America's Misguided Bullying of German Economic Policy

President Obama
President Obama

It's hard to top American politicians when it comes to strong-arming other countries about economic policy. Especially, when actually accomplishing something to help those hurting at home from the Great Recession is so difficult.

The G-20 summit, where a showdown is brewing most pointedly between American and German camps, offers the latest vivid example. German politicians have been making a push for austerity and spending cuts following a sovereign debt crisis in Europe. And they've come under intense fire from American policymakers even as the U.S. Congress struggles with basics like extending unemployment benefits to its own citizens.

American politicians -- starting with President Obama himself, who recently wrote a letter to this effect -- have been howling that the drop in demand that German austerity measures would bring about is the last thing the limping global economy needs. But the U.S. is hardly in any position to lecture other countries about how to handle their affairs.

Ready for Rainy Days

The evidence backing American policy thinking is flaky. Stimulus spending measures in the U.S. were supposed to keep unemployment below 8%, for example, a claim that seems laughable with rates long hovering near 10%.

But critics prescribing generic responses conveniently overlook many of the features of the German economy built precisely for the rainy days of a downturn. Public goods in Germany like state-funded health care dampen the human cost of a recession, while generous unemployment subsidies help shore up domestic demand.

Indeed, "automatic stabilisers, which acted to the full, cushioning the labor market and domestic demand from the steep downturn," were recently trumpeted by German Finance Minister Wolfgang Schäuble. "Some of those who are pointing fingers at Germany on Thursday hail from countries where such built-in mechanisms to tackle economic slowdowns are much weaker."

And those measures seem to have worked admirably beyond just dampening human suffering. Unemployment in Germany is contained at about 8%, manageable by historical standards, and well below that of the U.S. And German manufacturing seems to be rebounding nicely.

It's All About Politics

But those defense mechanisms don't come cheap. German workers and businesses foot the bill in the form of higher taxes in better times. Tha's why pressuring Germans to engage in deficit-spending to prop up demand that might somehow find its way across the Atlantic is rightly perplexing.

Of course, the American push has little to with effectiveness or justness and everything to with political expediency. It's much easier to blame other governments than right the ship at home.

The recent browbeating of China, which was told to adjust the value of the yuan or face U.S. trade sanctions, was the prior example of this playbook. And while an appreciation of the Chinese currency is hardly going to create jobs at home, influential U.S. economists like Paul Krugman of Princeton University are already looking for ways to bully Germany.

"If the euro falls to parity with the dollar, the Europeans are going to be surprised by the demands that will come out of the U.S. Congress, and I would support that," Krugman recently said.

But as congressional elections -- where incumbents are likely to get hammered -- fast approach, this kind of posturing should hardly surprise anyone. And neither should its inevitable failure.