Tuesday, December 16, 2008

The Rush to Stimulus

There was a rush to war five years ago. A crisis was created, an urgency was declared, action came before thought , and - the Americans messed it up completely.

The Americans are at it again. They are trying to badger foreign governments into stimulating their economy through massive deficit spending because - well, because they can't think of anything else to do, and they imagine that it is better to keep pedaling and risk hitting a wall than fall off straightaway. It's part of the short-term philosophy of life that has sent Americans to the mall and living off their credit cards. The threat of government default doesn't worry them, not because it shouldn't, but because it seems to far-off in the future, and one more trip to the casino beforehand, after all, might save them.

When the Iraq War was being discussed, there was much talk of American "hard power" versus European "soft power." I was always a bit skeptical about this as a distinction, because the Americans are just as expert at soft power as the Europeans, if they only put their mind to it. Case in point, would be the determined Anglo-Saxon media campaign against the Germans, who are resisting going off the deep end and spending money for the sake of stimulus. This is from a Bloomberg article entitled Merkel’s Popularity Sinks on Handling of Crisis, Poll Shows":

Chancellor Angela Merkel’s popularity slumped last week amid criticism that the leader of Europe’s biggest economy is doing too little to stem the country’s slide into recession, a poll showed.

Asked whom they would vote for if the chancellor could be elected directly, 47 percent named Christian Democrat Merkel, compared with 51 percent a week ago, according to a Forsa poll for Stern magazine and RTL television.

That’s still 22 percentage points ahead of Social Democrat Vice Chancellor Frank-Walter Steinmeier, who garnered 25 percent support, 2 percentage points more than a week earlier, Stern said in an e-mailed statement.

Merkel’s declining popularity may reflect criticism that the chancellor is lacking determination to fight the economic downturn. Nobel Prize-winning economist Paul Krugman told Spiegel magazine that Merkel is “misjudging the severity” of the crisis and “wasting precious time.”

Merkel’s declining support may be rubbing off on her party. The Christian Democrats fell 1 percentage point to 37 percent and the pro-business Free Democratic Party, her preferred ally, rose 1 point to 13 percent.

The combined total of 50 percent, maintained for a third week, would still allow the CDU and FDP to form a coalition government if replicated in national elections in September 2009.

So Merkel lost 4 percentages in a week, her party lost 1 point, and her coalition stayed steady - and Bloomberg ties it to her resistance to a stimulus package because at the same time, Herr Krugman told Spiegel he wasn't happy with her. On the contrary, I would say that Merkel understands much better than Krugman the severity of the crisis, and how important it is to keep some money in the till to help people when they need it, two or three years down the road, rather than frittering it away in a go-for-broke strategy based on a failed economic ideology.

What, may I ask, is Krugman's exit strategy?

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