The libertarian economist Tyler Cowen has an op-ed entitled What Germany Knows About Debt in the New York Times today extolling the virtues of German fiscal prudence.

In many countries, including the United States, there are calls for the government to spend more to jump-start the economy, and to avoid the temptation to cut back as debts mount.

Germany, however, has decided to cast its lot with fiscal prudence. It has managed rising growth and falling unemployment, while putting together a plan for a nearly balanced budget within six years. On fiscal policy and economic recovery, Americans could learn something from the German example.

Twentieth-century history may help explain German behavior today. After all, the Germans lost two World Wars, experienced the Weimar hyperinflation and saw their country divided and partly ruined by Communism. What an American considers as bad economic times, a German might see as relative prosperity. That perspective helps support a greater concern with long-run fiscal caution, because it is not assumed that a brighter future will pay all the bills.

Cowen, who teaches economics at George Mason University and runs the libertarian Marginal Revolution blog, goes on to question the validity of Keynesian calls for another round of fiscal stimulus by pointing to the German experience after unification, the rather unequal absorption of the East by the much larger West.

Certainly, in Germany, the recent history of fiscal stimulus wasn’t entirely positive. After reunification in 1990, the German government borrowed and spent huge amounts of money to finance reconstruction and to bring East German living standards up to West German levels. Millions of new consumers were added to the economy.

These policies did unify the country politically but were not overwhelmingly successful economically. An initial surge was followed by years of disappointing results for output and employment. Germany’s taxes remain high, and overall West German living standards failed to rise at the same rate as those of most other wealthy countries.

Persuading former East Germans to spend more as consumers turned out to be less important than making sure that they had the skills to mesh with the economic expansion of the country. It is no surprise that many Germans are now skeptical about debt-financed government spending or excessive reliance on domestic consumers.

In recent times, Germany has shown signs of regaining a pre-eminent economic position. Policy makers have returned to long-run planning, and during the last decade have liberalized their labor markets, introduced greater wage flexibility and recently passed a constitutional amendment for a nearly balanced budget by 2016, meaning that the structural deficit should not exceed 0.35 percent of gross domestic product.

Amid the sluggish economies of much of Europe, Germany has booming exports and is nearing full capacity utilization. And many of its workers are postponing vacations to produce, and earn, more. The unemployment rate in Germany is 7.5 percent — below that of the United States — and falling.

The above was enough to send an already exasperated Paul Krugman into the throes of outright despair.

I’ll be frank: the discussion of fiscal stimulus this past year and a half has filled me with despair over the state of the economics profession. If you believe stimulus is a bad idea, fine; but surely the least one could have expected is that opponents would listen, even a bit, to what proponents were saying. In particular, the case for stimulus has always been highly conditional. Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound.

That doesn’t sound like a hard point to grasp. Yet again and again, critics point to examples of increased government spending under conditions nothing like that, and claim that these examples somehow prove something.

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If I were to predict a GOP bumper sticker for the 2012 election cycle, it might be "Obama Still Has His Job, Do You?" If the President and by extension the Democrats have an electoral Achilles Heel, it is the continuing erosion of the nation's labor market. By 2012, the nation's electorate will no longer remember that the bleed of jobs began in 2007 under George W. Bush nor are they likely to pin the blame on Reagan-era policies that set in motion a three decade destruction of the country's manufacturing sector. For too many Americans, this is not a recession but a quiet depression, an epic crash of living standards. Even for those still with jobs, wage deflation is a harsh reality and falling wages are a symptom of a sick economy. This sick economy may be a GOP legacy but if we fail to stem the ebb tide of jobs then a political day of reckoning will await us.

An editorial in the New York Times published on Saturday sets forth the urgency of the matter:

September was the 21st straight month of job loss -- the longest unbroken stretch of losses since record-keeping began in 1939 -- bringing to 7.2 million the number of positions that have been axed since December 2007. And that understates the damage. During the recession, the economy has failed to create another 2.7 million jobs that were needed simply to employ new workers -- like high school and college graduates, immigrants and stay-at-home parents who want to go back to work.

The unemployment rate for September -- 9.8 percent -- also understates the damage. It would have been higher but for the fact that 571,000 people dropped out of the work force last month -- in general, it's assumed, because they've despaired of finding work. If they had kept looking, they would have been counted as unemployed.

The combination of a rising unemployment rate and a quickening pace of labor-force dropouts is especially worrisome. In September, the employment rate for all workers -- defined as the share of the population with a job -- fell to 58.8 percent, its lowest level in more than 25 years. For adult men, who have been particularly hard hit by job loss in this recession, the employment rate fell to 67 percent, its lowest level since the government began keeping track in 1948. Before this recession, that rate had never dropped below 70.5 percent.

