'The myth of German austerity' is the title of a recent post on Paul Krugman's blog. He's making an important point about public spending: Germans were far less austere than most other European nations. In this sense the German case confirms what critics of austerity have argued all along: less public spending cuts=higher growth.
However, it needs to be added that Germans experienced substantial economic harshness ('austerity') because of stagnating real wages.
But neither the fake austerity in public spending nor the real abstinence of wage earners are at the root of Germany's slightly better economic performance. This is caused by significant export surpluses which are problematic for a number of reasons outlined in previous posts.
Wednesday, 26 February 2014
Monday, 17 February 2014
No cash, no party
Still working on the German foreword (among other stuff). Here is another objection to austerity critique that you get frequently in German debates: 'why all the fuss about austerity? It's simple really: if you don't have money you cannot spend any.'
This is based on the experience of private households and sounds like common sense. However, if you think about it a bit more it is a rather silly idea. Even for private households this principle only makes sense in part and it is completely wrong when you think about businesses and states.
This is based on the experience of private households and sounds like common sense. However, if you think about it a bit more it is a rather silly idea. Even for private households this principle only makes sense in part and it is completely wrong when you think about businesses and states.
True, private individuals need to tailor their expenditure to their income. But even private households are not normally expected to have 'balanced books' at all times. For example, it is common that young families go into debt to buy a home and then pay off the mortgage over time. It would not make much sense to allow families to buy homes only once they can pay in cash. If families were prevented from taking out loans most would be able to buy a family home when they do not need it anymore.
Renouncing credit makes even less sense in the cases of businesses. They need to invest when an opportunity presents itself. Even if they do not have the necessary funds at the time. Without credit the 'economic miracle' by which capitalism has multiplied the wealth and prosperity of many nations over the last centuries would have been impossible.
And states? In contrast to private households their level of income depends to a substantial extent on their level of expenditure. If states spend less, employment and investment likely decline and this leads to reduced tax income. This is what sets state a part from private individuals. If the later spend less this will not bring down their income. They will simply accumulate more savings. But because of feedback loops the state's income tends to decline with its spending. There is some debate about the extent that GDP declines for every Euro that governments cut. Nonetheless, there is overwhelming evidence that this link exists. (See here and here.)
Therefore it makes a lot of sense for states to behave anti-cyclically: cut expenditure during the boom and expand it during economic downturns. What matters is that government finances are balanced in the medium and long term. In the short term it often makes sense to spend money that you do not have.
And states? In contrast to private households their level of income depends to a substantial extent on their level of expenditure. If states spend less, employment and investment likely decline and this leads to reduced tax income. This is what sets state a part from private individuals. If the later spend less this will not bring down their income. They will simply accumulate more savings. But because of feedback loops the state's income tends to decline with its spending. There is some debate about the extent that GDP declines for every Euro that governments cut. Nonetheless, there is overwhelming evidence that this link exists. (See here and here.)
Therefore it makes a lot of sense for states to behave anti-cyclically: cut expenditure during the boom and expand it during economic downturns. What matters is that government finances are balanced in the medium and long term. In the short term it often makes sense to spend money that you do not have.
Wednesday, 12 February 2014
More notes for preface of German edition
Another objection to austerity critique often heard in Germany and elsewhere is this: the reason austerity appears not be working is that we haven't really tried it yet. Proof? Well, the central banks are printing money like mad. How can this be austerity?
This is an odd argument because it connects different things that are not directly related. Yes, some central bank are 'printing money'. They are engaging in 'quantitative easing' which consists in buying financial assets from banks and other institutions. This provides these institutions with liquidity and props up demand for financial assets.
