Embracing 'Crass Keynesianism'

Over at the New York Times, Paul Krugman rips into Peer Steinbrueck: 

There’s an extraordinary — and extraordinarily depressing — interview in Newsweek with Peer Steinbrueck, the Germany [sic] finance minister. The world economy is in a terrifying nosedive, visible everywhere. Yet Mr. Steinbrueck is standing firm against any extraordinary fiscal measures, and denounces Gordon Brown for his “crass Keynesianism.”

You might ask why we should care. Germany’s economy is the biggest in Europe, but even so it only accounts for about a fifth of EU GDP, and it’s only about a quarter the size of the US economy. So how much does German intransigence matter?

The answer is that the nature of the crisis, combined with the high degree of European economic integration, gives Germany a special strategic role right now — and Mr. Steinbrueck is therefore doing a remarkable amount of damage.

Here’s the issue: we’re rapidly heading toward a world in which monetary policy has little or no traction: T-bill rates in the US are already zero, and near-zero rate will prevail in the euro zone quite soon. Fiscal policy is all that’s left. But in Europe it’s very hard to do a fiscal expansion unless it’s coordinated.

[Here, Krugman argues that Germany's spoiling the chances for a coordinated response]

And if Germany prevents an effective European response, this adds significantly to the severity of the global downturn.

In short, there’s a huge multiplier effect at work; unfortunately, what it’s doing is multiplying the impact of the current German government’s boneheadedness.

Of course, I don't know who's right here, although I tend to find much of what Krugman says convincing. I can understand Steinbrueck's dismissive response to UK policy and to 'Keynesianism', since it sounds like stuff I frequently hear from German business and government types:

1. This crisis started out in the U.S. and the U.K., they're the ones who are going to suffer from it, we'll be largely exempt because we didn't drink their Kool-Aid;
2. 'Keynesianism', whatever these German bigwigs consider it to be (and, in my experience, they often can't really define it when asked, except to imply that it always endorses large deficit spending) is irresponsible and wrong-headed. Another variant: those 'damned reds' are always invoking Keynesianism, so it must be a terrible idea; and
3. We Germans are extremely debt-averse, and have a lot invested in our reputation as Europe's Captain Sensible in budgetary affairs, scolding other EU countries who run large public debts. If we take on 1 extra euro in public debt, that will give a green light to those hot-headed Italians, who will take on 5 euros for our 1, and the even more hot-headed Greeks, who will take on 10.

We'll see which position emerges as the right one -- although if what Krugman says is true, Germany's refusal to play along is likely to diffusely hurt Europe as a whole, not just Germany.

Perhaps Krugman should issue a challenge to Steinbrueck to have a public debate. Would be fun for wonks like me.

Comments

[Don]

Here is another lucid analysis of the dilemma facing the nations facing exporting nations. In this case the columnist is discussing China, and says that there are three possibilities:

1) The governments of 'consuming' countries like the US will increase their own consumption to offset the drop in consumer demand,

2) That China will expand domestic demand to take up the slack,

3) That there will be a large liquidation of production in China combined with export subsidies and other policies designed to force more of the cutbacks upon China's trading partners.

But he points out that #1 and #2 are unlikely to make up for the drop in consumer demand in the 'importing' nations. He also points out the parallel between China today and the US in 1929, and that China may go through a 'Great Depression' of it's own.

Not all of this applies to Germany, or to the degree that the problme appears in China. For an example, Germany may well be able in theory to expand domestic demand considerably more than China can, because Germany is a rich nation. In theory it can, at least.

[Don]

Paul Krugman repeated his attack on Germany's inaction with a column titled European Crass Warfare, this time labelng Angela Merkel as "Frau Nein".

Krugman predicts the blindness won't last forever:

"Germany’s big Nein won’t last forever. Last week Ifo, a highly respected research institute, warned that Germany will soon be facing its worst economic crisis since the 1940s. If and when this happens, Mrs. Merkel and her ministers will surely reconsider their position."

"But in Europe, as in the United States, the issue is time. Across the world, economies are sinking fast, while we wait for someone, anyone, to offer an effective policy response. How much damage will be done before that response finally comes?"

[Don]

"I still fail to understand why Germany should be chastised as a "free rider" (free loader?)"

Two comments.

First, Germany is being 'chastised' as a 'free-rider' in the in the international system for lot's more reasons than exports. Exports are merely one more count on the indictment.

Second, as an American I've come to understand one thing very well, and that is that in certain areas it doesn't matter whether I understand the reasoning for what others think, and why. Nor do my opinions to the contrary matter a angstrom's worth in changing their minds.

I see Germany falling into a similar trap as Bush fell into 7 years ago. If that continues Germans will rue the day it happened, no matter who is right and who is wrong....

