How to interpret Germany, again

by on August 29, 2010 at 7:35 am in Data Source, Economics | Permalink

Here is one recent Paul Krugman post on Germany, here is another.  Excerpt from the first:

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.

Bill August 29, 2010 at 8:44 am

Tyler, you’ve been honest and careful; others have not in describing Germany. Becker and David Brooks repeating him have made the claim that Germany came out faster with less stimulus, whereas IMF data on Thomas’ Economist View site clearly show that not to be the case: that stimulus is comparable and that German GDP declined even more than US and has been rebounding due to continued stimulus and exports of capital goods. And Germany has not yet shifted to austerity, just talked about it.

steve August 29, 2010 at 10:15 am

Nice post-but did you just refer to yourself in the third person?

Matt August 29, 2010 at 11:25 am

Andy,

The issue with the US is that the increase in government spending appears anything but temporary. Not necessarily the stimulus bill itself, but health care reform alone added a trillion dollar commitment which was “paid” for mostly with medicare cuts already on the books. The general air of uneasiness mirrors that of the depression, starting with Hawley-Smoot and not ending until after WWII.

Now, I’m not saying Germany’s recovery can be attributed completely to lack of stimulus. Germany’s main advantage is they did not leverage themselves like Americans while also embracing the structural shifts necessary to reamin competitive in the global economy. Like a bank who came clean early about bad loans, they face less uneasiness with investing since they are fundamentally sound as an economy.

In the US, on the other hand, both governments and consumers are way too leveraged. We have to come clean and somehow fix our balance sheets before we can grow. The best way to do this is to continue aggressive quantitative easing, but it will be a long road.

Yancey Ward August 29, 2010 at 11:38 am

A more nuanced interpretation of events?

dearieme August 29, 2010 at 12:49 pm

“Germany’s experience doesn’t track very well with standard economic models …”: I wonder whether “standard economic models” are just American prejudices writ large – or rather, writ algebraic.

Bill August 29, 2010 at 1:50 pm

On point number 6–that ramp up of stimulus doesn’t mean much–I was surprised someone even would seriously consider a two dimensional plot–size of stimulus v. IMF projection–in the first place across 20 countries.

Let’s be serious for a moment. First, some countries did a mix of fiscal stimulus and monetary expansion–whoops, that last variable wasn’t in that two dimensional plot. Second, initial and terminal conditions varied between countries in the IMF projection–meaning, some countries were operating at a higher level of output than others, and stimulus for a given output will have different effects. Third, some countries are exporters to other countries, so that if your trading partner stimulates, you as an exporter to that country, get a secondary stimulus effect as well.

And on, and on, and on. Uncontrolled two dimensional proofs and not proofs. No surprise that there wasn’t much of a tilt in the regression.

To be credible, you should do what CBO did. Yet I do not see anyone criticizing that study. Oh, maybe you can find a wingnut, so I should say you can’t find a credible main stream economist criticizing it.

Geoffrey August 29, 2010 at 3:32 pm

Hi Tyler -

A few things:

- In your original post, to substantiate the argument that Krugman argues that AD-expanding activities only work with a credible commitment to continue them in the future, you link to Krugman talking about monetary policy. I don’t see in that post, nor remember in any other post by Krugman, very strong emphasis that commitment was so vital in fiscal policy. In your response to Andy you say, as I understand it, that Krugman accuses Germany of being about to begin “wrenching deflationary policies”. My understanding of Krugman (and a lot of people’s) critique of the Eurozone is that it’s monetary policy is usually pitched to be most helpful to the German economy, as opposed to the Spains and Greeces. I don’t remember seeing Krugman accuse the Eurozone of particularly deflationary policies relative to the German economy. So, in sum, I’m having trouble following your arguments on this.

- Second, in your piece for the New York Times on Germany, you mention that Germany has terribly good capacity utilization figures and surging employment. I couldn’t find capacity utilization, but did find the OECD output gap figures, which shows Germany as about average, but slightly worse than the US, France, Greece, and a few others. Additionally, the output gap has exploded over the past few years, at the same time that unemployment has fallen, which makes me extremely suspicious of the unemployment numbers, at least as a measure of the overall health of the German economy.

Steve Sailer August 29, 2010 at 4:50 pm

Also, the German government and German media elites are in favor of Germans manufacturing stuff.

In the U.S., not so much …

David Welker August 29, 2010 at 5:13 pm

“I understand his spending argument quite well, the question is whether he is consistent in applying the same intertemporal horizon across various cases.”

Isn’t saying he should be consistent roughly equivalent to saying that he should be using the same model in different cases? Should the behavior of investors considering the impact of inflation be modeled in exactly the same way as the impact on consumers of temporary fiscal stimulus?

Wouldn’t it actually be counter-intuitive to apply the exact same model to both cases? We expect sophisticated investors to have a more long run time horizon, whereas many people are primarily concerned with whether they have a job or whether they could easily replace their job if they lost it. It would actually seem strange to me to be “consistent” regarding one’s model of behavior in these cases.

BKarn August 29, 2010 at 10:05 pm

@dearieme “”Germany’s experience doesn’t track very well with standard economic models …”: I wonder whether “standard economic models” are just American prejudices writ large – or rather, writ algebraic.”

With all due respect to what are often interesting comments you offer up: you are frequently an (though certainly not the only) entity that consistently underestimates and wildly oversimplifies the “other” you are attempting to evaluate and deal with. If this is really as representative of foreign thinking on all things American (and my experience over several decades say it is), it certainly explains a lot.

Andrew August 30, 2010 at 7:41 am

“Germany’s experience doesn’t track very well with standard economic models …”

Then we must change Germany to fit the models!

kent August 30, 2010 at 10:38 am

“No one (that I’ve seen) is saying that Germany’s turn-around is due to austerity.”

Have you not seen David Brooks!? Or does he not count?

Russell L. Carter August 30, 2010 at 12:24 pm

Unfortunately , Tyler, linking to an organization’s site that promotes climate change denialism (http://climatechange.ipa.org.au/) in support of your economic argument that seemingly contradicts a significant chunk of the people who have gotten a lot of things right, basically destroys your credibility.

I’m wondering what your incentives are to do this… Did you think nobody would look at the context of the data you cite? You don’t have the slightest bit of embarrassment about linking your credibility to such people? How can “freedom” be advanced if the people who supposedly support it are frauds?

Kent August 30, 2010 at 1:25 pm

@Bill:

Maybe David Brooks doesn’t matter to Tyler, but he matters to Krugman. Krugman was responding (in part) to Brooks. Pretending that Krugman is attacking a straw man is just wrong.

BKarn August 31, 2010 at 4:16 am

“You are right, though, that spending some time on some commentators is a waste of time.”

I’d wager the majority of commentators feel exactly this way about you and your bizarre hyperpartisanship, made worse by your refusal or inability to so much as acknowledge that reality. You would likely find far fewer objectionable commentators if you didn’t slosh around slamming everyone, and if the majority of your comments weren’t simply childish and snarky.

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