Rashomon in Deutschland

Before starting today’s post, a few quick comments:

1.  I am quoted in CNNMoney.com.  Considering that it is necessary to water things down a bit for the general audience, I thought it was actually pretty good.  I said in the interview that 3% inflation for 2 years followed by 2% inflation was about right.  But what he wrote is close enough.  And he got the tricky negative interest on reserve thing exactly right–so I can’t complain.

2.  Those readers thinking “I wish someone would take that arrogant Sumner down a peg or two” should be reading the comment sections of recent posts.  Andy Harless, who is a distinguished monetary blogger, has been giving me some very tough questions.  He has skillfully exposed some of the soft underbelly of my arguments, especially in the “Power Seduces” comment section.  I will add him to my blogroll.  He is very smart.

Here are 4 very different views of Germany:

Paul Krugman:  Germany is an anti-Keynesian villain.

Tyler Cowen:  Germany is an anti-Keynesian success story.

Der Spiegel (from Mark Thoma):  Germany is a Keynesian success story.

Me:   Germany?  Successful?

I do understand that Germany has done very well on the jobs front, and deserves credit for that.  But I don’t see that as a Keynesian success.  Keynesian stimulus is supposed to create jobs by boosting NGDP, and NGDP has done much worse in Germany than the US (as has RGDP.)  Their jobs success comes from reduced hours, not more output.  Output is still well below 2008 levels, and is expected to remain lower for years.

Germany’s strength, in my view, is its manufactured goods export sector.  I don’t know why they are so good at building BMWs and turbines, but my hunch is that it isn’t fiscal stimulus.  It probably has more to do with an educational system that has a technical skills track, and which doesn’t bore normal boys out of their minds in a futile attempt to use schools to create an egalitarian society.

This reminds me of a point made by Tyler Cowen last month:

I’m a fan of the northern European social democracies, but in part they succeed because those countries don’t follow all of the prescriptions you might hear coming from their boosters in the United States.

PS.  This New York Times article suggests that German technical education was already superior to ours by 1902.



18 Responses to “Rashomon in Deutschland”

  1. Gravatar of Benjamin Cole Benjamin Cole
    21. July 2010 at 10:16

    Fresh from the WaPo: Bernanke does not rule out further QE, and, in fact, hints it may be useful.

    The Associated Press
    Wednesday, July 21, 2010; 2:11 PM

    WASHINGTON — Federal Reserve Chairman Ben Bernanke told Congress Wednesday the economic outlook remains “unusually uncertain,” and the central bank is ready to take new steps to keep the recovery alive if the economy worsens.

    The Fed chief, in prepared testimony to the Senate Banking Committee, also said record low interest rates are still needed to bolster the economy. He repeated a pledge to keep them there for an “extended period.”

    Bernanke downplayed the odds that the economy will slide back into a “double-dip” recession. But he acknowledged the economy is fragile.

    Given that, the Fed is “prepared to take further policy actions as needed” to keep the recovery on track, he said. He didn’t mention specific action being explored by the Fed policymakers. But they still have options beyond holding rates at record lows – including reviving some crisis-era programs.

  2. Gravatar of Indy Indy
    21. July 2010 at 10:18

    I studied Chemistry (among other things) in my undergrad years, and when doing some basic research in the stacks (in the days before everything was completely scanned digitized), the collection of Chemical publications for decades prior to WWII was nearly all in German.

    Years later, I was in the Army and led a platoon of special German-made armored vehicles. After my service, I was able to take a tour of the assembly plant in Kassel, Germany. I noted three things:

    1. The overwhelming pride and level of eager obsession for quality and perfection in every worker from the top to the bottom was obvious and palpable. There was also a real sense of cooperation, cohesion, common purpose, and job satisfaction.

    It made me want to learn Engineering (and German) and work there. I saw a man happily and busily polishing a tiny metal disk with the world’s smallest toothbrush until it was *just* right, and then smiling at his perfect accomplishment. And it translated into real success in the field, every part of my vehicles was of astonishing quality and durability compared to the regular Army rolling stock.

