Here’s a letter that I sent yesterday to the New York Times:
Paul Krugman is impressed that in Germany “unemployment is only slightly higher than it was before the crisis” (“Free to Lose,” Nov. 13). Indeed, Krugman is so bedazzled by the results of Germany’s extensive labor-market interventions that he writes that America “might have something to learn” from “Germany’s jobs miracle.”
Let’s explore this “miracle” with facts. OECD data reveal that annual unemployment rates in Germany during the ten-year period from 1998 through 2007 (the latest year for which consistent data are available) never fell below 7.5 percent and soared as high as 10.6 percent (in 2005). Over these ten years, Germany’s unemployment rate averaged 8.9 percent.*
During the same period, America’s annual unemployment rate never rose above 6 percent (which it reached in 2003), and was as low as 4.0 percent (in 2000). It averaged over these ten years 4.9 percent – fully four percentage points lower than the corresponding figure for “miraculous” Germany. This fact means that if America during these years had had the same unemployment rate as Germany, roughly 5.5 million more Americans would have been unemployed.
Even if Germany’s restrictive labor policies are the reason that that country’s unemployment rate is today lower than is the current rate in the U.S., a longer-run perspective suggests that America has far less to learn from Germany than Germany has to learn from America.
Sincerely,
Donald J. Boudreaux
Also, as my colleague Tom Hazlett points out (in private correspondence) — and others point out, too — Germany engaged in nothing like the “stimulus” spending that Uncle Sam irresponsibly orgied on during the past couple of years. Perhaps the fiscally more prudent Germany — the Germany that resisted U.S. calls for obnoxious “stimulus” spending — does have a thing or two to teach America about fiscal policy if not about labor-market policies.
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{ 17 comments }
It amazes me that so many people, like Krugman, value consistency and predictability over quality. Yes, Germany’s results have been consistent, but they have been consistently much worse than those of the U.S.
They would rather you cut off your arm, just in case you get an infection that could cause gangrene.
I think that Germany will go through a credit crunch in the “near future”. Germany, Italy and France are the main targets of the newest expansionary policy of the European Central Bank (as countries like Spain and Ireland no longer attract as much investment; especially Spain). This time, the credit expansion is targeting the manufacturing sector, in an effort to “bail out” these companies. As a result, if Misesian theory is correct then at some point in the near future the extent of these malinvestments caused by a distortion in relative prices should show themselves through a bust.
We will see what Krugman has to say then.
European countries, as you note, tend to have higher “natural” unemployment rates than the United States (although, we will see if that remains true after Obama gets through all his social programs). For example, in Spain “natural” unemployment rate has always been extremely high. You can track “natural” unemployment rate in the United States, as well. During the credit boom of the 1920s unemployment was nearer to 2%, while during the credit boom of the 2000s it was at around 4% or 5%.
Does Krugman write his own columns?
For someone who is, no doubt, a great economist, much of his stuff is very carelessly written.
We’re comparing apples to watermelons. Remember the big news last week about the 20th anniversary of the removal of the Berlin Wall? The reunification of Germany came at a high price. Unemployment was much higher in the former East Germany. Many workers had no transferable skills. Outdated factories in East Germany had to be closed because they polluted. It’s unsurprising that Germany has a higher baseline unemployment level. It will take another generation to bring it down.
I recently visited Germany while helping my daughter get started at Dortmund Technical University. I knew what the country had gone through for the past 20 years, and I was astounded at the progress. The country is too socialist and too bureaucratic for me, but most Germans are content. There also is a tremendous pride in their country and their industries that I haven’t seen since I was a boy in the 1960s. My hope is that Germany will lighten-up on business regulations (such as the ones that stymied WalMart’s attempt to build seven stores), but, like many Europeans, Germans develop policies that support small stores and small farms despite the economic idiocy of doing so.
I strongly agree – it’s somewhat disingenuous to attribute all of that unemployment to labor market policies alone.
One thing I haven’t seen an answer to – these policies were in place in the 50s, 60s, and 70s as well, and Western Europe had considerably lower unemployment than the U.S.. Now why was that? A lot of Americans like to just ignore the European economy in these decades.
Yea, as far as I understood Germany was basically pushing for solid monetary policy, and Spain kept pushing for more and more spending while everyone else was in the middle. Spain now has 18% unemployment. Germany around 7-8.
Of course Keynsians will argue that Spain needs spending more and Germany is holding them back. This is a bit absurd, Spain is an outright cradle to grave socialist society. High unemployment are in part because there is no incentive to work in combination with a lack of reporting. Few employers will hire with penalties on letting someone go, mandated paid leave, and other absurd policies. Many just work under the table.
Spain, Ireland and Estonia were the “big three” growing economies during the boom because they were the ones that were relatively liberal (especially in regards to foreign investment; i.e. Spain’s income tax for foreign wealthy entrepreneurs is still in the 20s). Also, there is suspicion that they were used to buy central European (France, Germany and Italy) goods, since those economies were stagnating. So, these nations on the margin was where the money found the least pressure to flow into, and naturally where the crux of the credit boom took place.
But the new credit boom, inspired by Europe’s attempt to devalue the Euro as to not hurt their export market relative to the U.S. Dollar, will hit the big manufacturing countries, not the nations on the fringes which are no longer attracting as much investment.
