Via Mark Thoma, Dean Baker points out that real government consumption of goods and services – that’s government buying things, as opposed to cutting taxes or handing out checks – has risen more in “austerity” Germany than in the United States.
In the second post:
Germany’s austerity policies have not yet begun – up to this point they’ve actually been quite Keynesian.
I would frame this debate with a few points:
1. Kindred put it well: "No one is saying Germany is an economic miracle. Some people, like Tyler Cowen, are saying that Germany's experience doesn't track very well with standard economic models and this fact needs to be acknowledged by those who loudly proffer policy advice…No one (that I've seen) is saying that Germany's turn-around is due to austerity." The good analyses of Germany credit the real economy and restructuring — the supply side — with credible fiscal policy as only one part of a broader story, while recognizing Germany already had higher government spending, high previous use of debt, and better automatic stabilizers.
2. The German recovery has been export-driven, which also suggests the role of domestic fiscal policy is secondary.
3. If Germany is so Keynesian, why did Krugman write in June: "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. Nicely, nicely isn’t working. Time to get tough."
It's fair enough for Krugman to simply admit he was wrong. But then he should…admit he was wrong (and also ponder what such an admission means for "get tough" trade policies). Maybe Krugman has a story about how he was talking only about their pending austerity, and approving of their current policies but simply failing to mention that at the time, but it's hard to get that impression from reading his corpus of 2010 writings on Germany.
4. Talk of exports as zero-sum has been dwindling. German imports have risen to new highs and it is also apparent that the Germany economy is a positive-sum locomotive for most other countries. And a lot of the German exports contribute to the productive capacity of other nations.
5. For well over a year, and also in earlier research, Krugman has repeatedly argued that AD-expanding policies work only if they are accompanied by a credible commitment to continue them in the future. Germany has exactly the opposite of such a commitment, indeed they have a fairly credible commitment to near-balance the budget by 2016. By Krugman's logic a) the German use of stimulus shouldn't work, and b) we shouldn't measure the German AD stance by checking current policies only and therefore we should not judge their overall fiscal policy as very expansionary. His current remarks on Germany leave aside this intertemporal perspective.
6. Across countries, the size of ramp-up stimulus doesn't seem to matter for recovery.