At the end of April George Bratsiotis and David Cobham organised a
conference
with the provocative title “German macro: how it's different and
why that matters” which I unfortunately was not able to attend. Six
of the papers presented, plus some additional papers on related
themes, are published here.
The papers by Peter Bofinger and Michael Burda are related to earlier
work by both authors that I have discussed in earlier posts here
and here.
Many of the themes in these papers have been briefly discussed in
past posts. Peter Bofinger notes that the macro taught in German
universities is little different from that taught elsewhere, but
stresses the prevailing influence of Ordoliberalism and the ideas of
Walter Eucken. Michael Burda emphasises the role of German
self-interest in influencing the policy positions of German
macroeconomists. As I note here,
it is often difficult to distinguish between the relative importance
of ideas and self interest.
This is particularly true when ideas and self interest reinforce each
other. According to Bofinger, Ordoliberalism reacted to the demand
problem identified by Keynes by stressing the importance of wage
flexibility and sound money. Germany’s distinctive wage bargaining
structure allows an unusual degree of flexibility. In the context of
a fixed rate system or monetary union where other countries cannot
respond in kind, this does indeed allow a way out of demand
deficiency as we saw in the early years of the Euro. As a result,
virtually the only country to survive to Eurozone recession largely
unscathed was Germany.
I hope it does not need spelling out that this route out of demand
deficiency only works by taking demand from other countries. [1] If
Germany had its own currency and a floating exchange rate, any fall
in domestic prices would be offset by an exchange rate appreciation.
Luckily for Germany its neighbours, perhaps attracted by its ability
to keep inflation low, have been eager join fixed rate systems or
monetary unions where the wage cutting trick will work (see the book
by Yanis Varoufakis reviewed here
for example).
The only points I would add is that this unusual economic outlook is
not confined to macroeconomics, and that it depends to some extent on
a degree of insularity
from international mainstream discussions of economic policy. It is
hard to imagine a reputable UK or US research institute talking about
the minimum wage and saying
“minimum wages have time and again been shown to help some workers
earn more at the cost of the low-skilled losing their jobs”, as if
the work
of Card and Krueger had never happened. I have sometimes wondered
whether in Germany business has an influence on the economic debate
that in the UK and US has been replaced by the influence of finance,
but that at the moment is purely a speculative idea.
[1] An important point to note here is that if you have a target for
the level (or path) of the money stock, then wage and price
flexibility might get a closed economy out of recession if it was
successful in raising inflation expectations. However the ECB has an
inflation target and not anything like a price level target.