So there is not really much impact of these monetary measures on demand and hence on investment and growth. That's unfortunate because economies urgently need stimulus to kick-start growth. But in current conditions additional liquidity will not do the trick because no one is willing to spend it. Additional demand needs to be created directly through government expenditure (in the short term) and income redistribution (in the medium term)
The only sector where demand may actually be stimulated by the current monetary policy are financial markets. Cheap money is used for financial speculation: despite the depressed economic situation stock exchanges are up. The supply of liquidity may well result in new asset bubbles on the financial markets but it does very little to alleviate the problem of depressed consumption and investments.
Quantitative easing is not the antidote to austerity. It's an attempt of central banks to do something to keep economies going while austerity politicians are doing their best to strangle growth.
This is an odd argument because it connects different things that are not directly related. Yes, some central bank are 'printing money'. They are engaging in 'quantitative easing' which consists in buying financial assets from banks and other institutions. This provides these institutions with liquidity and props up demand for financial assets.
How does this relate to austerity? There is no fixed definition of what austerity means. Some people use it to mean cuts of public expenditure. This is close enough to what is happening but in the book I defined austerity more broadly as abstinence from consumption. That comprises most of today's cuts to government expenditure. That's because most government expenditure is for forms consumption anyway and government expenditure for investments is often not reduced as much.
In theory, governments could (and should) take advantage of the liquidity injected by central banks and the low interest rates in order to finance stimulus programs (building roads, power lines, schools or hire more teachers, pay firefighters more etc etc). But because governments are committed to austerity policies they won't. Companies could take advantage of easy finance--to the extent that it trickles down to small and medium businesses--and invest. But they won't because there is no market for additional output. Private individuals could also take out loans and consume. But they won't because of economic uncertainty and because many people just got burned during the last round of easy credit.
In theory, governments could (and should) take advantage of the liquidity injected by central banks and the low interest rates in order to finance stimulus programs (building roads, power lines, schools or hire more teachers, pay firefighters more etc etc). But because governments are committed to austerity policies they won't. Companies could take advantage of easy finance--to the extent that it trickles down to small and medium businesses--and invest. But they won't because there is no market for additional output. Private individuals could also take out loans and consume. But they won't because of economic uncertainty and because many people just got burned during the last round of easy credit.
So there is not really much impact of these monetary measures on demand and hence on investment and growth. That's unfortunate because economies urgently need stimulus to kick-start growth. But in current conditions additional liquidity will not do the trick because no one is willing to spend it. Additional demand needs to be created directly through government expenditure (in the short term) and income redistribution (in the medium term)
The only sector where demand may actually be stimulated by the current monetary policy are financial markets. Cheap money is used for financial speculation: despite the depressed economic situation stock exchanges are up. The supply of liquidity may well result in new asset bubbles on the financial markets but it does very little to alleviate the problem of depressed consumption and investments.
Quantitative easing is not the antidote to austerity. It's an attempt of central banks to do something to keep economies going while austerity politicians are doing their best to strangle growth.
Friday, 31 January 2014
The austerity of others
Still preparing the foreword for the German edition of 'Austerity. The great failure'. Another comment often heard in German debates about austerity is this: 'Why should we care about austerity in Greece and other distant places? That's their problem. We're doing fine and that's all that matters.'
Below are 7 reasons--in no particular order--why Germans should care about what's going on in the European periphery. (As discussed in the previous post the claim that Germany is doing well is rather dubious in itself. But won't rehash this here.)
(1) Much of German growth depends on exports and most German exports are to European countries. If Germany's main trading partners don't grow the market for German exports is smaller and Germany grows less. Germany is doing better if everyone else is doing better.
(2) The crisis in the European periphery has in part the result of German export surpluses. The German trade surpluses correspond to trade deficits in the crisis countries. These deficits were financed with credits (taken out by the private sector). When the credit bubble burst, governments stepped in, their borrowing costs rose and this led to the Euro crisis. The trade imbalances need to be limited to have a stable Euro. A stable Euro is in Germany's economic interest because only with a common currency is a European free trade zone a truly integrated market.
