Macroeconomic Policy, European-Style

Last Spring President Obama tried to talk German Chancellor Angela Merkel into continuing massive deficit spending to support the sagging economy. Quitting now, Obama argued, would cut the recovery short and risk major economic problems. A more sluggish German economy would slow world recovery, including recovery in the U.S. Merkel’s response was that narrowing deficits and showing some fiscal responsibility was the better road to recovery.

If Merkel had bought Obama’s argument, these major players would have been on the same page, and we could legitimately ask, even though the recovery is stalling, whether things might not have been even worse without the federal government’s stimulus. But Merkel didn’t buy the argument, so we can compare the U.S. recovery, where the strategy has been continued deficit spending and more fiscal stimulus to prop up the weak economy, with the German recovery, where fiscal policy has turned to fiscal responsibility and moving toward balanced budgets.

Figures announced this week show that in the second quarter the U.S. economy grew at a 1.6% annual rate. Economic growth in the 16-nation euro zone was 3.9%. That includes Greece, Spain, and Portugal, who are part of that 16-nation group. Germany, by itself, grew at a 9% annual rate.

Is the Obama stimulus package working? One way to judge is to compare US economic growth with economic growth in Germany, where Chancellor Merkel has rejected deficit spending for stimulus as fiscally irresponsible. In last Spring’s debate on economic policy between Obama and Merkel, the evidence appears to tilt toward Merkel.

Randall G. Holcombe is a Research Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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