[Don]

Here is a link to a blog post by Dan Drezner which mentions Germany in passing.

The World Bank is being optimistic

Point four in Drezner's list below:

"4. There is a very dangerous prisoner’s dilemma game brewing in the interplay of fiscal expansion and trade policy. Unless export engines like Germany start to signal that they’ll prime their pump as well, you’re going to start to see some nasty protectionist attachments to any new government spending;

Drezner is no extremist, he's a hemi demi semi free market type, a political scientist with economics background and about as moderate as you get in the US academic community.

And 'protectionism' is what he sees coming - and decries.

[ben]

"talking the British pound down like that"

Now, where did he do that, when did it start (since the Pound is sliding down for quite a while already - for reasons!), does his boneheaded opinion even matter, and haven't Britsh politicans been talking down the Euro since before it even came into existence?

[Norbert]

I still fail to understand why Germany should be chastised as a "free rider" (free loader?) for being an export-oriented economy which benefits from foreign economies' profligacy. What is the sin in a country making use of its resources and selling goods to where there is demand for them? Can one blame Argentina for making huge profits from selling meat at inflated prices? Does anyone blame the UK or the US for brain-draining the brightest people away from other countries in the years when financial markets prospered?

And, of course, one way forward for the German economy is to try to continue to export as much as possible, what's wrong with that? If a company fails to sell its goods on the market it is probably because its goods are not good enough (lack of innovation). Why would it be "beggaring thy neighbour" if it turns out that your products are better than those of your neighbour? Maybe, in just a few months' time, German car companies will face the same fate as those in Detroit now...

As for Steinbrück, he is a diplomatic catastrophe. And he should know he's doing damage to the UK by talking the British pound down like that. It is not hard to imagine that he will have to eat his words soon, when the situation in Germany has worsened dramatically.

[ben]

"If Detroit, Peugot, nd Renault go through hard times while the German auto companies increase their market share - that won't make you any friends in the US and France."

It would be wonderful to have a greater share in a dying market, wouldn't it. That aside, if American people don't like them American people won't buy them. Problem solved.

And so far people around the world seemed to have good instincts on how to blame for the mess they're in. And the reason why Detroit crash-burns does not lie in Stuttgart.

"It will make Germany the outlier in the coming decade. Americans know full well what it's like being the outlier"

If to invade, say, Argentina on false pretenses and to kidnap US citizens and detain them in a torture camp on ... um .. Sylt is part of Steinbrück's economic policy, then I fully agree with your prediction.

[Johannes]

Kassandra Krugman already made it into this nice little strip:

http://www.salon.com/comics/tomo/2008/12/09/tomo/

"if it's invisible, why can we see it? - never mind, just RUN!"

Krugman is probably right, Steinbrück is an idiot, and what's worse, a hypocrite. It's really an amazing media stunt (and that it can be pulled of shows a lot about the critical faculty of most of the press) that he (and Merkel), too are still praised as cold-blooded saviours in the crisis, when they were first responsible for it (by lowering standards of regulation etc.) then largely ignorant (believing in summer and fall that Germany would hardly be affected at all) and now stubbornly refusing taking decisive measures in step with the EU.

They should have resigned weeks or months ago, but of course they won't and neither will anyone else of the people who have politically responsible for the development in the last decade.
(insert quote about not being able to eat enough etc.)

Johannes

[Don]

"It takes some sophistication to turn that simple fact around and argue that Germany will actually somehow benefit in the downturn. I'd like to hear how exactly the sinister German plan to "export more" in the midst of a worldwide recession looks like."

I am not in fact mking that argument, in fact I am arguing the opposite - that Germany and the other agressive exporting nations will not be able to export their way out of the crisis - and should not even try to do so.

I am also arguing that any effort to do it - or even a percieved effort to do so (whether effective or not) will be widely and publically percieved to be 'beggar thy neighbor'.

In fact it's perrfectly possible that even 'business as usual' can and will be seen this way. If Detroit, Peugot, nd Renault go through hard times while the German auto companies increase their market share - that won't make you any friends in the US and France.

This is why it's so critical that Germany be seen as a 'good neighbor' in dealing with the economic crisis. Right now Germany is seen as seeking to be a 'free rider' in far too many things. There may or may not be justice in that, but standing aloof from participating in pan-European Keynesian measures when German companies benefit from Keynesian measures taken elsewhere in Europe....

It will make Germany the outlier in the coming decade. Americans know full well what it's like being the outlier, with Germans being a major part of the process which made the US into a pariah. I sincerely hope you enjoy it more than we did, but fear that you will not....

[ben]

I'd wish people (including Mr. Krugman) would actually read Steinbrück's interview instead of free-associate.

