Keynes and Germany

by Henry on July 22, 2010

A bloggingheads with Dan Drezner, where we discuss in passing the recent dust-up between Tyler Cowen and Paul Krugman on Keynesian demand-stimulation strategies and Germany (see here, here here, here. I’m mostly on Krugman’s side of this argument, but not entirely – a few points.

(1) Tyler says “Krugman also directs his attention at a secondary point in the argument, taking up a single paragraph in the column. He doesn’t touch the main point: Germany cut off fiscal stimulus early and focused on the real economy and they’re doing fine.”

Having done some research into this, I’m not sure that this is true. My understanding of events goes roughly as follows. Germany was initially highly reluctant to engage in fiscal stimulus, and made loud noises in various international fora about how bad an idea this was (the SPD finance minister being, interestingly, more vociferous on this point than the CDU chancellor). They came up with a sort-of-stimulus, much of which was a repackaging of spending that had already been announced. They were lambasted for this by a variety of sources, not only including US economists, but also hitherto spending averse senior German economists (the “Wise Men”) and large chunks of German business. Initially they stuck to their guns – see e.g. the attack on economic “experts” in Angela Merkel’s “Swabian housewife” speech – but eventually they folded, and came up with a genuinely very substantial fiscal spending package. Which is still being delivered – the current debate (which is helping precipitate a massive rise in discontent among German voters) is about what happens next. The right wing coalition has put forward a package that would cut spending sharply over the next few years, but its effects only really begin to kick in in 2012. Even still, the government is haemorrhaging political support.

You could even argue, if you wanted, that the current German export boom is mostly a result of the previous stimulus package – this claim is put forward in a recent piece in Der Spiegel. I think this argument can only go so far though – much of the boom is driven by the machine industry, which is doing as well as it is because of orders from China and other countries in the developing world that are continuing to develop their manufacturing capacity, and prepared to pay for high quality machinery. In other words, Germany is benefiting indirectly from China’s continued rise to prosperity (I’m grateful to Gary Herrigel, who keeps up with the German machine sector far better than I do, for a short email conversation about this, while absolving him of blame for any errors of interpretation etc).

(2) Tyler

I am not sure why the American left so near-unanimously lines up behind Keynesian recommendations these days. (Jeff Sachs is an exception in this regard.) There are other social democratic models for running a government, including that of Germany, and yet a kind of American “can do” spirit pervades our approach to fiscal policy, for better or worse. Commentators make various criticisms of Paul Krugman, but putting the normative aside I find it striking what an American thinker he is, including in his book The Conscience of a Liberal. Someone should write a nice (and non-normative) essay on this point, putting Krugman in proper historical context.

For what it’s worth, I’m reading a brand-new book by an American lefty which is a vigorous defense of the German model, strong aversion to debt, inflation and all. On which, more soon I hope. But I think that the claim here doesn’t quite work. In this instance at least (I’d also be interested to read the essay Tyler proposes – my mind is open on the broader question), I think that the exception is less Paul Krugman than Germany. Germany has, with the exception of an exceedingly brief and somewhat tentative flirtation in the late 1960s/early 1970s, been hostile to Keynesian ideas. The German “ordo-liberal approach” (of which the Merkel speech cited above is a stirring defence) may be fading, but was sufficient to inoculate Germany against ideas about fiscal stimulus. But here, Germany was the exception rather than the rule. Other Continental European countries took up Keynesian ideas more readily, and retained them better, albeit in quite different ways (see Johannes Lindvall’s recent article for further discussion). While certain features of Krugman’s argumentative style seem to me to be American, his basic arguments could fit quite well into the economic debates of several European countries.

(3) I’m also not convinced that the “German model” is a “social democratic model” as Tyler seems to suggest – indeed, the argument that it is seems to me to be a rather American one. From a US perspective, it looks quite social democratic indeed, but from the perspective of other European countries, it builds at least as much on ideas from right-of center Christian Democracy and the certainly-not-left-wing Ordoliberalismus mentioned above as from Social Democracy. That this isn’t easily apparent to Americans speaks to the impoverishment of debate on the American right, where “conservative” and “vigorously pro free-market” are effective synonyms. That said, where I think Tyler is right is in arguing that the German model is not necessarily deficient, and seems (whether through luck, design or some combination) to work out pretty well for Germans over the longer run. Keynesian demand management strategies are not a sine qua non of a decent and responsible political system.

(4) The real debate between Tyler and Paul seems to me to be twofold. One is over the actual effectiveness of Keynesian policy in recessions – where Tyler seems to me to be not entirely opposed in theory, but largely skeptical in practice. I’m not sure that this can be easily resolved given the murkiness of the data (I’m inclined myself to think that demand stimulation works – but only on the balance of probabilities – the evidence seems to me to be strongly suggestive but not compelling). The second is over whether the countries in question are at or around the zero bound, where Keynesian fiscal policy (assuming it does work) is the best tool available. This seems to me to be more fruitful ground for an actual argument – there should be decent empirical indicators that we can use to figure this out.

(5) The debate I would like them to be having is not about Germany’s internal stance towards fiscal strategy – but rather its external stance towards EU institutional change. My specific worries concern the institutional debate about how to fix economic and monetary union in the wake of the Greek crisis. The institutions of the European Union – the European Commission, the Council and the European Central Bank – seem to be engaged in some sort of informal competition to see who can come up with the most painful fiscal hairshirt to be imposed on EMU members to mitigate the risk of future bailouts. My very strong impression is that their enthusiasm for these proposals is propelled by their understanding of German preferences. But this seems to me to be horribly shortsighted. Rigid institutions are going to at best make it more difficult for states to engage in counter-cyclical spending. At worst, they may effectively seek to ban it. In the absence of any mechanisms for fiscal transfers, most countries suffering asymmetric shocks are going to have to adjust through wage cuts and increased unemployment. This is not going to work over the longer term – read Barry Eichengreen’s Golden Fetters book. And if you think that the legitimacy of the EU has been taking hits lately, just wait until the Cross of Euros starts to weigh on voters’ shoulders …

{ 100 comments }

1

Ginger Yellow 07.22.10 at 5:31 pm

It’s kind of funny as I have distinct memories of American conservatives pointing to relatively high unemployment and anaemic growth in pre-crisis Germany as their main example of the evils of European economic policy norms.

2

hix 07.22.10 at 5:49 pm

My impression is that the anger about the cuts and tax risis is mainly because they are so concentrated at the bottom, not so much about the general idear. Keynsianism just isnt much part of the German political debate – which makes lots of sense considering how unimportant local demand was during this crisis in Germany and how far less painfull unemployment is and how much Germany is justused to compared to the sometimes hysterical Keynsian America. The economic contraction was i think over 100% export industry driven, meaning the government sector still did grow substancial, just like construction and consumption a bit, but investment in machinery and exports were down a lot. We had this business as usual debates at the Presseclub between Süddeutsche and FAZ with the Süddeutsche guy argueing how great multipliers social spending has countered by the usual it takes to long and ratioanl expectation arguemnt, but that didnt even go to the point that politicians talked much about it.

3

piglet 07.22.10 at 6:06 pm

Part of the argument is just comical. It seems to me that especially American writers are lacking an adequate terminology to describe not just German but European economic policies. Cowen describes Germany as social democratic despite the fact that it was governed by conservatives for most of the past 30 years (heck, for most of its history!) and ironically, the brief period of social democratic government from 1998 to 2005 was about as un-social democratic as its gets. What Cowen means by “social democratic” is really “different from America” and it encompasses most of European economic history since Bismarck.

On the other side, Krugman and it seems Henry too, identify “social democratic” (or leftist or progressive) with Keynesianism. There is really no good reason for that (in fact, social democrats turn to Keynes usually to mask that they have given up on transforming capitalism at all). In that respect, Cowen is right. Obama’s stimulus policy may be Keynesian but it is certainly not social democratic by any stretch. Krugman’s insistence that you are either with Keynes or else has made his recent columns repetitive and uninteresting.

4

Henry 07.22.10 at 6:14 pm

piglet – no I don’t believe that at all, and I don’t think I say anything like it. I _do_ think that the period of greatest success for social democracy was linked with a kind of “Keynesianism” – but a kind of Keynesianism that had drifted very far away from Keynes’ own specific claims about demand stimulation strategy in depression. See Peter Hall’s book. There was a kind of elective affinity between “Keynesianism” and Keynesian strategies, but no more than that. To the extent that I think that Keynesian strategies make sense in times of crisis, it is for prudential reasons, not because it is somehow social democratic.