A shrinking labor force represents a tremendous waste of talent and potential, a loss of value that will not be entirely retrievable. Widespread joblessness among men is particularly devastating for the economy and many families, because men tend to earn more than women and to have jobs offering health insurance.

To make matters worse, unemployment among men and women is proving relentless. Of the 15.1 million people who are now officially counted as unemployed, over a third have been out of work for 27 weeks or longer, the highest percentage of long-term unemployment on record. By the end of the year, benefits will expire for more than one million unemployed workers.

Those are bleak numbers and the Administration seems to revel in celebrating a "catastrophe averted" when the pain remains all too evident. As the Times editorial board concludes, "Congress and the Administration also have not done enough to directly create jobs." Creating jobs is not just an economic necessity but a political imperative.

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When Doctor Doom speaks, I listen.

"The recovery is going to be subpar," Roubini said. "I see a one percent growth in the economy in the next few years. There will also be 11 percent unemployment next year and the recovery is going to be slow. It's going to feel like a recession even when it ends."

To clarify the U3 will be 11%. The U6 should reach twice that. U3 is the "official unemployment rate" as calculated by the Bureau of Labor Statistics. U6 is the broadest measure of unemployment. It includes those who are unemployed but no longer looking for work and those who are working part-time jobs because they can't find full-time employment. The U6 is already 20% or more in at least six states including California and Michigan.

On a second stimulus, Dr. Roubini adds that he thinks "there will be another one toward the end of the year. We need to have more shovel ready labor intensive infrastructure projects." He concludes that we'll need it. Yup.

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After watching Jon Stewart's take down of CNBC market guru Jim Cramer, my curiosity got the better of me and I opted to read what just what Mr. Cramer's complaints might be. I got 86 words into his rant before deciding that Mr. Cramer isn't interested in a debate on the merits of the President's economic proposals, he is interested in polemics.

After the White House briefing, Rush Limbaugh defended me as a wayward leftist who has seen the light. I am always glad to have any allies and defenders, but I do favor almost all of Obama's agenda, right down to having the rich pay more of their freight in this great country. It's just not the right time. We need to declare a war on unemployment and solve it before we let it get out of hand. We need to stop house-price depreciation. Neither the pork-laden fiscal stimulus . . .

If Mr. Cramer is going to assert that the fiscal stimulus is "pork-laden," then he is not engaging in an economic debate, he is trying to obfuscate and score political points. I realize that bombastic mad money style may play well on a financial entertainment program to a select audience but a serious economic debate of global consequences is not well served by such caustic framing that the President is the one responsible for the financial crisis. Some objectivity is required if you want to be taken seriously.

Both the Dow and the S&P 500 have fallen more than 25 percent this year. The Dow is at its lowest level since the spring of 1997, and the S&P 500 is at its lowest point since the fall of 1996. The Nasdaq, meanwhile, is at a six-year low. The Dow Jones Wilshire 5000 index, which reflects nearly all stocks traded in the country, is down 24.5 percent this year. That represents a loss of $2.7 trillion. It is the steepest decline since the Great Depression. But Mr. Cramer lays it all at the President's doorstep.

Mr. Cramer can bemoan "ad hominem" attacks but the fact of the matter is that when it comes to having calm or spirited rational debate, he is ill-suited. With Mr. Cramer, it's all about screaming how the Obama Administration has put "the Second Great Depression" on the nation's table. That, sir, is a leftover from 30 years of Reaganism. It's the carcass economy.

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Japan's GDP Contracts -12.7%
The government of Japan reported its GDP numbers for the 4Q08. Japan's real gross domestic product shrank at an annual rate of 12.7 percent from October to December. This marks the third consecutive quarter of economic contraction in the world's second largest economy. The Japanese economy is facing a declining export sector that had previously kept the economy afloat and it continues to be plagued by lackluster consumer spending and anemic business investment. The downturn is the most severe in Japan since the oil shocks of 1973-74. More from the New York Times.

The numbers are mind numbing. While the Japanese case is not wholly analogous to our own, there are some takeaways. One of the biggest mistakes that Japanese policy makers have made is to prematurely withdraw their fiscal stimulus in vain attempts at budgetary discipline. These fits and starts have simply put decimitated the tax receipts according to Richard Koo, chief economist at Nomura Securities. In this kind of environment, Dr. Koo argues that a "proactive fiscal policy is far more desirable" in sustaining the economy and thus raising tax revenue. If the economy stutters, then tax receipts collapse only aggravating the deficit further. This is sound advice on both sides of the Pacific.

Japanese officials are considering drafting a fresh fiscal stimulus package to stem the downturn before the economy collapses. Prime Minister Taro Aso has promised spending worth almost 50 trillion yen ($545 billion) in two packages.

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