The Germany That Said No
The stimulus pleas of the Obama administration fell on deaf ears in Berlin. Guess whose economy is growing faster.
Nov 8, 2010, Vol. 16, No. 08 • By CHRISTOPHER CALDWELL
"You won’t find a lot of Keynesians here,” explained one German economic policymaker in Berlin in September. That will not be news to anyone who has spoken to his counterparts in Washington. In their view, Germany is a skulker, a rotten citizen of the global economy, the macroeconomic equivalent of a juvenile delinquent, or worse. It is a smart aleck in the emergency ward that is the global economy. It is a flouter of the prescriptions of the new Doctor New Deal who sits in the White House.
Germany has been scolded, even browbeaten, by Obama administration officials, from Treasury Secretary Timothy Geithner on down, for saving too much and spending too little. It has refused to stimulate its economy as the United States has done, on the grounds that the resulting budget deficits would not be sustainable and the policies themselves would not work. Administration officials have not been the only ones to warn the Germans about the path they’re on. On the eve of last summer’s G‑20 summit in Toronto, the economist and New York Times columnist Paul Krugman gave an interview to the German business paper Handelsblatt in which he said that, while Germany might think its deficits are big, they are peanuts “from an American viewpoint.” Germany cannot say it wasn’t warned.
And now the consequences of Germany’s waywardness are clear. Germany’s growth in this year’s second quarter was 2.2 percent on a quarter-to-quarter basis. That means it is growing at almost 9 percent a year. Its unemployment rate has fallen to 7.5 percent, below what it was at the start of the global financial crisis—indeed, the lowest in 18 years. The second-biggest Western economy appears to be handling this deep recession much more effectively than the biggest—and emerging from it much earlier.
This means that something in our economic dogmas is probably false. Perhaps the policies of Keynesian stimulus favored by the Obama administration are simply misguided, and Germany is reaping the benefit of not pursuing them. Perhaps Germany is pursuing a stimulus, albeit in a lower-key and harder-to-measure way. Perhaps, when an economy is as globalized as ours now is, stimulus will not really work unless it is pursued uniformly across countries. All of these explanations are partially true.
Even before the present financial crisis, Germany and the United States were thought of as embodying two opposite dispositions on matters of monetary policy and fiscal discipline. Both dispositions were the product of history. Germany was the archetypal inflation-fighting country. That is because, when it tried to inflate its way out of the reparations payments imposed on it after World War I, it lost control, as countries that print too much money usually do. The result was people carting around trillions of marks in wheelbarrows to buy a ham sandwich.
The United States, supposedly, has had more to fear from deflation. The late nineteenth-century deflations brought misery to farmers and William Jennings Bryan to national prominence. But since most macroeconomists are idolaters of both John Maynard Keynes and Franklin Delano Roosevelt, the lesson they prefer is that of 1937, when FDR “withdrew stimulus too fast” and plunged the United States back into depression. There are two problems with this argument, one historical, one theoretical. First, government spending fell by very little that year, as Amity Shlaes and others have pointed out—less than 1 percent, by some calculations. Second, if four years into the New Deal was too soon to cut spending, then a fan of the New Deal is likely to believe it’s always too soon to cut spending. Stimulus plans seem to work that way.
Chancellor Angela Merkel does have typically “German” worries about deficits. They are heightened by a new factor—demographic decline. In a country with a shrinking population, deficits are more dangerous than they would be otherwise—you need much higher per capita growth to get yourself out of the hole you have dug.