Sunday, July 07, 2013

German infrastructure

Cornell economics professor Robert H. Frank -- no stranger to readers of this blog -- uses a recent trip to Germany as the basis for his column in today's New York Times:
I recently spent a week in Berlin, where the entire city seemed under construction. In every direction, cranes and other heavy equipment dominated the landscape. Although many projects are in the private sector, innumerable others — including bridge and highway repairs, new subway stations and other infrastructure work — are financed by taxpayers. 
But wait. Hasn’t Germany been one of the most outspoken advocates of fiscal austerity after the financial crisis? Yes, and that’s not a contradiction. Fiscally responsible businesses routinely borrow to invest, and so, until recently, did most governments. 
...The Germans are investing in infrastructure not to provide short-term economic stimulus, but because those investments promise high returns. Yet their undeniable side effect has been to bolster employment substantially in the short run. 
Not all German public investments have met expectations. Berlin’s new consolidated airport, for example, has suffered multiple delays and cost overruns, and parts of the city’s recently constructed central rail station are to have major repairs. But private investment projects suffer occasional setbacks, too, and no one argues that businesses should stop investing on that account. 
The Germans didn’t become bogged down in debate over stimulus policy, and they didn’t explicitly portray their infrastructure push as stimulus. But that didn’t hamper their strategy’s remarkable effectiveness at putting people to work. The unemployment rate in Germany, at 5.3 percent and falling, is now substantially lower than in the United States, where it ticked up to 7.6 percent last month. (By contrast, in March 2007, before the financial crisis, the rate in Germany was 9.2 percent, about five percentage points higher than in the United States.)
The column, which goes on to use the Germany example as an argument in favor of increased US infrastructure spending, is incredibly sloppy. Frank's argument essentially goes like this: I was in Berlin, saw lots of construction, and therefore Germany's declining unemployment rate must be a product of infrastructure spending. In other words, he presents correlation as causation while offering up exactly zero data regarding German infrastructure spending levels. Literally the only evidence given for high levels of German infrastructure spending is his personal observations while spending one week in the country's capital. 

Since Frank places such a premium on anecdotal evidence, perhaps he will find this nugget left by commenter "ned" on the Marginal Revolution blog to be of interest:
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. 
Indeed, ned makes a great point -- Germany engaged in heavy infrastructure spending to rebuild the country's formerly communist East since reunification in 1990. All of that spending should have translated into plenty of jobs, correct? Not exactly:

In fact, not only did German unemployment spike in the immediate aftermath of reunification as the country absorbed East Germany's labor pool, but it reached 11.5 percent in 2005, almost fifteen years after reunification took place. If anything, the decline in Germany's unemployment rates nicely correlates not with infrastructure spending, but with the Hartz reforms -- implemented from 2003-2005 -- which somewhat loosened German labor laws while tightening unemployment benefits. 

Furthermore, if Frank had spent even a few minutes googling "germany infrastructure spending" among the top results he would have come across are this June 27 article from Der Spiegel decrying the poor state of German infrastructure, a March 2013 Wall Street Journal piece which states that "Germany spends significantly less on public infrastructure than the U.S. and most other European nations" and an April 2013 Forbes column which notes that "According to OECD statistics, the United States spends 3.3 percent of its GDP (2006-2011) on infrastructure investment versus the European Union’s 3.1 percent."

But what are such facts compared to a week in Berlin and an ideological axe to grind?

Bonus sloppiness: later in the column Frank states that in 2009 "Congress enacted a stimulus bill totaling only $787 billion, spread over three years." Except the cost has since been revised, with the Congressional Budget Office in 2011 placing the price tag at $830 billion.

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