Was the New York Times too hard on Germany's economy when it said that

Some economists worry that the relatively modest labor market changes have fallen far short of what the German economy needs to assure its long-term competitiveness, and that the government might be well advised to use this time of prosperity to tackle the tough issues. Instead, the long-awaited recovery has led to relief and perhaps even a little complacency.



Dean Baker certainly thinks so:

While this no doubt true, it’s also true that many economists don’t see Germany as facing intractable economic problems. These economists point out that Germany is actually running a substantial current account surplus, which means that it is lending money to the rest of the world. By contrast, the United States has a current account deficit of more than 5 percent of GDP, which means that it is borrowing money from the rest of the world. The position of the United States is clearly unsustainable, as nearly all economists would agree.

The article also misleads readers on the extent of Germany’s unemployment rate. It reports that the rate has fallen to 9 percent, implying Germany still has very high unemployment. In fact, this is the official German measure of unemployment, which counts part-time workers as being unemployed. The OECD measure for German unemployment (which uses essentially the same methodology as the U.S.) is 6.4 percent. Since unemployment is still concentrated in the areas that were formerly East Germany, the unemployment rate in the areas that were formerly West Germany would be approximately the same as in the United States.



This analysis seems rather . . . odd. America was running a healthy trade surplus in the 1930's; I don't think that anyone would have argued that this meant that the economy was in sterling health. On the contrary; a capital account deficit (a.k.a. lending money to the rest of the world) can be a sign that local investors don't think much of the economy's prospects. America's position is undoubtedly unsustainable. But nonetheless, the OECD leading indicators index grew twice as fast over the last six months as Germany's did, even though Germany is coming out of a recession and we seem to be heading into one.

Likewise, though Germany's OECD harmonised unemployment measure is lower than the official measure, it's still much higher than the level in the US: 6.4% vs. 4.6%. In a country with a population the size of Germany's, that's an extra 1.8 million people out of work. And if anything, that understates the problem, since America's social safety net is structured to inflate the stated size of the labor force (and thus the unemployment figure): for many benefits, you can only qualify if you are actively looking for work.

And while Eastern Germany is a problem, it's been almost 20 years since unification; at some point, you have to acknowlege that, whatever its historical problems, Eastern Germany is now part of Germany. America does not, after all, get to throw out Mississippi and Michigan because historical forces have caused them to underperform the rest of the country.

Dean Baker's assertions seem designed to obscure the fact that the big economies of Europe have been underperforming America for more than a decade on almost any measure one might care about, from unemployment to national income growth. It may be true, as Henry Farrell argues, that the evidence for pinning this on European labor markets is underwhelming--although, in the absence of another explanation for persistently higher unemployment rates, structural rigidity still seems the most likely answer. But that still leaves us with the fact that America is pulling away from all but a few small European countries, and the worry about what this means for the future of Europe if this trend continues1.


1This is, of course, a big if . . . witness all the books from the early nineties mindlessly extrapolating trends to prove that we were about to be relegated to teh dustheap of history by Japan and/or Germany.

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