Germany and economic myths

The real problem with German macroeconomic policy by Simon Wren-Lewis

German macro

More Notes On Germany  by Krugman

A few more things to say about Germany’s trade surplus and the US report saying, correctly, that it’s harmful to the world economy.

The worst thing, if you ask me, in the Spiegel report on the controversy is the statement by Germany’s Economics Ministry that Germany’s surplus is

a sign of the competitiveness of the German economy and global demand for quality products from Germany.

Economists everywhere should read this and weep. It is a basic accounting identity that

Current account = Savings – Investment

Any story about the determination of the current account balance must take this identity into account. Suppose you have wonderful products that the world loves; even so, if you have low savings and high investment, you must run deficits. How can this happen? Simple: you end up with a high value of your currency and/or high wages relative to competitors.

So while it’s impressive that Germany can run a surplus despite quite high labor costs, and that’s a testimony to the quality of its stuff, ultimately the surplus reflects high savings relative to investment.

And we are, as I said in a different context just the other day, in a world awash in savings, a world in which someone who decides to spend less and save more makes the whole world poorer. That’s not the normal situation, but it’s where we are now, and where we have been for five years.

Does the German Economics Ministry really not understand any of this? My guess is that it doesn’t — that Germany really does see itself as a role model, believes that all would be well if everyone behaved the same, and doesn’t see the notion of a world in which everyone runs big trade surpluses as being problematic in the least.

Germany's trade surplus

Germany's Blind Spot

Germany, the biggest economy in the euro zone, has long been a major contributor to imbalances in the global economy. It exports far more than it imports and does too little to encourage the growth of domestic demand. That has made it hard for countries like Greece and France to increase their exports and revive their economies. Last year, Germany’s current account surplus was 7 percent of its gross domestic product; by contrast, China, which is often criticized for pursuing an aggressive export policy, had a surplus of just 2.3 percent.

Fawlty Europe: Will the European Commission dare to utter the unmentionable to the Germans?

The Harm Germany Does by Krugman

The Germans are outraged, outraged at the U.S. Treasury department, whose Semiannual Report On International Economic And Exchange Rate Policies says some negative things about how German macroeconomic policy is affecting the world economy. German officials say that the report’s conclusions are “incomprehensible” — which is just bizarre, because they’re absolutely straightforward.

Oh, and yes, the US inexcusably spied on Angela Merkel — but that has nothing to do with this, and anyone bringing it into this conversation thereby demonstrates his or her intellectual bankruptcy. Also, frank talk about German economic policies doesn’t make you anti-German or anti-European; again, anyone trying to evade the substance by bringing that kind of accusation in has in effect conceded the argument.

So, about the argument. Here’s a brief history of the euro zone, told through one number for two countries, Germany and Spain:  

The creation of the euro was followed by the emergence of huge imbalances, with vast amounts of capital flowing from the core to the periphery. Then came a “sudden stop” of private capital flows, forcing the peripheral nations to eliminate their current account deficits, albeit with the process slowed by the provision of official loans, mainly through loans among central banks. The really bad news for the periphery is that so far the adjustment has taken place mainly through depressed economies rather than regained competitiveness; so the counterpart of that “improvement” for Spain is 25 percent unemployment.

Normally you would and should expect the adjustment to be more or less symmetrical, with surplus countries reducing their surpluses as deficit countries reduced their deficits. But that hasn’t happened. Germany hasn’t adjusted at all; all of the rise in peripheral European current accounts has taken place at the expense of the rest of the world.

And that’s a very bad thing. We are still in a world ruled by inadequate demand, and very much subject to the paradox of thrift. By running inappropriate large surpluses, Germany is hurting growth and employment in the world at large. Germans may find this incomprehensible, but it’s just macroeconomics 101.

You might argue that it’s not the German government’s fault that it runs surpluses — but you’d be wrong. (I’ve fallen into this trap, but acknowledged the error.) For one thing, Germany has pursued fiscal austerity despite its creditor status, contributing to an overall tightening of policy in the eurozone. And one way to think about Germany’s role within the euro is that it is in effect engaging in huge foreign exchange intervention via Target 2, which holds down the “shadow Deutche Mark”:  

Of course, I don’t expect German officials to admit that there’s anything to what Treasury says. They’re not big on macroeconomics as we understand it; actually, they’re not big on accounting identities, since their view seems to be that everyone should be like Germany, and run huge trade surpluses.

