What Germany knows about debt

Here is my latest NYT column, excerpt:

Far from embracing this social democratic model, American Keynesians have criticized it for relying too heavily on exports and not enough on spending and debt. Yet it is not just the decline in the euro‘s value that supports the German resurgence.

Most of the other euro-zone economies are not having comparable success because they did not make the appropriate investments and reforms. Moreover, the euro is still stronger than its average value since 2001, which suggests that the recent German success is not attributable only to a falling currency.

In any case, the Germans are exporting much quality machinery and engineering (not just glitzy autos), which can help other nations recover. It is an odd state of affairs when the relatively productive nations are asked to change successful policies because of an economic downturn.

I would add a few points:

1. 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.

2. You sometimes hear it said: "Not every nation can run a surplus," or "Can every nation export its way to recovery?"  Reword the latter question as "Can every indiviidual trade his way to a higher level of income?" and try answering it again.  Productivity-driven exporting really does matter, whether for the individual or the nation.  It stabilizes the entire global economy,

3. There really is a supply-side multipler, and a sustainble one at that.

4. The phrase "fiscal austerity" can be misleading.  Contrary to the second paragraph here, even most of the "austerity advocates" think that the major economies should be running massive fiscal deficits at this point.  (And Germany had a short experiment with a more aggressive stimulus during the immediate aftermath of the crisis.)  They just don't think it works for those deficits to run even higher.

5. The EU is an even less likely candidate for a liquidity trap than is the United States.  That said, how to distribute and implement additional money supply increases would be a serious political problem for the EU.  Simply buying up low-quality government bonds would work fine in economic terms, but worsen problems of moral hazard, perceived fairness, and so on.  This problem should receive more attention.


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