From the TUC

German lessons?

07 Aug 2012, by Guest in Economics

Earlier today the Economist’s Daniel Knowles, tweeted a link to this chart:

 

He captioned it:

I’m going to retweet this, because it’s why all of these people saying we should be more like Germany are WRONG

Of course when looking at comparative economic performance it’s useful to look at GDP per capita rather than just growth – this accounts for differences in population changes and provides a fairer picture. Jonathan Portes, provided a link to this chart:

 

The picture is broadly the same – despite a much weaker recovery since 2009, the UK has outperformed Germany in terms of both GDP growth and GDP per capita growth.

Does this conclusively prove that those saying ‘we should be more like Germany’ are ‘WRONG’?

I’m not at all convinced.

For a start there are two important caveats to the raw data. First if looking at German economic performance in the 1990s or even early 2000s, one should not discount the impact of reunification.  As the EU noted ten years ago this can’t explain all of Germany’s economic underperformance since the mid-1990s but did have a large impact, especially in the 1990s.

If we take the starting point as 2002 (i.e. look at the last decade) then the picture is somewhat different.  Using OECD data (hat tip to Jonathan Portes) we can see that over the past decade German GDP per capita has grown by 12% and UK GDP per capita by 6%. The time period chosen matters quite a bit here.

Second, the UK experienced something of a credit boom (to put it mildly) from the early 1990s until 2008. If we take a balance sheet approach rather than just looking at annual flows (as this excellent Bank of England paper attempts to do) then we see a large build up in household debt in the UK throughout this period. This debt may constrain future growth. There is also the question of the extent to which finance service activity boosted GVA in the UK through higher risk taking.

Apply these caveats and the growth picture is a lot more nuanced.

But my real problem with Daniel Knowles’s tweet isn’t his use of data, it’s the blunt claim that those ‘saying we should be more like Germany’ are ‘WRONG’.

I’m not really sure who is claiming ‘we should be more like Germany’ in the sense I think he means. (And I may have missed some nuance here or got this wrong). 

My TUC colleague Tim Page wrote an excellent report earlier this year on ‘German lessons’ – a comparative study at the company level of things that the UK could learn from Germany. No-one, that I’m aware of is calling for the wholesale import of the ‘German model’ into the UK. That’s simply not practical.  

There are important lessons to take from Germany about industrial policy, banking structure, the concept of a Social Market Economy, the role of labour market institutions, technology policy and skills policy.

If that means ‘we should be more like Germany’ then I for one would be happy with that. But that doesn’t mean that we should try to replicate Germany’s reliance on exports, as Larry Elliot wrote last week:

The German myth is you can solve a problem of demand deficiency with belt tightening and export growth.

There are important lessons to learn from Germany, and many other countries, but we won’t heed them unless we take the time to look and pointing at charts of GDP growth over the past 20 years probabaly isn’y the best place to start.

4 Responses to German lessons?

  1. Gareth
    Aug 7th 2012, 3:30 pm

    Why would the level of debt “constrain” growth? What’s the intuition? Debt for one party in the economy is an asset for another. Would you say a high level of financial assets would “constrain” growth?

  2. Duncan Weldon

    Duncan Weldon
    Aug 7th 2012, 3:38 pm

    Depends on which people are in debt and who holds the counterpart asset.

    Resolution Foundation data suggests debt rose faster lower down the income spectrum. if those people are now credit constrained and focused on paying down debt that reduces growth if the people with the assets are higher up the income spectrum/older and have a lower MPC.

    http://www.resolutionfoundation.org/media/media/downloads/Final_-_Inequality_debt_and_growth.pdf

    Or if we have indebted households unable to consume as much and cash rich (i.e. deposit rich) firms unwilling to invest.

  3. Gareth
    Aug 7th 2012, 11:05 pm

    If you presume firms are “unwilling to invest”, regardless of interest rates – and a shift away from consumption to saving should lower (long term) interest rates, improving investment opportunities at the margin, you are assuming no – or slow – AD growth, not showing how a given level of debt (or ratio to income) could cause an AD problem.

    All this seems an odd thesis, anyway. You can see countries like Australia which have similar – or higher – levels of household debt/income, and they have not fallen off a cliff like the UK did in 2008. Is it not possible that the UK had really bad AD management in 2008?

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    Aug 17th 2012, 10:43 am

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