Since Joe Biden became president, one can imagine that the pandemic will be history for the foreseeable future, at least in America. In the not too distant future, all Americans who wish will be vaccinated. Biden’s $ 1.9 trillion aid package could even spark a boom. On this side of the Atlantic you should not only learn from the Americans how to vaccinate effectively, you also have to think about the time after Corona. For example, what happens to the national debt that Germany had to take on during the crisis. Will it continue to rise like in the USA? Or do you return to the debt brake and black zero as quickly as possible, in other words to the goal of a balanced budget? Last year, Finance Minister Olaf Scholz had to take on 160 billion euros in new debt, and this year it will probably be 180 billion. All of this is proven crisis policy according to John Maynard Keynes and essentially undisputed among economists and politicians, apart from the AfD. The federal budget for 2022 is also likely to have to be financed with high debts.
But after that? The SPD rejects the return to the black zero, as stated in the draft of its election manifesto. Chancellery Minister Helge Braun wants to loosen the debt brake of the Basic Law, much to the annoyance of his party friends from the CDU, who want to return to balanced budgets as soon as possible. Before you make things too easy for yourself, it is advisable to look back. American economic history in particular provides very vivid examples of what happens when the government switches to saving too early after a crisis. But there are also examples of the opposite: in good times, the government gets too deeply indebted, overwhelms the capacity of the economy and thus triggers inflation. Example number one is the 1937/1938 recession. It broke out when President Franklin D. Roosevelt, after successfully battling the Great Depression, feared excessive government deficits. The government began to save, the Federal Reserve raised interest rates, industrial production collapsed, and unemployment rose. In December 1940, a year before Japan bombed the United States in World War II at Pearl Harbor, the unemployment rate was still 14.6 percent.
Case two came a generation later. Between 1961 and 1967, Presidents John F. Kennedy and Lyndon B. Johnson went into debt in the boom to further reduce unemployment and renew America. Shortly thereafter, inflation began to rise. In the course of the 1970s, currency devaluation reached double digits, often associated with very weak economic growth. The trend was only broken in 1980 by a brutal hike by the central bank. The result was the election of Ronald Reagan as president and a shift to the right in American society.
Former US Treasury Secretary Larry Summers has already sounded the alarm
It is remarkable that the memory of this time is being conjured up again right now, and not the apparently closer case one. Olivier Blanchard, former chief economist of the International Monetary Fund, warned in a paper for the Peterson Institute in Washington that Biden’s 1.9 trillion program could be too big and trigger inflation, as it was in the 1960s. Larry Summers, former Treasury Secretary and advisor to President Barack Obama, had previously served in the Washington Post The alarm sounded: “An economic stimulus of a dimension closer to that of the Second World War than that of a normal recession” could “trigger inflationary pressures such as we have not seen in a generation”. The mere fact that Summers, an old Democrat sage, and not a staunch Republican, made that statement caused a stir.
In the comparatively small German economy, such questions arise differently than in the USA. But they also present themselves. If, for example, Summers’ fears were to come true and prices rose in America, then interest rates would rise worldwide too. That would have far-reaching consequences for German politics. So far, the interest rates for ten-year federal bonds are negative, which means that the Federal Republic can borrow money practically for free. Nobody now assumes that this could one day change. And that’s exactly the problem. Will Germany be willing and able to consolidate its public finances even under much less favorable conditions?
One should take this opportunity to remember why the Bundestag even decided on the debt brake at the time. It was the prospect that this decade would see the baby boomers retiring and that the social budget would rise accordingly. Therefore, the burdens of the next generation from the federal budget should remain as small as possible. In the past four years, the grand coalition has not necessarily acted on this knowledge, but instead, in the form of the basic pension, saddled the young with new social costs. In the pandemic, economic stabilization was at the center of budgetary policy, and rightly so. However, the initial problem, demographic change, has not disappeared. On the contrary, it is becoming more and more urgent.
It is quite possible that Larry Summers is wrong. However, it would be unwise to rely on it. That is why German politics should return to the debt brake and black zero in an appropriate time.
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