5

Castorp 07.22.10 at 6:42 pm

Henry you really need to send this to Matt Yglesias, who, like other American pundits, keeps describing German economic policy in terms of German fear of hyperinflation to the exclusion of everything you said above. As you rightly point out, the ordo-liberal paradigm–which became entrenched in the post-war era–is much more responsible for Germany’s Swabian Hausfrau approach than constructed memories of hyperinflation. The latter is merely the cautionary tale in ordo-liberal approach.

6

piglet 07.22.10 at 6:52 pm

Thanks for the clarification Henry. I am reading with great interest the Allen reference about German ordoliberalism. I have one remark about the use of the term “supply-side” economics. In US discourse, the term usually refers to “a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation.” (wikipedia) Allen uses the term in the sense of “an emphasis on investment over consumption”, and cites as an example that The billions of DM spent after German unification were presented as infrastructural investment, that is, economic supply rather than economic demand.”

When US Keynesians hear about German supply-side policies in that context, they are likely to get a wrong idea. American right-wingers espousing “supply-side economics” don’t usually talk about infrastructure investment.

7

Bónapart Ó Cúnasa 07.22.10 at 6:58 pm

The answer on your point (4), whether we’re at the zero bound or not is unfortunately as clear as mud too. The real question is, once short-term interest rates are at or near zero, can central banks stimulate the economy by committing to low rates for a long time or by quantitative easing. The Japanese didn’t have much success, but they only undertook QE in a half-hearted fashion, and whether what the Bank of England and the Fed have done has had any effect is lost in a fog of alternative counterfactual…

8

Ken Houghton 07.22.10 at 7:13 pm

castorp – Where do you think MY got that idea about Germany and hyperinflation by from Tyler Cowen?

Thought-experiment (it sounds better in the original German): assume five Swiss cantons A-E that are in equilibrium. For A-D, increase interest rates. Do not, however, adjusting the value of the currency that is common to the five.

Doesn’t E, by definition, look as if it is growing faster?

9

piglet 07.22.10 at 7:47 pm

“it sounds better in the original German” – what is “the original” of that thought experiment? Who invented it? And what’s its point? Just curious.

10

Tyler Cowen 07.22.10 at 8:08 pm

“Cut off stimulus” relative to what is one big question. Most of all, I’d start by noting that Obama, and Krugman, are the ones claiming the Germans have not done enough. Yet they’ve pretty much fixed unemployment. How can that be? They’re doing exactly what Krugman criticizes and yet it is working. It’s also true that they will achieve a near-balanced budget by 2016, which would be unthinkable for the US. I call that cutting off stimulus early, by most standards, not just Krugman’s. As you note, the recovery has come in exports, not domestic retail which is pretty flat. That suggests to me that the stimulus they had did not drive that recovery; you could to some degree credit their wage subsidies and call that a fiscal policy. As for Krugman I read him as coming out of the American Progressive tradition, in the earlier sense of that word.

11

Steve LaBonne 07.22.10 at 8:14 pm

I assume Tyler realizes that there’s a small logical problem with the idea that every country could do what Germany did- export itself out of the recession. (And he knows very well that Krugman has repeatedly made that very point.)

12

hix 07.22.10 at 8:34 pm

Again just for Steve LaBonne:
http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Tabellen/Content75/Gesamtwirtschaft,templateId=renderPrint.psml

Local consumption by both government and the private sector had a positive growth impact throughtout the crisis.

13

Henry 07.22.10 at 8:37 pm

Tyler – I may be misinterpreting here but your claim read to me as saying “the Germans have cut off the stimulus but they seem to be doing fine.” ‘Cut off’ is past tense, nicht wahr? But as best as I read it (and I _do_ have to do some research sometime soon on the actual spending program – I am working from secondary sources here), the cutoff has not happened yet. In other words – I don’t think that the evidence supports the “main point” of your article – that Germany “cut off” fiscal policy and is still “doing fine,” since Germany hasn’t cut off fiscal policy yet. Although, to be clear, it doesn’t disprove it either. Perhaps you could work up an argument about how future expectations of a cut-off ought to have consequences for current demand under some form of Keynesian assumptions – but I’m not sure what that would be, exactly, and that isn’t how I read your piece and your later explication of it.

On what others have said – my reading of statements by Obama (the Toronto letter) and Lael Brainard (some remarks she made at the Atlantic Council a couple of weeks ago) are that they do not say that Germany has already cut demand and this is a problem – instead, they say in diplomatic-speak that they do not want Germany or other states like Germany to do this too soon. Perhaps there are other statements that I am unaware of – if so, would be grateful to see them, since this is something I’m actively doing research on. And I haven’t done a trawl through Paul’s archives, but my memory is that he has been inveighing against Germany’s plans to introduce swingeing cuts in the future, which he believes would be too soon, rather than making the claim that Germany is already cutting back and suffering for it. Again, I may be wrong and misremembering, but my memory of his column and blog is that he did a lot of fulminating about Germany in late 2008, stopped saying much of anything from the beginning of 2009, when Germany did introduce a big stimulus, and only started up again in response to the very recent CDU and FDP ‘s proposals.

As noted above, I don’t think that fiscal policy drove the recovery, which I suspect (again I have to look at the figures properly) is primarily a result of China continuing to build up its manufacturing sector, and demanding lots of German machines and high quality inputs to do so. So my first approximation answer would be that Germany’s “doing fine” is not a result either of fiscal policy, or of it being cut off, but of exogenous circumstances (combined with its long term advantages in a specific set of sectors of production). On the wage subsidies as fiscal policy – from my own memories of interviewing machine manufacturers in B-W in 1999-2000, I would suspect that the supply-side consequences may also have been significant, in allowing companies to retain skilled workers, and to maintain a market for individuals with mechanical engineering skills.

14

Steve LaBonne 07.22.10 at 8:38 pm

Local consumption by both government and the private sector had a positive growth impact throughtout the crisis.

But not nearly enough to be anything like the whole story. So the German story is in fact a little bit of Keynes and a lot of exporting, and again not everybody can do the latter at the same time.

15

Jörgen in Germany 07.22.10 at 8:46 pm

The most important single point that sets off Germany from all others is its surplus in international trade. So, looking at Germany to prove or disprove any hypothesis doesn’t make sense. The US have only their own consumers (and the financial sector) to rely on for their GDP.
The problem of unemployment in Germany was mitigated by Kurzarbeit (shorter hours, partly compensated). That was enough to weather the storm. And now orders from India and China are rolling again.
I just see a problem with the Angela Merkel pressing other nations to take the same track, just without the trade surplus to rely on.
What works for Germany or maybe some other export oriented economy, Finland maybe, will not work in most other places.

16

ScentOfViolets 07.22.10 at 8:49 pm

But not nearly enough to be anything like the whole story. So the German story is in fact a little bit of Keynes and a lot of exporting, and again not everybody can do the latter at the same time.

Which is exactly what I have been understanding Krugman to be saying. The referenced “not enough” seems to be referring to the fact Germany helping itself isn’t helping anyone else (quite the contrary – a tragedy of the commons situtation), that everyone has to do their part to pull out of this dive, and so some sort of policy shift is indicated. Just my two cents, but I don’t see how anyone can read Krugman any other way on this.

17

piglet 07.22.10 at 8:50 pm

“And I haven’t done a trawl through Paul’s archives, but my memory is that he has been inveighing against Germany’s plans to introduce swingeing cuts in the future, which he believes would be too soon, rather than making the claim that Germany is already cutting back and suffering for it.”

Krugman has pretty much claimed that Everything Is Germany’s (or “Chermany’s”) Fault. Check out his “Dealing With Chermany” post. It doesn’t sound that he’s writing about hypothetical spending cuts sometime in 2012. Although I’ll admit that his writing hasn’t been all that clear recently.

