picture alliance/dpa | Bernd Weißbrod

New investment strategies for economic reconstruction Rediscovering the Marshall Plan?

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One reason for the government’s perplexity is that it has not reached any kind of consensus about the road ahead. On the contrary, there is evidently a fundamental disagreement between the ideas on financing now current in the FDP on one side and the Greens and SPD on the other. The FDP is advocating a neoliberal conception of financial policy in which private actors are to be granted priority over state activities in all investment processes whatsoever. That is the reason why the state is caught in a trap that will end up limiting its own investment activity. On one hand, tax increases are being rejected, the revenue from which might be applied to investments, among other purposes. And on the other hand, due to the current, very restrictive interpretation of the debt brake (a law limiting new debt to no more than 0.35% of GDP; ed.), it has been denied the option of pre-financing its investments through funds available on capital markets.

As a result of this impasse, either public investments are directly blocked or else pressure is exerted to cut consumptive outlays – particularly for social-welfare purposes  – due to demands for the redeployment of available funds. In this way, a conflict is sparked between social security and the dynamics of investment, one which might also prove counterproductive for the investment process since it might diminish society’s willingness to accept social-welfare spending. What is more, the already unsteady economic climate is growing shakier.

It has turned out to be a grievous political mistake to anchor the debt brake in the constitution. 

In contrast to the FDP’s strategy, the SPD and the Greens want to strengthen both investments and social security, especially when the process of transformation toward environmental sustainability is involved. But right now, there is no simple majority in favor of such policies and certainly not one that would accept changes to the constitution. So, in retrospect the SPD’s consent, back in 2008, to anchor the debt brake in the constitution turned out to be a grievous political mistake.  So now, confronted with such obstacles, how might we push through the wide-ranging investments that are so urgently needed to secure our future?
Ultimately, the hopes of broad segments of the population for greater prosperity would be jeopardized if growth were to remain anemic, the infrastructure of public services were allowed to deteriorate further, and the transition to climate-friendly technologies  – and with it the effort to gain a technological edge in those areas  – continued to be postponed.

A desperately needed economic stimulus

The law requires us to abide by the debt brake in its current restrictive form. Although it is true that reform would be the preferred method for overcoming the wait-and-see attitude toward investment, no one should expect it to happen before the Bundestag elections despite signs of growing acceptance in the ranks of the CDU. To that extent, the numerous reform proposals being aired now in public debates will have to wait. Consequently, other ways will have to be found to push the economy onto a more dynamic investment path, which is desperately needed.
A dual investment strategy might help in the short run. It would mandate that the necessary public investments in service-provision be made as quickly as possible, while also stimulating private investments. Furthermore, taken together, those elements would deliver a much-needed economic stimulus that would put new wind in the sails of flaccid domestic demand. It would boost the still subdued expectations of businesspeople. But the main advantage is that it would advance the necessary reconstruction of the economy.

The state alone ought to erect the first pillar of this investment strategy: the root-and-branch renovation of public services including transportation, health care, and education. It would narrow our view unduly if we were to evaluate the benefits of those measures on an exclusively economic basis. We can assume that one of the crucial sources of the present dissatisfaction with and resistance against the reconstruction of the economy flows from the obvious deficiencies of public services. They complicate many people’s everyday lives and are perceived  – rightly  – as a failure of economic policy. Once public services have been palpably modernized, this negative attitude may fade, thereby easing the necessary transformation and minimizing its unavoidable insecurities.
To some extent, the Federal Government has started to tackle these improvements. For instance, there are already plans afoot for a renovation of railroad infrastructure and for fundamental reforms in the health care sector. Still, the financing of these measures has been secured only in part. Because they have an investment character, the financing of such innovations through debt would be unproblematic from an economic standpoint. However, current political majorities stand in the way of such solutions. 

It depends on the political will

All of these projects should be carried out using funds already allocated in the budget along with a technical »fix« of the debt brake which would allow for increased indebtedness depending on the state of the business cycle and which could be enacted through a directive issued by the Federal Finance Ministry – assuming that is what we want politically. The fundamental renovation of the educational system also depends on political will. In the past, the latter has not been fully covered financially; besides, it has been a matter for the federal states. One elegant approach would be to increase the inheritance tax on large fortunes. That tax goes directly to the states which could use it to improve the educational system. Unequal distribution of the revenue from inheritance taxes among states could be moderated by the financial equalization scheme. In the long run, a more productive educational system thus created would energize the entire economy.

To make the transformation of the private economy socially acceptable, considering the multiple changes and uncertainties that will accompany it, the modernization of public services will be a sine qua non. The key factor in ensuring future prosperity will be how quickly private productive capital can be redeployed. It has to happen quickly, because speed confers a competitive advantage in the sustainable-production-oriented global economy now taking shape. From that perspective, the ongoing blockade of financial policy is especially damaging. It will simply take too long to wait for a reform of the debt brake. We are in danger of losing our linkages to international markets.
In the short term, it might help to reflect back on the Marshall plan, which financed the reconstruction of West Germany after the Second World War. That program did not consist of subsidies or tax breaks for investments, but rather offered low-interest loans. It is true that this is a less advantageous kind of financing for the investors than the options discussed above, which explains why their stimulative effect might turn out to be less than expected. But the advantage is that it is achievable under the parameters of current legislation. This is so because the granting of loans, which eventually must be paid back with interest, does not fall under the debt brake. Here, we are talking about financial transactions in which expenditures by the state generate a capital gains yield. The latter arises either in the form of interest income for the loans granted or as the value of equity stakes held by business corporations acting as silent partners. Thus, those funds do not enter into the calculation of sovereign debt.

»A fund in the Reconstruction Loan Corporation suggests itself, one that should enable private investors to deposit funds as well.«

For example, if the Federal Government should furnish the Reconstruction Loan Corporation (which already administered the Marshall Plan) with the appropriate funds, the money could be used for the granting of loans or for silent-partner participation. Either way, the funds should be targeted to promote innovation that would accelerate the redesign of the economy toward greater sustainability. Here, it is all about private goods that, on average, promise to yield returns over the long haul. Thus, the establishment of a fund within the Reconstruction Loan Corporation suggests itself--one in which private investors, too, should be able to purchase equity stakes. The private shareholding option augments the available capital volume, thus bolstering the process of reconstruction. But private investors will only participate if they can make profits. Those expectations of profit should be met through interest income and gains from equity stakes. The returns would not have to be especially high, since the assets invested in the fund would be relatively safe due to the state’s simultaneous participation.

The scheme outlined above could turbocharge a faster process of reconstruction. That matters, because only a technological head start can yield export earnings sufficient to strengthen the growth dynamic  – and the well-paid employment opportunities – of the German economy. Reconstruction by itself will achieve such dynamism only to a limited extent, because that process merely replaces non-sustainable production capacities. In short, reconstruction per se does not generate additional productive capacity. Moreover, besides the costs of investing in the redesign of the economy, businesses will be doubly burdened, at least temporarily, by their need to purchase certificates for the CO2 emissions of their old technologies. Therefore, it is urgent that we provide additional positive incentives for investment to support firms and thereby accelerate the process. The export dynamic would be strengthened by a technological head start. In the end other countries will need those goods for their own restructuring. In this way, a dual investment strategy could link the social acceptance of economic renovation to a dynamic economy.

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