(3) Since German exports were financed by credits in the periphery Germany has a strong interest that these countries do not default on their debt. Otherwise all the beautiful things that Germany has sold to these countries will ultimately not be paid for. Germany's economy needs a stable financial framework with solvent trading partners.
(4) Strong imbalances in the standard of living in an area where people are free to move will lead to significant migration. In other words, if the crisis in the periphery will be deep and long enough people will move from there to Germany. Often that's hailed as flexibility and a solution to Europe's unemployment problem. But this solution is not without problems. First of all, there are not enough jobs in Germany to employ everyone who moves there in the hope of getting a job. Second, large scale immigration creates social and economic problems. Even the very limited immigration from Romania and Bulgaria that is taking place now is extremely controversial in Germany. One might wonder if German society would really be able to handle large scale immigration without creating a dangerous political backlash. Third, it can hardly be in Germany's interest to empty the European periphery of the most skilled and ambitious individuals. That would harm the long term growth prospects of these countries and make it harder to every overcome unequal levels of economic development in Europe.
(5) Economics is not everything: if the economic and social crisis in the European periphery is not solved then it may well turn into a political crisis. There are signs of political instability in Greece, Italy and to a lesser extent in Spain. Germans ought to know from their own history how quickly an economic downturn can lead to the collapse of democracy. Today, the danger of political collapse and conflict in Western Europe is often underestimated. During the last 50 years the European Union has delivered on its main promise: keeping peace and stability in Europe. But this task was made easier by growing prosperity and a stable geopolitical context. The cold war was a period of tension but it also had a stabilizing effect. This macro conflict overshadowed and repressed other possible conflicts. Now the cold war is over and we live in a multi polar world that is a lot more fragile. As others have pointed out our world resembles that before World War I in many ways. If you add economic decline to this new international complexity a new era of instability and conflict may be the consequence.
(6) Germany could use this opportunity to polish its historical record. Modern Germany was created in the late 19th century and since that time its main contribution to European history were violence, instability and destruction. That's not uncommon for European nations but Germany still stands out. There were more benign periods in Germany's history but now would be an occasion to go down into history for once as the nation that brought peace and prosperity to Europe instead of the usual war and destruction.
(7) Compassion, perhaps? This is a somewhat old fashioned argument that many in today's debates brush aside all too easily. However, the notion that caring about your fellow human beings is a precondition to creating a good society and leading a fulfilling and happy life is central to European culture. It can be found in the writings of the pagan philosophers of antiquity, in the religious traditions of Europe and even in the thoughts of the hard-nosed writers of the enlightenment. Political decision need to take into consideration these ethical norms and values on which out societies are built.
Below are 7 reasons--in no particular order--why Germans should care about what's going on in the European periphery. (As discussed in the previous post the claim that Germany is doing well is rather dubious in itself. But won't rehash this here.)
(1) Much of German growth depends on exports and most German exports are to European countries. If Germany's main trading partners don't grow the market for German exports is smaller and Germany grows less. Germany is doing better if everyone else is doing better.
(2) The crisis in the European periphery has in part the result of German export surpluses. The German trade surpluses correspond to trade deficits in the crisis countries. These deficits were financed with credits (taken out by the private sector). When the credit bubble burst, governments stepped in, their borrowing costs rose and this led to the Euro crisis. The trade imbalances need to be limited to have a stable Euro. A stable Euro is in Germany's economic interest because only with a common currency is a European free trade zone a truly integrated market.
(3) Since German exports were financed by credits in the periphery Germany has a strong interest that these countries do not default on their debt. Otherwise all the beautiful things that Germany has sold to these countries will ultimately not be paid for. Germany's economy needs a stable financial framework with solvent trading partners.
