During the first half of this year, German and American political leaders engaged in an epic debate. American leaders argued that the economic crisis was so bad, governments should borrow billions to stimulate growth. German leaders argued that a little short-term stimulus was sensible, but anything more was near-sighted. What was needed was not more debt, but measures to balance budgets and restore confidence.
The debate got pointed. American economists accused German policymakers of risking a long depression. The German finance minister, Wolfgang Schaeuble, countered, "Governments should not become addicted to borrowing as a quick fix to stimulate demand."
The two countries followed different policy paths. According to Gary Becker of the University of Chicago, the Americans borrowed an amount equal to 6 percent of 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?
The early returns suggest the Germans were. 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.
The German economy, on the other hand, is growing at a sizzling (and obviously unsustainable) 9 percent annual rate. Unemployment in Germany has come down to pre-crisis levels.
Results from one quarter do not settle the stimulus/austerity debate. Many other factors are in play. For example, Germany is surging, in part, because America is borrowing. Essentially, we Americans borrowed from our kids, spent some of that money on German machinery, and ended up employing German workers.
But the results do underline one essential truth: 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.
The economy can't be played like a piano — press a fiscal key here, and the right job creation notes come out over there. Instead, economic management is more like parenting. If you instill good values and create a secure climate then, through some mysterious process you will never understand, things will probably end well.
The crucial issue is getting the fundamentals right. The Germans are doing better because during the past decade, they took care of their fundamentals and the Americans didn't.
The situation can be expressed this way: German policymakers inherited a certain consensus-based economic model. That model has advantages. It fosters gradual innovation (of the sort useful in metallurgy). It also has disadvantages. It sometimes re-enforces rigidity and high unemployment.
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. As an editorial from the superb online think tank e21 reminds us, the Germans have recently reduced labor market regulation, increased wage flexibility and taken 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.
Over 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.
Nations rise and fall on the intertwined strength of their cultures and governing institutions. Despite all the normal shortcomings, German governing institutions have functioned reasonably well, ushering in painful but necessary reforms. The U.S. has a phenomenally creative culture, but right now it's an institutional weakling.
If you look around the world today, you see that a two-class system is coming into being. Some countries are undertaking fundamentals reforms. In these places, weaknesses have been exposed. Orthodoxies have been shattered. New coalitions have formed.
This is happening in Britain, where a center-right government is reining in a government that had spun out of control. It's also true in Sweden and other consensus-based countries, where there is so much emphasis on consistent, long-range thinking.
In other countries, political division frustrates long-range thinking. The emphasis is on fixing things for next month or next quarter. The U.S., unfortunately, is struggling to get out of Group 2.