IMF Survey: Don't Forget the Role Automatic Stabilizers Can Play
January 21, 2009
FISCAL STIMULUS PACKAGES
Dear IMF Survey:
I read the IMF Staff Position Note Fiscal Policy for the Crisis ("IMF Spells Out Need for Global Fiscal Stimulus" December 29, 2008). What is lacking in the actual discussion of fiscal stimulus packages is consideration of the role automatic stabilizers can play.
Some years ago (when I still was a member), the German Council of Economic Advisers stressed the relevance of automatic stabilizers. For Germany, the Kiel Institute for the World Economy estimates that they account for 1.5 percent of GDP. Other empirical estimates tend to be somewhat lower, but seem to agree that automatic stabilizers play a bigger role in European economies than in the United States.
Low oil prices and a low inflation rate increase the real income of consumers and should stabilize aggregate demand. Labor market reforms in a country like Germany have stabilized employment (so far) relative to previous recessions. They have made the German economy more robust against shocks. After all, that is why we told the government that these reforms were needed. Other instruments, such as extending short-time work arrangements, also stabilize employment. This helps to reduce uncertainty.
It is not my point that automatic stabilizers will do the job alone. But they should not be forgotten.
Given the role of automatic stabilizers, it is amazing that Germany-bashing seems fashionable these days in newspapers such as the Financial Times and the New York Times. This is partly due to false information. Germany's debt will increase by 50 billion euros in 2009—about 1.8 percent of GDP, which is more relative to national income than is being done in other countries such as France and the United Kingdom.
I agree on the general idea of joint effort. However, I am concerned that one of the root causes of the financial crisis lies in overconsumption in the United States that is not supported by savings, and in artificial institutional distortions leading to this type of overconsumption (see my working paper "An International Rule System to Avoid Financial Instability"). We must be careful not to perpetuate this situation.
The concept of coordinated action and burden-sharing has a strange historical experience (see my 2009 book: "Rules for the Global Economy," (Princeton: Princeton University Press)). The proposal in the mid-1980s that Japan and Germany should act as the demand locomotive for the world economy clearly contributed to the financial bubble in Japan (and, as a consequence, to more than a decade of stagnation). Luckily, Germany's Bundesbank did not follow suit.
Heinz Nixdorf Professor in European Integration and Economic Policy
Johns Hopkins University
Kiel Institut for the World Economy