Germany, Tax Cuts, Export Growth, and Recovery

The Dodd-Frank Act was supposed to bring some certainty to the markets with an overhaul of Wall Street rules. What we got was a multi-year long process of renaming and reorganizing existing agencies, giving failed regulators more power, and a virtual guarantee that unintended consequences from the pro-cyclical legislation will lead to the next crisis.

Treasury’s conference on housing finance reform earlier this week was supposed to launch a robust debate on the “wide range” of opinions on how we should move forward. What we got was a framing exercise that marginalized the free market view, assumed away one of the biggest debates—whether or not there should be a government role—and went straight for assuming pro-cyclical government guarantees are the best approach. This is good news for mortgage bankers, but bad news for credit markets that are sure to suffer again in the future from a misallocation of resources destabilizing the housing market.

Health care reform wound up being a package of political favors, plus an additional 3.8 percent Medicare tax on investment income in 2013. Proposed energy reforms are nothing more than social engineering at the expense of businesses and consumer prices. The government has furthermore loaded itself up with debt, including an unsustainable Federal Reserve balance sheet, and stimulus spending that has (assuming the stimulus has actually impacted the economy) at best bumped the U.S. up to annualized growth no greater than 2 percent.

And with the talk of tax increases on businesses and investors (including an implied 160 percent increase in taxes on dividends), is it any wonder that there is still significant uncertainty in the market place?

In The Wall Street Journal today, the editors write that Germany has been a better fiscal manager than the U.S. over the past few months, cutting its deficit, and avoiding borrow-and-spend policies. This had yielded some promising results:

While the U.S. debates whether, by how much and on whom to raise taxes in January, Berlin’s budget cuts have taken some of the uncertainty out of Germany’s fiscal future. In America, U.S. corporations are holding back on investments despite soaring profits. At the end of the first quarter, nonfinancial companies in the Standard & Poor’s 500 had a record $837 billion in cash, apparently preferring to make almost no interest on the money instead of investing it in the face of uncertainty about taxes and regulation going forward.

In other words, by the simple expedient of not frightening business, Berlin has made it easier for the country’s export-oriented industries to take advantage of the global recovery. German engineering is successful in emerging markets such as India and particularly China, where BMW, Audi and Daimler, posted record sales these past few months.

One quarter of growth in Germany is hardly proof enough to mirror a policy. However, the business culture and investment community mood in Germany are sound evidence that Berlin’s public policy is on sounder footing now than Washington’s is coming anywhere close to.