Dr T – In reference to your comment:
“We’re comparing apples to watermelons. Remember the big news last week about the 20th anniversary of the removal of the Berlin Wall? The reunification of Germany came at a high price. Unemployment was much higher in the former East Germany. Many workers had no transferable skills. Outdated factories in East Germany had to be closed because they polluted. It’s unsurprising that Germany has a higher baseline unemployment level. It will take another generation to bring it down.”
I believe you are helping Perfesser Boudreaux make his point. Why was unemployment so much higher in East Germany than in West Germany? Why did workers have so few transferable skills? Why were the factories outdated?
Was it because of the presence or the absence of excessive labor/market interventions on the part of the East German government?
I’m not disagreeing with his point (which I agree with), only with using Germany as the comparison country.
The Nazi Col. Erhardt, Sig Ruman’s character, along with “the great Polish actor,” Jack Benny’s, posing as a fellow Nazi, in To Be or Not To Be, 1939.
Benny’ character: “I can’t tell you happy I am to be breathing the air of the Gestapo again. And, by the way, Col Erhardt, you may be interested to know that in London they call you Concentration Camp Erhardt.”
The colonel, beaming with pleasure:
“So, they call me Concentration Camp Erhardt.”
It doesn’t appear that Concentration Camp Krugman was as pleased.
I liked the letter better, but then I read this: “Germany engaged in nothing like the “stimulus” spending that Uncle Sam irresponsibly orgied on during the past couple of years.”
Really??? The story I’ve generally heard is that Germany’s stimulus is generally delivered through automatic stabilizers that are already in place (ie – those business cycle smoothers). We legislate additional stimulus here because our automatic stabilizers are so much smaller. Is your or Hazlett’s understanding different?
And aside from fiscal conservatism, the ECB is famous for monetary conservatism which means that they haven’t hit the constraints on monetary policy that we have.
No monetary constraint = no liquidity trap = no especially strong justification for a Keynesian stimulus.
There are some mistakes Mr. Boudreaux. First, Germany DID indulge a (for its size) huge Stimulus, called Konjunkturpaket I & II (though just a few billion
). On top of that the German taxpayers have to fund a Cash for Clunkers program that gave 2.5 k€ rebates on old cars, leading to the collapse of the new car market AND the resellers’ market.
As a guy who is on the verge of entry into the job market, I have to say that German labour rules are one of the issues why it is so bleak a future for me. It will be hard to get a decent job, because companies are not hiring inexperienced workers.
The situation in France is only marginally better in this regard.
I have read some comments here refering to the fall of the Berlin wall and the following reunification as a reason to the high unemployment. This is not entirely true, though unemployment is still high in the east (mostly, because the better paid workers all left for western Germany) there are several areas in Western Germany were high unemployment is a problem.
It is, in my opinion, not a result of the reunification but of the now decade-long subsidies for Eastern Germany that prove to be a burden for the region. They don’t have any need to get competitive and thus high unemployment reigns. Also, Berlin, f.e. is a master piece of fiscal irresponsibility. The city has no money and only functions, because it is the capital and subsidized by the rest of Germany, and thus it attracts all slackers do-nothings of all over the country. And they still can’t reign in their budget deficits…
Actually, there are a lot of labour-related laws that could be scrapped to make the east more competitive especially for small businesses. There are several guild structures in Germany, that still hamper competition.
http://www.economics.harvard.edu/pub/hier/2005/HIER2068.pdf
“European labor market regulations, advocated by unions in declining European industries who argued “work less, work all” explain the bulk of the difference between the U.S. and Europe”
In France: “Starting in the mid sixties and especially from the
mid seventies onward the reinforced union movement focused heavily of reduction of hours worked. In the late seventies lengthy rounds of negotiation on hours reduction between unions and employers organization finally came to a January 1981 agreement that reduced the working week to 39 hours…the new Socialist Government in 1982
clearly took the side of the unions. In a series of laws (1982, 1986 1987) the government issued regulations that either forced or created strong incentives for employers to reduce working hours by increasing mandatory vacations, making it harder to use overtime, etc…”
Not so quick.
No, Germany has nothing to learn from the US. The high unemployment was (and still is) mostly in East Germany due to the collapse of the East German economy. Imagine the US had in the past decade to rebuild a communist economy with some trillion dollars and integrate 100 million people. Check the unemployment numbers in west German states – those were much less.
So, Germany had it MUCH harder in the last two decades because it had to rebuild a former communist economy, where much of the elites had to be removed or retrained.
If you want to compare the US with Germany, then check the unemployment numbers of West Germany in the last two decades – that would be much more useful.
The recent fall of the unemployment numbers was basically due to full employment in some states of West Germany (even shortage of workers) and improving economic situation in East German states.
Pre-unification German unemployment was between 7% and 8% from 1983-1988.
However back in 1980, FRG unemployment was 3.4%. It averaged 4.4% from 1974-1979, which included some bad global economic times.
A number of labor market regulations enacted in France and Germany during the 1980′s may be responsible for the permanent rise in those country’s unemployment rates by several percentage points.
http://www.indexmundi.com/germany/unemployment_rate.html