-the-future
Thought this might be interesting to some.
Thanks for pointing this one out. I just registered. Looks very interesting
Amen and amen! I read the other comments and I’m reminded of the innate human desire to try to make something just a little better. If the last 20 years in the US have proved nothing else, it is that there is so little accountability for politicians who overspend. The federal debt has gone from what, $3T to over $30T? And this is one of the core reasons there is so much unrest in the US. I don’t trust them and they don’t trust me with the purse. So much turmoil from the way “they” spend “my” money. A balanced budget amendment would make so much right. Perfect? No but who so naive to think perfect is attainable. I’ll be happy with just “real good.”