The German analogy

The current economic climate has prompted plenty of comparisons with the Great Depression, the analogy being chiefly employed by the Obama Administration to justify spending huge amounts of money in order to place the economy on the road to recovery. Critics, including myself, have cited Japan's experience with fiscal stimulus during the 1990s as a great example of the failure of this approach, noting that Japan spent gobs of money but failed to achieve long-term growth.

Via Marginal Revolution I noticed another parallel that has been overlooked -- Germany after reunification. For those unfamiliar with the the subject after East and West Germany were reunified you had a situation where you had one country with two very different living standards. While West Germany enjoyed one of the highest living standards in the world East Germany was a polluted economic backwater, plagued by 40+ years of communist neglect. While West Germans drove around in Volkswagens, Mercedes and BMWs East Germans had to content themselves with the Trabant:

Der Trabi -- you had to wait years to get one

Understandably there was a lot of pressure on the German government to quickly boost East German living standards to that of their cousins in the West. To do this the German government spent tens of billions worth of dollars to replace crumbling infrastructure -- sound familiar? -- and engaged in other projects to bring the East up to Western standards. To pay for it they implemented a 7.5 percent unification tax. The result? Great infrastructure and economic stagnation. As one commenter from Marginal Revolution writes:

I have travelled extensively throughout Germany, including the eastern part (former DDR) in the decade following reunification. The German government in Bonn (and later Berlin) poured money into the East. The results? A stunningly beautiful infrastructure, but little real economic growth. I rode sleek, high-speed trains over smooth new track through decrepit villages full of abandoned houses and factories. I drove on the autobahns past abandoned farms and decaying towns. Many of the residents of eastern germany have moved to the west, where the jobs are.

But don't take his word for it, just look at this graph:

The German government increased infrastructure spending, promoted clean energy investments and raised taxes to pay for it all to no avail. Read more about the whole sorry saga in this article from Der Spiegel. It's the same path that the Obama Administration wants to place us on and we shouldn't be surprised when we achieve the same results.

Update: I should note that the analogy isn't perfect because East Germany also suffered from West German labor laws. These labor laws ensured that East Germans had to be paid like West Germans even though they were far less productive, therefore eliminating much of the incentive to hire them. In any case we might be headed in that direction anyway if Democrats succeed in passing the Employee Free Choice Act.