David Brooks on two different stimulus approaches

[Ursa Majoris]

Good article from Brooks in the NYT assessing the German and American approaches to the recession.

 

The two countries followed different policy paths. According to Gary Becker of the University of Chicago, the Americans borrowed an amount equal to 6 percent of G.D.P. in an attempt to stimulate growth. The Germans spent about 1.5 percent of G.D.P. on their stimulus.

 

This divergence created a natural experiment. Who was right?

 

The early returns suggest the Germans were. The American stimulus package was supposed to create a “summer of recovery,” according to Obama administration officials. Job growth was supposed to be surging at up to 500,000 a month. Instead, the U.S. economy is scuffling along.

 

The German economy, on the other hand, is growing at a sizzling (and obviously unsustainable) 9 percent annual rate. Unemployment in Germany has come down to pre-crisis levels.

 

Results from one quarter do not settle the stimulus/austerity debate. Many other factors are in play. For example, Germany is surging, in part, because America is borrowing. Essentially, we Americans borrowed from our kids, spent some of that money on German machinery, and ended up employing German workers.

 

But the results do underline one essential truth: Stimulus size is not the key factor in determining how quickly a country emerges from recession. The U.S. tried big, but is emerging slowly. The Germans tried small, and are recovering nicely.

[wiegie]

This is a somewhat bogus natural experiment unless one also controls for the facts that:

 

1) Germany has benefitted from the strengthening of the dollar

&

2) Germany has large counter-cyclical policies built into its economic system as already in the form of substantial social safety nets that they pay for through higher taxes. Hence when things go bad, they are better positioned to handle it without having to enact a large stimulus plan.

[Azazello1313]

* "There's a problem: conservative politicians, clinging to an out-of-date ideology--and, perhaps, betting (wrongly) that their constituents are relatively well positioned to ride out the storm--are standing in the way of action. No, I'm not talking about Bob Corker, the Senator from Nissan--I mean Tennessee--and his fellow Republicans. . . . I am, instead, talking about Angela Merkel, the German chancellor, and her economic officials, who have become the biggest obstacles to a much-needed European rescue plan."-- Paul Krugman, New York Times, Dec. 15, 2008

 

* "Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany's finance minister you have to listen to, well, Republicans."--Krugman, New York Times, March 16, 2009

 

* "The euro area economy grew 1 percent in the second quarter of this year, a much better rate than had been expected, as Germany's best quarterly performance since reunification compensated for slow growth in Spain and Italy and a sharp decline in Greece, according to data released Friday."--news story, New York Times, Aug. 14, 2010

[Perchoutofwater]

Az, you mean Nobel Prize winning economists don't know their ass from a hole in the ground?