    2. They actually set up a little surprise “engineer’s working lunch conference” for me, where they enthusiastically interrogated me for an hour on every aspect of the vehicle’s performance and what could be made better. Every time I suggested something it devolved into incomprehensible Teutonic brainstorming, and everyone carefully wrote everything down for later use during their “constant improvement cycles” processes.

    These engineers were simply completely preoccupied with producing the best product on Earth – no compromises. They cared deeply about meeting the highest standards and preserving the value of a well-earned reputation for consistent excellence. It’s intoxicating to be around men like that (they were all male).

    3. The University of Kassel has a big automotive engineering program, and my guide told me that their company essentially had a majority of the board of the directors of engineering education. They would insist that every graduate be taught precisely the skills that the company thought most important, appropriate, and necessary for new hires. This helped to keep the professors “grounded” and would “prevent them from floating into the clouds, as they would tend to do”, he said.

    Students apprenticed at the company (and others) all throughout their education to both learn and show their skill, and many would be hired on after graduation. The focus was on talent, practice, and the most marketable skills, instead of theory and academic diversions.

    I thought, “Wow, any country with a system like this could produce the world’s best engineers and best automotive products even with merely average workers.” And they do.

  3. Gravatar of JimP JimP
    21. July 2010 at 10:47

    Bernanke at this moment –

    “Monetary policy is currently very stimulative” and the “Fed cannot be accused” of tight money. He thinks policy right now is “very stimulative”.

    Personally – I think he doesn’t believe a word of this. He knows better

    I think he is a straight lier.

  4. Gravatar of JimP JimP
    21. July 2010 at 10:53

    Will anyone on the Committee quote his own speeches back to him? I have no hope of that.

  5. Gravatar of Benjamin Cole Benjamin Cole
    21. July 2010 at 11:01


    It is politically incorrect to say so, but much of any nation’s success has not so much do with the political-economic system, and much to do with the character of the people in it.

  6. Gravatar of Joe Joe
    21. July 2010 at 11:34

    Professor Sumner,

    Something you might find interesting.

    My family comes from Soviet Ukraine, and they were all engineers. My grandparents tell me how when they were kids, before, during, and even after the war, ALL engineering/science/mathematics/etc students had to learn German. My grandfather, who was an engineering manager, can still speak German at 80!

    They say that even after the war the “German style” was the most respected and revered. Everybody studied German blueprints, mathematics, sciences, etc. All of their studies were centered around German ideas and ways of doing things.

    My theory, is that it comes down to the Protestant work ethic, something along those lines…



  7. Gravatar of StatsGuy StatsGuy
    21. July 2010 at 11:36

    Regarding Andy Harless’ point, I think we can find part of the answer in the Vishny/Schleifer paper – Limits of Arbitrage.

    I think a second part of the answer requires an understanding of sources of funding/credit. March 09 was partly a demand crisis, partly a liquidity/funding crisis. The key question being, if expectations of future money supply went up, how come nominal bond yields dropped (rather than going up)?

    The indirect effect involves expectations of future monetary base and time arbitrage. However, in a funding crisis (dollar shortage) speculators can’t get funding for time arbitrage, credit can’t be created due to lack of collateral. Even worse, those speculators that do load up too early can be margin called – in other words, they face the risk that EVEN IF they are right long term, an additional short term move lower in the asset price would cause temporary insolvency, and banks or creditors would pull funds – so this limits the amount of leverage that speculators can wield.

    Thus, nominal bond yields had risen going into 2009 even as inflation plunged, because no one had the dollars to buy and hold bonds – and the crisis vicious fed upon itself. EVERY ASSET IN THE WORLD, except the dollar, faced a simultaneous run against it. Leaving March 2009, every asset except the dollar rose simultaneously – including bond prices (aka, rates on bonds went down).

    The Fed alleviated the dollar funding crisis by sucking in assets (as “collateral”) and offering dollars – something banks could not or would not do (largely because they were hoarding dollars for fear of falling below regulatory capital/asset threshholds,and declared insolvent under mark-to-market rules – and I’ve argued before the MtM is a disastrously pro-cyclical policy for banks).

