The Economist is probably the best magazine in the world, but a recent cover story on “The German problem” is just appalling:
For a large economy at full employment to run a current-account surplus in excess of 8% of GDP puts unreasonable strain on the global trading system. To offset such surpluses and sustain enough aggregate demand to keep people in work, the rest of the world must borrow and spend with equal abandon. In some countries, notably Italy, Greece and Spain, persistent deficits eventually led to crises. Their subsequent shift towards surplus came at a heavy cost. The enduring savings glut in northern Europe has made the adjustment needlessly painful. In the high-inflation 1970s and 1980s Germany’s penchant for high saving was a stabilising force. Now it is a drag on global growth and a target for protectionists such as Mr Trump.
There are so many misleading statements here that one hardly knows where to begin:
1. The Economist confuses trade and aggregate demand, which are entirely unrelated issues. People do not need to “borrow and spend with . . . abandon” to insure an adequate level of aggregate demand, rather they need a sensible monetary policy.
2. We know that Italy, Greece, and Spain were not “forced” to run large deficits by Germany, because Italy and Spain have sizable surpluses, and Greece’s current account is roughly balanced. That would not be possible if the German surplus forced these three countries to run deficits. It’s true that these countries currently have a shortfall of AD and high unemployment, but that’s due to a combination of the ECB’s tight money policy and very rigid labor market regulations, not Germany’s trade policy.
3. It’s true that at a global level a German CA surplus must be offset by an equal deficit elsewhere. But the German economy is only a very small percentage of the global economy, so a Germany CA surplus of 8% of GDP implies a “rest of world” deficit of far less than 1% of GDP.
4. As a practical matter, one can see the German surplus as being offset by the even larger US CA deficit. But obviously this US deficit does not create an AD problem in the US, as the Fed is currently involved in raising interest rates to prevent AD from rising too rapidly! The rest of the world (not the US and not Germany) is currently running a large CA surplus. So Germany certainly does not force the rest of world (excluding the US) to run a deficit.
5. Some argue that current account deficits are problems even if they don’t depress AD. Perhaps the US current account deficit has led to de-industrialization. If so, that must have happened before 1987, as the US deficit has not increased at all over the past three decades, so it can’t have contributed to recent de-industrialization. It’s a bit over 2% of GDP, even less than in 1987.
6. Some argue that trade causes job loss through “re-allocation of labor”. This is a channel that might apply to the US, even if our CA deficit is not getting “worse”. But this argument would equally apply to Germany, indeed even more so, as it’s CA has changed more rapidly than in America. So Germany has presumably been doing a lot of re-allocation from its declining industries to its advancing industries. Re-allocation is a genuine challenge (from both trade and automation) but it has absolutely nothing to do with current account balances.
7. The Economist makes the common error of confusing CA deficits with net borrowing. The German CA surplus in no way “forces” other countries to borrow more. It’s up to each individual, business and government to decide how much they want to borrow. Even in a world with zero debt, there would be large and persistent CA imbalances as assets are bought and sold across borders. The Economist is simply wrong, CA balances and net borrowing are completely separate issues.
Their entire cover story seems based on the worst elements of Keynes’s General Theory, where he speculates that the mercantilists might have a point. These ideas were wrong in the 1930s, and they are still wrong. Unfortunately this sort of article gives aid and comfort to protectionists like Donald Trump, Steve Bannon and Peter Navarro, and that’s the last thing the world needs right now.
Germany is not the problem; it’s the solution. More countries should emulate Germany’s labor market reforms and its high savings rate. If we all did so, the world would be much better off.
PS. Tomorrow I say goodbye to Boston and leave for Southern California by car. While I’m getting my kicks on Rte. 66, blogging will be spotty.
Category: International Macroeconomics: Exchange Rates, International Debt, etc.