Recovery Summer Update: Wie geht’s?

With but a few weeks left in “Recovery Summer,” this past week was not what many would have hoped. On Tuesday, the Federal Reserve’s FOMC announced that “the pace of recovery in output and employment has slowed in recent months” and “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”  Conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The market responded to the Fed’s optimistic forecast much as one might have predicted.

The front page article in today’s NYT by  Graham Bowley and Christine Hauser provides a sobering description of where we are economically:

The optimism that had pervaded Wall Street only weeks ago has faded quickly. In its place is a growing realization of what many Americans have been feeling in their bones: this is not the economic recovery the nation had hoped for. While the economy is growing again, it is growing too slowly to create many jobs or to increase household incomes. Given the uneven rebound in the United States, and now signs that the world’s other economic engines are slowing, economists say Americans may confront high unemployment and lackluster growth for some time to come.

The Goldman Sachs Group added to the sense of malaise when it  informed its clients that there is a 25 to 30 percent chance that the U.S. economy will fall back into recession. (Bloomberg).

But wait…

While things are increasingly dismal in the US, there are rays of hope across the Atlantic…more precisely, in Germany.

As Roddy Thompson reports: “Germany posted Friday its best quarterly growth since reunification.” The growth rate between April and June was 2.2 percent, compared with 0.6 percent in the US. In the words of senior ING economist Carsten Brzeski,  Germany is “playing in a league of its own.” By any one’s account, an annualized rate of growth approaching 9 percent is quite impressive. Kay Murchie notes at the Financial Markets blog that the growth in Germany has been largely export driven: “Earlier this week, Germany’s federal statistics office reported exports grew 3.8% in June compared with May. On an annual basis, exports were 29% higher.”

According to the Economist blog, Free Exchange, the surge in exports is only part of the story. Growth must also be attributed “to investment by firms at home looking to upgrade and expand their capital stock to meet that demand.” German firms are not worried by

American complaints that Germany is living off the spending of others and adding little to global demand have much impact. There are some signs that Germany’s recovery is leading to more spending at home. The German statistical office said that consumer spending made a positive contribution to GDP. Some firms are already reporting skill shortages, which ought to be good for jobs, wages and (eventually) consumption. Even so, a more balanced recovery in Germany may yet be thwarted by fragile banks and by the inherent thrift of consumers.

Germany’s impressive growth must come as a surprise to the Obama administration. If you will recall, in the early days of “recovery summer,” the administration chastised the Germans at the G-20 for providing insufficient stimulus to domestic demand and relying too heavily on exports. Chancellor Angela Merkel rejected the administration’s advice. As Marcus Walker and Matthew Karnitschnig (WSJ) reported at the time, Merkel claimed that the core argument “that increased deficit spending promotes growth— doesn’t apply in Germany.”

Continuing to run big deficits could backfire here, she said, because of Germans’ angst over their aging society and rising public debt. Fear that the German welfare state could run out of money leads individuals to save their income as a precaution, she said. If Germany cuts its budget deficit instead, “then the citizen is more willing to spend money,” she said, “because he knows that he can count on the pension, health and elderly-care systems.”

So, lets sort this out: if the government reduces the budget deficit, citizens have greater faith in the future and, as a result, are more willing to spend? Fiscal stability creates a comparable faith for corporations, leading them to invest in their capital stock? And all of this promotes growth?


6 thoughts on “Recovery Summer Update: Wie geht’s?

  1. What does it say about the state of my discipline that Angela Merkel understands macroeconomics better then Nobel laureate Paul Krugman?

  2. Living in Germany I can only say this blog entry is wishful thinking that finally someone showed that Keynes and Krugman (@Sven Wilson) are wrong. The German government certainly made not so much noise about their stimulus like the US government. But it was big …

    I find it always amusing that you right of the center libertarian guys jump on every opportunity like drug addicts to somehow prove that all the liberals are wrong. What about labor union organization in Germany? What about unconditional unemployment benefits in Germany? What about health-care for everyone in Germany?

