After the discussion on the Germany case today, I would like to address a couple of questions on the consumption behavior of the Germans who belong to an industrialized, well-developed and progressive state. The MPCs of people in such countries tends to be relatively low - reasons being they have already achieved a high level of consumption and their incremental consumption needs are not high value. They tend to be more savings (investment) oriented after their consumption needs are well satisfied. Comparing Germany's low spending behavior to the high spending Chinese or Indians may not be fair comparison whatsoever.
The second issue to ponder over would be if taxing the people's income and reducing their spending power is being compensated in the form of subsidized spending on education and healthcare. Does it make sense for the State to get money out of the hands of spenders to compensate the unproductive non-spenders? Consumption follows in a business cycle. It is production and improved productivity that will lead the movement out of stagnant growth periods.
Germany seems to be in a state of what is 'steady-state growth' where growth in specific leading sectors has already reached a high point and marginal growth is sort of inconsequential. Do they need a shift in focus? If so for a country with 70% of GDP coming out of services, a nation that is highly industrialised (30% from industry), what do you think is the way forward? What should be Germany's focus for the next decade based on what you have read in the case? Do you think it is the end of the road and that they would need another war to bring that "Aufklarung"?
Will look forward to your views......
About incentives i would like to say that the incentives given for educatioon should be given only to those who complete there education on time so after the normal time period for a particular course incentives should be stopped. Also instead of giving incentives in the form of money to unemployed germany should give them coupons for basic necessities so that they are not able to save and they may think of working when they will not get anything to save.
ReplyDeletehttp://www.thegatewayonline.com/article/268
ReplyDeleteLow MPC's and high savings has been the order for the war battered german economy. I think not all savings translates to investment, not substantial, as read from the above link (President Obama criticizing) and class discussion on low consumption by german and chinese.
The state intervention in the sale of Opel indicates priority to ease the prevailing unemployment rate (protectionist measures) in the wake of global slow down.
The govt. can reduce taxes with reduction in the welfare schemes at various points having a same net income as before and possible labour and student-aid reforms in a phased manner, may not go well with voters though.
1. Germany is a developed economy with low GDP growth rate; whereas India & China are developing economies having higher GDP growth rates as compared to Germany. Hence MPC is higher for both India & China, than that for Germany.
ReplyDelete2. Taxing income of the people and reducing their expenditure over Education & Healthcare will be beneficial only if the economy is well grown; as development in both the sectors fetch sizable revenue in developing economy. On the other side the average income level is low; therefore not all the citizens may afford to incur education and healthcare expenses and may have to trade-off between them along with other necessities.
3. Germany alike USA has almost comparable revenue generation from service sector (as a % of GDP). But unlike USA, it’s a very sound engineering and manufacturing potential; what it may fetch from the glob with intense focus and outsourcing. On the other side, they may frame the policies in such a fashion so as to be able to consume major chunk of its production; and thus reduce revenue dependency from the export; by so it may compete with growing economies. Also Euro association plays prominent role in his decisive steps towards growth; for what they may structure the policies.
Late in 2008 the global financial and economic crisis began having significant effects in Germany, forcing the government to rescue one of Germany's largest banks from collapse, and sending the economy into recession. In Feb., 2009, the German parliament passed a sizable economic stimulus package.
ReplyDeleteIt was never an easy journey for the country which lost both the two world wars. Tax and a positive contribution from the ECB are important, of course, but I wonder if there aren’t other hindrances to domestic consumption. Japan and Germany have CA surpluses and their currencies are depreciating, while the US has a large ongoing deficit and the dollar is rising. It’d be hard pressed to think of an upswing in the German economy that wasn’t led by exports and fed by investment. Domestic consumption brings up the rear.
As far as necessary steps which Germany should take now is to bring a balance between its internal consumption and exports. It is high time for labor market reform. Germany should definitely not look for abatement of its exports; however it should make its economy dependent on internal factors too. Instead of imposing high consumption tax, it can shift its focus to high production tax which will make the consumption vibrant. Idea of giving coupons instead of cash benefits should be welcomed. I do see Germany coming up with new policies and continuing with the pace with which is growing incessantly. As far as the recession period was concerned, it was obvious for a country which was so much dependent for the foreign markets. After all, sometimes you need to stumble to show how upright you always were. Great men get noticed when they fail, ordinary when they succeed. Let us have an eye on Germany which is all set to show its pyrotechnics after the slowdown.
Abhishek Kr. Sinha