Opinion
7:57 am
Thu April 26, 2012

New Republic: The Misuse Of The German Example

Originally published on Thu April 26, 2012 11:44 am

Alec MacGillis is a senior editor for The New Republic.

I don't usually wade into global economic policy here on the Stump, but as Mitt Romney reminded us in his speech last night, the 2012 presidential race is "still about the economy — and we're not stupid." So after coming across a particular pet peeve of mine just now, I'm going to wade on in.

In its lead editorial today, the Wall Street Journal pushes back at the broadening ranks urging Germany to loosen up on its austerity mantra for Europe. I'm not going to get into that fight now — I figure this guy's got it under control. But I am going to file an objection to a particular element of the Journal's argument that I've seen regurgitated over an over the past few years, and not just by people on the right: the utterly false notion that Germany steered clear of Keynesian stimulus during the past recession. The Journal writes:

[Angela] Merkel's government did the world an additional favor in 2009, amid the financial crisis, by rejecting calls from the International Monetary Fund, then British Prime Minister Gordon Brown, President Obama, Treasury Secretary Tim Geithner and the same dominant Keynesian consensus to join the global spending party.

"They've already pumped endless amounts of money into the economy," said German Finance Minister Wolfgang Schauble in 2010 about U.S. policy. "The results are dismal." (See our March 12, 2009 editorial, "Old Europe Is Right on Stimulus.")

Germany's resurgence might have been even stronger if Mrs. Merkel and her coalition partners hadn't reneged on their tax-cutting campaign promises and raised VAT and other taxes in a bid to stay close to budget balance. Still, Europe is lucky that its largest economy remains strong and creditworthy.

Yet now Mrs. Merkel is widely berated for avoiding the policy errors that led to the debt crisis and for having the nerve to encourage other countries to emulate the reforms that worked in Germany. The Keynesians will never forgive the Germans for being right.

This is ridiculous — or as the Germans would say, laecherlich. No, the Germans did not implement a giant stimulus package, equivalent to our own $787 billion American Recovery and Reinvestment Act. That's because they had in place a massive Keynesian program of a different sort, one that was, it's now clear, far more effective in providing counter-cyclical stimulus than anything we or other Western countries tried. Namely, kurzarbeit, or "short work," a work-sharing program under which the government subsidized private employers to keep workers on the rolls, typically at reduced hours but only slightly reduced pay, rather than laying them off. The logic is plain: in a big cyclical downturn, it's better to keep workers around for the eventual upturn (perhaps with some training in the interim) rather than laying them off, losing their skills, having to pay their unemployment benefits and then having to hire and train new people when business picks back up. Most crucially, the program keeps workers earning decent wages that they are in turn injecting back into the economy. The program's a bargain — it cost Germany an estimated $6 billion or so in 2009. But it played a major role in keeping the country's unemployment rate below 8 percent while ours soared.

So successful was kurzarbeit proving in 2009 that I challenged Larry Summers late that year about why the Obama administration hadn't considered it here. His answer, in essence, was that the White House wanted to focus on growing the output pie back to where it had been, rather than just divvying up a shrunken pie among more workers. Well, sure, but how can it not be a good thing to have more workers getting paychecks — not to mention keeping the unemployment rate from crossing the politically disastrous 10 percent line? Others have argued that kurzarbeit is more suited to Germany because the country has more of the export-heavy manufacturing firms where the logic of work-share applies most clearly. But over time, regret over missing the boat on kurzarbeit has only grown, to the point where Congress recently tweaked the rules on unemployment benefits — several years too late — to make it easier to do kurzarbeit here in the future (more than a dozen states have small work-share programs of their own, but they never achieved the scale necessary to have a big impact.)

I'll gladly continue to debate the merits of kurzarbeit some other time. For now, though, it's enough to point out that it is deeply disingenuous for the Journal and other conservatives to be holding up as a paragon of austerity a country that was paying billions of dollars to keep people on the job — make-work, essentially — not to mention paying even more for the rest of the generous safety net that automatically kicked into gear in Germany. Merkel may be preaching austerity to the Greeks now, but when the recession hit, her country was as Keynesian as they come.

Copyright 2012 The New Republic. To see more, visit http://www.tnr.com/.