There’s an easy story you can tell about deficits in American politics. Basically, the way it goes is that tax cuts produce a positive short-term response from those who get them. And spending hikes also produce a positive short-term response from those who get the spending directly or the services provided indirectly. Deficits, meanwhile, have their impact over the medium term and don’t directly target anyone’s interests. Hence the tendency is for deficits to drift up and up until you’re on the verge of collapse in the bond market, at which point “avoid short-term collapse” becomes an important constraint on politicians. And if you look at, say, Italy you’ll see that a similar story seems to be in effect. And these appear to be pretty simple facts of political life grounded in basic elements of human nature. But consider the case of Germany, which has provided a pretty large fiscal stimulus by continental European standards, but which most American observers want to do more. Look at the political incentives facing Angela Merkel:
Unlike Mr. Sarkozy, who has three more years to his term, Mrs. Merkel finds herself in a difficult position, facing elections in September with voters leery of fiscal profligacy. Her Christian Democrats have been sinking in the polls, with the pro-business Free Democrats eating away at their support.
I keep hearing this. In part, Merkel is constrained by policy considerations that she deems compelling. But in part she’s constrained by a German political logic in which the voters would, apparently, prefer to see unemployment skyrocket as economic problems abroad cause Germany’s export-oriented economy to collapse than to see large budget deficits. She is, I’m reliably told, actually paying a political price for having done as much stimulusing as she has. But no matter how many times I read that, I find it difficult to imagine a political culture that operates that way.
In principle, my understanding is that Germany’s heavily regulated retail sector means you could actually find ways to stimulate domestic consumption and demand without necessarily spending more money. But changing those policies has been a hardy perennial of “things non-Germans think Germany should do” and the German people themselves don’t seem very enthusiastic about the idea.