Curious contrast of public policies between Germany and the US

Superb column by Joshua Aizenman and Ilan Noy.

They say where US policies focused on increasing home owndership, those in Germnay looked at increasing education and vocational training.

 

During the years leading to the global crisis, the US and Germany were the dominant growth poles in the Americas and Europe, respectively (ADD CITE). Their position reflected their growth performance and their dominant size. Both countries were characterised by contrasting patterns of public policies towards home ownership and education – the US put greater public commitment to subsiding home ownership, whereas Germany put much greater public commitment towards education and vocational training.

The US has prioritised housing ownership, promoted by preferential tax treatment of mortgages and home ownership, subsidising quasi-public institutions designed to deepen the ownership of real estate.1  In the US, there is a lower and declining public commitment towards subsidising quality education (pre-school, primary, secondary, vocational, and tertiary levels). In contrast, Germany does not provide public subsidies for home ownership, and has a much deeper residential rental market. Germany is also committed towards deeper support of low-cost quality education, including a well-resourced vocational education and training system, combining public and private funding, aiming at preparing blue collar workers for the challenges facing labour in the modern economy.2

Why different policy prescriptions?

More plainly, the difference in policy emphasis between Germany and the US may just reflect different policy preferences. The lower home ownership rates in Germany are a result of a stronger desire to assist the lowest-income households through a more extensive social housing programme. In this case, both lower ownership rates and the provision of high-quality technical training are both a result of these policy targets (lower poverty/reducing inequality). US policymakers did not share this aim, but were more interested in electoral support from the middle class.

We also note that during 1994-2006 Japan shows a German-style non-bubbly housing market, and a correspondingly flat manufacturing-to-GDP ratio, while the UK is very similar to the US in terms of real estate appreciation and the decline of manufacturing.7

Why US chose this inefficient outcome?

While both parties in the US supported heavily subsidised home ownership, it is not obvious why an inefficient policy survives the test of time. If one should choose to subsidise only one sector by 6% of the GDP at time of scarcity of tax revenue, why is subsidising residential investment preferred to human capital and vocational training?8

The sustainability power of the US inefficient policy configuration may be explained by the dynamic effects of subsiding home ownership. Once a subsidy of residential investment was adopted, it provided immediate gains to house buyers and to the construction sector. Importantly, this policy generated a growing club of supporters, as scaling down the policy would lead to capital loses for homeowners and to the construction sector. In contrast, a policy of subsidising investment in human capital and vocational education may take a long time to generate the social and private rewards. The elimination of this policy may increase the quasi-rents of the older population, which has greater political clout relative to the young and the unborn.9

Pretty much short term policy goals over long term ones.

It is amazing that much of the Indian government policies are headed towards the US despite not being anywhere closer to the US incomes..The education policy is simply a waste with hardly any human capital addition…Meanewhile, it is distributing all the natural resources for virtually free to the haves and providing subsidies and other welfare programs to the poor….

Most of the cities are seeing a surge in allocation of land towards creating more housing (and shopping malls)..What is worse is that unlike in US where policies led to atleast a rise in home ownership. Here because of spiralling prices, the haves are simply adding more homes to their already owned homes. There is hardly any attempt to regulate the real estate sector and introduce proper rules for rental housing etc. On top of that, one cannot buy a house without paying anything in black. I mean why dont we first fix this black money issue in our own country before targeting Swiss, Mauritius etc.

The middle class is simply getting crushed not having any of the benefits except taking loans for everything.. Much of the growth story was built on the promise of the middle class and if things continue like this, a disaster is just around the corner..

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