18

Jörgen in Germany 07.22.10 at 8:59 pm

Paul Krugmans criticism of Germany was a lot about Germany expliting it’s trade surplus in a beggar thy neighbour way. There certainly is abig imbalance in Europe to Germany’s advantage, but this goes on it may break up the Euru Zone. Germany sells expensive cars and buys cheap food. German banks lend the balance to the poor food-producing countries. Then Germans complain about Greeks living above their means. Had the Greeks done as told, they wouldn’t have bought expensive German cars but maybe cheap Korean ones.
But the current economic regime allows Germany to export it’s way out of the crisis and the rest of Europe is left holding the bag.

19

piglet 07.22.10 at 8:59 pm

“The referenced “not enough” seems to be referring to the fact Germany helping itself isn’t helping anyone else (quite the contrary – a tragedy of the commons situtation)”

That is precisely the problem. Krugman has been insinuating that Germany is hurting the US, which is neither a rational nor polite thing to say (if that mattered), in fact it is more than preposterous. If Krugman keeps repeating that nonsense, he shouldn’t be surprised if nobody listens to him any more. The economic abyss that the US finds itself in is nobody else’s fault. It is kind of tragic that Krugman, who has been rightly criticizing many of the US policies that led to this point, is now weakening his own position with that finger-pointing to “Chermany” nonsense.

20

chris 07.22.10 at 9:02 pm

@Tyler: ISTM that when an American (I think) says to a mostly American audience “Germany has cut off stimulus and is doing fine”, there is a subtext of “and therefore the US could/should do the same”. But if Germany’s balance of trade is relevant, then that subtext doesn’t hold up, and IMO you should be more careful to qualify the Germany argument by noting the reasons why it doesn’t apply to the US. If you explicitly say “Germany doesn’t need stimulus because it has exports”, then that would more clearly expose that you need at least one of domestic demand or international demand.

21

Jörgen in Germany 07.22.10 at 9:02 pm

ScentOfViolets @ 16
I’m a slow typer, so when I finally submitted, I found that you already made my point.

22

chris 07.22.10 at 9:05 pm

Had the Greeks done as told, they wouldn’t have bought expensive German cars but maybe cheap Korean ones.

Or built cheap Greek ones.

23

piglet 07.22.10 at 9:07 pm

Another point that especially American observers need to understand is that the USA is in a very bad crisis. Germany is not. Germany has suffered some damage from the global financial crisis but even though its employment level has held almost steady. I visited in December 2008, when The Crisis was in full swing, and the newspaper headline was that Germany’s employment rate had reached record level.

Imagine Germany being in crisis and the US doing just fine. Would anybody talk about how the US needed to engage in fiscal expansion to help Germany? BS. The whole debate, in my view, is pretty much derailed and divorced from facts. The first question Krugman needs to answer, I submit, is this: “Why do you insist on discussing German economic policy at a tine when the US is going down the drain and something urgently needs to be done about it?”

24

piglet 07.22.10 at 9:09 pm

“The Crisis was in full swing, and the newspaper headline was that Germany’s employment rate had reached record level.”
Just to make sure: you have not misread. it is “employment level”, not “unemployment level”.

25

Jörgen in Germany 07.22.10 at 9:10 pm

Here we have another source of imbalance: it takes a large economy to run an auto industry. The Netherlands have long since given up, Sweden has recently . Chechia is building Volkswage under the Skoda brand. Entry to this market is extremely expensive, competion is tough and development costs are high.

26

Norwegian Guy 07.22.10 at 9:18 pm

German recovery is driven by fiscal stimulus and exports to China. But what have driven the Chinese recovery. Didn’t China have the largest fiscal stimulus package (per GDP) of all countries? I think the Chinese might have read Keynes too!

27

ScentOfViolets 07.22.10 at 9:31 pm

That is precisely the problem. Krugman has been insinuating that Germany is hurting the US, which is neither a rational nor polite thing to say (if that mattered), in fact it is more than preposterous.

Could you explain to me why you think this is preposterous?

If Krugman keeps repeating that nonsense, he shouldn’t be surprised if nobody listens to him any more. The economic abyss that the US finds itself in is nobody else’s fault.

Ahem. You know, I didn’t contribute one thin dime this financial crises (excuse me.) I haven’t used a credit card since some time before 2001, I bought my house with a (semi) traditional 30-year fixed interest mortgage, etc. And yet, as a taxpayer, I am obliged to bail out the big financial institutions, even though none of what they did is my fault. I don’t like the way the bailout was handled, not at all; nevertheless I will concede that financial intervention was a better gamble than alternative scenario of the collapse of these big banking entities.

Iow, if your line is that if you didn’t cause the problem you shouldn’t have to help solve it is all fine and dandy, but you better be consistent in your application of that principle (for all I know, maybe you are.)

28

ScentOfViolets 07.22.10 at 9:33 pm

@ 21: Well thanks for the props, but I’d prefer not to get it for displaying basic reading comprehension!

29

Doug 07.22.10 at 9:43 pm

Sehr geehrtes piglet, interessieren Sie sich für das Originale des Gedankenexperiments bei Nr 8, oder das Originale der Gedankenexperimente im Allgemein?

Im ersten Fall kann ich nicht besonders behilflich sein. Im zweiten ist es wahrscheinlich eine Andeutung der vielen Gedankenexperimente der Physik im spät 19. und früh 20. Jahrhundert.

30

Walt 07.22.10 at 9:52 pm

I don’t understand what you’re saying, Piglet. Krugman’s argument is perfectly clear. If there’s a worldwide recession, and if one country exports its way out of it, then it has exported the impact of the recession as well. Krugman is a Keynesian, and this is basic Keynesian economics.

This kind of export-led growth only works because someone (frequently the United States) is willing to run a current account deficit. While running a current account deficit is okay when the economy is booming, it’s harmful when the economy has considerable slack in it.

31

Mick L. 07.22.10 at 9:54 pm

RE: Peter Hall. Perhaps the ‘varieties of capitalism’ approach is helpful here. The distinction between liberal market economies (US, UK, Ireland, NZ, AUS) and co-ordinated market economies (Austria, Germany, France, Nordics, Benelux, Japan, Switzerland etc.) doesn’t rest on the willingness to utilise demand management but rather institutional differences in relation to labour market structure, firm structure etc and to a certain extent, the structure of the welfare state.

Didn’t Helmut Schmidt’s SPD/FDP government run a budget deficit from 78-80 as part of the ‘locomotive’ with Japan and the US in the last big attempt at international fiscal policy co-ordination? I think the Bundesbank might have even let the money growth run ahead of it’s targets a little too (shocking!).

32

piglet 07.22.10 at 10:08 pm

SoV: “Could you explain to me why you think this is preposterous?”

Because it is not just wrong but absurd, and smacks of an attempt at finger-pointing.

“You know, I didn’t contribute one thin dime this financial crises (excuse me.)”

Same here, and it’s not that I suggested you did, did I? What is your point, exactly?

Walt: “Krugman’s argument is perfectly clear. If there’s a worldwide recession, and if one country exports its way out of it then it has exported the impact of the recession as well.” Sorry but that is not clear at all. Hoe exactly does Germany coerce other countries into importing German stuff?

33

piglet 07.22.10 at 10:14 pm

SoV:

Iow, if your line is that if you didn’t cause the problem you shouldn’t have to help solve it is all fine and dandy, but you better be consistent in your application of that principle (for all I know, maybe you are.)

It’s not that I get to decide who should solve the problem but you are right, if I did have that power, I’d make sure that those who created the problem would be made to pay for it. Now in the context of the Krugman-Germany debate, this is irrelevant anyway. I mean, what are you arguing here? Since you are suffering unjustly from Wall Street’s excesses, Obama better make sure that some krauts are also made to suffer? As ridiculous as this is, it is the essence of Krugman’s “Chermany” post.

34

hix 07.22.10 at 10:26 pm

Broken record part three:

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Tabellen/Content75/Gesamtwirtschaft,templateId=renderPrint.psml

Gross domestic product1 EUR bn. 2,428.20 2,495.80 2,409.10
Final consumption expenditure EUR bn. 1,810.96 1,861.48 1,884.35
Final consumption expenditure (households and NPISHs) EUR bn. 1,375.39 1,409.71 1,410.81
Government final consumption expenditure EUR bn. 435.57 451.77 473.54
Gross fixed capital formation EUR bn. 455.53 474.71 429.86
Machinery and equipment EUR bn. 196.53 201.79 158.16
Construction EUR bn. 231.50 244.99 244.38
Other products EUR bn. 27.50 27.93 27.32
Changes in inventories and acquisitions less disposals of valuables EUR bn. -9.99 3.92 -18.24
Domestic uses EUR bn. 2,256.50 2,340.11 2,295.97
Balance of exports and imports EUR bn. 171.70 155.69 113.13
Exports2 EUR bn. 1,139.49 1,179.36 979.33
Imports2 EUR bn. 967.79 1,023.67 866.20

See, its not that hard to understand. Germany does in fact not export itsself out of the crisis rather Germany did import the crisis through a lack of exports. Its ridiculous to claim some “exports out of the crisis” theory based on one quarter of slightly above US growth after a year with a 2,4% negative differential, which can be entirly explained by an export demand shock. Demand for investment goods in most cases not consumption goods.

