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The German Miracle: Another Look
Posted by: mcsmack ()
Date: September 08, 2010 09:02AM

The German Miracle: Another Look
Germany has cut government spending and its economy is growing smartly. It's not the first time that market-friendly policies have led the nation out of crisis.





By LAWRENCE H. WHITE

Earlier this summer George Soros and some leading Keynesian economists criticized what they regarded as Germany's overly strict fiscal discipline. Yet Germany's real output expanded at a robust 9% annual rate in the second quarter, while the U.S. economy grew at an anemic 1.6% rate. So is Germany now a role model for how to recover?

In a June op-ed, German Finance Minister Wolfgang Schäuble justified his government's decision to cut spending, citing "aversion to deficits and inflationary fears, which have their roots in German history in the past century." He was presumably making a reference to the destructive hyperinflation of the 1920s.

Yet Mr. Schäuble might have cited another relevant episode from his nation's history. Sixty-two years ago Germany became a role model for recovery from a very different crisis. In the aftermath of World War II, Germany's cities, factories and railroads lay in ruins. Severe shortages of food, fuel, water and housing posed challenges to sheer survival.

Unfortunately, occupation policy makers actually perpetuated the shortages by retaining the price controls the Nazi government had imposed before and during the war. Consumers and businessmen battled against the bureaucratic regime of controls and rationing in what the German economist Ludwig Erhard described as Der Papierkrieg—the paper war. Black markets were pervasive.

Germany's new Social Democratic Party wanted to continue the controls and rationing, and some American advisers agreed, particularly John Kenneth Galbraith. Galbraith, an official of the U.S. State Department overseeing economic policy for occupied Germany and Japan, had been the U.S. price-control czar from 1941-1943; he completely dismissed the idea of reviving the German economy through decontrol.

white0908
Associated Press
A 1950s Volkswagen plant. Between 1950 and 1960 the West German economy's real output more than doubled, growing at a compound annual rate of nearly 8% per year.

Fortunately for ordinary Germans, Erhard—who became director of the economic administration for the U.K.-U.S. occupation Bizone in April 1948—thought otherwise. A currency reform that he helped to design was slated to replace the feeble old Reichsmark with the new Deutsche mark in all three Western zones on June 20. Without approval from the Allied military command, Erhard used the occasion to issue a sweeping decree abolishing most of the price controls and rationing directives. He later told friends that the American commander, Gen. Lucius Clay, phoned him when he heard about the decree and said: "Professor Erhard, my advisers tell me that you are making a big mistake." Erhard replied, "So my advisers also tell me."

It was not a big mistake. In the following weeks Erhard removed most of the Bizone's remaining price controls, wage controls, allocation edicts and rationing directives. The effects of decontrol were dramatic.

The shortages ended, black markets disappeared, and Germany's recovery began. Buying and selling with Deutsche marks replaced barter. Observers remarked that almost overnight the factories began to belch smoke, delivery trucks crowded the streets, and the noise of construction crews clattered throughout the cities.

The remarkable success of the reforms made them irreversible. A few months later the French zone followed suit. The Allied authorities went on to lower tax rates substantially.

Between June and December of 1948, industrial production in the three Western zones increased by an astounding 50%. In May 1949 the three zones were merged to form the Federal Republic of Germany, commonly called West Germany, while East Germany remained under Soviet domination as the German Democratic Republic.

Growth continued under the market-friendly policies of the new West German government. Erhard became the Minister of Economic Affairs, serving under Chancellor Konrad Adenauer from 1949 to 1963. The West German economy not only left East Germany's in the dust, it outgrew France's and the United Kingdom's despite receiving much less Marshall Plan aid. This was the era of the Wirtschaftswunder or "economic miracle."

Between 1950 and 1960 the West German economy's real output more than doubled, growing for a decade at a compound annual rate of nearly 8% per year. Econometricians who have tried to parse the various factors contributing to this remarkable record found that not all of it can be attributed to a growing labor force and investment flows, or to "catching up" from a low initial level of output. A large chunk of the period's growth is explained by superior economic policy.

Erhard succeeded Adenauer in 1963 and served as chancellor for three years. His electoral success was an endorsement of the policies that had unleashed the Wirtschaftswunder.

Erhard drew his ideas from free-market economists centered at the University of Freiburg, particularly Walter Eucken, who developed a classical liberal philosophy known as Ordoliberalism (named after ORDO, the academic journal where the economists published their ideas). Interest in Ordoliberal ideas waned in Germany after 1963, eclipsed by interest in Keynesian economics. The welfare state grew. The economy became clogged with interest-group policies. Not coincidentally, economic growth also waned. From 1960 to 1973 growth was about half as great as it had been in the 1950s, and during the period from 1973 to 1989 it was halved again to only 2% per year.

