Krugman debunks German austerity as a solution

[Spamature]

May 6, 2012, 8:39 am
German Adjustment

It has become clear that one of the main forces behind the insistence on austerity as the answer to Europe’s problems is the belief among many German opinion leaders that their own experience in the last decade shows the way. Here’s Josef Joffe:

Why [should France emulate] the former German chancellor? Because he dared tell his own electorate what neither Mr Hollande nor Nicolas Sarkozy would have uttered even on the rack. Nine years ago, Mr Schröder warned his country: reduce social benefits, loosen up labour markets and accept individual responsibility – or else. Then he carried through with his “Agenda 2010”. And lo, Germany went from zero to 3 per cent growth in the two years before the crash – and back to 3 per cent thereafter.

So, how useful a role model is German adjustment in the 2000s?

It certainly did happen:



But how did it happen? I As I pointed out a couple of days ago, Germany got out of its turn-of-the-millennium doldrums by moving into a huge trade surplus, which is not possible for everyone now. Even that, however, isn’t the whole story.

That trade surplus was possible because Germany had a large fall in its costs and prices relative to other euro countries. Here’s the German real exchange rate using unit labor costs relative to the same measure for the euro zone as a whole, using OECD data (note to serious wonks: I know that’s not a perfect procedure, but I don’t have time to do it right — and I’m sure that the basics won’t change):




What’s really striking from the current perspective, however, is that Germany was able to achieve this “internal devaluation” without anything resembling actual deflation:





How was that possible? The answer is that there was relatively high inflation in the European periphery thanks to those big capital flows from the core to the periphery.

Or to put it differently: Germany believes that its successful adjustment was the result of its own virtue, but in reality it was successful in large part because of an inflationary boom in the rest of Europe.

And here’s the thing: the Germans are now demanding that the European periphery replicate its achievement (and actually surpass it, because the required adjustment is much bigger) without providing a comparably favorable environment — they’re demanding that Spain and others do what they never did, which is deflate their way to competitiveness.

This is a road to disaster.

http://krugman.blogs.nytimes.com/2012/05/06/german-adjustment/

 

[Woolleybugger]

I continue to harp on aggregate demand as the great unspoken concept in this national and global debate. Everything you do should increase AD or it will result in contraction. There is no other way to describe an economy in such simple terms. I cannot fathom why governments are not using this concept in every single speech or policy about the economy. Were I Obama, I would make sure every single person in the USA knew what AD was and how each and every proposal either increased it or decreased it. I would fill in the aggregate numbers for each of the four items in the equation (personal consumption + business investments + government spending + (delta between exports and imports) and report back to the nation every month or whenever we get reliable figures. Harp on this until we get sick of hearing about it. Then, explain how each item goes up or down and how it affects the other three when it moves. The lesson learned by Germany is perfect for this exercise. Germany is doing well for one reason only : It exports enough goods and services to fuel their economy and lifestyle at a certain level. If you took exports away, Germany would have to rely upon domestic demand creation alone. The USA used to be a nation that could prosper simply by selling things domestically because demand was going up due to increased incomes and growth in the middle class. Once that growth moved from demand created by the middle class to capital accumulation by the top 1%, our only option for growth was exports or deficit spending. When you open up your markets unequally to foriegn competitors in every sector, you can expect your exports to drop and imports to increase. A trade deficit is a recipe for economic contraction. Its not that hard to figure out.

 

[Lukey]

Actually what it proves is the Euro-style "austerity" (mostly tax increases and spending restraint - not cuts) is just a watered down version of what got them into trouble in the first place, and that, in order to succeed, you have to couple the spending restraint with efforts to jump start your private economy (regulatory, labor and tax reform would be the ticket) so that you can increase sales to other nations that are not cutting back (like the BRIC).

 

[Lukey]

I continue to harp on aggregate demand as the great unspoken concept in this national and global debate. Everything you do should increase AD or it will result in contraction. There is no other way to describe an economy in such simple terms. I cannot fathom why governments are not using this concept in every single speech or policy about the economy. Were I Obama, I would make sure every single person in the USA knew what AD was and how each and every proposal either increased it or decreased it. I would fill in the aggregate numbers for each of the four items in the equation (personal consumption + business investments + government spending + (delta between exports and imports) and report back to the nation every month or whenever we get reliable figures. Harp on this until we get sick of hearing about it. Then, explain how each item goes up or down and how it affects the other three when it moves. The lesson learned by Germany is perfect for this exercise. Germany is doing well for one reason only : It exports enough goods and services to fuel their economy and lifestyle at a certain level. If you took exports away, Germany would have to rely upon domestic demand creation alone. The USA used to be a nation that could prosper simply by selling things domestically because demand was going up due to increased incomes and growth in the middle class. Once that growth moved from demand created by the middle class to capital accumulation by the top 1%, our only option for growth was exports or deficit spending. When you open up your markets unequally to foriegn competitors in every sector, you can expect your exports to drop and imports to increase. A trade deficit is a recipe for economic contraction. Its not that hard to figure out.