But Treasury just stated the obvious and true.

The Axis of Fools is the Republican Party first and foremost, Germany, and China. China, however is a poor country managing the trick transition(?) from authoritarian to democracy. Germany and the Republican Party should know better.

Germany: work sharing and weak currency

Angela Merkle's approval ratings are around 80 percent while Obama's are dropping. Merkel's party won a rare clear majority in the German parliament. Germany's unemployment is around 5 percent while the U.S.'s is at 7.3 percent and the civilian-employment ratio hasn't recovered from the crisis. The surplus countries need to help out the deficit countries with closing their output gaps and achieving full employment. Granted the U.S. would be at Germany's unemployment level with a fiscal policy that was at the same level as the early 2000s recovery.

Germany As Currency Manipulator by Krugman

A correspondent — whose email and name I have lost! — makes a good point. In talking about trade and secular stagnation, I described Germany, with its huge surpluses, as not a currency manipulator. As the correspondent said, however, the euro can be seen as a de facto foreign exchange intervention to keep the de facto Deutsche mark weak. Before 2008, the euro encouraged private capital outflows from Germany to the periphery. Since then, both official rescue packages and also lending among national central banks in the euro area can be seen as taking the place of these private flows. The interbank portion is shown in this chart from Pimco:  

The general point is that if we imagine a euro breakup, I think everyone would agree that the new mark would soar in value, making German manufacturing much less competitive. The German public imagines that it is being cruelly exploited for the benefit of lazy southerners; arguably, what’s really happening is more like China’s purchases of dollars, which are intended not to subsidize America but to boost industry.

As Europe’s Currency Union Frays, Conspiracy Theories Fly by Floyd Norris

Conceivably, Germany learned three things from the 1992 experience, and mapped out a course with those lessons in mind. First, absent fixed exchange rates, its export-oriented companies faced the risk of periodic competitive devaluations from the rest of Europe.  

German exports had peaked in 1990, and did not fully recover until 1994. They would not fall again for an entire year until 2010, after the credit crisis devastated world trade. 

Second, a currency union could help German exports if the euro’s value were held down by less competitive economies. 

Italy had been forced repeatedly to devalue the lira as rising costs made its exports too expensive. A common currency would not stop the rising costs, but it would prevent a new devaluation.         

Finally, if Germany adopted a low-interest-rate policy, and superlow rates arrived in European nations accustomed to high rates, banks could open the credit spigot and create a debt-financed boom in much of Europe. That would invite a mushrooming of imbalances. Ultimately, deeply indebted countries would face a crisis, one that they could solve only if they acquiesced to German policies and surrendered a large part of national sovereignty.

Germany, China and the Republicans are the Axis of Fools.

Germany vs.the Rest of Europe by Floyd Norris

The German labor system, with its incentives to move workers to part time rather than lay them off, does appear to have been critical in keeping the country’s unemployment rate from rising more than it did during the credit crisis.

But the decline of unemployment since then has more to do with the fact that Germany — perhaps unintentionally but certainly effectively — has managed to assure that its currency is undervalued, both relative to that of its neighbors and to much of the rest of the world. That has helped the country’s exporters and brought more business to the country.
...

The impact of currencies could be seen earlier this month on successive days when Nissan, the Japanese automaker, and Daimler, the German maker of Mercedes cars, announced profits. Nissan moaned about the yen, which makes it very difficult to make money exporting cars from Japan, while Daimler forecast strong earnings if the euro stays where it is. The euro has lost a third of its value against the yen since the credit crisis began.

The O.E.C.D. report is worth reading for its explanation of labor policies that other countries should consider. In good times, many German workers work overtime but are not immediately paid for it. Those hours are credited to their account, and when times get rough they go on part time but are paid full-time wages, with the difference coming out of the account. Another government policy allows companies to reduce hours with the government making up two-thirds of the lost pay.

