No Keynesianism in the Berliner Morgenpost

Some of you thought that I was making fun of Germans by scrutinizing one of the local newspapers, the Berliner Morgenpost.  Quite the contrary, the paper is more sophisticated than its American equivalents and furthermore I enjoy reading it myself.  What I am making fun of is people who have unrealistic expectations of how Germany can be slotted into this or that academic plan, without recognizing the realities of national and regional cultures.

Other people have suggested that Die Zeit or the FAZ are more representative of German opinion.  Among elites for sure, but if you walk through Berlin for days you will see the Berliner Morgenpost for sale much more often, by an order of magnitude.

Anyway, I noticed a piece in the 12 June edition, entitled "Germany is driving European economic growth."  What's most striking about thie article, and other sources, is how much Keynesianism has failed to influence either German policy or German public opinion.  In the piece, there is no mention of international imbalances or aggregate demand issues, but rather Germany is lauded for exporting so much and for serving as the economic locomotive for European economic activity.  Furthermore this is a news story, not an Op-Ed.

Germany, of course, is one of the most successful countries in the world since its postwar reconstruction.  (You could make a good case for giving Germany the "best country award" for the last fifty or sixty years.)  Yet German policymakers adhere reasonably consistently to the following views:

1. It is the long run which matters and we should be obsessed with the long run consequences of our choices.

2. Economic growth comes from high productivity, most of all in quality manufacturing.

3. Borrowing to finance consumption is a nicht-nicht.  Savings is all-important.

4. If we need to make a big change, we'll all grit our teeth and do it.  For instance Germany has done a good deal, on the real side, to restore its export competitiveness in the last ten years, not to mention unification and postwar recovery.

5. These strictures should be enforced by rigorous rules, to limit temptation, because indeed you will find cases where it appears to make sense to break the rules.  

6. Values matter, as do norms of cooperation.

7. Don't obsess over the creation of too many low-wage jobs, because in the longer run it will be bad for your cultural capital.  If need be, pay people to be unemployed, but hold high human capital.  In the longer run, try to educate them up to higher productivity and thus employment.

8. Be obsessed with self-improvement, most of all at the personal level.

(If you're wondering, the recent talk about coalition collapse is not challenging these basic principles.  There is talk about not cutting some kinds of government spending, or raising taxes on the wealthy, or whether the ruling coalition can get things done, or whether the draft should be abolished, or whether Germany has mishandled the Euro crisis.  German politics produces a lot of government spending, and that is part of the above vision, but there is a great concern about whether it is paid for in the proper way.)

Most Keynesian economics makes good sense to me, especially at the methodological level.  But when it comes to principles for guiding a country…?  The numbered items above are not exactly my preferred list (especially not for the United States), but they have worked out very well for Germany.  I would not so lightly toss them away.  Might these principles be better, all things considered, than the Keynesian alternatives?

I'm a fan of the northern European social democracies, but in part they succeed because those countries don't follow all of the prescriptions you might hear coming from their boosters in the United States.  For instance American liberals often admire the activist government in such countries, but it's built upon a very different set of cultural foundations.  I hear or read liberals calling for the comparable interventions but usually remaining quite silent about the accompanying cultural foundations or in some cases actively opposing them.

The cultural elements of the current Keynesian debates remain underexplored in the United States, but they are fairly well understood in Germany.

Comments

Very interesting point re "accompanying cultural foundations." Anyone care to explicate?

Really interesting. On point 7 (don't obsess over the creation of too many low-wage jobs), how has this applied to immigrant labour?

I like your insights - and it strikes me that your comparative approach underlines how the mainstream media stick to the dominant narratives of economic policies in Germany.
I don´t know how long you will stay at Berlin (being abroad myself, but will come back thursday night) - and I am really curious how we will be informed about the outcomes of the EU summit on thursday. The whisperings about another bailout - this time for Spain - are increasing. The exposure of German banks is imminent. How will a weakened government communicate another "Rettungspaket" without loosing even the support of the 3 political parties forming the actual coalition? How will Berliner Morgenpost spin that story?

Here a link to a posting after your 1st reading of Berliner Morgenpost: http://blog.handelsblatt.com/rhetorik-blog/2010/06/12/tyler-cowen-liest-die-berliner-morgenpost/

I think the "best country award" is indubitable - though would like to hear your other nominees. Countries please, not city-states, and even if you want to nominate Singapore the humanity side matters too. As a sound economist, I would expect you to overlook the lauded Chinese "miracle" as the fruit of a bias towards the recent.

'BUT, if policy views 1-8 are broadly also those of .... Japan !! .... how then can they be cultural?'

Because the Japan of the ca. the 1880s to 1930s consciously used Germany as a model for their political and economic policies? (Which they did - Bismarck's approach to democracy under a monarch especially.) Because, as seen in Jared Diamond's book Collapse, both Japan and Germany seem to have been able to respond to deforestation with a long term approach which allowed the process to be reversed? Because the logic of a successful, export driven industrial society places certain boundaries on how a successful, export driven industrial society looks at the world?

