What would my great-uncle Lulu, better known as Ludwig Erhard, West Germany’s first and most famous economics minister and subsequent chancellor, do today if he were a policy maker in Washington?
The question comes from Cheri, and it got me thinking. So I asked my dad (pouring tea for his uncle and godfather above). Dad, who is also an economist, knows best how the gears of Lulu’s mind ground.
(Disclaimer: I am writing this not as a correspondent of The Economist, but only as a family member of Erhard’s.)
The first question is what he would have done before all of this transpired: Would this catastrophe have happened in the first place?I think he would have fought much earlier and more vehemently against this absurd “compensation” culture in America. (He was known as the Masshaltekanzler–ie, the chancellor who keeps things measured and reasonable.) The bonuses and salaries of some of the characters at the center of the current American crisis were obscene, and the short-term basis of their calculation counterproductive. So maybe this alone would have sufficed to prevent some of today’s excesses.He probably also would have railed against the unrestrained consumption mania that prevailed in America during the good years (which would have made him very unpopular in America). Savings rate = 0. This is why the crisis is now hitting so many so hard.He was always and implacably for a politically independent–completely independent!–central bank [ie, “Fed”] which was to have only one mandate: to preserve the value of the currency. (The Fed’s mission, by contrast, is to mind both the economy in general and prices in particular; but since Greenspan, economic growth seems to take precedence over prices and the currency.)Lulu was always very well informed and interested in new trends in banking, and he almost certainly would have demanded strict controls over these exotic new breeds of securities [credit-default swaps and what not].One question is whether he would have succeeded with these policies in America. Probably not. His style was to educate, and appeal to, the public directly. At his height, he was so popular and trusted among ordinary voters that he could cajole his own party into following his ideas in direct contravention even of the party’s platform. This style would not work today, and certainly not in America.What would he do today? The heart attack has already occurred, so now the patient first has to be kept alive. The trick is to keep him on life support without changing the underlying structure of the economy in ways that could lead to irreversible damage in the future.For example, Lulu would have been against giving Detroit, under the guise of life support, carte blanche to merge or form alliances that might become, in effect, cartels or quasi-monopolies. Even and especially in the banking market, he would have been concerned about creating super-institutions [“too big to fail”] that will sooner or later demand special treatment in Washington.Above all, he would have already started campaigning, with stump speeches and such, for free trade internationally, lest anybody anywhere jump to the disastrous conclusion that protectionism, even in specific industries, might be the answer. Such a turn would actually kill the “protected” industries in the medium term and lead to a cascade into even worse disaster [as happened during the depression: see the Smoot Hawley Tariffs].Most urgently: Re-establish confidence (perhaps Obama has the flair that Lulu once had). And get the inter-bank lending market working again.But he would have been concerned that the Fed’s current approach of just printing money might lead to inflation before long. He would also note that America has a pretty shoddy infrastructure today. If somebody were to fix it in a big way now [as Obama appears intent on doing], à la Keynes, even Lulu would find a sympathetic word. 😉 [Ie, ordinarily he would not be a Kenesian.]