Those policies no doubt reduce hiring when times are good, but also hold down layoffs when times are bad.

Not all is rosy in the German labor market. Felix Hüfner, an O.E.C.D. senior economist in charge of the German desk, told me that he was worried about the fact that about two-thirds of younger German workers did not have permanent jobs. Instead, they have “fixed-term contracts,” which make it easier for companies to let them go when the contracts end. Germany may, he said, be in danger of becoming a “two-class society,” with most older workers in a protected group and most younger ones outside of it.

Should The U.S. Take A Harder Stance On China's Currency? (Part II) by Joe Gagnon

Federal Reserve Chairman Ben Bernanke recently said that Chinese currency manipulation "is blocking what might be a more normal recovery process." In fact, the problem goes beyond China to include many other emerging economies and even a few advanced economies. All together, governments in these economies are spending about $1.5 trillion per year on currency manipulation.

Currency manipulation occurs when governments purchase foreign currency in order to hold up its value relative to their own currency. Manipulation makes a country's exports cheaper and imports more expensive, artificially raising the trade balance. The evidence suggests that currency manipulators jointly have increased their trade balances by about $1 trillion relative to where they would have been in the absence of manipulation. Europe and the United States have suffered the corresponding decline in trade balances.

(via Thoma)

American Republicans (and Fed board members like Lacker), the Chinese Communist Party, and German conservatives are the Axis of fools, all denying the American economy full employment and adequate demand to close the output gap. Germany however is mostly damaging Europe, though. The Chinese are screwing their consumers.

DeLong gives an early sketch of the Brookings paper he's working on with Larry Summers, titled "Fiscal Policy in a Depressed Economy".

Persistent high transitory cyclical unemployment is transforming itself into permanent structural unemployment as the labor market recovery continues to delay its appearance.

Government polices by the American, Chinese and German governments are actively delaying its appearance. Its not choosing to be fashionably late itself.

Inflated Worries by Laurence Meyer


The Austerity Delusion by Krugman

Flirting With a Repeat of a Stunted Recovery by Leonhardt

On the positive side, exports and consumer spending are up, and the job market finally seems to be improving. If anything, last week’s jobs report probably undercounted recent gains. That often happens early in an economic recovery because the Labor Department has a hard time keeping track of newly started businesses.

On the negative side, oil prices have risen more than 40 percent since September, and every level of government is considering spending cuts and layoffs.

All in all, the situation is uncomfortably reminiscent of last spring. Back then, companies were just starting to hire again, before a combination of events -- including Europe’s debt crisis and the fading of the stimulus program here -- spooked them and cut short the recovery. It’s easy to imagine how energy costs and government cuts could do the same this year.

Why Jobs Haven't Come Back

Verizon Deal May Expose iPhone Flaws by Joe Nocera

Fool's Gold 
(or the Axis of Fools)

I'm still in the middle of Lords of Finance and have come to the part where Churchill has been brought on as Chancellor to the Exchequer by Stanley Baldwin. Churchill is genuinely undecided on whether or not to return to the Gold Standard. To help himself decide, he organizes an evening party at his house and invites the top people from both sides of the debate. All of the establishment at the Treasury and Bank of England advise him to, and so he does. BIG mistake.

Obama can't get more fiscal stimulus past the Republicans in the Senate. Bernanke needs to convince the FOMC to enact unconventional measures like inflation targeting and quantitative easing. If he doesn't we could be in for a "lost decade" like Japan's.

Nouriel Roubini and Ian Bremmer are worried about prospects for world economic growth.

Countries that save too much must also do their part for global demand. In particular, the Chinese leadership should recognise that failure to allow a more substantive revaluation of its currency will have serious consequences at home. It makes little sense to try to boost China’s local exporters while undermining the longer-term health of their best customers. Beijing must also move much more quickly to boost China’s domestic consumption.

The eurozone needs fiscal austerity, but it also needs a level of growth best provided by an easing of monetary policy from the European Central Bank. Early debt-restructuring of insolvent members should also be on the agenda. Germany should postpone its fiscal consolidation for a couple of years to boost disposable income and consumption. Outside Europe, Japan must accelerate economic reforms.