Or lets look at US specific numbers only for 2009, thats a 7billion Euro negative shock for Germany. http://ims.destatis.de/aussenhandel/Default.aspx
Quite a lot for Germany ~ -0,3%, on the other side of the Atlantic, that translates to arround +0,07% . Germany just doesnt matter for the US either way, to small, the other way round, the effect is more substancial, albeit also rather irrelevant for the bigger picture.

35

Cranky Observer 07.22.10 at 10:30 pm

> That said, where I think Tyler is right is in arguing that the German model is not
> necessarily deficient, and seems (whether through luck, design or some combination)
> to work out pretty well for Germans over the longer run.

Well, there is that entire 60 year run of industrial policy, with heavy government management of preferred industries, government intervention in labor-management relations, strong cultural bias against the “billionaire CEO” culture, and so forth. And of course the powerful emphasis on exports, which has to come at the expense of someone (one assumes partially by not allowing wealth to concentrate as it has in the US, but in large part out of the paycheck of the average worker). For some reasons conservatives such as Cowen seem to conveniently ignore this aspect of the German economy when it suits their needs to do so, since it cuts badly across the free market/free trade ideology.

Cranky

36

ScentOfViolets 07.22.10 at 10:59 pm

SoV: “Could you explain to me why you think this is preposterous?”

Because it is not just wrong but absurd, and smacks of an attempt at finger-pointing.

Rather than get into it with you again about what you meant you thing you said what you understood me to have said, I’ll just ask: Could you explain why what Krugman has said is not just wrong but is absurd and smacks of fingerpointing to the degree that it is preposterous?

Show, please, don’t tell.

37

ScentOfViolets 07.22.10 at 11:03 pm

It’s not that I get to decide who should solve the problem but you are right, if I did have that power, I’d make sure that those who created the problem would be made to pay for it. Now in the context of the Krugman-Germany debate, this is irrelevant anyway. I mean, what are you arguing here? Since you are suffering unjustly from Wall Street’s excesses, Obama better make sure that some krauts are also made to suffer? As ridiculous as this is, it is the essence of Krugman’s “Chermany” post.

No, I am saying that if this is your attitude elsewhere, then you better be foursquare against any sort of bailouts for the banksters.

I am also saying that sometimes it’s in the interest of other people to help fix a problem even if they didn’t cause it; if my neighbor’s house is on fire, I’ll help put it out if for no other reason that I don’t want the fire they started to become my problem. Surely this is elementary?

38

piglet 07.22.10 at 11:12 pm

Let me answer with some Krugman quotes:

“Oh, and while they rely on US demand to make up for their own contractionary policies, they’ll lecture us on how irresponsible we’re being, running those budget and current account deficits…. And it’s also important to send a message to the Germans: we are not going to let them export the consequences of their obsession with austerity.”

Combine that with the data showing that “Germany just doesn’t matter for the US either way” (hix), combine that with the fact that it is not in the power of the German government to coerce the US into importing German goods, combine that also with the fact that Germany is running deficits and far from implementing “contractionary” policies, etc. etc. Maybe that isn’t going to convince you that the quote is preposterous and I’ll have to live with that. But at the very least you’ll have to acknowledge that blaming German “austerity” isn’t going to make things better for Americans.

39

piglet 07.22.10 at 11:15 pm

“then you better be foursquare against any sort of bailouts for the banksters.”

Sure thing.

“I am also saying that sometimes it’s in the interest of other people to help fix a problem even if they didn’t cause it;”

Agreed, but doesn’t apply here. There’s simply not much that Germany could do for us even if they were so inclined.

40

Kevin Donoghue 07.22.10 at 11:17 pm

The real debate between Tyler and Paul seems to me ….

… to be about how to do economics. Paul Krugman uses models, the simpler the better provided they generate relevant insights. Tyler Cowen doesn’t. That is all.

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novakant 07.23.10 at 12:27 am

Why I’m against any sort of bank bailout:

http://www.rollingstone.com/politics/news/12697/64868

And if this is Keynesianism, well, then I’m against it as well.

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ScentOfViolets 07.23.10 at 1:52 am

Let me answer with some Krugman quotes:

“Oh, and while they rely on US demand to make up for their own contractionary policies, they’ll lecture us on how irresponsible we’re being, running those budget and current account deficits…. And it’s also important to send a message to the Germans: we are not going to let them export the consequences of their obsession with austerity.”

Combine that with the data showing that “Germany just doesn’t matter for the US either way” (hix), combine that with the fact that it is not in the power of the German government to coerce the US into importing German goods,

As far as I can tell, what you’re quoting has nothing to do with what you go on to say about “Germany just doesn’t matter for the US either way”. So again I don’t see how this is “Preposterous” or “Absurd”.

Since really – honestly and truly – I don’t see the reasoning here, could you explain the logical connection point by point?

combine that also with the fact that Germany is running deficits and far from implementing “contractionary” policies, etc. etc. Maybe that isn’t going to convince you that the quote is preposterous and I’ll have to live with that. But at the very least you’ll have to acknowledge that blaming German “austerity” isn’t going to make things better for Americans.

I think the consequences of German austerity are a little more roundabout than you seem to imply here. As I understand it, German austerity more directly effects the EU, and if the EU takes a dive, that will have an impact on Americans, and for the worse. “For want of a nail” and all that.

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Tyler Cowen 07.23.10 at 1:59 am

Henry, the decision is made past tense, you are correct that not all of the money has been spent yet (I apologize for the quick and misleading words), though it is imminent as it currently stands. I also think we agree that the evidence shows that both the downturn and the recovery are driven by real factors, not fiscal policy. That was my main point.

On Krugman, in June he wrote this:

“And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.

But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.

What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that don’t add up. Point this out, and they come up with different rationales, which also don’t add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another.” (http://www.nytimes.com/2010/06/18/opinion/18krugman.html)

I see that portrait as at variance with the facts, most of all the parallel with the Weimar deflation, which is more than a little exaggerated. And as I’ve pointed out on MR, the most important German fiscal policy is simply lots of automatic stabilizers, which I think work better than rapid ramp-ups of spending. Germany could do zero ramp-up and still have a pretty good stabilizing fiscal policy, compared to a lot of countries.

One could argue nonetheless that Germany is just about to fall off the cliff. They have a lot of exposure to China, and are vulnerable in that regard, but if you look at German trends themselves, what you see is that real economy restructuring has been effective and they are close to full employment, at least in the cyclical sense. They’re also exporting a lot more to the U.S., not just China by any means. That’s a sign of strength on the productivity side because the U.S. is still sluggish.

It had become an article of faith in the Keynesian blogosphere that Germany was shooting itself (and others) in the foot with tight fiscal policy and I wanted to correct that portrait. The better vision is that most of the good fiscal policy is “invisible” (spending is permanently high) and most of the recent success comes from real restructuring. Unless you disagree with that, I think that puts you closer to my side than to Krugman’s.

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ScentOfViolets 07.23.10 at 2:11 am

It had become an article of faith in the Keynesian blogosphere that Germany was shooting itself (and others) in the foot with tight fiscal policy and I wanted to correct that portrait. The better vision is that most of the good fiscal policy is “invisible” (spending is permanently high) and most of the recent success comes from real restructuring. Unless you disagree with that, I think that puts you closer to my side than to Krugman’s.

Uh-huh. We must read different blogs then. Or have a different definition of the “Keynesian Blogosphere”.

I hope my point is taken without having to say more.

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John Quiggin 07.23.10 at 3:44 am

A minor point, which also comes up in relation to Australia’s successful experience of fiscal stimulus is that, to the extent to which domestic stimulus was supplemented by export demand coming from China, that demand was itself due, in large measure to China’s large-scale resort to fiscal stimulus.