(4) Strong imbalances in the standard of living in an area where people are free to move will lead to significant migration. In other words, if the crisis in the periphery will be deep and long enough people will move from there to Germany. Often that's hailed as flexibility and a solution to Europe's unemployment problem. But this solution is not without problems. First of all, there are not enough jobs in Germany to employ everyone who moves there in the hope of getting a job. Second, large scale immigration creates social and economic problems. Even the very limited immigration from Romania and Bulgaria that is taking place now is extremely controversial in Germany. One might wonder if German society would really be able to handle large scale immigration without creating a dangerous political backlash. Third, it can hardly be in Germany's interest to empty the European periphery of the most skilled and ambitious individuals. That would harm the long term growth prospects of these countries and make it harder to every overcome unequal levels of economic development in Europe.
(5) Economics is not everything: if the economic and social crisis in the European periphery is not solved then it may well turn into a political crisis. There are signs of political instability in Greece, Italy and to a lesser extent in Spain. Germans ought to know from their own history how quickly an economic downturn can lead to the collapse of democracy. Today, the danger of political collapse and conflict in Western Europe is often underestimated. During the last 50 years the European Union has delivered on its main promise: keeping peace and stability in Europe. But this task was made easier by growing prosperity and a stable geopolitical context. The cold war was a period of tension but it also had a stabilizing effect. This macro conflict overshadowed and repressed other possible conflicts. Now the cold war is over and we live in a multi polar world that is a lot more fragile. As others have pointed out our world resembles that before World War I in many ways. If you add economic decline to this new international complexity a new era of instability and conflict may be the consequence.
(6) Germany could use this opportunity to polish its historical record. Modern Germany was created in the late 19th century and since that time its main contribution to European history were violence, instability and destruction. That's not uncommon for European nations but Germany still stands out. There were more benign periods in Germany's history but now would be an occasion to go down into history for once as the nation that brought peace and prosperity to Europe instead of the usual war and destruction.
(7) Compassion, perhaps? This is a somewhat old fashioned argument that many in today's debates brush aside all too easily. However, the notion that caring about your fellow human beings is a precondition to creating a good society and leading a fulfilling and happy life is central to European culture. It can be found in the writings of the pagan philosophers of antiquity, in the religious traditions of Europe and even in the thoughts of the hard-nosed writers of the enlightenment. Political decision need to take into consideration these ethical norms and values on which out societies are built.
Tuesday, 28 January 2014
Vorsprung durch Austerität?
One of the most common German objections to a critique of austerity will go something like this: 'What's wrong with austerity? We went through tough labour-market reforms, welfare cuts and have limited our government spending and look how well Germany is doing now.'
The main problem with this view is of course that Germany is not doing well. That's both in terms of economic growth and in the terms of living standards.
Clearly, German growth has been much stronger than in Greece, Spain and in the other crisis countries. But that's not because Germany has done so well but because these countries have done so badly. If you compare Germany's economic performance with the average of the OECD countries (a selection of the world's economically most advanced countries) there isn't much to brag about. Since 2007, when the crisis hit most countries, German growth has been above average only in four years and mostly not by more than a percentage point. In two years it was below average. That includes 2012, the last year in the statistic, when average growth in the OECD was 1.5% while Germany grew at a meager 0.7%. If you compare Germany to the US, its performance looks even weaker. The American economy grew 2.8% in 2012. That's four times the German growth rate. And that's despite the fact the German growth is propped up by unparalleled export surpluses.
There is no question that Germany has done better than many other countries: it is one of the few countries in Europe to have reached pre-crisis output levels again. The GDP of most other European countries is still below what is was before 2007. But that does not change the fact that being at 2007 output levels when it is 2014 is no reason for celebration.
The weakness of growth in Germany has also had a negative effect on employment. This is sometimes obscured by good unemployment statistics: German unemployment is low at 5.5% (2012). But to some extent this reflects more institutional arrangements than economic strength. The average number of hours worked per worker has declined substantially from 1422 in 2007 to 1397 in 2012. In other words, after seven years of 'recovery' employment has still not returned to pre crisis levels.