They don't do it because it would show just how much of our economic "growth" is due solely to the ever expanding deficit spending of big government...

 

[gabriel]

reform?? lol

 

[ya-ta-hey]

May 6, 2012, 8:39 am
German Adjustment

It has become clear that one of the main forces behind the insistence on austerity as the answer to Europe’s problems is the belief among many German opinion leaders that their own experience in the last decade shows the way. Here’s Josef Joffe:

Why [should France emulate] the former German chancellor? Because he dared tell his own electorate what neither Mr Hollande nor Nicolas Sarkozy would have uttered even on the rack. Nine years ago, Mr Schröder warned his country: reduce social benefits, loosen up labour markets and accept individual responsibility – or else. Then he carried through with his “Agenda 2010”. And lo, Germany went from zero to 3 per cent growth in the two years before the crash – and back to 3 per cent thereafter.

So, how useful a role model is German adjustment in the 2000s?

It certainly did happen:



But how did it happen? I As I pointed out a couple of days ago, Germany got out of its turn-of-the-millennium doldrums by moving into a huge trade surplus, which is not possible for everyone now. Even that, however, isn’t the whole story.

That trade surplus was possible because Germany had a large fall in its costs and prices relative to other euro countries. Here’s the German real exchange rate using unit labor costs relative to the same measure for the euro zone as a whole, using OECD data (note to serious wonks: I know that’s not a perfect procedure, but I don’t have time to do it right — and I’m sure that the basics won’t change):




What’s really striking from the current perspective, however, is that Germany was able to achieve this “internal devaluation” without anything resembling actual deflation:





How was that possible? The answer is that there was relatively high inflation in the European periphery thanks to those big capital flows from the core to the periphery.

Or to put it differently: Germany believes that its successful adjustment was the result of its own virtue, but in reality it was successful in large part because of an inflationary boom in the rest of Europe.

And here’s the thing: the Germans are now demanding that the European periphery replicate its achievement (and actually surpass it, because the required adjustment is much bigger) without providing a comparably favorable environment — they’re demanding that Spain and others do what they never did, which is deflate their way to competitiveness.

This is a road to disaster.

http://krugman.blogs.nytimes.com/2012/05/06/german-adjustment/

Mr. Spam,

So you're saying that with Austerity measures, Germany was able to decrease labor costs and in turn increase exports because their goods were now more fiscally attractive, mostly because the rest of the EU refused austerity and labor costs stayed high?

Why exactly is that a bad thing?

 

[gabriel]

goods more FISCALLY attractive?? lol

 

[Spamature]

If you're saying that the Germans were the only ones with a crystal ball concerning the upcoming economic crash and had purposely position themselves for it. Then you can credit austerity. And even it that were true they were still following the Keynesian model of austerity during the boom times.

Remember he's pointing out that capital flowing into the other EU states and the rise of inflation in their economies during the bubble made German production comparatively more attractive.

 

[Sickofleft]

I wonder what Krugman is going to write when France manages to flush what is left of the EU down the toilet?......Oooppppsssss.......

Has Krugman ever heard of Japan and the lost decade or has he become such a piece of shit political shill he is just blowing anyone with a DNC badge?......

 

[Spamature]

I wonder what Krugman is going to write when France manages to flush what is left of the EU down the toilet?......Oooppppsssss.......

Has Krugman ever heard of Japan and the lost decade or has he become such a piece of shit political shill he is just blowing anyone with a DNC badge?......

A) Compare his predictions on the economy with others and tell me what they said when he was right and they were wrong. Then wait until he's wrong then challenge him. And last I heard he doesn't control any ministry in the French govt.

B) He had done extensive writing on Japan. So if you want to know what he thinks it's out there for you to find. While you are at it I think you better take a look at how conservative economists have been force to carry tea party water rather than stick with their own convictions and training.

 

[ya-ta-hey]

Mr. Spam,

Exactly, the Germans apparently saw the looming crisis, implemented austerity, and it worked.

 

[degsme]

Mr. Spam,

Exactly, the Germans apparently saw the looming crisis, implemented austerity, and it worked.

Not quite.

Germans saw a possible crisis... shorted the market and it worked. They did NOT "implement austerity"... They actually did what many are saying Greece needs to do - they 'grew their way out' of their deficit rate. And they did so in part at the expense of the rest of the EU. IN part by making it cheaper to hire temporary workers and in part by leveraging the cheaper but still well educated "Osti" labor.

 

[degsme]

I wonder what Krugman is going to write when France manages to flush what is left of the EU down the toilet?......Oooppppsssss

Hmm and how is France going to do that? Essentially France is demanding that the EU have closer politcal and economic integration- exactly what the USA did in 1789 after 8 years of a Currency Union with loose political union that resulted in a major currency crisis....

 

[Spamature]

Mr. Spam,

Exactly, the Germans apparently saw the looming crisis, implemented austerity, and it worked.

Whether they saw what was coming or not really isn't the point. The timing is what would be more important. It was done while Europe had a booming economy. Which is the central argument about austerity right now. It helps build reserves in the good times and but it distresses the economy and becomes self defeating in bad times.