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Friday, August 27, 2010

Merkel Was Right, Obama Was Wrong- Summer Of Recovery Belongs To Germany, Not U.S.

German Chancellor Angela Merkel was right, American President Barack Obama was wrong.

Last year reports showed a very public disagreement between world leaders on how to pull their respective countries out of a financial quagmire.

German Chancellor Angela Merkel said spending too much money to revive global growth will create an unsustainable recovery, so instead they decided to tighten their belts and spend less.

Merkel's words were "This crisis did not come about because we issued too little money but because we created economic growth with too much money, and it was not sustainable growth. If we want to learn from that, the answer is not to repeat the mistakes of the past."

In an interview published in Saturday's Financial Times, Merkel rejected calls to spend more public money in Germany as part of a coordinated stimulus for the global economy, saying that China can do much more to stimulate domestic demand.

Barack Obama and the Democratically controlled House of Representatives and Senate decided to do just the opposite and throw good money after bad with a $787 billion (which ended up totally $862 according to some) stimulus package that was supposed to keep unemployment down and stimulate economic growth.

Over a year later, David Brooks reports that Germany's economy is growing at a 9 percent annual rate while reports today show America's second quarter slowed down to an annual rate of 1.6 percent growth.

The debate got pointed. American economists accused German policy makers of risking a long depression. The German finance minister, Wolfgang Schäuble, countered, “Governments should not become addicted to borrowing as a quick fix to stimulate demand.”

The two countries followed different policy paths. According to Gary Becker of the University of Chicago, the Americans borrowed an amount equal to 6 percent of G.D.P. in an attempt to stimulate growth. The Germans spent about 1.5 percent of G.D.P. on their stimulus.

This divergence created a natural experiment. Who was right?

The early returns suggest the Germans were. The American stimulus package was supposed to create a “summer of recovery,” according to Obama administration officials. Job growth was supposed to be surging at up to 500,000 a month. Instead, the U.S. economy is scuffling along.

The German economy, on the other hand, is growing at a sizzling (and obviously unsustainable) 9 percent annual rate. Unemployment in Germany has come down to pre-crisis levels.

Merkel was right, the temporary growth from spending instead of reducing the spending was unsustainable. Barack Obama and the Democratically controlled House and Senate were wrong.

Comparisons are clear, Germany spent less and grew more and grew faster and lowered the unemployment rate. American spent more and continues to spend and grew less and is continuing to slow down and unemployment is up to s staggering 9.5 percent and is expected to go even higher.

Simply put, you do not put a band aid on a gaping wound, you stitch it up so the bleeding stops. Even a bigger band aid will only hide the blood for so long before it seeps out and the patient continues to fight to survive.

Merkel stitched, Obama used a very expensive band aid.

Looking at the results from both countries a year later, it is easy to see that refusing to borrow and spend like drunken sailors has given Germany a true summer of recovery.

Yet Liberals still claim Obama should have used a bigger band aid (bigger stimulus like $787 billion wasn't big enough!)instead of stitching up the patient to stop the bleeding.

Some people just never learn.