The Parent Model

August 30, 2010

In response to the economic crisis, America and Germany followed different policy paths.  According to Gary Becker of the University of Chicago, the Americans borrowed an amount equal to 6 percent of gross domestic product (GDP) in an attempt to stimulate growth.  The Germans spent about 1.5 percent of GDP on their stimulus.  This divergence created a natural experiment.  Who was right, asks David Brooks, a columnist with the New York Times? 

The early returns suggest the Germans were, says Brooks: 

  • The American stimulus package was supposed to create a "summer of recovery," according to Obama administration officials.
  • Job growth was supposed to be surging at up to 500,000 a month.
  • Instead, the U.S. economy is scuffling along.  

On the other hand: 

  • The German economy is growing at a sizzling (and obviously unsustainable) 9 percent annual rate.
  • Unemployment in Germany has come down to pre-crisis levels.  

The results do underline one essential truth, says Brooks: Stimulus size is not the key factor in determining how quickly a country emerges from recession.  The U.S. tried big, but is emerging slowly.  The Germans tried small and are recovering nicely. 

Over the past few years the Germans have built on their advantages.  They effectively support basic research and worker training.  They have also taken brave measures to minimize their disadvantages by reducing labor market regulation, increasing wage flexibility and taking strong measures to balance budgets.  In the United States, policymakers inherited a different economic model, one that also has certain advantages.  It fosters disruptive innovation (of the sort useful in Silicon Valley).  It also has certain disadvantages -- a penchant for overconsumption and short-term thinking, says Brooks. 

In the past decade, American policymakers have done little to maximize their model's natural advantages or address its problems.  Indeed, they've only made the short-term thinking problem worse, with monetary, fiscal and home-ownership policies encouraging even more borrowing and consumption, says Brooks. 

Source: David Brooks, "The Parent Model," New York Times, August 26, 2010. 

For text:

http://www.nytimes.com/2010/08/27/opinion/27brooks.html 

 

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