Why didn't Keynesian theory provide successful solutions to the German economy where unemployment currently around 14%?
WHY DIDN'T KEYNESIAN ECONOMICS NOT PROVIDE SUCCESSFUL SOLUTION TO THE GERMAN UNEMPLOYMENT PROBLEM
The Keynesian theory stating that active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability.
However: A some supporters of Keynesian economics believes it is the government's job to smooth out the bumps in business cycles. Intervention would come in the form of government spending and tax breaks in order to stimulate the economy, and government spending cuts and tax hikes in good times, in order to curb inflation.
The German economy is now in the grip of a technical recession. Real capital investment fell by 4% in 2001, consumer spending is static leading to substantial de-stocking by German industry. Export growth declined sharply from 5.6% in 2000 to just 1.6% in 2001 - contributing to a sharp fall in industrial production last year. Manufacturing output was falling at an annual rate of 4.4% in the first quarter of 2002 leading to heavy job losses in German industry. Gerhard Schroder is unlikely to achieve his election target of cutting German unemployment below 3.5%. And this problem makes it more difficult to introduce additional labour market reforms designed to increase the flexibility of the domestic German economy.
To most economists they are practicing Keynesian economics, with the alteration of promoting demand side for investment and upper income consumption, that there is nothing to distinguish "Supply-Side Economics" from ordinary borrowing to finance present budget deficits.
Between February 1994 and April 1996, the German Bundesbank gradually eased
interest rates. The discount rate dipped from 5.25 percent to 2.5 percent and the marginal
lending facility (Lombard) rate descended from 6.75 percent to 4.5 percent. These
relatively favorable interest rates remained unchanged until January 1999 (i.e., for more
than two and one-half years), when the transition to the single European currency took
place. The relatively low and stable interest rates did little to stimulate the German
The second main part of a Keynesian policy-maker's theoretical apparatus was the Phillips curve. This curve, which was more of an empirical observation than a theory, indicated that increased employment, and decreased unemployment, implied increased inflation. Keynes had only predicted that falling unemployment would cause a higher price, not a higher inflation rate. Thus, the economist could use the IS-LM model to predict, for example, that an increase in the money supply would raise output and employment -- and then use the Phillips curve to predict an increase in inflation.
More than 5.2 million Germans were out of work in February, new figures show.
The figure of 5.216 million people, or 12.6% of the working-age population, is the highest jobless rate in Europe's biggest economy since the 1930s.
The news comes as the head of Germany's panel of government economic advisers predicted growth would again stagnate.
Speaking on German TV, Bert Ruerup said the panel's earlier forecast of 1.4% was too optimistic and warned growth would be just 1% in 2005.
The growth warning triggered anger even from government supporters, who said the Social Democrat-Green administration of Chancellor Gerhard Schroeder had to do more.
"We are not going to create more jobs with growth of 1%," Harald Schartau, head of the Social Democrats in the northern state of North Rhine-Westphalia, told ZDF television.
"We say to our friends in Berlin, you have to persevere and create more impulse for growth."
Many German newspapers had the figures a day ahead, splashing them with angry headlines on Tuesday morning.
The mass-market Bild tabloid used red type to splash the phrase, "Do something!" across its front page.
The strength of Keynesianism's influence can be seen by the wave of conservative economists which began in the late 1940s with Milton Friedman. Instead of rejecting macro-measurements and macro-models of the economy, they embraced the techniques of treating the entire economy as having a supply and demand equilibrium. But unlike the Keynesians, they argued that the "crowding out" effects discussed above would hobble or deprive fiscal policy of its positive effect. Instead, the focus should be on monetary policy, which was largely ignored by early Keynesians. This monetarism had both an ideological appeal -- since monetary policy does not, at least on the surface, imply as much government intervention the economy. The monetarist critique pushed Keynesians toward a more balanced view of monetary policy, and inspired a wave of revisions to Keynesian theory.
Slower growth always hurts government finances. The German budget balance as a share of GDP increased to 2.5% in 2001 - stretching the limits placed by the Fiscal ...
Keynesian theory is debated. The successful solutions to the German economy where unemployment currently around 14% is examined.