Germany and Japan – can they offer good alternative economic models? [Ed.]

August 31, 2009

Germany and Japan, among the world’s most important economies, have held elections this week-end. Japan overthrew the long-ruling LDP and the coalition party members in Germany suffered severe blows in regional elections, not boding well for them in the forthcoming general elections. The economic crisis and its management so far has a lot to do with this. Both Germany and Japan suffer strains on their social systems and their economies due to their ageing societies. They also have had an economic model based on exports at any price with concomitant restrictions on domestic consumption. Both models – in particular Germany’s stakoholder capitalism – have often been portrayed in the past as less brutal and unstable than Anglo Saxon “shareholder”, or worse “casino”, (not to say “locust”…) capitalism.

As capitalism is deemed in crisis globally, and in particular, the Anglo-Saxon model, The Peterson Institute’s Adam Posen published on Friday a refreshing comment on these countries’ economic prospects:

Regarding economic policy, there is concern in both countries that entrenched politicians have pandered to their constituencies of older citizens for too long without sufficient regard for long-run fiscal sustainability.  And in both Germany and Japan, there is a legitimate sense that things have not been going well – legitimate because in both countries real wages have been stagnating or declining for years […].

Is there a compelling economic alternative on offer in either election? Does the program of the likely winning party or parties show a fiscally sustainable way back to real income growth for average workers? This is not just a matter of who will set economic policy in two of the world’s largest countries. This is about the future of economic policy. A well-justified casualty of the global financial crisis is the confident consensus that we know what to do.

It is not enough for politicians to simply offer a program of avoidance of Anglo-Saxon finance. First, such avoidance has not conferred safety during the crisis, especially since restricted consumption is associated with export dependence, and thus external vulnerability as Japan and Germany experienced. Second, such self-assigned financial distinctions have done little to prevent sizable banking problems from emerging in Germany or Japan as well. Third, the approach of Germany and Japan has not delivered noticeably better results for citizens’ incomes looking at the long-term –even when the additional fiscal burden to the US and UK from recent crisis responses is rightly taken into account.

Most importantly, “don’t act like the US” is an insufficient guide to policy in the face of stagnant wages precisely because all advanced countries are already acting differently from the US in terms of saving, of social policies, and of compensation of bankers, as well as on environmental, education, health care, and tax policies. If not acting like the US were enough, the rest of the rich world would be doing far better economically than it is.

The most promising economic programs are those of parties which are trying to return economic liberalism to its core values. I characterize this effort as making a commitment to protect citizens not stakeholders. That means combining social protections for individuals with willingness to subject businesses to strong competitive pressure, and progressive taxation to pay for the safety net. This is a step away from the promotion of corporate interests that have deceptively donned the cloak of “free-market” policies in many advanced economies in recent years – and not coincidentally given liberalism a bad name. The recent excesses of the US in protecting financial businesses, however, if anything, show the need for such citizen-not-stakeholder policies. […]

I have no personal horse in either of these electoral races, but in Germany it is the minority Green Party, with their emphasis on long-term sustainability and breaking down collusive business-labor barriers to competition, and the even smaller Christian Social Union*, with their opposition to bailouts, that offer a productive agenda of this kind. In Japan, it is the true heirs to former Prime Minister Koizumi in the Liberal Democratic Party who come closest, but who also are of the next generation in seniority, and thus will only come to power after the LDP loses this time, at soonest. Thus, for Germany and Japan the outlook is for continued economic underperformance, and mounting dissatisfaction, even after the coming electoral changes.

* Edit on 1 September 09 – My comment on this: The arch-conservative CSU is NOT the most economically liberal party in Germany. Given its deep often rural Bavarian roots, it is not exactly open to e.g. reforms of the highly protectionist EU Common Agricultural Policy, for example. It is rather the currently up-and-coming FDP that has a consistent liberal outlook. Given its current rise in polls, along with indeed the Greens, it is most likely to tilt the balance – if this is ever possible – in favour of changing German-style corporatism.  Daniel Schwammental at the WSJ Journal published an interesting article on the FDP today. Here it is (walled for subscribers).


2 Responses to “Germany and Japan – can they offer good alternative economic models? [Ed.]”

  1. […] Go here to review a rest: Germany as great as Japan – can they suggest great pick mercantile models? […]

  2. JimmyBean Says:

    I don’t know If I said it already but …This blog rocks! I gotta say, that I read a lot of blogs on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say I’m glad I found your blog. Thanks, 🙂

    A definite great read..Jim Bean

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