Is there an Economic Alternative?

By: Adam S. Posen

Germany and Japan are heading into parliamentary lower-house elections.  In both countries, there is a great deal of dissatisfaction with at least one major incumbent party, according to polling data. 

Regarding economic policy, there is concern in both countries that entrenched politicians have pandered to their constituencies of older citizens for too long without sufficient regard for long-run fiscal sustainability.  And in both Germany and Japan, there is a legitimate sense that things have not been going well – legitimate because in both countries real wages have been stagnating or declining for years.

 

This dissatisfaction persists despite surprisingly early signs of economic recovery in both countries and the successful placement of blame overseas for the financial crisis.  Clearly, elections are fought on more than just economic policy and performance.  Yet, for Germany and Japan, postwar politicians have generally laid claim to leadership on the basis of their delivery of economic success. 

Is there a compelling economic alternative on offer in either election?  Does the program of the likely winning party or parties show a fiscally sustainable way back to real income growth for average workers?  This is not just a matter of who will set economic policy in two of the world’s largest countries.  This is about the futureof economic policy.  A well-justified casualty of the global financial crisis is the confident consensus that we know what to do.

 

It is not enough for politicians to simply offer a program of avoidance of Anglo-Saxon finance.  First, such avoidance has not conferred safety during the crisis, especially since restricted consumption is associated with export dependence, and thus external vulnerability as Japan and Germany experienced.  Second, such self-assigned financial distinctions have done little to prevent sizable banking problems from emerging in Germany or Japan as well.  Third, the approach of Germany and Japan has not delivered noticeably better results for citizens’ incomes looking at the long-term –even when the additional fiscal burden to the US and UK from recent crisis responses is rightly taken into account.

 

Most importantly, “don’t act like the US” is an insufficient guide to policy in the face of stagnant wages precisely because all advanced countries are already acting differently from the US in terms of saving, of social policies, and of compensation of bankers, as well as on environmental, education, health care, and tax policies.  If not acting like the US were enough, the rest of the rich world would be doing far better economically than it is. A,nd the status quo would not be producing so much dissatisfaction with the incumbents in these upcoming elections.

 

Is anything better on offer?  The soon-to-be victorious Democratic Party of Japan’s platform wants to shift the focus of public expenditure away from waste, spend more on education, new green jobs, and incentives for child birth, all while cutting taxes.  So does the poll-leading but less guaranteed to win Christian Democratic Union Party in Germany.  For that matter, so does the Obama administration, replacing the fertility promotion with (more needed) health insurance expansion.  This may be the election-winning strategy by default, but is hardly anything to stabilize the path of public finances, let alone produce wage growth rapidly. 

 

How about on the left?  Of course, Japanese politics does not have a viable left party at present, or for some time now.  The German Social Democratic Party’s program is now centered on an unattainable aspiration to create 4 million new jobs, also believing unduly in the power of new investment in green technologies.  In addition, the SPD wants to protect declining businesses and industries, thus potentially reversing some of the policies the previous Social Democratic government put in place that reduced unemployment in Germany.  Greater regulation of financial services is certainly welcome, but is unlikely to be a cause of income growth on its own or to generate greater tax revenues.

 

The most promising economic programs are those of parties which are trying to return economic liberalism to its core values.  I characterize this effort as making a commitment to protect citizens not stakeholders. That means combining social protections for individuals with willingness to subject businesses to strong competitive pressure, and progressive taxation to pay for the safety net.  This is a step away from the promotion of corporate interests that have deceptively donned the cloak of “free-market” policies in many advanced economies in recent years – and not coincidentally given liberalism a bad name.  The recent excesses of the US in protecting financial businesses, however, if anything, show the need for such citizen-not-stakeholder policies.

 

I have no personal horse in either of these electoral races, but in Germany it is the minority Green Party, with their emphasis on long-term sustainability and breaking down collusive business-labor barriers to competition, and the even smaller Christian Social Union, with their opposition to bailouts, that offer a productive agenda of this kind.  In Japan, it is the true heirs to former Prime Minister Koizumi in the Liberal Democratic Party who come closest, but who also are of the next generation in seniority, and thus will only come to power after the LDP loses this time, at soonest.  Thus, for Germany and Japan the outlook is for continued economic underperformance, and mounting dissatisfaction, even after the coming electoral changes.

 

Adam Posen is Senior Fellow at the Peterson Institute for International Economics. 

 

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