Meanwhile the IMF - who never warned about the housing bubble by the way - sees little risk of a double dip.

Peter Bienart on Why Liberals are Down on Obama. No it's Firebaggers* and Clintonoids like Eric Alterman who are down on Obama. (I bet the poor are so glad Clinton did welfare reform with unemployment at 10 percent!)

Jonathan Cohn writes about dishonesty of the Republicans.

To review the relevant history: Early in the year, leaders of the Democratic Party called for a new stimulus program--a combination of public works spending, aid to states, and other measures that, they said, would create jobs and strengthen the weak recovery. President Obama eventually came forth with a package of that would have cost the federal treasury more than than $200 billion.

The Republicans rejected this idea flatly, saying (among other things) that the country couldn't afford such to keep running such high deficits.

OK, Democrats said. How about some smaller programs? Just before the July 4th recess, Senate Democratic leaders tried to pass a $33 billion bill focusing on unemployment benefits only. The federal government has done this many times before, during downturns, in part because unemployment benefits give a real boost to the economy.** (Unemployed workers tend to spend the money right away, because they need it just to cover essentials like food and rent.) Surely that would be ok.

Nope, Republican leaders said. Even $33 billion in new deficit spending is too much. The country can't afford it.

Then, a few days ago, Judd Gregg, chairman of the Senate Budget Committee, and Eric Cantor, minority whip in the House, appeared on CNBC. When asked about the economy, the two proposed extending the Bush tax cuts that are set to expire at the end of this year. Not some of them, mind you. All of them. (A Gregg spokesperson later told me he was speaking only "generally," about the importance of the tax cuts. I'm not sure what that means, but full extension of the tax cuts has long been GOP dogma.)

What would extending all the Bush tax cuts mean, in dollar terms? According to the Center on Budget and Policy Priorities, which quickly ran some numbers at my request, extension would raise the deficit about $3.7 trillion--roughly $820 billion more than extending only the middle class tax cuts, as Democrats have proposed.

Numbers like this make people's eyes glaze over. A billion here, a trillion there. What's the difference? So maybe a more concrete comparison will help.

Rejecting a $33 billion proposal, because of its alleged impact on the deficit, and then embracing an $820 billion one is a bit like a dieter passing on a plain baked potato

...and then gorging on four pints of Ben & Jerry's Chocolate Fudge Brownie Ice Cream...

Also, if the Republicans' filibustering of further fiscal stimulus throws us into a lost decade of deflation, that will worsen the budget picture. I believe it's called slash and burn politics.

Barry Eichengreen writes:

It is almost as if governments like Britain’s are attempting to manipulate the private sector into believing that the dire conditions required for an expansionary fiscal consolidation have already been met. It as if they are trying to terrorize the private sector, so that when the fiscal ax actually falls, consumers and investors will be sufficiently relieved that disaster has been averted that they will increase spending.

If so, leaders are playing a dangerous game that depends on encouraging more future spending by exciting consumers and investors now, while depressing actual spending just when it is most urgently needed.

Or maybe politicians don’t believe any of this and are simply intent on cutting spending for ideological reasons, irrespective of the economic consequences. But who would be so cynical as to believe that?

I blame Greece! But seriously, if world growth slows to a crawl and America enters a Lost Decade, it will be thanks to Senate Republicans, the Chinese Communist Party and the European Central Bank: an Axis of Fools.***

In the meantime we can enjoy the spectacle of  Firebaggers and Clinton fanboys like Eric Alterman raging at Obama.
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* FireDogLake + Teabaggers. Their influence is too negligible for them to be included in the Axis of Fools. Clinton fanboys will switch back to Obama once - if - things turn. As if no one will remember their opportunism.
** Ronnie Raygun extended unemployment insurance for three years during the downturn in the early 1980s.
*** The Chinese dictatorship would correspond to the intransigent, self-centered Saddam-era Iraq, the ECB to the paranoid Iranian theocracy, and the Senate Republicans to the batshit crazy, epistemically closed North Korean regime.