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gr 07.23.10 at 4:43 am

It’s certainly true that the German welfare state has always been a bi-partisan project, in the sense that the center-right Christian democrats support the core elements of the welfare state as much as the social democrats. It’s also true that this conservative support for the welfare state has ideological roots that differ to some extent from those you’d find on the center-left. But how does that show that Germany is not a social democracy? If the actual policies and institutions are those of a social democracy, it seems rather silly to make such a claim. What is more, the fact that the German welfare state has ideological support from the center-right, that there’s an ‘overlapping consensus’ in favor of it, is the main reason why it wasn’t gutted and dismantled in the fashion of Thatcher. So it’s a good thing if social democracy is supported from different ideological points of view. But I guess all that doesn’t quite fit the preferred narrative.

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tom bach 07.23.10 at 6:41 am

gr:
You are right on all counts.

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Tim Worstall 07.23.10 at 8:32 am

“There was a kind of elective affinity between “Keynesianism” and Keynesian strategies, but no more than that.”

Not sure there should be any surprise at that. One (incomplete but not entirely misleading) reading of social democracy would be that everything would be better if we had wise politicians and bureaucrats running things. The sort of Keynesianism (no, not simple fiscal expansion in recession/depression, but the detailed demand management that was tried, or at least claimed to be tried in the 60s and 70s) that is what I assume is meant by “Keynesianism” is that the econopmy would be better if we had it being run by wise politicians and bureaucrats.

Whether either of the two statements are actually true (I tend to think not but so what) is rather different from the observation that there’s an affinity between them, that people who believe one are likely to believe the other.

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Steve LaBonne 07.23.10 at 12:23 pm

Not sure there should be any surprise at that. One (incomplete but not entirely misleading) reading of social democracy would be that everything would be better if we had wise politicians and bureaucrats running things.

And one (incomplete but not entirely misleading) reading of libertarianism is that everything would be better if we had wise Galts running things. See what I did there?

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chris 07.23.10 at 2:16 pm

There’s simply not much that Germany could do for us even if they were so inclined.

Buy more American-made goods and balance trade between our two nations?

ISTM that part of the point of saying that not everyone can export their way out of the crisis is that any one country that *does* manage to export its way out is pushing everyone else deeper in. And a trade balance (or imbalance) is made up of two trade flows. So if Germany wants to stop beggaring its neighbors, maybe it should buy stuff from them.

Or, of course, we could take steps to stop buying so much from them — i.e. protectionism.

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Norwegian Guy 07.23.10 at 2:26 pm

Any discussion of welfare states and social democracy would be incomplete without a reference to Gøsta Esping-Andersen’s work on welfare state typoligies, The Three Worlds of Welfare Capitalism. Here, Germany, France and much of the rest of Continential Europe are considered conservative (corporatist- statist) welfare states, while the social democratic welfare states are found in Scandinavia, and liberal welfare states in the English-speaking world.

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Tim Worstall 07.23.10 at 3:19 pm

“And one (incomplete but not entirely misleading) reading of libertarianism is that everything would be better if we had wise Galts running things.”

An odd reading, certainly, given that Galt is famous exactly for refusing to run things and that libertarianism tends to be emphasising that no one should be “running” things.

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Henry 07.23.10 at 3:21 pm

bq. Henry, the decision is made past tense, you are correct that not all of the money has been spent yet (I apologize for the quick and misleading words), though it is imminent as it currently stands.

No problem, obviously. If I were held to account for every sentence I wrote in a little too much of a hurry, I’d be in serious trouble. And it does sound as if we are more in agreement than I thought we were. But I do still think we disagree on some important stuff (or maybe, since this is something that you haven’t written on yet to my knowledge, we don’t disagree – but I’d love to know what you think). When I read Paul, I think that his underlying point is a collective action one. If you are in an international economy, with lots of leakages across frontiers, and you think that fiscal stimulus is needed to prevent a Great Depression style double dip, then (a) you want everyone to coordinate on fiscal policy, and (b) you could plausibly see countries like Germany as free riders if they don’t boost AD themselves, but rely on exporting to other countries which have taken fiscal measures to boost demand in order to get out of recession. I think that there are plausible counter-arguments to this, and plausible counter-arguments to the counter-arguments – but that is the debate between you and Paul.

What I’m worried about is less Germany’s internal willingness or unwillingness to engage in fiscal policy (although I find the determinants of this fascinating, and am trying to figure them out for research), than the apparent desire of Germany to make everyone else in Europe look like her, with strong domestic legislation to minimize deficits coupled with punishments for those countries that do not conform. And ideally, the German government would like _everyone_ to be ordoliberals – Merkel’s speeches are pretty clear on this. The question here is: the German model works for Germany – but does it work for everyone else? And will some form of it be a credible foundation for a revamped EMU? I don’t think so – but it is what Germany is trying to shove down the throats of other European states. With the willing assistance of the ECB – Trichet’s op-ed in the FT this morning was something special (when the FT itself in its front page story describes an op-ed in its own newspaper as ‘strident’ …). This is, I think, the real debate in Europe at the moment, and I would love to see you (and indeed Paul) take up this set of questions.

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Henry 07.23.10 at 3:25 pm

gr – the point I am trying to make is that the German political system is an amalgam between the ideas of social democrats, and a quite different set of ideas descended from certain strains of conservatism. In fairness, I should note that there are other perspectives on this – see the back and forth in the Sheri Berman seminar that we did a couple of years ago (there’s a link at the top right of the main page).

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Walt 07.23.10 at 3:25 pm

Tim, it only requires the tiniest of mental jumps to get Steve’s point. It’s just so small. You can do it!

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piglet 07.23.10 at 6:17 pm

chris: “Buy more American-made goods and balance trade between our two nations?”

It is not in the power of the German government to decide to “balance trade” with the US. Do I need to get more specific? And about the “buy American” thing, it would make some sense to tell that to Americans. But Germans? What do you expect, that they start a solidarity campaign to help ailing USA, out of sympathy with Obama, like the “Bananas from Nicaragua” campaigns of old? These suggestions are just weird.

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gman 07.23.10 at 6:20 pm

“libertarianism tends to be emphasising that no one should be “running” things.”
Which why libertarianism is so silly…some entity ALWAYS ends up “running things”..corps. lobbyist, unions, churches, armed gangs or whatever. Makes for great fanstasy…things would great but for…

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gman 07.23.10 at 6:26 pm

“It is not in the power of the German government to decide to “balance trade” with the US.”
So Germany does not have a policies that fosters it massive trade surplus? That trade surplus is by and large a product of policies that would be decried by Cowen and his ilk as “government picking winners” if tried here in the US.

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ScentOfViolets 07.23.10 at 8:12 pm

ISTM that part of the point of saying that not everyone can export their way out of the crisis is that any one country that does manage to export its way out is pushing everyone else deeper in. And a trade balance (or imbalance) is made up of two trade flows. So if Germany wants to stop beggaring its neighbors, maybe it should buy stuff from them.

The other point here is that while Germany may not be able to directly affect the U.S.’s trade imbalances to any great extent, Germany’s trade imbalance with other countries does have such an effect. That’s why there is all of that concern about the economic well-being of the PIGGS, and why Greece’s debt was restructured rather than run the risk of having it default and having it pull down the the rest of the EU with is.

I can’t believe that people who feel so free to comment on this situation don’t know these basic facts. They’ve only been in the media for at least the last six months or so.

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novakant 07.23.10 at 8:24 pm

Yeah, if only Germans had bought more Greek and Irish cars, we wouldn’t be in such a mess.

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piglet 07.23.10 at 8:25 pm

Well I’m open. What exactly do you guys think the German government could do to “balance trade” with the US? What exactly are the “policies that foster it massive trade surplus”? And are there US policies fostering its trade deficit? Isn’t the importer the one who has the power to make the buying decision, rather than the exporter who can only export as long as there is an importer?

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hix 07.23.10 at 8:39 pm

” So Germany does not have a policies that fosters it massive trade surplus?”

No. It doesnt – no matter how long people insinuate such without even a single example to justify some fuck the world, lets close the borders (expect for oil imports, how those might be paid without trade who knows…) and pretend other countries dont exist policy.