Furthermore I'd wish they'd look at the existing German stimulus programs in comparison to the rest of Europe. I agree with Steinbrück that the UK is basically just burning money by lowering the VAT. And the French program is merely an illusion created by rebranding long-planned projects - or so they say. Feel free to enlight me if that's not the case. Unfortunately (or dare I say fortunately) the German budget alone cannot save the world.

And *if* things start to get really bitter we better have some money left for the real problems. Better don't come around next year telling masses of *real* people you can't help them anymore because your money has gone in a futile attempt to stabilize some abstract *state of the economy*.

And Don, of course an export-oriented economy will be hit by economic problems *anywhere*. It's just that we can't do much about it. It takes some sophistication to turn that simple fact around and argue that Germany will actually somehow benefit in the downturn. I'd like to hear how exactly the sinister German plan to "export more" in the midst of a worldwide recession looks like. It's not that the number of Mercedes' sold worldwide is decided in the Chancellery.

The fact that "German" companies (that don't even pay their taxes here) offer products people want to buy is not a crime per se BTW.

[Don]

One more blast from the past (the Great Depression).

Another thing which occurred during the Great Depression was - an arms race. If one has enormous quantities of unemployed young men and lots of empty factories.....

Unoccupied young men in the streets are a huge social problem. They cause crime, and vicious demagogues appeal to them and rouse no end of trouble.

Sooner or later someone will be elected who sees an elegant solution; expand the armed forces. Put those factories back in business making weapons and put those young men to work as soldiers and sailors.

Germany knows about this progression better than most nations do, doesn't it?

[Don]

One more comment, if I may. Looking back on the history of the Great Depression of the 30's, one thing which stands out is that the US suffered worse than almost any other country.

One reason is that global trade almost collapsed; the US was the premier exporter in the world at that time, and the collapse of trade meant that the workshops of the US were forced to shut down, throwing millions of people into unemployment.

Depression puts enormous stresses on the world trading system. A national government faced with a choice between complying with WTO at the cost of raising local unemployment is going to feel huge pressure to thrown WTO into the trash can. The choice may be to ignore WTO or be voted out, and we know how politician's minds work, don't we? Forget WTO as a rememdy, at least in the short to medium term.

A real depression will put enormous stress on ALL those multilateral interntional institutions we (particularly Germans) hold so dear. If Germany sought to export it's way out of depression to it's EU neighbors, I suspect the neighbors would take steps to prevent that from happening. I also expect that the inevitable appeal to Brussels would be resolved more or less by a majority vote - you can work out what that means.

If the EU seeks to export it's woes outside of the EU something very similar will occur within the WTO, I think. And if the WTO sided with the EU (as it might) WTO would come to be regarded as anistrument of EU hegenomy - and destroyed that way.

Germany whould be exerting it's utmost efforts to saving the world trading system, but instead it is doing the opposite.

Which countries are the world's workshops today? China, Germany, Japan, and perhaps India, Taiwan, and South Korea.

[Don S]

"Thus, to prevent a further downward spiral, governments themselves must immediately begin spending massive amounts on projects that will directly stimulate the economy, such as public works and infrastructure."

This is true, but there is one more element to be added to the pot. Germany believes in 'working' it's way through the crisis.

Germany already runs an enormous trade surplus with the rest of the world, and proposed German policy is to ride through the recession unscathed by exporting more.

But in a world in which consumer demand is cratering, what is the implication of this kind of policy? German production is to replace local production in this view of things. Which effectively means that Gerany proposes to export it's internal unemployment to other nations.

This won't work for several reasons. 1) Germany has no way to compel others to buy German exports. 2) "Beggar thy neighbor" policies tend to rebound viciously upon those pursuing them. Any effort to agressively export German goods into other countries with falling demand will make Germany into the leper of the international community in record time. Governments will erect barriers to save local employment, whether it's legal under WTO - or not.

The bulk of German exports is currently to the EU, and perhaps to Russia and other close-by countries. If Germany seeks to keep it's rate of unemployment low at the cost of higher unemployment in France, Poland, Italy, and Spain - those countries will retaliate in a devestating manner.

Ok, let's say that Germany instead seeks to expand it's exports outside the EU and vicinity. Where? The 'rich' oil countries are imploding so I rather doubt Germany can export much to them. China? China is in a similar situation to Germany's - they will be seeking to expand their exports and not in a mood to buy much.

No, German exports have to go where the money is and some modicum of demand remains. I.E. the US, Canada, Japan, South Korea, and perhaps Latin America.

A German policy designed to lower German unemployment by raising US unemployment will win you no friends in the US. No friends at all. Not even the Democrats, in fact ESPECIALLY not the Democrats!

Efforts to expand German exports at the cost of US exports in Latin America and Canada will have the same effect, not to mention angering the people and governments of those countries as well, because German exports will also come at the cost of local jobs.

