Mittwoch, Mai 03, 2006

A modest proposal...

Economists, pundits and politicians in Germany are talking these days about the "resurging" German economy.

The official forecast for 2006 has been moved up to 1.8% growth. That's right, up to 1.8% growth.

There are myraid reasons why German economic growth is so weak - to be honest, 1.8% growth only means that the economy isn't in meltdown and is hardly resurging in any shape that could be called realistic - and I won't go into them here.

This links to Donald Luskin's talk he recently gave in Washington DC to the National Association of Investment Professionals.

I'll briefly sum what's important: tax cuts and the ensuing incentives to invest and grow the economy.

It's really rather simple: lowering taxes means that there is a positive incentive to work harder and earn more money, since you actually get to keep it. Any one out there has a point where extra effort ceases to be profitable: everyone has their limits. When the government works hard at taking what you earn, the limits are so much lower than they would be otherwise. Trust me, I know what I'm talking about, having recently seen a modest bonus turned into a pittance by the taxman. My wife has it even worse: after taxes her Christmas bonus wasn't enough to fill the tank of our car with diesel...

My modest proposal is that to get the German economy running at anything like normal - as far as I am concerned, long-term growth rates MUST exceed 3% if the German economy is going to be able to maintain its ability to compete internationally while providing domestic jobs - that the German government eliminates any and all taxes on revenues from corporate financial instruments, be it stocks, bonds, direct investments, venture capital or whatever clever instruments the financial people dream up. In addition, German companies investing in German factories, offices and the like may deduct the cost of their investments 100% in the first year from their taxable income AND may fully depreciate the investment as they normally do.

German finances will suffer: they are already catastrophic, so losing revenue won't really make that much of a difference. But the downside is small, with the potential on the upside being huge.

What Luskin points out and which few I think understand outside of the US (and many in the US don't understand either) is that by letting people keep what they earn you allow them to make the rational choices for their consumption. Germans today show little propensity to add value to relatively high income levels because all that happens is that the government takes around half of it. Which completely and totally removes any incentive to take that extra step and improve something so that value is created.

And the 3% growth rate for Germany - no economist that I know expects this, and indeed I don't expect Germany to reach these growth levels - is based on the need in Germany to recapitalize its economy. Germany is living no longer off its fat, but rather is burning muscle in order to generate the very weak growth of the last several years. Germany needs to invest between 8% and 10% per year for the next 10 years in order to improve its infrastructure, one of the best in Europe if not the world: the current investment levels don't allow the current infrastucture to even be maintained, ensuring that things here are going to get worse before they get better.

It's not like I'm recommending eating babies or anything like that.

My modest proposal, of course, has absolutely no chance of being implemented by any of the political parties here.

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