Interest in Ordoliberalism began to revive among academics in the 1970s and 1980s, and it continues to have an institutional presence in Freiburg at the university and at the Walter Eucken Institute. Greater interest among politicians might be the best thing for reviving German economic growth over the long term.

If Mr. Schäuble is sincere when he says that, by comparison with U.S. policy makers, "we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation," he can find a useful model in the policies of his predecessor 60 years ago.

Mr. White is professor of economics at George Mason University. This op-ed draws on his forthcoming book, "The Clash of Economic Ideas."

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Re: The German Miracle: Another Look
Posted by: Britdrnva~ ()
Date: September 08, 2010 09:26AM

McSmack I'm surprised you'd look to such a socialist nation for macro-economic policies as a model for the US. I had you pegged as laissez-faire anti-government sort.

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Re: The German Miracle: Another Look
Posted by: mcsmack ()
Date: September 08, 2010 09:52AM

Britdrnva~ Wrote:
-------------------------------------------------------
> McSmack I'm surprised you'd look to such a
> socialist nation for macro-economic policies as a
> model for the US. I had you pegged as
> laissez-faire anti-government sort.

What Germany has done recently is anything but big government centralized control over the economy. Quite the opposite. They are seriously considering substantial tax cuts right now to sustain growth. Also if you take the exact opposite position as George Soros regarding economic policy it is guaranteed you won't be following socialistic principles. Read the article.

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Re: The German Miracle: Another Look
Posted by: Britdrnva~ ()
Date: September 08, 2010 10:12AM

I read the article - most western nations grew at an exceptional rate post WW2 - Germany was no exception. This article suggests rather facetiously that solely because of Keynesian economics the nations' growth sputtered in the 70's - like most things it wasn't solely attributable to one notion - there was an oil shock, the political climate was drawing inward, etc. The welfare state had been established long before the 70's. It wasn't because of the welfare state that the country's economic policy failed. Certainly it was a cost but as I just wrote there were many factors involved. And it wasn't isolated only to Germany which had a much more robust welfare state than the US...the US also sputtered.

McSmack wrote:
"What Germany has done recently is anything but big government centralized control over the economy. Quite the opposite."

I find that rather curious - the German Bundestag (their parliament) recently (against the vast majority of German wishes) decided to bail out Greece. They've enacted Keynesian stimulus spending much like the US. Much like France - no new company has broken through their top 100 in decades. Their government is much more centralized than the US, if they decided to decentralize portions (which would not come without major internal upheavals) they would still have a long way to go in terms of deregulations/decentralizations to even come close to catching the US.

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Re: The German Miracle: Another Look
Posted by: Registered Voter ()
Date: September 08, 2010 10:16AM

They had to approve the Greece bailout or it would have killed the EU. So yeah, they went against the voters in that case - to keep the EU floating, but in their internal policies they have enacted lower government spending and looser market controls to give the private sector a boost.

If you can’t model the past, where you know the answer pretty well, how can you model the future? - William Happer Cyrus Fogg Brackett Professor of Physics Princeton University

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Re: The German Miracle: Another Look
Date: September 08, 2010 10:20AM

Germany's deficit has doubled in 2010 and has surpassed the limits set by the EU...

http://webcache.googleusercontent.com/search?q=cache:XcVqr6KogGUJ:news.yahoo.com/s/afp/20100824/bs_afp/germanyeconomydeficitpact+german+deficit+2010&cd=1&hl=en&ct=clnk&gl=us

---------------------------------------------------------------------------------
http://bible.cc/1_corinthians/13-11.htm



Edited 1 time(s). Last edit at 09/08/2010 10:20AM by WashingTone-Locian.

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Re: The German Miracle: Another Look
Posted by: not mister mizzz ()
Date: January 03, 2016 07:40AM

oh no!!!!!

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Re: The German Miracle: Another Look
Posted by: Gerrymanderer2 ()
Date: January 03, 2016 11:09AM

Yeah, cost cutting along with a marginal tax increase.

They raised taxes too instead of holding government hostage and shutting it down. You stupid rightarded rightard.
Attachments:
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Re: The German Miracle: Another Look
Posted by: Gerrymanderer2 ()
Date: January 03, 2016 11:11AM

Old ass thread anyway. Who is bumping this crap? Obama was right.

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Re: The German Miracle: Another Look
Posted by: Gerrytardz!!! LOLZ! ()
Date: November 23, 2017 04:17AM

Gerrymanderer2 Wrote:
-------------------------------------------------------
> Old ass thread anyway. Who is bumping this crap?
> Obama was right.

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Re: The German Miracle: Another Look
Posted by: Liberals hate America ()
Date: November 23, 2017 12:41PM

Gerrymanderer2 Wrote:
-------------------------------------------------------
> Old ass thread anyway. Who is bumping this crap?
> Obama was right.
Attachments:
image.jpeg

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