Not only is Germany's economic recovery rather anemic but its benefits are also distributed very unevenly. Substantial parts of the German population are experiencing low or declining standards of living. Real wages declined from the early 00s and have only started to grow again recently. In 2012 they were at the same level as in the late 1990s. Partly as a result of this even many workers in full time employment have to rely on forms of public subsidies to make ends meet. Those who completely live off public subsidies feel the effects of the welfare cuts of the last decade. For many Germans even the weak recovery does not coincide with improving standards of living. A recent survey found that the poverty risk in Germany is below EU average. But it is still higher than in all of Germany's neighbors with the exception of Poland.
Germany is also falling behind in many other areas that depend on public funding. In international comparisons German schools, universities and infrastructure are rarely rock bottom. But neither can do they occupy top spots.
The weak economic development and the standard of living crisis are direct results of Germany's own austerity policies. Mainly under the auspices of Gerhard Schröder's Agenda 2010 the labour market was liberalized and welfare provisions were cut. Subsequently, public spending was restricted by legislation limiting deficit spending. These policies resemble closely those applied today in the European crisis countries and have similar effects. The weak development wages, benefits cuts and restrictions on public spending have depressed domestic demand. The result are depressed levels of investment and weak growth.
That the economic results are not worse is due to the fact that the weakness of domestic demand has in part been compensated by extraordinarily strong exports. (It is far from clear that low labour costs are responsible for the export boom. The quality of German products may be a more likely explanation for the strong international performance of Germany's export economy.)
Germany has in this way avoided outright economic crisis but it still has an economy that is performing far below its potential. The fact that Germany is in a better position compared to many European countries should not obscure the fact that it is achieving only a faction of what it could and should aspire to in terms of economic strength and standard of living.
Ultimately, the problem is a political and social one rather than an economic one. In order to perform better economically, domestic demand would have to be strengthened. In the short run this would mean increasing government spending and in the longer run it would require a substantial redistribution of incomes in favor of low incomes which would boost domestic demand. (Lower incomes tend to be spent completely while higher incomes are usually saved in part.)
This could be a path to stronger growth and also a way out of an export oriented growth model that is in large part responsible for the troubles of the Euro. However, income redistribution is as contentious in German politics as anywhere else. Instead of facing Germany's economic difficulties large parts of the German public prefer to ignore Germany's economic weaknesses and lecture the rest of the world about an imagined success story.
The main problem with this view is of course that Germany is not doing well. That's both in terms of economic growth and in the terms of living standards.
Clearly, German growth has been much stronger than in Greece, Spain and in the other crisis countries. But that's not because Germany has done so well but because these countries have done so badly. If you compare Germany's economic performance with the average of the OECD countries (a selection of the world's economically most advanced countries) there isn't much to brag about. Since 2007, when the crisis hit most countries, German growth has been above average only in four years and mostly not by more than a percentage point. In two years it was below average. That includes 2012, the last year in the statistic, when average growth in the OECD was 1.5% while Germany grew at a meager 0.7%. If you compare Germany to the US, its performance looks even weaker. The American economy grew 2.8% in 2012. That's four times the German growth rate. And that's despite the fact the German growth is propped up by unparalleled export surpluses.
There is no question that Germany has done better than many other countries: it is one of the few countries in Europe to have reached pre-crisis output levels again. The GDP of most other European countries is still below what is was before 2007. But that does not change the fact that being at 2007 output levels when it is 2014 is no reason for celebration.
The weakness of growth in Germany has also had a negative effect on employment. This is sometimes obscured by good unemployment statistics: German unemployment is low at 5.5% (2012). But to some extent this reflects more institutional arrangements than economic strength. The average number of hours worked per worker has declined substantially from 1422 in 2007 to 1397 in 2012. In other words, after seven years of 'recovery' employment has still not returned to pre crisis levels.