    Anyway, all of the above is the fundamental argument underlying the giffen-good analogy for the dollar – for most assets, as its price goes up demand (eventually) goes down. But for a reserve currency, there’s a point at which as the price of the dollar goes up (aka, other asset prices go down), then demand for the dollar goes up due to a massive global “margin call”.

    You could think of this as a nonlinearity in the payoff curve created by bankruptcy risk.

    Alternatively, you could call early 2009 “the biggest short squeeze ever”. And in such a squeeze, those with unlimited access to the discount window win…

  8. Gravatar of Matthew Yglesias Matthew Yglesias
    21. July 2010 at 11:45

    You can look up the comparative Program for International Student Assessment scores here and see that German students do, indeed, perform quite a bit better in math and science than do Americans. But Finland, Japan, South Korea, Australia, New Zealand, and the Netherlands do better on both. Most of those countries are German-style manufacturing exporters, but Australia and New Zealand don’t fit the bill.

  9. Gravatar of Mattias Mattias
    21. July 2010 at 12:04

    Reminds me of the story about car workers in Germany, Japan and US being asked what they were making. Germans answered what part they were working on (a dashboard etc), Japanese proudly told they were making a car and finally Americans told them their wage.

  10. Gravatar of Benjamin Cole Benjamin Cole
    21. July 2010 at 12:14

    FYI-For those of you who atill read newspapers (I mean real paper papers) on page A17 of the WSJ is a Obama-bash piece by the ever dour-faced Michael Boskin, the Stanford economist.

    In the middle of bad-mouthing Obama, Boskin drops in a paragraph to the effect that recession would have been worse save for the Fed’s QE.

    I find this remarkable. A policy tool that lessened a recession, caused no inflation, and yet is barely noticed? In fact, something of a throw-away line in an anti-Obama diatribe?

    More and more, I sense the left- and right-wing are fighting wars past, no longer meaningful in today’s world. From welfare programs to aircraft carriers to HUD to farm subsidies, the left- and right-wing sing largely off key.

    Boskin is so steamed up about Obama’s posturing he tosses away an incredible insight–QE works. Oh, that.

  11. Gravatar of Mike Sandifer Mike Sandifer
    21. July 2010 at 14:41


    The negative rate on reserves was discussed on CNBC today:


    at about the 5 minute mark.

    The case made by a couple of the commenters was that such a policy would be disasterous for the money markets.

  12. Gravatar of Lorenzo from Oz Lorenzo from Oz
    21. July 2010 at 15:58

    Matt: That is because our population levels, resource base and location all mitigate against being major manufacturing exporters. We tried import-replacement for a long time: that did not work so well. In effect, we used our miners and farmers to subsidise our manufacturers. (The reverse of Europe: again part of the basic factor endowmnents.)

  13. Gravatar of kary kary
    22. July 2010 at 01:00

    To the comment of Matthew Yglesias:

    Perhaps there is a different educational background ofr german engineers. There are some engineers studied at the university and then go in the first job as in other countries. But there are several others who leave the school after 10 years, 16 years old, do an apprenticeship for 2 or 3 years, go then to back to school and the “FH”, university of applied sciences, and finally reach an engineer position in the industry. I assume, passed through this career path, the developers reflect some constraints to know to get things done.

  14. Gravatar of Marton Marton
    22. July 2010 at 03:51

    To take Dr. Sumner down a peg or two: the obsession with GDP growth as a measure for comparative success of national policy is fallacious without taking into account changes in the base population; an econ PhD should be able to avoid such schoolboy errors.

    And once you account for differences in population growth between Germany and the US (somewhere between 0.5% and 1% per year for the last decade), the difference in GDP largely disappears…

  15. Gravatar of scott sumner scott sumner
    22. July 2010 at 18:23

    Benjamin, Thanks, I have a post on that.

    Indy, Yes, cultural differences may play a role. Germans are very careful to do things the right way. (Am I allowed that ethnic stereotype?)

    JimP, I wish someone had dug up his speeches on Japan. I had a few posts last year that contrasted then and now, and it was quite startling.

    Benjamin, Yes, culture plays a role. But it should not be oversold. Many countries have passed Germany and Japan in per capita GDP. Some are surprising (Britain and Ireland and Australia, for example.)

