The United States Is No Germany

The debate regarding fiscal stimulus over the past year and a half has, frankly,

RELATED ARTICLES

made me despair at the state of the economics profession.

If others believe stimulus spending is a bad idea, fine.

But surely we should expect opponents of stimulus to engage in real debate, which means that they’d have to actually listen, just briefly, to what proponents of the argument are saying — in particular, that the case for stimulus has always been highly dependent on conditions on the ground.

Fiscal stimulus only makes sense when the following two conditions prevail: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by interest rates that are very near the zero lower bound.

This doesn’t sound like a hard point to grasp.

But again and again, critics point to examples of increased government spending in completely different circumstances, and then claim that those examples somehow prove their point.

Here’s the latest from New York Times contributor Tyler Cowen, a professor of economics at George Mason University: “Certainly, in Germany, the recent history of fiscal stimulus wasn’t entirely positive,” he wrote in an article published in late July. “After reunification in 1990, the German government borrowed and spent huge amounts of money to finance reconstruction and to bring East German living standards up to West German levels.

Millions of new consumers were added to the economy.

“These policies did unify the country politically but were not overwhelmingly successful economically.

An initial surge was followed by years of disappointing results for output and employment.” This passage makes me want to stick a pencil in my eye. Why? Let’s look at Germany’s situation: 1. The example of spending that Mr. Cowen cites was not an effort at fiscal stimulus; it was a supply policy, not a demand policy. The German government wasn’t trying to pump up demand — it was trying to rebuild East German infrastructure to raise the region’s productivity.

2. The West German economy was not slowing due to high unemployment.

On the contrary, it was running hot, and the Bundesbank, Germany’s central bank, feared inflation.

3. Low interest rates were not a concern at that time.

In fact, the Bundesbank was in the process of raising rates to head off the risk of inflation — from 4 percent in early 1989 to 8.75 percent in the summer of 1992. In part, this increase was a deliberate effort to choke off the additional demand created by stimulus spending on East Germany.

Also, the German government’s decision to embark on deficit spending while raising interest rates is widely blamed for the European exchange rate crisis of 1992-93, when other European countries with currencies pegged to the German mark were unable to implement corrective policies of their own.

In short, it’s difficult to think of a less relevant case; the example of Germany under reunification does not tell us anything at all about the consequences of fiscal stimulus in our current situation.

And the fact that a prominent commentator on current events apparently doesn’t know that, even after a year and a half of debating this issue, leaves me pessimistic about the economic outlook.

Reader comments from nytimes.com

(Most comments are condensed from longer postings.)

After the fall of the Berlin Wall, West Germany inherited major structural problems, which even the massive amount of money pumped into East Germany could not solve.

While I agree that Germany’s situation in 1990 is not comparable to the current downturn in the United States, I suppose that the American approach would have been to simply rely on the mobility of the people, and let all of East Germany become an economical wasteland.

In the end, that wasn’t politically feasible here.

— G., Germany


The cost of rebuilding East Germany’s infrastructure was only a small fraction of the total costs of reunification. Most of the 1.3 trillion euros that have been transferred from east to west since 1990 have been spent on pensions and welfare.

The real problem in the wake of reunification was that the official currency conversion rate between west and east was 1:1, although the unofficial exchange rate was more like 1:5.

This boosted demand in the east but it also made manufacturing uncompetitive there.

To this day unemployment in the east is still twice as high as in the west, although the situation has improved a lot in the last five to 10 years.

— R., Germany


Mr. Krugman, responding condescendingly to other economists such as Mr. Cowen only continues to polarize the state of economics.

I believe that Mr. Cowen was just trying to provide some support for the lack of stimulus in countries like Germany — he was not making the case for the United States.

— B.C., New York


The Germans today are effectively, if not intentionally, engaged in a zero-sum trade policy in which their growth is generated exclusively through other nations’ spending.

Germany’s policy of aggressive exporting is going to widen the European Union’s horrific internal trade imbalances and destroy the euro.

— K., Britain


Mr. Krugman, the quality of economists in the United States appears to be as low as those in Japan, which is a bit surprising to me. I deeply sympathize with you, but the world is benefiting greatly from your ideas.

— Tomo Nakamaru, Tokyo


Post new comment

E-mail ID will not be published
CAPTCHA
This question is for testing whether you are a human visitor and to prevent automated spam submissions.
Image CAPTCHA
Copy the characters (respecting upper/lower case) from the image.

FC NEWSLETTER

Stay informed on our latest news!

EDITORIAL OF THE DAY

  • Retail investors need to be drawn to bond trading

    A country requires both a healthy capital market and a liquid debt market for vibrant economic growth. India has had the first for a long time.

INTERVIEWS

GV Nageswara Rao

MD & CEO, IDBI Federal Life

Timothy Moe

Goldman Sachs

Chander Mohan Sethi

CMD, Reckitt Benckiser India

COLUMNIST

Urs Schöttli

Japan’s living national treasures

While the world is fascinated by the economic “miracles” in ...

Robert Clements

Cherish good times and accept bad ones

Initially, I was angry and confused, I was even repentant…,” ...

Bubbles Sabharwal

Mothers just see things differently; they can’t help it

Before we begin on mothers, I have to share this ...