Not only is Germany's economic recovery rather anemic but its benefits are also distributed very unevenly. Substantial parts of the German population are experiencing low or declining standards of living. Real wages declined from the early 00s and have only started to grow again recently. In 2012 they were at the same level as in the late 1990s. Partly as a result of this even many workers in full time employment have to rely on forms of public subsidies to make ends meet. Those who completely live off public subsidies feel the effects of the welfare cuts of the last decade. For many Germans even the weak recovery does not coincide with improving standards of living. A recent survey found that the poverty risk in Germany is below EU average. But it is still higher than in all of Germany's neighbors with the exception of Poland.
Germany is also falling behind in many other areas that depend on public funding. In international comparisons German schools, universities and infrastructure are rarely rock bottom. But neither can do they occupy top spots.
The weak economic development and the standard of living crisis are direct results of Germany's own austerity policies. Mainly under the auspices of Gerhard Schröder's Agenda 2010 the labour market was liberalized and welfare provisions were cut. Subsequently, public spending was restricted by legislation limiting deficit spending. These policies resemble closely those applied today in the European crisis countries and have similar effects. The weak development wages, benefits cuts and restrictions on public spending have depressed domestic demand. The result are depressed levels of investment and weak growth.
That the economic results are not worse is due to the fact that the weakness of domestic demand has in part been compensated by extraordinarily strong exports. (It is far from clear that low labour costs are responsible for the export boom. The quality of German products may be a more likely explanation for the strong international performance of Germany's export economy.)
Germany has in this way avoided outright economic crisis but it still has an economy that is performing far below its potential. The fact that Germany is in a better position compared to many European countries should not obscure the fact that it is achieving only a faction of what it could and should aspire to in terms of economic strength and standard of living.
Ultimately, the problem is a political and social one rather than an economic one. In order to perform better economically, domestic demand would have to be strengthened. In the short run this would mean increasing government spending and in the longer run it would require a substantial redistribution of incomes in favor of low incomes which would boost domestic demand. (Lower incomes tend to be spent completely while higher incomes are usually saved in part.)
This could be a path to stronger growth and also a way out of an export oriented growth model that is in large part responsible for the troubles of the Euro. However, income redistribution is as contentious in German politics as anywhere else. Instead of facing Germany's economic difficulties large parts of the German public prefer to ignore Germany's economic weaknesses and lecture the rest of the world about an imagined success story.
Monday, 27 January 2014
Austerity, German edition
A German edition of 'Austerity. The great failure' is in the making and I am preparing a foreword to address some of the peculiarities of the German debate about 'Austerität'.
Over the last months when I told German friends what I was working on they usually went 'Austerity? What's that?'. And, once you explain what austerity is many will be bewildered by the notion that anyone could consider it to be a failure. This is not only because Germany is not feeling the pinch of the current crisis as much as other countries. It's also because of the ways in which certain economic beliefs have become part of (West) German national identity in the post-war period. Foucault has made some very insightful remarks about this in the 70s in his lectures at the Collège de France. I will try bring some of this into the foreword.
But in order to gauge what passes through the mind of German readers when they hear 'Austerität' I have asked some German friends and colleagues to send me their questions and comments. I will distill them and reply on this blog as a way to develop and share my own ideas.
Please feel free to write with comments and questions (even if you're not German.)
Over the last months when I told German friends what I was working on they usually went 'Austerity? What's that?'. And, once you explain what austerity is many will be bewildered by the notion that anyone could consider it to be a failure. This is not only because Germany is not feeling the pinch of the current crisis as much as other countries. It's also because of the ways in which certain economic beliefs have become part of (West) German national identity in the post-war period. Foucault has made some very insightful remarks about this in the 70s in his lectures at the Collège de France. I will try bring some of this into the foreword.
But in order to gauge what passes through the mind of German readers when they hear 'Austerität' I have asked some German friends and colleagues to send me their questions and comments. I will distill them and reply on this blog as a way to develop and share my own ideas.
Please feel free to write with comments and questions (even if you're not German.)
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