Fiscal stimulus and German unification
For all the talk about the Great Depression, we are missing one historical analogy for a program of large fiscal stimulus, namely Germany after the Berlin Wall came down. The two countries united, lots of money was spent and lots of money was borrowed. West Germany had a modern economy with both manufacturing and services. At the time Germany had unemployed resources, especially if you count the labor moving from East Germany to West Germany as grossly underemployed and available for higher-return projects.
The results were less than wonderful. The higher demand boosted measured gdp growth in the short run (bananas and porn, plus reconstruction) but Germany fell into economic stagnation. The new demands took the West German economy only so far. The higher taxes and debt then kept the German economy down for many years. Few Germans were happy with the economic fallout from this "stimulus." And that was with a relatively well-functioning financial system and a reasonable amount of initial optimism.
You can list many dissimilarities between German unification and the current U.S. situation (and in the comments I am sure you will). Still, as historical examples go, I believe this one has some relevance. When European leaders are skeptical about fiscal stimulus, they have some reasons, some of them quite recent.
If you'd like a lengthy account of the economics of that period, along with lots of numbers, try this study. Just read through the first few pages, you'll see statements like:
Economic theory suggests that a fiscal expansion financed by distortionary taxation could potentially generate substantial adverse growth effects after the initial positive demand stimulus dies down.
It is then estimated that the negative economic impact from the German stimulus may explain up to one third of the subsequent growth gap between Germany and comparable European nations.
Addendum: Don't be fooled by the topic-shifting comments on why East Germany didn't do better; this post is about how West Germany fared from so much stimulus. Not so great.
Posted by Tyler Cowen on March 26, 2009
marginalrevolution.com
Understanding German fiscal policy
It is a common view that governments should run a deficit in bad times, and a surplus or balanced budget -- if at all possible -- in good times.
I have news for the people: according to the German view of the world, these are the good times. Thus they want to run a surplus. I don't see that perspective being rebutted.
The Germans see themselves as having made the necessary wage adjustments, in advance, and in a manner that Keynesian economics is skeptical of. The Germans also see themselves as having produced and maintained true credibility about future fiscal policy (how many other countries can claim that?) by a constitutional amendment, a lot of tough talk, and a relatively robust real economy. German bonds are a safe haven investment, even though Germany's numbers, such as the debt-gdp ratio, are not overwhelmingly wonderful. That's a testament to German public sector management.
Did I mention that -- after unification -- the Germans tried (against their will, they had to) more than a decade of massive fiscal stimulus, and subsidization of consumption, starting with well under full employment, and yet with mediocre results? That wasn't long ago.
And yet somehow it is a mystery, or a strange annal in some long book of Dogmengeschichte, that the Germans are not more interested in Keynesian economics.
It is incorrect to argue that: "their high-savings export-oriented economy only works if someone else runs a high-debt economy and buys their stuff." The Germans do just fine when they trade with current account surplus countries. If Portugal and Greece were more like Norway or the Netherlands, the German trade surplus might well go down, but the total value of German exports likely would go up (Germany exports mainly "normal goods") and the German economy would do just fine.
The Germans are well aware that most of their neighbors have not managed their finances nearly as well as they have. How should we expect them to respond, if we, and others, now tell them that, after all their careful management, it is now time to run up debt to spend more money in their neighbors' shops? (And that is in addition to significant ongoing EU transfers from Germany to poorer countries.) How would we respond to such a request? Do we blame our own successful export sectors -- such as aircraft and movies -- for the troubles of the world economy? Does Obama lecture Boeing and Hollywood for creating problems?
How do we speak to the much poorer Chinese? Do we offer them aid or do we make demands on them? In this matter, the Germans to me seem more reasonable than the United States.
The not-too-often-stated-but-often-thought German attitude is that if other nations are going to share in beneficial German and European institutions, some of them need a bit more discipline. If they don't have that discipline, they need to step back until they do. Is Germany doing either itself or the broader world a favor by lowering its policies and standards to meet the requirements of the less successful nations?
Here is my previous post on a related topic.
Posted by Tyler Cowen on June 22, 2010
marginalrevolution.com |
