Where is the demand?

It is one thing for little Ireland to assume that she will recover through exports. It is more alarming when bigger countries assume the same thing, since then one has to ask: where will the demand come from? If we all wait for others to provide it, we may wait a long time.

Martin Wolf has been arguing for a while that the collapse of private demand in high-spending economies such as the UK and US has left a hole in the world economy that has to be filled somehow, and that those countries’ governments will only be able to do so much to fill it. Those limits may be reached in the British case sooner than he may have initially anticipated. As he points out today, the collapse of the German and Japanese economies is the logical flipside of this same coin. It seems that the Germans are finally waking up to the scale of the crisis; how depressing then to read that Berlin is as resolute as ever in its refusal to do what is necessary (HT Eurointelligence):

Auch wenn es immer weiter abwärts geht – weiteres Geld zur Stützung der Konjunktur will die Bundesregierung derzeit nicht bereitstellen. Gleich zu Beginn des Gipfels habe die Kanzlerin klargemacht, dass man nicht zusammengekommen sei, um über ein drittes Konjunkturpaket zu reden, heißt es später. Die Koalition ist sich darüber einig und lässt die Gewerkschaften, die entsprechendes fordern, abblitzen. “Kontraproduktiv” nennt Steinbrück deren Rufe nach zusätzlichen hundert Milliarden Euro.

On the contrary: Steinbrück’s obstinacy is what is counterproductive. One supposes they will eventually change their tune, but how many workers must lose their jobs before that happens?

12 replies on “Where is the demand?”

This is not astonishing after several decades of public policy debates — which are centered on labour market reforms and fiscal consolidation in Germany. In fact, most politicians are sure that the recent upswing of the German economy (mainly 2007 and the first half of 2008) had to do with this policy and not with a beggar-my-neighbour effect stemming from a dramatic real devalution of the German labour costs in the last years.

And reading what the German Bundesbank, the research institutes and Volker Wieland published — very low or even negative multipliers sometimes already in the short run but definitely in the long using the argument of Ricardian equivalence — does not give hope.

We have to realize that is a reflection of the level of public policy debate — to blame only Steinbrück makes the things too easy.

“Steinbrück’s obstinacy is what is counterproductive. One supposes they will eventually change their tune”
Let’s keep economic analysis, not ideology, in focus.
On the specific point
1) No German federal government (let alone this coalition) has the political/legal means to suddenly change course on the Federal budget, and that only makes up a part of total public sector spending in Germany.
2) A few days ago, the German economic institutes revised upwards their budget deficit forecasts to some 5.5% of GDP next year. The European Commission’s Interim Forecast was 4.2% for 2010 back in January. This will be revised sharply upwards again (Spring forecasts come out 4 May) and may again be an underestimate. 5.5% is already massive by any historical standard for Germany.
3) The IIF April 2009 Global Economic Monitor was published overnight. It welcomes “green shoots” from greater government spending worldwide, while also fretting over the dangers. It would be a very brave economist indeed who claims to know where the Holy Grail is on such an overarching issue as the deficit.

On the first point (everyone waiting for everyone else), Stephen Kinsella brings Keynes back to the table on this here, http://www.stephenkinsella.net/2009/04/24/where-is-the-demand-here-it-is/. If I’ve followed the argument right, it’s that one must always look to the consumer to get things started again.

In the 1930s, that meant getting things started locally. These days, consumers buy but colour-blind, i.e. not really looking to whether it’s domestic produce or import.

Does that mean the solution we all need is a more ethereal up-tick in global sentiment? And does that mean we’re all faced with a sort of free-rider problem? (“Someone else can pay to improve sentiment.”)

I agree Ulrich, point well taken re singling out one person.

As far as I can gather, these experts are saying not only that more stimulus now will involve costs in the future (who could dispute that?) but that such programmes will do relatively little in the face of “einen so noch nie da gewesenen Einbruch”. Interesting that the IMF says precisely the opposite: “expansionary fiscal policy seems *particularly* effective in shortening recessions associated with financial crises and boosting recoveries”. The IMF also of course says that fiscal stimuli will have to be “at least sustained, if not increased, in 2010, and countries with fiscal room should stand ready to introduce new stimulus measures as necessary.”

Interesting that the consensus in Germany, a country which suffered so much as a result of flawed macroeconomic policy in the past, should have strayed so far from the international mainstream. To what would you attribute this Ulrich?

I’ve seen Angela Merkel quoted as saying that Germany cannot afford stimulus for demographic reasons:
“Over the next decade we will undergo a massive demographic change, and, therefore, borrowing is a greater burden for the future than in a country with a much more continuously growing population, as in the United States of America” (http://www.nytimes.com/2009/03/30/world/europe/30merkel.html?_r=1&hp).

Some might say that this is akin to refusing to leave the Titanic on the grounds that one cannot swim!

