Wednesday, August 18, 2010

Lessons from the German Economic Miracle

In a recent comment a reader proposed that the post-WWII Marshall Plan was a great example of government stimulus leading to national prosperity. Based on my previous posts on foreign aid, you might guess I don't agree with the common assumption. Economist David Henderson also disagrees and claims economic growth was mostly due to three other factors:
The two main factors were currency reform and the elimination of price controls, both of which happened over a period of weeks in 1948. A further factor was the reduction of marginal tax rates later in 1948 and in 1949.
The article goes into a lot more detail, but here's his specific response to the Marshall Plan story:
Marshall Plan aid to West Germany was not that large. Cumulative aid from the Marshall Plan and other aid programs totaled only $2 billion through October 1954. Even in 1948 and 1949, when aid was at its peak, Marshall Plan aid was less than 5 percent of German national income. Other countries that received substantial Marshall Plan aid exhibited lower growth than Germany.


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  3. Lemme try this one more time.

    The article you linked to only discusses West Germany, and states "This account has not mentioned the Marshall Plan. Can’t West Germany’s revival be attributed mainly to that? The answer is no. The reason is simple: Marshall Plan aid to West Germany was not that large." That is true. According to Wikipedia, the UK and France received the bulk of the funds.

    Also from Wikipedia:
    "By 1952 as the funding ended, the economy of every participant state had surpassed pre-war levels; for all Marshall plan recipients, output in 1951 was 35% higher than in 1938.[6] Over the next two decades, Western Europe enjoyed unprecedented growth and prosperity, but economists are not sure what proportion was due directly to the ERP, what proportion indirectly, and how much would have happened without it. The Marshall Plan was one of the first elements of European integration, as it erased trade barriers and set up institutions to coordinate the economy on a continental level—that is, it stimulated the total political reconstruction of western Europe."

    It may be true that Europe would have been no better off if the MP had not been carried out. As the podcast about our current economic stimulus package you posted recently discussed, there is no control group -- we have no real way of knowing. However, I personally don't see anything in this post that provides real evidence either way, except perhaps in the specific case of West Germany.

  4. How do you explain this: "Other countries that received substantial Marshall Plan aid exhibited lower growth than Germany."

  5. Well there are a million ways to explain that, including the amount of damage suffered during the war, their economic condition before the war, the policies and structure of their government, the amount and value of resources they possessed before/after the war, the amount of corruption in their government, and on and on. This is macroeconomics, dude.

  6. Sure it doesn't "prove" anything. But it does take the Marshall Plan out of the category of "successful test for stimulus".

  7. New tangent: Does anyone else feel the suggestive tones of phrases like "only" or "just" between other phrases like "$2 Billion" or "5% of the country's national income."

    I realize they didn't pay for everybody to get a segway, but $2 billion is/was a lot for one document to give to the double loser of the world wars. Which could also account for West Germany's extra rebound: they were used to it.

  8. The "only" implies it was such a small percentage that we can't give it credit for the growth.

    If the debate was whether we regret spending it, I'll turn that "only" into a "over".


You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.