[califax]

The Problem is, that we really like our big spending social wellfare state.
And that needs a lot of money.
Germany is deep in dept. It's so deep under water that really noone knows, how to get out of the trap without starving the welfare state even in times of economic boom.
Part of the story of how we got under water is the traditional policy of keynesian "Konjunkturprogramm".
It never worked. It always burned money, that we now have to pay back with raised taxes and lowered welfare standards.
Steinbrück wants to save the welfare state and he wants to keep the big gouvernment model with state driven public mass transport and subsidies here, subsidies there.
If this model is to have a chance, it's only by a strict agenda to cut and save spending until our annual dept pressure is much, much lower. Until our governments income is at least almost as high as our governments spendings.
We really gotta get rid of our depts.
And as another part of the picture: He doesn't like it, when privatiers take the cream and push the risk away to the taxpayers.
I support him.
If we are to throw a lot of money at the problem, we should first ask "which action can make a difference" and not "How much money shall I throw?"

[Alexandra]

I also think our government makes a severe mistake. IIRC it's the same mistake Japan made a couple of years ago, and the Japanese econonmy still hasn't recovered.

[Andrew]

I think everyone's missing Krugman's point. What he's saying is that the global economy is on the verge of a catastrophic meltdown. Who or what started it is beside the point -- we can deal with that later. This is no time to point fingers. The problem is that consumer demand is collapsing, both in the U.S. and in Europe. Trying to stimulate consumer demand is beside the point; there's no way to do that now. Consumers are terrified, and are hoarding money.

Since both the U.S. and Europe are nearing zero interest rates on government bonds, there's no way to use monetary policy to stimulate the economy. Thus, to prevent a further downward spiral, governments themselves must immediately begin spending massive amounts on projects that will directly stimulate the economy, such as public works and infrastructure. Krugman himself has suggested a number around 700 billion for the U.S.

Krugman is normally a moderate deficit hawk and believes large and sustained budget deficits are a problem. But in the short term, only a massive infusion of direct deficit spending can avert catastrophe. What Krugman is saying, along with dozens of other economists from across the ideological spectrum, is that the patient needs desperate lifesaving measures. Crack a few ribs resuscitating him if need be -- he can recover later, after his heart starts beating again. And a global financial collapse will most certainly take Germany along with it.

These are very milquetoast people who don't normally use language like this and are usually averse to deficits. When lots of Nobel laureate economists begin sounding near-hysterical warnings, it impresses me.

[ben]

For fairness, I'd rather have a discussion between Steinbrück's advisors and Krugman.

Now, Steinbrück raises some convincing points in his Newsweek interview about the long-term debt problems and the doubtful impact of lowering the VAT. Whereas Krugman's delivers no arguments at all for our government’s "boneheadedness".

[Kyrill]

I think that Steinbrück has a very valid point: Any money borrowed now has to be repaid in the future. And with budgets already deep in red, he takes a long-term view.
Personally, I doubt whether all these "spending programs" will really matter. Especially in Germany, people tend to keep their money together - and you can see that in the stats. If they believe times are getting rough, Germans are not going to spend their way out of it - they rather work. And most spending in the US will be on consumer goods and therefore help the Vietnamese or Chinese economies - but not the American.
All in all, I think that Mr. Steinbrück is doing a good job.

[Mac]

@Sam.Z: Except that the metaphor isn't correct. It's been more like the Anglo's told everyone that if you don't buy fire insurance you have more money for matches. And then they bought the matches from Germany. The point is, that the German companies made tremendous profits by selling their exports to the debt based Anglo economy and invested their profits in the financial markets that now broke apart. That's the point about the "world export surplus championship" that our politicans crave to celebrate each year. Germany is a net-creditor in the global economy (the second largest after Japan, I believe to remember) and the credit crunch urges to correct this - We must allow our debitors to pay their debt back and the only way to do this is to increase domestic consumption.

We have a fair share to this problem.

[Sam Z.]

Even if Krugman is technically correct, it's easy to understand German frustration in this case. For some years we in the UK and US have been aggressively proclaiming the virtues of economic policies which it is now clear have got us all into trouble. To the extent that Germany participated in what happened, it seems to me that it was mainly because of a generation of young German managers who were influenced by the "exciting" Anglo way of doing things, for example, people who did MBAs in the UK or US. So you've got (i) primary financial problems in the UK and US and (ii) more than a little responsibility for pushing an intellectual position which facilitated secondary problems in other countries.

How can you not be annoyed? It's like someone in your building talked you out of taking out fire insurance, and the next week left a hob on and burned down the house. Oh, and then came around castigating you for not participating enthusiastically enough in the clean up.