Dispatch

‘Stinginess Is Cool’

‘Stinginess Is Cool’

Judging from the recent comments of U.S. policymakers and commentators, it’s not hard to pinpoint the greatest impediment to global economic recovery: the know-nothing, beggar-thy-neighbor policies of Germany. Policymakers in Berlin are portrayed by everyone from President Barack Obama to New York Times columnist Paul Krugman as single-mindedly focused on increasing their country’s exports and keeping down domestic demand, even at the expense of prolonging or deepening the global recession. Why can’t the Germans just reach into their pockets and support global consumption at a time when the United States and other indebted countries have to exercise restraint?

The problem is it’s a lot harder than you’d think to get Germans to spend their money.

Thrift is practically part of Germany’s national identity. A recent commercial ad campaign ran with the claim Geiz ist geil — "Stinginess is cool." And the statistics bear out the slogan. In 2009, the savings rate of the private sector stood at 22 percent of GDP, compared with 12 percent in the United States. Private consumption expenditure rose 0.2 percent between 2002 and 2006, while it increased 3 percent in the United States and 2.7 percent in Britain. Polls show that Germans prefer having their taxes raised and public spending cut: It is hard to imagine a government in any other country overstating the size of an austerity package for the sake of popularity. In Germany, that’s precisely what just happened.

 

Cultural factors play an important role: Whereas the Anglo-Saxon world is characterized by what one could call pragmatic optimism, Germans instinctively think about the long term, and they aren’t disposed toward cheerfulness. Whereas America’s recent history teaches hope, Germans see in their history the need to be cautious: In the last 100 years, Germans have experienced two currency reforms and the rise and demise of three regimes.

Political instability isn’t much of a concern anymore, but the mindset remains. Germans today still think of credit as morally dubious, if not pernicious. It’s telling that the German words for debt and guilt are identical: Schuld. And German consumers instinctively think of bad times as just around the corner, so they save money as a precautionary measure against the next crisis that’s sure to come. For instance, with the country’s population now rapidly aging, many Germans are saving money in anticipation of the imminent demise of their pay-as-you-go public pension system. In fact, Germany is likely the only country in the world where Ricardian equivalence — the theory that the government cannot stimulate private consumption by cutting taxes because rational actors know that taxes will eventually have to rise again and therefore put aside savings — actually holds true.

It’s not only Germans’ propensity to save that’s at issue, but their easy assumption that economic activity consists primarily of foreign trade. It’s an economic model that traces back to the beginning of the postwar period, when booming exports were the backbone of the Wirtschaftswunder, or economic miracle — the period of strong growth in the 1950s that transformed the destroyed country into a major world economic power. When Germans saw Volkswagens on roads all over the world, it wasn’t only a source of income, but proof that the country was once again an accepted member of the international community. Add Germany’s traditional obsession with engineering and its distaste for the service sector, and it may become clearer why the country is prone to mercantilism.

Germans have embraced this outmoded economic formula, even though it has essentially imposed years of mild austerity measures on the country. To boost exports, Germans have had to increase their competitiveness through stagnant labor wages. Unit labor costs fell 0.1 percent between 2002 and 2006 in Germany, while they rose an average of 1.6 percent in the eurozone. But Germans don’t rebel against that lack of wage growth; they join the country’s economic establishment in interpreting it as a strength. Indeed, the major trade unions were involved in negotiating the wage levels.

If German psychology is one reason for the country’s surplus savings, the reluctance of the country’s policymakers to use macroeconomic tools to change spending patterns is the other major contributor. Germany simply does not have a tradition of macroeconomic policy, at least not in the American sense of managing aggregate demand. Contemporary German economics has its roots in Ordnungspolitik, a unique school of thought that emerged in the 1940s and for which there is no English translation. Ordnungspolitik accepts that government intervention is necessary for the economy to function properly, but the role it assigns to the state is fundamentally different than in the Anglo-Saxon tradition. Whereas most American macroeconomists believe in discretionary intervention in the way of countercyclical monetary and fiscal policy, German economists encourage the government to only alter the framework within which economic agents interact.

The emergence of Ordnungspolitik — with its obsession with rules and skepticism toward discretionary action — was a reaction to the excessive abuse of governmental power experienced during the Nazi years, but it also reflects another fundamental German preoccupation: The idea that it is better to design a system that works perfectly than to resort to permanent ad hoc troubleshooting.

From this perspective, swings in the business cycle are a natural phenomenon of a market economy, and given the complexity of economic processes, any attempt to smooth them out will lead to a misallocation of resources. The very idea of stimulating the economy or producing domestic demand sounds strange to many German economists. The solution to the problem of global imbalances advanced by their U.S. counterparts — expand demand in the surplus countries in order to compensate for the decline in deficit countries — is seen as the application of a blunt instrument that, however much it helps, will ultimately distort the global economy for the worse.

Even in the heyday of Keynesianism in the 1960s and 1970s, Germany’s economic establishment regarded with skepticism the government’s attempts to manage aggregate demand. When Chancellor Helmut Schmidt gave in to pressure by then-U.S. President Jimmy Carter and launched a stimulus package amounting to 1 percent of GDP at the 1978 G-7 summit in Bonn, Germany’s central bank, the Bundesbank, reacted harshly. For years afterward, bank officials said the stimulus had no positive effect, and the public believed them. Economic historians have been benign in their assessment of that stimulus package, but German policymakers would probably still cite this episode as proof that countercyclical policies are bound to fail economically and politically.

Indeed, Germany’s greatest struggle may be to overcome the legacy of its famously independent postwar central bank. Germans have a well-known obsession with inflation, but what Americans don’t often appreciate is how responsible the Bundesbank is for that affliction. It’s true that the 1920s period of hyperinflation, not the Great Depression of the 1930s, is the defining moment of recent history for German economists. But that cultural memory of the effects of loose money is not as strong as some Americans sometimes suggest — after all, it was the downturn of the 1930s, not the loss of value of German currency in the 1920s, that brought Adolf Hitler to power in 1933. In point of fact, it was the postwar Bundesbank, with its almost theological focus on price stability as the prime goal of economic policy, that anchored inflation angst in the collective memory.

In pushing their anti-inflation line, Germany’s central bankers were not only motivated by conviction, but also institutional self-interest: By staking such a hard line, they managed to claim more influence for themselves in the West German political order. Germany’s contemporary fear of inflation is the product of an invented history — one that the mythmakers themselves came to believe.

Americans are welcome to put pressure on Germans to consume, but it’s likely to be in vain. As long as they find someone in the world to buy their products, Germans will choose to export and save. They are all too eager to send off their Porsches to other countries, even if they don’t know what to do with the money they get in return. Germany will probably find itself again putting its excess cash into bad investments, just as it ended up holding much more than its share of worthless Lehman Brothers securities. If that isn’t enough to change a country’s economic habits, then nothing will be.