Wednesday, February 25, 2009

German Policy Lessons

A great op-ed from the European Wall Street Journal can be found here.

An excerpt is here:

...governments are constituted to fulfill three economic functions: providing public goods that are insufficiently provided by private agents; enforcing the rule of law to ensure private property rights as well as competitive markets; and, what we are currently witnessing, the protection against systemic risks.

Right now the government has to step in to prevent the breakdown of the financial markets and ease the immense pressure on the supply side. At the same time, the continuing economic downswing has turned into the deepest recession since World War II. This is why, for all their shortcomings, the stimulus plans go in the right direction. Sometimes you have to fight fire with fire.

However, burying a problem caused by too much easy money in another pile of (government) money obviously is a solution that will only work for so long. In fact, the provision of easy credit violated the right of ownership -- meaning the government failed in one of its central duties. Buying a house one cannot afford is not property, but pseudo-property.

In the long run, the second function of government, guaranteeing property rights, will have to guide future economic policy. For the United States this means that after the dust has settled it will have to start repaying some of its debt and reduce its twin deficits -- government debt and current account.

There are two ways to reduce the current account deficit: importing less or exporting more... 

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