Germany did it right.

From InsiderIowa.com

Did The USA do it Wrong; The Germans Right?
Steffen Schmidt

“Germany has sparred with its European partners over how to respond to the financial crisis, argued with the United States over the benefits of stimulus versus austerity, and defiantly pursued its own vision of how to keep its economy strong” says the New York Times.

The result? Germany is recovering much more quickly than the US or its European Union neighbors. Its annual growth rate will be 9 percent the best since East and West Germany unified twenty years ago.

Germany did NOT use a debt-fueled consumer stimulus, which was being pushed and pursued by the United States. This proved to be politically tough but the results are spectacular.

Germany cut (not increased) unemployment benefits and made it easier to hire and fire employees. And, instead of allowing people to lose their jobs and then go on government unemployment welfare the government worked with companies to have workers hours and wages reduced but they stayed in their jobs. The government then subsidized the lost income of workers. “Kurzarbeit” or “short work” program to encourage companies to furlough workers or give them fewer hours instead of firing them, making up lost wages out of a fund filled in good times through payroll deductions and company contributions” as the New York Times - August 13, 2010 - put it.

This made it possible for companies to continue churning out Germany’s legendary high tech products that have worldwide markets. Germany did not fall for the fool idea promoted by US economists that the future was in “service” and “knowledge” industries. Instead they forged ahead with some of the most enviable engineering and science-based manufacturing. Germany is recovering at impressive rates because they still make complex things and sell them to other countries!

What a novel idea! In the US we export corn, wood, and other low value added products and we still believe that our friends the economists were right that services (banking, financial services, etc) are the future of the US.

My own reading (and I read a lot!) is that they are dead wrong and we were tricked by some unreliable economic models into surrendering our manufacturing base to other countries, including, as it turns out, Germany!

Now, using what may be outdated Keynesian economic models, we are printing money like crazy, letting companies lay off people and then putting them on extended welfare (yes Martha, unemployment benefits are pure welfare because the recipients are not required to do diddly while getting these checks).

Although a “socialist” country with extensive welfare, Germany under Angela Merkel turned out to be much more market oriented than the United States under Bush or Obama.

Weird isn’t it!?

Now, there is a gnawing worry that the US “stimulus” and “economic recovery” strategies were in fact not very smart economics (and I predict were not even good politics because they did not work and the US is threatened with a long stagnation and “malaise.”

So, you want to know, why is a political scientist writing about economics?

Because all of this has HUGE political consequences!

Obama and the Democrats are going to have some ‘splanin to do on why all the deluge of tax money, the unemployment welfare program, and the random stimulus programs (plus an exploding national deficit and a crushing national debt) have produced a mouse that squeaks and not an economic recovery.

The New York Times points out that “Germans steered clear of the debt-fueled consumption boom that many believe contributed to the financial crisis. During the recession, Chancellor Angela Merkel resisted the palliative of government spending that the United States and some European partners felt was crucial to restoring growth,” and she will come out politically stronger. Obama and the Democrats on the other hand may get crushed in November.

American politicians are not always right and resisting or opposing them can be a smart policy.


Steffen Schmidt is University Professor of political science at Iowa State University, Blogs for the Des Moines Register and writes for InsiderIowa.com