It is very important that you reflect on your Economic Model-in-Use. Each of us has one – we generally are unaware of what it is. Mine was Permagrowth – what’s yours? Your Model-in-Use frames all your opinions, beliefs, ideas.

The principal (global) current economic model-in-use is Permagrowth (annual incremental increase in economic activity). Unfortunately we are approaching an inflection point on the Permagrowth plot-line. No one knows what effect this will have – but the Tea-leaf readers are not happy campers.

An export-led emergence from this Deflationary Spiral is a complete non-starter. So are all ideas based on a Permagrowth economic model-in-use. I expect wealth and money destruction to continue until the significant disparity between China + India + East (ex Japan) and ‘the west’ lessens – a lot! When energy costs start to increment again, the real economic horror story will unfold.

We have, perhaps a decade, to implement a change to a Sustainable Economic Model-in-Use – that is , where we have an annual, incremental declension in economic activity!

Brian P

I think if we compare the percentage of GDP which the Germans have allocated to the first two stimulus packages they will stand up to the packages in process from the other major economies.
Possibly the point missed here is that the Anglo Saxon model which largely caused the current recession and their solutions is not necessary the best herd to follow.

Joe Slevin

Kevin, regarding some reasons why the mainstream is far from international debates in Germany I try to make my point of view as brief as I can.

1) The 1960s/1970s saw strong left-wing Keynesians in macrodebates and a cohort of Keynesians entering the chairs in academia. However, intl. competition was low (I don’t say the level of the disputes!), most of these economists (obviously no women in macro at this time) spend a lot of their time in discussing what Keynes really really really meant.

2) The 1980s/1990s saw a orientation towards micro and methods with more intl. focus — macro discussions still centered around the question if Milton or Maynard are right (and remained in German). A significant portion of German macroeconomists were seeking for education in Anglo-saxon countries and started their careers there. At the same time to get a chair ideology became less important (but still is) and “publication records” international journals became the main criteria (which excluded all the old macrodebates!).

3) If you look at the last “joint diagnosis” publication, especially the little grey boxes (containing some theoretical discussions on why e.g. fiscal stimulus does not work), we find the “new neoclassical synthesis” (the New Keynesian DSGE models) but with a strong asymmetry always to the neoclassical aspects of this consensus models. This is still the legacy from the old wars on “who is right, Milton or Maynard?”.

4) Last but not least we are in the election campaign. Interestingly, politicians like Merkel or Steinbrück are fairly right in their intuition regarding “vox populi”. Most people on the street are fairly sceptical on Keynesian policy. There are surely different reasons for that but the legacy of old debates are still in the minds.

Thanks Ulrich.

I guess you have seen this?


I think your emphasis on history of thought type disputes is probably exactly right. As you can see from a lot of the comments on this website, and from the blogosphere more generally, there is a divide between people who think in terms of ‘schools of thought’, and which one do you believe in, which appeals to the ideological mind, and those economists who have been trained to view the field as an essentially empirical one — in which case evidence matters rather more.


I agree with your points to some extent.

But even some of the “research institutes” — where the empirical economists should be located — have a long ideological legacy. Take as an example the arguments about monetary policy (funny to find recommendations for monetary policy in a report for the German government — of course this is the responsibility of the ECB) in the last report of the “joint diagnosis”. Three pages with the old and well-known arguments that always — if too much money is hunting too few goods –inflation will show up sometimes (in the medium run they wrote, which is clearly a sentence of compromise). This is — my personal view — completely irrelevant in the actual situation (OK, my opinion).

Regarding your last sentence: “…and those economists who have been trained to view the field as an essentially empirical one — in which case evidence matters rather more.”

This is difficult. Which evidence should matter? None of the living German economists has personally seen a crisis of that kind and scope ever in their lifetime. Therefore it is quite natural to go back to your “textbook” knowledge. The problem is — as the joint diagnosis report effectively showed — that this is not possible here. See the comments of Willem Buiter on the use of DSGE models for monetary policy, see

to quote from that piece:

” Charles Goodhart, who was fortunate enough not to encounter complete markets macroeconomics and monetary economics during his impressionable, formative years, but only after he had acquired some intellectual immunity, once said of the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling: “It excludes everything I am interested in”. He was right. It excludes everything relevant to the pursuit of financial stability.

The Bank of England in 2007 faced the onset of the credit crunch with too much Robert Lucas, Michael Woodford and Robert Merton in its intellectual cupboard. A drastic but chaotic re-education took place and is continuing.”

To make my point differently: A lot of German macroeconomists are so proud just to become “believers” in the Woodford, Gali etc. models(and Lucas in the filed of fiscal stimulus) that they don’t want to change their minds so fast as economists in the Anglo-Saxon world do. You know, we Germans a serious in our beliefs. And we are ready to suffer.

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