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During the first half of this year, German and
American political leaders engaged in an epic debate. American leaders
argued that the economic crisis was so bad, governments should borrow
billions to stimulate growth. German leaders argued that a little
short-term stimulus was sensible, but anything more was near-sighted.
What was needed was not more debt, but measures to balance budgets and
restore confidence.

The debate got pointed. American economists
accused German policymakers of risking a long depression. The German
finance minister, Wolfgang Schaeuble countered, “governments should not
become addicted to borrowing as a quick fix to stimulate demand.” The
two countries followed different policy paths. According to Gary Becker
of the University of Chicago, the Americans borrowed an amount equal to
6 percent of GDP in an attempt to stimulate growth. The Germans spent
about 1.5 percent of GDP on their stimulus.

This divergence created a natural experiment. Who was right?

The early returns suggest the Germans were. The
American stimulus package was supposed to create a “summer of
recovery,” according to Obama administration officials. Job growth was
supposed to be surging at up to 500,000 a month. Instead, the U.S.
economy is scuffling along.

The German economy, on the other hand, is growing
at a sizzling (and obviously unsustainable) 9 percent annual rate.
Unemployment in Germany has come down to pre-crisis levels.

Results from one quarter do not settle the
stimulus/austerity debate. Many other factors are in play. For example,
Germany is surging, in part, because America is borrowing. Essentially,
we Americans borrowed from our kids, spent some of that money on German
machinery, and ended up employing German workers.

But the results do underline one essential truth:
Stimulus size is not the key factor in determining how quickly a
country emerges from recession. The U.S. tried big, but is emerging
slowly. The Germans tried small, and are recovering nicely.

The economy can’t be played like a piano – press a
fiscal key here and the right job creation notes come out over there.
Instead, economic management is more like parenting. If you instill
good values and create a secure climate then, through some mysterious
process you will never understand, things will probably end well.

The crucial issue is getting the fundamentals
right. The Germans are doing better because during the past decade,
they took care of their fundamentals and the Americans didn’t.

The situation can be expressed this way: German
policymakers inherited a certain consensus-based economic model. That
model has advantages. It fosters gradual innovation (of the sort useful
in metallurgy). It also has disadvantages. It sometimes re-enforces
rigidity and high unemployment.

Over the past few years, the Germans have built on
their advantages. They effectively support basic research and worker
training. They have also taken brave measures to minimise their
disadvantages. As an editorial from the superb online think tank e21
reminds us, the Germans have recently reduced labor market regulation,
increased wage flexibility and taken strong measures to balance budgets.

In the United States, policymakers inherited a
different economic model, one that also has certain advantages. It
fosters disruptive innovation (of the sort useful in Silicon Valley).
It also has certain disadvantages – a penchant for overconsumption and
short term thinking.

Over the past decade, American policymakers have
done little to maximise their model’s natural advantages or address its
problems. Indeed, they’ve only made the short-term thinking problem
worse, with monetary, fiscal and home ownership policies encouraging
even more borrowing and consumption.

Nations rise and fall on the intertwined strength
of their cultures and governing institutions. Despite all the normal
shortcomings, German governing institutions have functioned reasonably
well, ushering in painful but necessary reforms. The U.S. has a
phenomenally creative culture, but right now it’s an institutional
weakling.

If you look around the world today, you see that a
two-class system is coming into being. Some countries are undertaking
fundamentals reforms. In these places, weaknesses have been exposed.
Orthodoxies have been shattered. New coalitions have formed.

This is happening in Britain, where a centre-right
government is reining in a government that had spun out of control.
It’s also true in Sweden and other consensus-based countries, where
there is so much emphasis on consistent, long-range thinking.

In other countries, political division frustrates
long-range thinking. The emphasis is on fixing things for next month or
next quarter. The U.S., unfortunately, is struggling to get out of
Group 2.

© 2010 New York Times