    Joe, Yes, the Protestant work ethic has been widely discussed. I’m no expert there, but note that some non-Protestant countries have done well recently. Those in East Asia have their own Confucian culture. But some Catholic countries (Ireland and Spain) have done pretty well since 1980, even accounting for their recent setback.

    Statsguy, What confuses me is that bullish news these days almost always pushes up both bond yields and stock prices. But I seem to recall that on that day stocks went up substantially, but bond yields went down. As I said in response, even monetary shocks like fed interest rate announcements often cause perverse movements in long rates. So that was a surprise to me. If the program was expected to work, why didn’t bond yields rise? And if it wasn’t expected to work, why did stocks rise? I suppose stocks could have risen in the lower discount rate, not expectations of higher profits.

    Your suggestion is certainly intriguing, and I don’t have a better explanation. I definitely think something weird was going on, but don’t feel I have enough data to evaluate your idea against some other non-conventional theories. If you find any more supporting evidence (not sure how it would be tested) let me know. I should revisit your idea when I am less harried and burned out.

    Matthew, Yes, that’s right. I was also thinking of the German schools that teach mechanical skills to students not good enough to go their more academic high schools. I have forgotten the terms the German use, but I believe they have two types of high schools.

    Mattias, That’s a good one.

    Benjamin, Yes, I also don’t understand the “been there done that” attitude. That may be one reason the interest on reserves is so harmful. Not directly, but because it allowed the Fed to greatly expand the base and say “look at all we’ve done”. People wouldn’t notice that the base had been sterilized, and assume the Fed had already done a lot.

    Mike, Thanks, I’ll listen.

    Lorenzo, Yes, I think that’s right. I think the Aussies are doing things the right way now–your country still has virtually no national debt, isn’t that right?

    kary, Thanks. That’s the sort of thing I was thinking of, but I didn’t recall the details. Many boys are very smart at mechanical things, but aren’t as smart (or are bored) with traditional academics.

    Marton, If you’ll allow me to rise up a half peg, in the longer piece I linked to I did discuss the difference in per capita terms. So I was aware of it. I just forget to mention it again in this post. But even in per capita terms I believe the US has done better. I think since 2008 the US has grown about 0.8% in population per year, and Germany about 0.3% per year. But those are from memory and may be off.

  16. Gravatar of StatsGuy StatsGuy
    23. July 2010 at 18:38

    Well, you can look a the spike in asset correlations that occurred in late 2008 and held through most of 2009. Unfortunately, it’s not convenient. There’s a website – assetcorrelations.com – which tracks this, but does not allow you to specify a time window. I suppose I could download the data and build the correlation matrix for windows myself.

    Alternatively, there’s an index which tracks asset correlations, and, yes, it DOES spike in Oct 08 and stay high for most of 2009.


    You can also read about this from the BIS


    And, of course, we all know what happened to the Dollar vs. other currencies in late 08 and then in 09. Consider this – in 07 (and later in 08) much of the world was borrowing dollars to fund investments – using dollars as a funding currency because of expectations of dollar decline. Then bam, the US financial market crashed, but instead of the dollar plummeting there was a huge domestic US demand for dollars as US libor jumped. This was enough to start driving the dollar up, and essentially the entire world got caught on the wrong side of the dollar carry trade, and was forced to unwind as the dollar kept rising. While many thought they were protected by owning dollar denominated liquid assets, they found those assets (CDOs and other instruments) were illiquid (couldn’t sell near par value). Commodities plummeted – oil, gold, everything. It was the mother of all short squeezes.

  17. Gravatar of ssumner ssumner
    24. July 2010 at 16:45

    statsguy, One guy I probably should have talked about more is Mundell. He saw the contractionary nature of the strong dollar in late 2008–but for some reason I rarely run across article he wrote. Once we got into October and the economy was clearly plunging there should have been much more effort to prevent the dollar from appreciating.

  18. Gravatar of Links « The Droning Inquisition Links « The Droning Inquisition
    14. September 2010 at 05:46

    […] first is from Scott Sumner. He talks about the Germany Economy. He has this quick line at the end: Germany’s strength, in my view, is its manufactured goods […]

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