Monday, July 19, 2010

Spiegel Claims Germany a Keynesian Success

That's got to be the first, a Keynesian success...

Germany's New Economic Miracle - A Keynesian Success Story
(7/19/2010 Spiegel Online)

"During the worst of the global financial meltdown, Berlin pumped tens of billions of euros into the economy and spent hundreds of billions propping up German banks. Now, the country is reaping the benefits as Germany is once again Europe's economic motor.

"It was just the sort of photo-op German Chancellor Angela Merkel urgently needs. Peter Löscher, the CEO of electronics giant Siemens, was sitting on a throne-like chair in the governor's palace in the central Russian city of Yekaterinburg. Contracts were being handed to him in brown leather folders, and every time Löscher signed one of the documents with his malachite green pen, the chancellor clapped with delight. The procedure took place four times, and by the time the round of contract signing ended, Siemens had secured Russian orders worth about €4 billion ($5.2 billion).

"The real purpose of Merkel's five-day visit to Russia and China last week was to hold political talks with the two countries' leaders, but the most important message of the trip was meant for the German people. Look, Merkel seemed to indicating to German citizens, German industry is in demand worldwide, even if the government at home is divided and lacking direction.

"The German economy has indeed come roaring back to life this summer. Two years after the outbreak of the financial crisis, the auto industry is adding extra shifts once again. The machine building, electronics and chemical industries are all reporting a rapidly growing number of orders. Total unemployment is expected to drop below the 2.8 million mark this fall, the lowest level since 1991.

"For the first time in decades, the former "sick man of Europe" is back to being an engine for economic growth. According to an internal government assessment, the country's gross domestic product increased by more than 1.5 percent in the second quarter of this year. In their last prognosis, completed in April, government officials had predicted only 0.9 percent GDP growth. Production in the manufacturing industry increased by 5 percent over the previous quarter. The government assessment also shows that exports grew by more than 9 percent in May." [Emphasis is mine. The article continues.]

The article defends the government spending and guarantees, even though they were ill-spent (bridge to nowhere, building a school only to have it shut down, etc.) and often unnecessary (loan guarantee to solvent companies who kept the money just in case). The article claims the government action kick-started the economy, and the economy took on its own momentum and started to grow.

With the numbers like these in the article above, it is understandable that the Spiegel wants to attribute success to Keynesianism.

Angela Merkel's coalition government has provided 480 billion euro stimulus (US$620 billion), 400 billion of which is loan guarantees and $80 billion for assisting banks in recapitalization. About 38% of the money has been actually spent so far.

In the US, the government has done way more, to the tune of $12 trillion in various programs and loan guarantees, but hasn't got much to show for it other than some inventory build-up.

What does Germany have that the US does not? And what does the US have that Germany does not?

Germany continues to manufacture things that countries around the world want, even at a premium - automobiles, machinery, electronics, chemicals.

The United States has Obama.


LK said...

You say:

Germany continues to manufacture things that countries around the world want, even at a premium - automobiles, machinery, electronics, chemicals.

So does the US: it's the largest manufacturing nation on earth.

But America has severe structural problems that will need to be fixed before Keynesian stimulus can work effectively. The US needs to fix its broken banks, chronic trade deficit, and loss of manufacturing first. State interventions will be required to fix these problems, not laissez faire economics.

When the US has fixed its structural problems, Keynesian stimulus will work well, just as it has worked well for Australia, New Zealand, China, South Korea, Taiwan, Sweden, and Germany over the last two years.

Germany's recovery, by the way, is proof of the success of global Keynesianism and the benefits of boosting global aggregate demand, as both Germany itself and China employed Keynesianism:

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