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ScentOfViolets 07.23.10 at 9:17 pm

Well I’m open. What exactly do you guys think the German government could do to “balance trade” with the US? What exactly are the “policies that foster it massive trade surplus”? And are there US policies fostering its trade deficit?

Isn’t this covered in basic economics? You know, things like tariffs, various import and export fees, quotas, that sort of thing? And going up in subtlety and sophistication form there?

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hix 07.23.10 at 9:37 pm

Or maybe Germany could demand fingerprints of every finger from any foreigner that wants to enter their country so that people are scared off, thus reducing tourism inflows.

Wait, i forgot, thats the thing that other country with the huge deficit and the finance fraud industry does, thus increasing the deficit even more without any good reason.

65

dieter 07.23.10 at 9:40 pm

I have posted this before on Tyler Cowen’s blog:

The Germans are mercantilists, as I have pointed out in previous comments.

This worked in the past, when the Germans had their own currency. The Bundesbank recycled the export surplusses through low interest rates and raised national income with frequent currency appreciations, while everybody else, including the unions were hell-bent on exporting as much as possible.

The German elites, starting possibly with Helmut Kohl, forgot how mercantilist export orientation and monetary policy fit together.

German economist Wilhelm Nölling explains how it worked in this (german) video:

http://www.youtube.com/watch?v=SMcyaBlSL8g#t=03m22s

****
@Henry: I very much enjoy your bloggingheads appearances. Looking forward to hang out more on this blog.

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piglet 07.23.10 at 9:50 pm

“Isn’t this covered in basic economics?” LOL, is that hand-waving all you can muster? And to appeal to nothing less than “basic economics”? You of all people?

If you are trying to say that Germany is engaging in some sort of unfair trade practices, be specific. But remember that trade policy is pretty much EU domain and that the US would appeal to the WTO if this were happening. One more thing, Krugman at one point seemed to allege that the EU was devaluing the Euro. That is nonsense and I can tell you that the Germans specifically hate to see the Euro fall – they love a strong currency, not realizing how much it hurts the export industry.

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dieter 07.23.10 at 9:50 pm

Let me cut and paste two other of my comments on Tyler’s blog.
(“You” refers to Tyler Cowen)

*****
You are reading too much sophistication into german intellectual opinion.

Germans are mercantilists of a calvinist kind. There isn’t anything more to it. The Germans dont reject Keynesianism. They are unaware of it, as much as they are unaware of classical economics or Ricardo.

Macro economists play almost no role in public policy debates. The go to persons for wisdom about the economy are industrialists and bankers.

I have never seen trade discussed in anything but extremely negative terms. Trade is perceived as cut-throat fight for survival. It is a matter of common knowledge that Germans have to be at the top in order to survive. (pre Ricardo thinking)

Wealth is largely attributed to lack of competition in the past and “social market economics” (meaning welfare and labor regulation).
This standard of living is seen as under threat and no longer affordable, now that China, Eastern Europe and other places also compete for work.

When the crisis hit, president Horst Köhler, who recently resigned, proclaimed that the crisis was supposedly caused by Germans living beyond their means.

The problem with unemployment is idleness, not lack of income and consumption for the unemployed, or lack of macroeconomic output. That is why the Red-Green coalition under Schröder introduced subsidies for low wage work and even completely useless make-work agencies called “Beschäftigungsagentur”, where unemployed women have to knit socks, which are then given away. (I am not kidding).

This created, together with other policies, contrary to your claim in item #7, an explosion of low wage jobs.

Only the countercyclical spending aspect of Keynesianism is accepted in Germany as a kind of make-work program (to combat individual idleness) and this is entirety of what is understood as “Keynesianism”. (no multiplier effect, aggregate demand, monetary policy).

The mercantilist worldview was only recently dented, when the magazine “Der Spiegel” pointed out after months of Greece bashing that the commonly proposed solutions can’t work, because not everybody can have a trade surplus. This conundrum is now frequently mentioned as if it were a new and confusing discovery. The chattering classes don’t know quite yet, what to make of that. Some reject the thought as some kind of mind trick, conjured up by those who envy Germany’s success. Some claim that exports within the common market don’t matter anyway and propose that Greek should export to other continents as a solution.

Anyway, Tyler, I would suggest that you throw away everything you know about economics before reading a german newspaper article on the subject. What appears to you like a sophisticated, long term Austro-Hayekian view might just be unsophisticated, mercantilist gibberish, given different assumptions of how the world works.

*****

More on the Linke and reforms.

The Linke believes, like everybody else, that trade and globalization is a cut-throat, zero-sum race to the bottom. While the other parties believe that this is an inevitable fate, the Linke wants to introduce tariffs and trade barriers against unfair competition on the european level.

The reason given for labor market reforms are not rigidities leading to higher unemployment, individual choice vs. collective consumption, effectiveness of private investments vs. public expenditures, etc., but rather “Lohnnebenkosten” (non-wage labour costs).

The german edition of Wikipedia is rather unsurprisingly the only one that has an entire article devoted to it:
http://de.wikipedia.org/wiki/Lohnnebenkosten

Income taxes and payroll taxes are primarily perceived as a cost on employers, which undermine export competitiveness.

Cuts on top marginal rates were introduced in order to prevent brain drain, not based on supply side reasoning.

Basically anglo-saxon neoliberal reforms are reinterpreted in the calvinist, mercantilist framework and preceived as survivalist necessities, rather than optimistic and wealth creating.

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ScentOfViolets 07.23.10 at 10:14 pm

“Isn’t this covered in basic economics?” LOL, is that hand-waving all you can muster? And to appeal to nothing less than “basic economics”? You of all people?

If you are trying to say that Germany is engaging in some sort of unfair trade practices, be specific.

I’m unsure of what you’re asking here, and I’m wondering what I’ve done to earn this uncivil response. The (rather generic) question as I understand it was:

Well I’m open. What exactly do you guys think the German government could do to “balance trade” with the US? What exactly are the “policies that foster it massive trade surplus”? And are there US policies fostering its trade deficit?

To which I replied with some generic textbook examples – import and export quotas, tariffs, currency manipulation, etc. I’m not sure what else you need here. Here’s one recent column by Krugman to get an idea of what everyone is talking about.

Remember, if you want answers to your questions . . . you’ve got to ask them first, and in a way that people can understand them. Would you care to rephrase whatever question you may have?

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Steve LaBonne 07.23.10 at 10:44 pm

I don’t speak for anyone else, but I don’t have any problem with the ability of the Germans (partly) to export their way out of the crisis. My point was simply the logical one that it’s impossible for everybody to do that at the same time, which means that Germany is not necessarily a model for other countries.

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hix 07.23.10 at 11:59 pm

Not true, everyone can and should export out of the crisis. Thats exactly how the higher gdp levels pre crisis were achieved with more exports by everyone. The economic contraction was very much concentrated in international trade expect for those nations that had an overconsumption problem. Those will just have to finally cut the fingerpointing at other and the denialism, come to terms with a new non debt financed lower lifing standard and start to export aswell.

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Norwegian Guy 07.24.10 at 2:45 am

Keynes did have a solution to the problem of trade imbalances; an International Clearing Union with a currency called bancor. This would prevent countries from running up large trade surpluses or trade deficits, but was rejected by the USA in the negotiations in 1944. Then he died two years later, and it was soon forgotten that his ideas went far beyond countercyclical spending to increase aggregate demand, important as it is.

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Steve LaBonne 07.24.10 at 3:51 am

Not true, everyone can and should export out of the crisis.

Uh, no. Everybody can’t run a trade surplus simultaneously. Don’t you see a teeny, weeny logical problem with that?

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novakant 07.24.10 at 10:14 am

I don’t think international trade can be adequately described as a zero sum game and economic policy doesn’t work like a faucet you can simply adjust to your liking, even if you wanted to. There are actual goods being traded and used, there is a demand for them, some countries are better at making them than others for all sorts of reasons… – no really.

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IM 07.24.10 at 11:54 am

I want to second Dieter. You can’t overestimate how primitive the level of economic discourse is in Germany. Very mercantilistic, exports as a zero-sum game, debt as guilt, a secular calvinism.

The actual policy was a lot of automatic stabilisers and a bit of stimulus. Kurzrabeit wa smostly automatic stabilisising with a bit of stimulus. So the export industries could keep hier employees on. The Abwrackprämie wa stimulus and helped our second (or first) export industry, cars. All thatkept umemloymant low, but at a considerable public cost. The welfare state in action.

