Krugman hit by boomerang

In a blog post today, Krugman tries to refute commenters who pointed to Germany's positive economical performance as alleged evidence for the advantages of reducing the deficit. Sadly, the good Prof seeked refuge to onesidedly using a GDP growth chart as a way to fight back, deliberately omitting the unemployment numbers which show a totally different picture. Just more of his usual badmouthing of Germany. He should have pointed to all the differences between Germany and the US instead, and argued that America can't simply copy single policies, but would have to copy the whole system to get into the same situation. That would have been more fair towards us, and the better argument, too. However, I already wrote about this, and I want to focus on another point now.

And that is that it actually was Krugman who played a most prominent role in providing this ammunition for the austerity advocates! Since the start of the year, he has been picking on Germany, complaining about us not doing enough for stimulus, and painting a picture of doom and gloom about the consequences of our (mostly cosmetic) austerity measures. During all those months, his readers waited for the bad news from Germany to show up in the headlines. But all they found were reports about a positive development month after month after month. Can he honestly blame them now for believing that apparently the rebound can be accomplished without much stimulus, and despite austerity policies? He distorted the situation in Germany for months, and now this turned out to be a boomerang that came back to hit him. Serves him well!

Really, with a lot of respect (and I'm still a fan), but Krugman's picking on Germany was unfair, misguided and strategically wrong. During the time he wasted trying to talk our folks into more of a stimulus, when the development showed them this wasn't necessary, the situation in the US deteriorated. I know, hindsight is 20/20, but didn't he ever have second thoughts that he may be flogging the wrong a**, uh, donkey? D'oh.

(based on a comment at Krugman's blog)

Should the US follow the German "austerity" course?

That question came up in a comment to another Krugman column ridiculing the allegedly "invisible bond vigilantes" (which weren't so invisible here in Europe at all). Brian Bolton from Boston was a bit confused about why austerity would be damaging for the US when others seem to get along with it so great: "I am with you on this but can you explain Germany? They're leading the austerity charge but are experiencing really strong economic growth."

Well, maybe I can put some perspective into this. See, the German calls for austerity in the EU (not for the US!) are based on purely political considerations. The major one is that almost nobody here really likes to use German taxeuros to bail out the PIGS (sry for that discriminating acronym, only using it because it's convenient). Those nations have to go through austerity, nobody wants to subsidize their wasteful spending, and the not-so-invisible "bond vigilantes" have already driven their bond rates up. But since it's not politically practicable to call for the austerity of others while at the same time living the high life on credit card, it was unavoidable that Germany had to lead by good example and implement cost cutting measures of its own, even though it could have afforded and used more stimulus to further reduce unemployment.

And actually, there's even an obligation for members of the Eurozone to keep the deficit under 3% of the GDP, a rule that was established because of German pressure to keep the Eurozone fiscally responsible! So, Germany had to live up both to this major principal and to the consequences of demanding others to spend less. And Merkel reacted on this by coming up with some cost cutting measures, most of which are only cosmetical, and which are dragged out over ten years to make the total amount look bigger. I guess this was seen as the best compromise that would show that we lead by example, without seriously hurting the rebound of our economy. I don't think the pundits and the political leaders can be fooled by that, but as a PR measure it seems to work. But behind the scenes, our social net is still working, stabilizing domestic demand (actually, an ongoing Keynesian stimulus), tax incentives boost investments in important sectors, and the weaker Euro fueled the comeback of our Export industries. Thus, the "economic miracle" here in Germany. Read the excellent roundup in Der Spiegel about this "Keynesian Success Story" for details.

However, the conditions in the US are different. You don't have a similarly strong social net (quite to the contrary, your jobless are threatened to be left pennyless by the Senate every few months), your industries aren't as export oriented (many managers don't care enough about that complicated foreign business) and that the dollar became stronger in relation to the Euro didn't help, too. So, obviously, you can't simply copy German policies, the situation in the States is too different. What is right for some European nations isn't right for you. The US need more stimulus to cope with the unsustainable high unemployment, or else you soon will have riots like in Greece. And as a rich country, with lots of resources guaranteeing credits, too big to fall victim to the bond raiders, you can afford another job program. Hopefully one which will really focus on improving infrastructure and create more employment this time!

(Based on a comment to that Krugman column)

"Anti-Krugmanism" in Germany?

"Anti-Krugmanism is working right now in Germany."
That's what commenter "Samuel" from Orlando wrote at Krugman's blog today, and it's utter nonsense. Yes, we Germans disagree with Mr. Krugman about the need for more stimulus for our economy right now. And we have good reason for this, since everybody can see that our industries are already working near full capacity, and our domestic demand has increased recently, too. The influential German weekly Der Spiegel even speaks of a "Keynesian Success Story"! So, as we see it, Krugman simply didn't pay enough attention to the different conditions here, where our still strong social net automagically stabilizes demand, and dampens recessions. Also, while our government had to come up with some austerity plans, to reduce our budget deficit to the EU standard of below 3%, and because of foreign relation reasons, too (we can't lecture the Greek when we ourselves live beyond our means), in reality the effect of these measures is miniscule. It's more PR than a serious reduction of governmental services.

So, no Anti-Krugmanism here, but actually policies in place that are much more in line with Keynes, and Krugman's advices, than everything in the US! That the good Prof himself somehow still tried to talk us into even more stimulus, despite the data showing this is unnecessary, and despite the political problems attached to this, is only evidence of a temporary disagreement, not of a general rift.

The situation in the US, on the other hand, is totally different. You don't have the same kind of social net working as a safeguard against economic downturn. So, America does need an additional stimulus to boost domestic demand. The horrible employment numbers show the necessity. And to say that the US should act like Germany, even though the conditions are totally different, is really a fundamental misunderstanding. If the US would firstly copy the German social net, then this would be debatable. But I guess if the WH would really try to implement our kind of social market economy in the states, "Samuel" would be among the first to cry "COMMUNISM"!

(Based on a comment at Krugman's blog)