Why the Social Market Economy Succeeds
Since World War II, Germany has served as Europe's economic anchor and managed to weather global and regional storms better than most other countries. The reason is not that it has been lucky, but that it has remained committed to a tried-and-tested policymaking approach anchored in classical economics.
COLOGNE – The COVID-19 pandemic has intensified ongoing debates about the future of capitalism and the economic framework best suited to meet the post-pandemic world’s long-term needs. Developed economies will, of course, need strong growth to offset the economic damage wrought by the virus, and to rise to the challenges posed by climate change and societal aging. And yet, across the developed world, the pace of economic growth has been slowing for decades, casting doubt on how these challenges will be met.
How should the gap between actual and necessary growth be closed? Should developed economies continue to focus on Keynesian demand management, thus risking the accumulation of ever more debt? Or should we shift to a longer-term, rules-based approach that anchors expectations and builds confidence, albeit at the expense of some policy discretion?
Such questions have become urgent, and yet are not being forthrightly addressed. Throughout the pandemic, the consensus has been that governments should intervene to boost aggregate demand through fiscal- and monetary-policy stimulus. Yet while a decisive crisis response was clearly necessary to avert an economic death spiral last spring, scant attention has been paid to the pitfalls of demand management – from the implications of massive government deficits to the potential for renewed inflation, lost business confidence, and future tax policies.