But we are fine – and that after massive state intervention – regarding unemployment. Growth was hit much hader then elesewhere and still has not come back. We did shrink 5% in 2009 and will only grow 1% or son in 2010. How exactly is this success?

How some one like Tyler Cown, who thinks our welfare state is obsolete, can twist considerable government spending into a paean to austerity is beyond me.

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IM 07.24.10 at 11:56 am

One other thing. If you look at the deficits in 2009 and 2010, Germany is probably in t he best position among western countries. That makes our obsession with austerity even more idiotic.

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IM 07.24.10 at 1:23 pm

I think there is no dispute the the crisis in Germany., starting in the last quarter of 2008 and ending (perhaps) in this quarter, is a quite simple affair. It was caused by a strong drop in exports and is cured now by a recovery in exports. I hope theres is consensus about that.

Now that caused the drop in exports? There is a standard mercantilist or supply-side or austrian explanation: German exports were not competitive enough. But does anybody really wants to propose that that – a sudden loss of ability to compete – happened in erman in ate 2008?

That leaves the other explanation: A drop in demand. So the crisis in Germany was caused by a drop in demand and is now ended by demand coming back.

A purely Keynesian crisis, in other words.

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Steve LaBonne 07.24.10 at 1:42 pm

I don’t think international trade can be adequately described as a zero sum game and economic policy doesn’t work like a faucet you can simply adjust to your liking, even if you wanted to. There are actual goods being traded and used, there is a demand for them, some countries are better at making them than others for all sorts of reasons… – no really.

You can’t “export your way out of unemployment” while running a trade deficit, and everybody can’t run a trade surplus at the same time… -no really.

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RandomGermanDude 07.24.10 at 2:19 pm

Calling austerity idiotic when acquittance payments are the 2nd largest block in the federal budget strikes me as odd. I don’t care if some our neighbors are even worse at handling their budget. Doesn’t make our situation better.

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Current 07.24.10 at 2:35 pm

@76 IM,

“That leaves the other explanation: A drop in demand. So the crisis in Germany was caused by a drop in demand and is now ended by demand coming back.

A purely Keynesian crisis, in other words.”

I don’t think folks around here know what Non-Keynesian economists actually wrote and said. Everyone agrees that a fall in demand for exports from a particular country due to external factors can cause a recession in that country. It’s not a particularly Keynesian view.

80

Tyler Cowen 07.24.10 at 2:48 pm

Can everyone run a net trade surplus? No. Can everyone produce more and export more, in a manner which aids recovery? Yes, if it’s through higher productivity and greater flexibility in labor markets, as the Germans have done.

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Steve LaBonne 07.24.10 at 3:13 pm

Can everyone produce more and export more, in a manner which aids recovery? Yes, if it’s through higher productivity and greater flexibility in labor markets, as the Germans have done.

This is a very slippery formulation. If you don’t think about it very much sounds as though it makes sense- rising tide, boats, etc. However, over a finite time period a large number of countries cannot all, at the same time, increase production AND sell more goods abroad AND increase consumption of one another’s goods so that every country has a market for its increased exports. This is a fairy tale. Back in the real world, in real recession conditions, a country that is able to jack up its exports in order to get its own workers back to work is effectively exporting unemployment.

It is simply not the case that everybody can follow Germany’s path out of the crisis. Especially since the Chinese can only buy so many machine tools. (Which they will ultimately use to out-compete the Germans in their other export markets, so there’s also a question of just how sustainable this strategy is. In fact, judging by the current paths of German and Chinese export statistics, it may already have run its course.)

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Consumatopia 07.24.10 at 4:14 pm

Back in the real world, in real recession conditions, a country that is able to jack up its exports in order to get its own workers back to work is effectively exporting unemployment.

Even in theory world, it makes no sense that the solution for our surplus labor problem is for everyone to be more productive.

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hix 07.24.10 at 4:16 pm

When did exports every mean “trade surplus”. Exports, or export orientation as an economic orientation and mercantilism are two very different policies. Vast surpluses, or in the US case vast deficits can be achieved with very limited exports or imports compared to other open economies with very balanced current accounts. Its the mercantilism that focuses on surpluses.

You so miss the point of German export orientation. While trade surpluses are not considered a sin by large, there are very public anounced expectations both to the right (Sinn) and left(Bofinger) of the economic spectrum and they sure arent considered some great basic virtue in anyway. The position towards the overall exports is quite different – high exports, with the usual flipside of high imports are very much seen as virtue. That goes beyond economics also touches general foreign policy orientations.

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Steve LaBonne 07.24.10 at 4:38 pm

It’s not about “sins”, it’s about the impossibility (outside of highly contrived models with no relevance to the real world) of everybody increasing exports at the same time- who’s going to do the increased importing this entails? I’m not knocking Germany, I’m simply pointing out that it’s not possible for every country to simultaneously follow their path.

I’m not the one who doesn’t get it. And the “it” is not something abstruse.

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ScentOfViolets 07.24.10 at 6:49 pm

Can everyone run a net trade surplus? No. Can everyone produce more and export more, in a manner which aids recovery? Yes, if it’s through higher productivity and greater flexibility in labor markets, as the Germans have done.

Sigh. Given the conversation up to this point, I can only infer that you think Germany is not running a trade surplus.

Don’t you have another Megan McArdle blunder you have to go support?

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ScentOfViolets 07.24.10 at 6:54 pm

It’s not about “sins”, it’s about the impossibility (outside of highly contrived models with no relevance to the real world) of everybody increasing exports at the same time- who’s going to do the increased importing this entails? I’m not knocking Germany, I’m simply pointing out that it’s not possible for every country to simultaneously follow their path.

I’m not the one who doesn’t get it. And the “it” is not something abstruse.

Ironically, everyone can increase both exports and imports in this situation if their governments are engaged in Keynesian policies. I don’t know whether the game here is to pretend not to get it, or to babble nonsense and then claim that the rest of us don’t get it because we’re not smart enough. Either way, I find it extremely hard to believe this is being said in anything like good faith.

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Cranky Observer 07.24.10 at 11:28 pm

> However, over a finite time period a large number of countries cannot
> all, at the same time, increase production AND sell more goods abroad
> AND increase consumption of one another’s goods so that every country
> has a market for its increased exports.

Well, between 1700 and 1900 the Atlantic trading nations did essentially that, although admittedly at that time each nation/region tended to have certain classes of exports that it dominated and others that it could not or did not produce. In practice not impossible, but given the structure of modern economies with much more widespread technology of production and instantaneous transfer of information much less likely to occur.

Cranky

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Consumatopia 07.25.10 at 2:50 am

Yes, of course it’s possible to increase imports and exports simultaneously, with the volume of trading rising even as the trade balance stays the same. If you have full employment, this will probably mean you can enjoy more efficient production and larger consumption (comparative advantage yadda yadda).

But if you’re not at full employment, this doesn’t move you any closer. You gain the jobs making the new exports, you lose the jobs making stuff you now import. In fact, if you’re more efficient now, you might even experience a net loss of jobs.

It’s like trying to lose weight by eating more food so you can run further to burn more calories.

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alex 07.25.10 at 7:37 am

If you’re importing things that weren’t previously made in your country, why should that make people unemployed? It’s an argument that works at a level of primitive autarky, but not for a modern consumer economy – we’ve been buying things from other countries, without having full employment, and yet without immiserating ourselves, for hundreds of years.

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Bruce Wilder 07.25.10 at 8:51 am

Hello, people! There’s this strange thing called “money”.

Of course, as Cranky says, every country could become more specialized and productive, trade would increase; every country would export more and import more. No problemo!

The impasse isn’t over trade, per se. The impasse is over “money” and payment flows. It is the balance of payments, not the balance of trade, which meets the constraint that not every country can simultaneously run a surplus.

German policy is great for Germany, but lousy for Spain and Portugal and Italy. Unemployment is “solved” in Germany, because unemployment isn’t a problem in Germany. It’s a problem in Spain, though. And, that’s not a fable about German virtue and Spanish vice. It’s a story of “money” and financial shell games, of German banks making foolish loans for foolish investments, and then insisting that the loans be paid back in full, by people, who haven’t been made more productive by the investments financed by the loans. It’s a story of very sticky nominal prices for German loans and very “flexible” wages, especially for Spaniards.