    You can not just pick the cherries! Otherwise you are just a bunch of hypocrites.

    1. Merkel’s point was about the impact of deficits on consumer (and investment) spending, in important point that Krugman completely ignores in his rants. That’s all.

    2. Hey Stephan. Great to have you on board. I think Sven is on target here. Yes, as a Wisconsin institutionalist, I have a keep appreciation for the institutional differences between Germany and the US. Rather than providing an extended discussion of comparative political economy, I focused on a simple but important issue. Although Merkel may not be up to speed on her Muth, Lucas and Sargent, she seems to appreciate that consumers and corporate mangers respond rationally to government decisions. Of course, Keynes also appreciated the role of expectations (e.g., the “waves of optimism and pessimism” that partially determine levels of economic activity). It is my guess that Krugman understands this as well.

      My key point: Push the envelope in government spending, consumers may refuse to spend. Create an unstable policy environment, corporations may refuse to invest. Efforts at stimulus may prove counterproductive.

      What will prove quite interesting is whether Germany’s excellent performance will be sustained (some may argue that it has been facilitated by exchange rates and may be hampered by weaknesses in the financial sector). At least there are quite positive signs at this point.

      Hope you come back soon, Stephan. I found your comments quite interesting.

  3. As the nation’s Keynesian-in-chief, Krugman well understands the role of pessimism. But he refuses to consider that these waves might be affected profoundly by government balance sheets.

    I don’t think Keynes anticipated this negative feedback loop. I don’t think one has to be a dyed-in-the-wool rational expectations believer to find the existence of this feedback loop quite credible. But Krugman won’t even consider the idea.

  4. @Marc
    Thanks for your answer. I enjoy your blog and read it regularly. Beside being an Austrian (by passport not persuasion) progressive clueless on economics (@Jason Sorens). But Pileus seems to be one of the rare places in the blogosphere where decent people can agree to disagree. Now in regard to the German economy and the role of pessimism in economics I disagree with your and Sven Wilsons assessment.

    The German economy has a current account surplus X-M>0. The German government runs a deficit G-T>0. Now as a matter of accounting (I-S)+(G-T)+(X-M)=0 Thus the private sector in Germany desires to save more than invest. It is completely irrelevant if you are a socialist (me) or a libertarian (you) for all of us this accounting identity must hold.

    This economic model is unsustainable in the context of a common currency. Germans are accumulating IOU from the rest of the world mostly Eurozone. My prediction: either the Euro is gone within 5 years or Germany regularly has to write off his foreign IOU. Do you really want to calibrate the US economy to this unsustainable path? Beside that any austerity measures in place right now (Ireland, Greece) deliver economies going South. More pain, more deficit, …

    I don’t buy that. I think the US economy is about to settle on a sub-optimal equilibrium. Business profits in fact are up and I think the majority of consumers is well and alive. The private sector has determined that it does not need the 10-15% of the labor force to prosper. No problem if society is willing to provide these unfortunates with the means for a decent life and opportunity to move up the ladder.

    But this is not happening in the US. I bet my shirt that any German government would be out of business in a month once tent cities spring up around Berlin, Hamburg and Munich.

    Now if there’s pessimism in the business community it stems from a look in the order book or expectations about future orders. But you and Sven Wilson seem to place your argument on Ricardian Equivalence. This is an economic Zombie Idea which seems to be well and alive as long as Robert Barro is allowed to publish his nonsense in the WSJ.

    Beside that there’s no empiric evidence for RE nobody seems to bother to look on the assumptions for RE. Just one example: The private sector has infinite concern for the future generations. RE is mute when these tax increases and/or law change will happen. Can be in hundred years. Well, looking how the private sector is concerned about the environment or resource depletion (will my grand-grand-grand-children have tuna steaks) I don’t consider this assumption realistic. Human beings seem to tick in another way than Barro assumes. Anyhow I can’t voucher how this works out for agents on Alpha Centauri which Barro seems to focus on.

    Puhh … Sorry for the long comment. I promise to read your blog in the future only during the week. Than I don’t have so much time at hand.

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