It also occurs to me that the entire role of 'Kurzarbeit' as a Keynesian mechanism is open to discussion when talking about Germany. Kurzarbeit ensures that consumption remains somewhat consistent, while also retaining a company's ability to continue to produce when economic conditions improve. Further, Kurzarbeit is intentionally countercyclical - funds are saved during periods of prosperity, and then used to pay workers when demand sinks. Of course, Kurzarbeit is basically a manufacturing policy, and admittedly, these days, Americans don't really seem to have much interest in such. An example - witness all the Americans stating that a weaker euro is a problem for Europe. German companies, with increased orders, have to wonder how policy makers in one of their major markets can be so utterly stupid in their convictions, but hey, it won't stop them from hoping the euro sinks some more. Not to mention what this means for the Chinese in terms of EU markets, allowing for increased EU exports AND decreased Chinese imports, all the while being able to enjoy not manipulating a currency to achieve such desirable results.

I kind of see Keynesianism as a tool, not a lifestyle. It's like a hammer, when in this particular situation we are screwed.

>>If need be, pay people to be unemployed, but hold high human capital.

Strictly speaking, they pay white people to be unemployed, and import Turks to do the low-wage work with reduced political participation.

re @Cameron

Yes, Tyler (or anyone else), please expand on "accompanying cultural foundations" on N European Social Democracies...you've piqued my interest.

Michael Heller,

Because Keynes published a German edition of the "General Theory" that specifically addressed the Nazi party. At least in the 1950s and 1960s there was a fairly visceral reaction to Keynes as some sort of supporter or fellow traveler with the Nazis - or Nazi economic policy that is.

I don't see how any of those principles are inconsistent with Keynesianism. Long-term investment is one of the most favored forms of stimulus, when it's politically possible, for example.

On the other hand, 4, 5, and 6 would give Hayek a heart attack -- deciding what "we" need and then gritting our teeth and doing it (collectively!) is the road to serfdom.

Also, you mention low-wage jobs briefly, but not how jobs become low-wage in the first place -- i.e. how to slice the pie between labor, management, and capital. I think that's where you're going to find a lot of the differences between Germany and the US. Consumer demand doesn't have to be sustained by consumer debt if the consumers (i.e. wage-earners) have some actual income. Then they can save and still have some money to maintain their standard of living.

Comparing the present-day US to the postwar US, ISTM that increasing Gini is largely to blame for the post-Reagan rising indebtedness of the US working and middle classes, and countries that have resisted Gini increase have a wealthier, more economically secure middle class that can do some consumer spending without dangerous levels of debt. This economic security encourages them to become more future-oriented and build up both their savings and human capital. The US is on the opposite path, the one that leads to a banana republic.

Most Keynesian economics makes good sense to me, especially at the methodological level.

Right there's your problem. The default position of a rigorous theoretical model is Ricardian equivalence, i.e., Keynes was wrong. Fiscal policy is ineffective and monetary policy affects only the price level. You can modify the model to get effects that look sort of Keynesian, but you can't rescue most of the corpus, because it really doesn't make sense.

Of course, that's just theory, but empirically, fiscal policy has never been shown to work. Every instance wherein a fiscal stimulus was followed by economic growth also had a monetary stimulus to confound it. The reverse is not true: there have been effective monetary stimuli (Roosevelt's devaluation is the shining example, as Scott Sumner has pointed out repeatedly) not matched by fiscal policy. The reasonable conclusion is that monetary policy sometimes works, fiscal policy most likely doesn't.

Despite his economics being mostly wrong, Keynes is still popular because lowbrow versions of his theory provide cover to spend other people's money.

"Does declining German population reflect an obsession with the long-term and acceptance of near-term suffering?"

LOL! Quite the opposite, I'd say.

Does Germany have a parasitic hedge fund/wall street class that has effectively stolen the country?

Also, here's a different view I picked up from reading Edward Hugh:

http://www.bloomberg.com/apps/news?pid=20601110&sid=aq85EMKckPa0

“Investors are now worried that governments will kill off the recovery with their austerity measures,† said Jens Kramer, an economist at NordLB in Hanover. “While they realize that the budget deficits have to be reined in, it’s almost impossible to do that without slowing down growth, particularly among Germany’s main trading partners.†

Does declining German population reflect an obsession with the long-term and acceptance of near-term suffering?

This was a taboo subject until recently, because concerns about birth rates and natalist policies are perceived to be connected with national socialism. Hitler famously awarded mothers with many children a medal called "Mutterkreuz". "Mutterkreuz" used to be the killer-phrase to shut down debate.

German demographer Herwig Birg popularized the issue a couple of years ago. But only after his retirement did he feel comfortable to raise the issue. Some natalist policies have been introduced since, but failed.

The same applies to Austria, although the issue was brought to attention much earlier by our right wing populist parties.

'Germans are mercantilists of a calvinist kind.' Almost as if they had never read any Marx - must be due to that old language barrier, hmmm? And where did that Linke party come from, by the way? A party which just managed to get a result quite close to that of the FDP in the NRW election. A party of people who probably never read an economic book in their lives, right?