I’m sure its great that the Germans are so averse to debt; it would be so much better if they had been more averse to creating debt for Spaniards, or driving up Spanish real estate prices.

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novakant 07.25.10 at 12:24 pm

It’s pretty simple: Brown et al have been lecturing everybody and their dog on the superiority of a neoliberal approach to economics for more than a decade and once it became clear that their model had failed completely and miserably, they immediately switched their position to the other end of the ideological spectrum (call it “Keynesianism” if it makes you happy), demanding that everybody embrace it and follow the new marching orders. Parts of the left have jumped on the bandwagon, because they see it as an opportunity to realize their life-long dream of a planned and rational economic system, others just can’t get used to the fact that their country might not be to dog anymore and want somebody else to suffer too. That might be all too human, but consider me unimpressed.

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Consumatopia 07.25.10 at 3:47 pm

If you’re importing things that weren’t previously made in your country, why should that make people unemployed?

If you’re in a recession, why do you expect people to start buying lots of new things they weren’t importing or making domestically before? This is a “recovery” solution that assumes recovery has already taken place.

we’ve been buying things from other countries, without having full employment, and yet without immiserating ourselves, for hundreds of years.

“full employment” usually means no cyclical employment, not literally 0% unemployment. We’ve spent most of the last “hundreds of years” closer to full employment than we are now.

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IM 07.25.10 at 4:40 pm

@current: that is not the point here. Fine, everyone agrees that demand matters. and what is the solution to a drop in demand? Ant is not a lack in demand for germman exports only; the same happend in Japan after all.

@tyler: I am not sure what country you are talking about, but it can’t be gernany in 2009/2010.

Can everyone produce more and export more, in a manner which aids recovery? Yes, if it’s through higher productivity and greater flexibility in labor markets, as the Germans have done.

Germany did not produce more but less. Caused by a drop in exports. Or do you think the economy did shrink in 2009 (-5.0%) and did produce more.

The flexibility in the labour market did not change in these one and a half years.

Higher productivity: productivity in Germany dropped since late 2008. Lower utilisation of capacity and a policy of labour hoarding pursued by employers, unions and the government. Unemployment is low because of Kurzarbeit; the classical right-wing critique of such measures is that they mask unemployment.

Now in the US there was and is a productivity miracle during the crisis, but at a cost: High unemployment.

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chris 07.26.10 at 3:58 pm

Even in theory world, it makes no sense that the solution for our surplus labor problem is for everyone to be more productive.

The solution for a surplus labor problem is to drive up the price of labor. Then workers won’t feel compelled to sell so much of it to support themselves and will take some leisure instead, taking some labor off the market and eliminating the surplus. Reduced hours worked per worker (or per family unit) could solve the labor surplus without leaving unemployment concentrated in a few hands, if wages were high enough to support a sufficient lifestyle on a smaller number of hours worked.

Labor has an inverted supply curve: the lower the price, the higher the quantity workers seek to sell to support themselves. People don’t react to low wages by staying home, but by looking for second and third jobs, because refusing to sell their labor isn’t really an option. Few people get a second job to afford a Ferrari, because the second job is more immiserating than the Ferrari is beneficial. But they *do* get a second job to make the rent and eat, because not doing those things is even *more* immiserating. If they could make the rent and eat on one job, then they wouldn’t look for a second and crowd out another worker who wants that job as his first job.

(Or to put it the other way: why isn’t the surplus of labor seen as a shortage of the complements of labor, i.e. means of production? Because there’s no market for higher output; Say’s Law has failed.)

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piglet 07.27.10 at 7:39 pm

SoV 68, there was no intention to be uncivil but your response made me laugh. I asked a straightforward question: “What exactly do you guys think the German government could do to “balance trade” with the US?”

chris (50) at least attempted a specific answer – “Buy more American-made goods” – but it is hardly convincing (to put it mildly). Your, SoV, response was some hand-waving and referring to so-called “basic economics”, and that is weak to say the least. What I find especially ridiculous in the debate so far has been the suggestion that Germany (or China) should just go ahead and “balance trade”, as if a country could unilaterally decide to do that. What is totally missing from the whole “Germany is exporting too much” meme is that there are no exports without imports, and the logical thing to do would be for the US to cut its imports if balanced trade was desired. That however might mean that some cheap stuff at Wal-Mart won’t be as cheap and I doubt that is a popular suggestion. Anyway it just doesn’t make sense to say that trade imbalance is the responsibility of the exporter rather than the importer and it’s up to the exporter to fix it (*). Now that is what I consider basic economics and I don’t think you can honestly disagree with that.

(*) There are exceptions, to be sure. Often the trading partners are really not equal, one of them is weaker, can be pressured, the more powerful country has means to prevent the weaker one from developing their own production and keeps them dependent. Trade imperialism. That kind of argument might perhaps – perhaps – be made with respect to Germany’s relationship to some of the smaller EU members. But please, you won’t seriously want to paint the USA as a victim of imperialism!

It is quite ironic that China is now so often painted as the global trade imperialist bullying defenseless little countries, such as America, by – can you believe it – buying US treasury notes! How outrageous, how unfair is that!

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Wolf 07.28.10 at 3:56 am

Good comments from gr and dieter. Norwegian guy may be correct that Scandinavia is the only place where social democracy lives, but the Germans call their system a “social market economy”. Given the stark contrast with the US, almost all of Europe is social democratic (though I am not sure about GB, as in “Anglo-Saxon Capitalism”).
Tyler Cowen should pay attention to dieter’s make-work description. This is exactly how Germany has “fixed” unemployment since the 80s. There were good times where that was minimal, but it’s always been there. Last time I checked destatis.de for employment numbers (early this year) a lot of the growth in employment was apparently subsidized (they have a category for “social insurance revenue generating” jobs which had fortunately rebounded to an extend, but not the bulk of growth).
And yes, Germany is mercantilist and hardly sophisticated in economic opinion. As Tyler Cowen acknowledges, economic performance has been very poor, especially in the East. All this despite near absence of labor laws there, where lots of people work for practically nothing. The only thing keeping the East’s economy afloat are social insurance transfer payments. No stimulus, all automatic stabilizers. None of this led to significant gains in the East.
And I wonder why I don’t see “automatic stabilizers” used at all in this discussion.
Anyway, so they had themselves some stimulus initiated by the guy who called British policies at the end of 2008 “crass Keynsianism”. This had some effect and was much larger than I expected.
Needless to say, given the mercantilist nature of the German economy and the Euro, Germany has to stimulate along with everyone else. Or the whole European dream will end in tears. Krugman is right about that.

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hix 07.28.10 at 2:25 pm

And still no example, not a single one for German mercantilist policy :-), just a statement of not to dispute fact.

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piglet 07.30.10 at 12:08 am

And yes, Germany is mercantilist and hardly sophisticated in economic opinion. As Tyler Cowen acknowledges, economic performance has been very poor, especially in the East. All this despite near absence of labor laws there, where lots of people work for practically nothing.

Wolf is really an expert on Germany. Tops even Tyler Cowen! No labor laws in East Germany – one wonders how they manage to share a legal system with the West. And Germania’s “hardly sophisticated in economic opinion” really makes one yearn for Chicagos green pastures. – Enough, let’s just roll out eyes and move on.

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Wolf 07.31.10 at 9:10 pm

Hix, does there have to be a policy for the outcome to be merchantilist?
piglet – well, if you talk to people in the East who also happen to work with people who came from the West, you really do wonder about the “shared” legal system. “Tarifbindung” is much lower in the East, where minimum wages exist they are lower in the East, “Tarif” gives fewer benefits to people from the East, etc…. The resentment generated is palpable (20 years later!).
Try to detail all the differences in a blog comment!

BTW, there doesn’t need to be bilateral trade balancing, just balanced trade. This should be done by demand oriented policy, which Germany rejects on a bipartisan basis. So, since unification you have relatively high real interest rates, fairly high unemployment (especially in the East), relatively (compared to the need and possibility) low budget deficits, declining (to well under 1% by the end of the 90s) inflation, lower average growth. Wouldn’t one see plenty of room for stimulus?

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Henry 08.01.10 at 12:00 am

piglet – take it down about ten notches on the eye-rolling etc.

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