Wednesday, June 14, 2006

Ought Germany to remain the sick man of Europe?

The German economy is finally picking up. Part of this strength comes from exports. Despite all the hype about China, Germany is still the world's largest expoerter in absolute terms. But there is also a clear recovery in domestic demand.

You would have thought that this should be greeted with joy by Germany's euro partners. After all, a strong German economy is in the interests of the euro-zone. No way! Instead, Germany is attacked - notably by people such as Paul de Grawe and Wolfgang Munchau, both writing in the Financial Times - for pursuing a beggar-thy-neighbour policy, starving its own workers and so making other Euroland countries uncompetitive.

This is complete rubbish. German labour cost levels are the second-highest in Europe (after Belgian). German workers are hardly starved. What is true is that German labour costs have risen less rapidly than those of other countries.

But remember that Germany entered the euro at a rate vastly overvalued vis-a-vis its partners - about 20% overvalued against the French franc, for instance. Add to that the impact of globalisation and Germany's own structural problems. Moreover, by joining the single currency, Germany abdicated both monetary and (de facto) fiscal policy. The only way Germany could restore competitiveness was through reforms - which have taken place, even if possibly less than we would like - and through lower relative labour cost inflation.

But both of these methods are demand deflationary and painful. For the other Euroland countries, it would, of course, be much easier if the Germans could remain content to be the sick man of Europe, with permanently slower growth than anyone else. Then places like Belgium would not have to worry about trying to become more competitive. Hence the attacks on Germany.

Somehow, I don't think this is seen in quite the same way in Germany.

This is an abridged version of an article I've written for International Economy.

Wednesday, June 07, 2006

Laws of economics

I have formulated three laws of economics. Like many such laws, they may appear obvious. But I don't think this detracts from their truth.

Stein's first law of economics:

When someone tells you, this time it's different, sell. If they advance esoteric theories to back up their statement, sell at once!

Stein's second law of economics:

When a government starts talking about repaying the entire national debt in the immediate future, budget deficits are just around the corner.

Stein's law on the motivation of human behaviour:

We want more, better and free!

For more laws, check out the Murphy's Laws site.

Happy Tax Freedom Day

Last Saturday (3rd June, 2006) was Tax Freedom Day (TFD) for the UK. I take a certain interest in this, as I actually calculate TFD for the United Kingdom. For those of you who don't know what TFD is, here is a brief explanation.

Assume that from 1st January every year, all the money everyone earns is paid over to the government. When have we all paid off our taxes and can start keeping some money for ourselves? In the UK and in 2006, this is 3rd June - Tax Freedom Day. (If you want a technical version, how about: Tax Freedom Day takes the sum of all taxes in an economy - direct, indirect, corporate and so on - and relates them to a measure of national income, in this case net national income or NNI. The resulting percentage is then expressed as days of the year.)

The main point about TFD is that it is a very easy and attractive way of illustrating the tax burden. In other words, it is a gimmick. This is why it is hated by finance ministries and revenue departments everywhere. Here in Britain, the Treasury has taken to trotting out a spokesman who every ear huffily declares that the Treasury does not recognise the concept of Tax Freedom Day and that everyone is much better off since 1997.

That the Treasury doesn't like TFD is its prerogative. But to cclaim thate veryone is much better off is a non sequitur. If, for instance, the tax burden had doubled over the past nine years, but wages had risen, everyone would indeed be better off - but they would be paying twice as much tax relative to income as before!

The Tories have said that they will make Tax Freedom Day a public holiday. That is nice. But it would be far better if they committed themselves to making sure that Tax Freedom Day falls earlier and earlier in the calendar.

In the United States, Tax Freedom Day fell on 26th April. In Canada it falls in late June. In Israel (originally calculated by your truly) it is in early August. And in my native Sweden, it will be 8 August. Taxes are not the reason why I moved to Britain, but they would have been a very good one.