'...president Horst Köhler, who recently resigned...' apparently because he proclaimed the need for Germans to wage war to protect their trade routes. Let's not forget that detail, shall we?

'...by our right wing populist parties.' Oh please, why be so polite in describing parties that have absolutely no problem with proud terms like 'socialist' and 'national' when talking, at least among themselves.

@dieter:

You are right. In hindsight, they micro-economic perspective of Germans seem always quite rational. Somehow they just can't make the leap to macro and public-policy though. So many times in conversation with Germans there seems a disconnect between the way they will act on a personal level and the way they expect national policies to be set.

Tyler, it is disconcerting to me that you are so enamored of "northern European social democracies", one of which I was born in and lived in before moving to the US seven years ago. This was a decision I came to rationally, and a decision I have not changed my mind about. So one of us must be wrong...

Anyway, I think you underestimate the differences between what you read in the newspapers in Germany and how it actually works in these countries, as 'dieter' also suggested.

I would like to add to his exposition the 'democratic deficit' in these countries. Their governments are almost technocratic, and policy options are not discussed publicly. Governments take broad-sweeping decisions, without consulting voters, and without presenting alternatives, and voters usually stay silent and go along, even though they do not agree.

Witness the Euro and EU decisions, as more famous examples. Another example of this deficit, implicit in northern European corporatism, is 'Lohnmaessigung' or 'salary moderation'. This is agreed upon by unions, employers and governments as a good thing, and that is where the discussion ends. Employees mostly do not understand that their salaries are being kept low on purpose to increase competitiveness, and you will not see Lohnmaessigung discussed much, if at all, and most people do not understand what it is about.

Instead of the continuous raucuous, messy, political discussions here in the US, you find voters generally going along with whatever the elite are deciding, even though they may not agree. Thus, the elite can 'just get the things done', as someone like Friedman (and now you?) seem to prefer.
The problem is ofcourse that eventually voters decide enough is enough, leading to large, and to outside observers, abrupt and unexpected swings in voters preferences, usually without violence. Witness the outcry from outside observers over the recent elections in Holland and the 'loss of tolerance'.

I think what really distinguishes Germany from other countries is something you do not discuss, namely how they dealt with the legacy of WWII. Germany, aided by the US, really took this by the horns and dealt with it in an admirable way. I lived in Japan, and they did not deal with it at all, nor did many European countries.

I just want to say great commenting by Dieter. I now feel a bit compelled to do some research on German politics and attitudes.

Maybe it's the lasting influence of Ludwig Erhard's "Ordoliberalismus". The German media looks back in awe of the 1950s "Wirtschaftswunder" as if it really was a miracle. At a deeper level, they must realize there were specific economic principles involved... they just can't admit it was a free-market system.

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.

Dieter is correct on several of his points but does overstate his case. I both studied and worked as an economist in Germany (now living in the US) and can assure you that many Germans both know and understand Keynes. However, many also understand that (more or less) balancing the budget over the cycle is an important part of making Keynesian policies work.

It is important to remember that Germany tried its very best to implement Keynesian counter-cyclical fiscal policies in the 1960s and 1970s, calling it "Globalsteuerung". You should look up the 1967 "Stabilitäts- und Wachstumsgesetz" (Stability and Growth Act), which institutionalized such policies. The oil price shocks of the 1970s and Stagflation more or less put an end to this attempt at institutionalized Keynesianism.

However, that does not mean that Keynesian arguments are absent from the current debate. For example, one of the five members of the German equivalent of the Council of Economic Advisers, Peter Bofinger (more or less the union representative), is effectively a Keynesian and is pushing demand-side arguments hard.

Well, Germany's economy is extremely strong. The reason is their strong export culture. However, what happens when everyone focuses only on export?

Also, Japan also looked something like Germany a couple of decades ago. Don't underestimate the effect of having China as a close neighbor. Its only now that China is moving to compete in areas where Germany is strong. And they are cleaning up where they are doing so (specifically speaking about clean energy tech like Wind).

But I agree with your bigger picture arguments. Each country/region needs to focus on different things.

The economic success of the various regions is very different in Germany as in other countries. This is not only a west-east divide, but also a north-south divide. Moreover, there is a obvious correlation between unemployment rates, long term voting behaviour and cultural imprint (religion). (Links for maps here http://theoreticalunkraut.blogspot.com/2010/04/1-german-minutiae.html). Especially, calvinism doesn't describe the economic success of the catholic regions.

Incentives created by regulation are far less discussed in German society than in the Us. Germans and Mainstream media cares a lot about questions of distribution. This is in line with Tyler's comment on the importance of values. Not the consequence of actions or laws are important, but the underlying intentions. One explanation for this phenomenon is the influence of Kant on european thinking: The deed and its intentions are crucial for valuation. Contrary to that, Anglo-america societies have been under the influence of utilitarism: The outcome is the point on determining whether it is desirable.

I believe that makes Germans less open to economic thinking and can to some extent explain Tyler's observations of the German soul.

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