Transcript Borchardt: Room to Maneuver...Could Bruening Do It?

Inflation: A symptom of conflict
• Inflations are not primarily economic problems with
secondary social problems, but are instead primarily
struggles over distribution with monetary consequences.
• Inflation is nothing more than the creation of additional
purchasing power, permitting certain consumers to satisfy
themselves without others voluntarily renouncing their
share of GDP.
Knut Borchardt (1972 essay)
Germany’s Experience of Inflation
in Perspectives on Modern German Economic History
Borchardt: Bruening Couldn’t Do It
Borchardt’s 1979 argument
• Lack of maneuvering room for anti-cyclical policies in the
German Slump Seriousness of downturn not evident until
mid 1931
– German law prohibited Reichsbank from financing deficit
• Constraint on Reichsbank reinforced by agreement fixing the exchange rate
– France certainly not amenable to extending a bailout loan
– Memories of hyperinflation threatened capital flight
• Capital flight after Nazi gains in 1930 election contained by high interest
• Weimar economy stymied by distributional conflict
– Political wage in post-WWI/post-hyperinflation Germany
• Compulsory arbitration...”Wage dictatorship”
• Wages rose irrespective of productivity  Profit Squeeze  Sick Economy
» Unemployment remained high throughout late 1920s
A matter of leadership?
...those holding positions of responsibility did not diagnose the
great depression as a catastrophe, but even saw it as an
opportunity for purgation in an otherwise unsolvable
situation...revise wages and avoid yet higher unemployment.
Borchardt...Room for Maneuver
Henry Kissinger: Great Man Theory
• Gustav Stresemann (1878-1929) could have done it
– Used Germany’s geopolitical dominance to assert German claims
» “Broke the rules” set down by Versailles Treaty
– Bruening similarly had to break the rules
» Break golden fetters [like Nixon did with Kissinger blessing]
» Capital controls to thwart capital flight
...Where was the economic equivalent of Stresemann? ... [instead, there
was] the German curse of kleine, petty democratic-conservative leaders
unable to advance the visions of Bismarck and Stresemann
Henry Kissinger, Diplomacy
Borchardt and Ritschl, Could Bruening Do It?
An Econometric Test of Borchardt’s High Wage Thesis
The model, 1925-1938
• Keynesian Consumption Function
• Investment function dependent on aggregate profits
• Depreciation dependent on past investment  K stock
• Tax revenues dependent on GDP
• Imports dependent on GDP and terms of trade
• Labor demand dependent GDP, K stock, and terms of trade
• Dummy Variable for Nazi regime
Policy Simulations
Simulation
• Sim 1 – Industry proposal
Results
– Hold real wage at 1927 level
– Balance budget like Bruening
• Sim 2 – Labor proposal
– Hold wage at high 1929 level
– No cuts in gov’t spending
• Sim 3 –Aggressive Wage Cuts
– Earlier than Bruening’s
• Sim 4 – Cost Cutting plus
absence of balanced budget
– Bruening’s wage cuts
– Spending at 1929 level
• Sim 1 & 2
– SR – labor strategy is superior
to sound finance approach
– LR – vice versa, industry
proposal does significantly
better
• Sim 3 & 4
– SR – austerity aggravates
situation
– LR – strong wage cuts plus
fiscal austerity prove
beneficial
Austerity Rocks
Borchardt-Ritschl Conclusions
Evidence suggests that a major slump
could not have been prevented by just
avoiding balanced budget policies. In
• The efficacy of fiscal policy
order to arrive at substantial reductions
with regard to employment
in unemployment, wage cuts appear to
depends heavily on the
be necessary prerequisite in any case.
behavior of wages
Indeed it turns out that a pure wage cut
strategy in the spirit of what Bruening
set forth in the course of 1931 provided
extended maneuvering room from 1931
on to the benefit of the Nazi economy.
Thus Bruening’s well known claim that
he was ousted 100 meters before
reaching his goal is possibly not too
mistaken after all.