Jonathan Chait

Memories Of the German Austerity Boom

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Do you remember the brief but intense American conservative love affair with Germany? David Leonhardt does:

Germany’s economic growth surged in the middle of last year, causing commentators both there and here to proclaim that American stimulus had failed and German austerity had worked. Germany’s announced budget cuts, the commentators said, had given private companies enough confidence in the government to begin spending their own money again.

Well, it turns out the German boom didn’t last long. With its modest stimulus winding down, Germany’s growth slowed sharply late last year, and its economic output still has not recovered to its prerecession peak. Output in the United States where the stimulus program has been bigger and longer lasting has recovered. This country would now need to suffer through a double-dip recession for its gross domestic product to be in the same condition as Germany’s.

Leonhardt proceeds to make the case for more short-term stimulus. But let me continue to dwell on the past. Germany was the great counter-example, the country that rejected stimulus and prospered. (Hence the cartoon, festooning a Weekly Standard cover story espousing the theme.) Leonhardt understandably does not quote his colleague David Brooks, who wrote at the time:

During the first half of this year, German and American political leaders engaged in an epic debate. American leaders argued that the economic crisis was so bad, governments should borrow billions to stimulate growth. German leaders argued that a little short-term stimulus was sensible, but anything more was near-sighted. What was needed was not more debt, but measures to balance budgets and restore confidence.

The debate got pointed. American economists accused German policy makers of risking a long depression. The German finance minister, Wolfgang Schäuble, countered, “Governments should not become addicted to borrowing as a quick fix to stimulate demand.”

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.

And now the more thorough returns suggest the Americans were. I'm sure that, in the light of this new evidence, American conservatives will undertake a thorough rethinking of their anti-stimulus beliefs. After all, as they told us at the time, this was a natural experiment.

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