Germany is especially proud that it has exported its way to becoming the strong man of Europe. It has suppressed wage growth, used subsidies to make its products more competitive, and taken advantage of the fixed euro, set at too low a rate to maintain trade balances. It is determined to remain oblivious to the fact that such a model requires countries that buy its products to run deficits and therefore borrow lots of money. This is why export models are known as beggar-thy-neighbor models, and it is why Germany has a moral obligation to help bail out nations like Greece, Italy, and Spain. Export models are really debt models on a global scale.
Madrick comes close to incorporating 10 economic misconceptions into one paragraph. Exports don’t make one strong, as the Japanese have shown. Subsidies don’t give one an advantage in trade. Nor does the level of the euro (except perhaps in the short run, but that doesn’t explain Germany.) Germany’s model doesn’t require other countries to run up lots of debt. It’s certainly not a beggar-thy-neighbor model, indeed I don’t think such a thing exists. Germany has no moral obligation to bail out the PIGS. Export models aren’t debt models. Even if every country in the world ran budget surpluses, places like Germany would still run trade surpluses. Here’s a quote from a new piece I wrote for The Economist:
It makes sense for a fast growing economy to borrow against the future, as when Korea ran deficits during the 1970s and 1980s. Or take a developed country like Australia. It absorbs a large flow of immigrants, who may borrow to buy a house against their future income within Australia. Indeed some current account deficits don’t even represent borrowing, at least in the ordinary sense of the term. Consider the case where Australians buy cars from East Asia, and pay for the cars by selling vacation condos on the Gold Coast to wealthy Asians. In many respects this is ordinary trade, except that the products that are built with Australian labour (the condos) never leave the country.
Australia hasn’t had a recession since 1991, despite running large current account deficits for that entire period. The Australian deficits are neither undesirable, nor unsustainable. Australia has lots of land, and Asia has a huge emerging middle class to buy condos located on that land. And Australia has almost no national debt. So why are trade deficits viewed as such a problem?
Australian national debt has recently risen to about 20% of GDP, whereas Germany’s is closer to 80%. Export powerhouse Japan is higher still.
The PIGS made several mistakes. One was excessive public debt (except perhaps Spain.) But Germany and America and Britain also have excessive public debt. The other mistake was in joining the euro. That combination proved deadly. But the euro isn’t responsible for Germany’s surplus; all the northern European countries (Switzerland/Germany/Netherlands/Denmark/Sweden/ Norway) have big surpluses, usually bigger than Germany in relative terms. Four of those six aren’t even in the euro.
Krugman also links to Dean Baker:
In an article discussing House Speaker John Boehner’s performance in his job, the Post referred to his negotiations last summer with President Obama over, “the federal government’s swelling debt problem.” Newspapers interested in maintaining the separation between the news and opinion pages would have simple referred to the debate over raising the debt ceiling, which is what was at issue.
The debt has risen rapidly because of the recession that followed in the wake of the collapse of the housing bubble. Financial markets do not see the debt as a problem, which we know since they are willing to lend the government huge amounts of money at very low interest rates. There was no reason to interject this sort of editorial comment in a news story.
Here my disagreement (if that’s the right word) will be more subtle. I certainly agree that our big deficits don’t imply higher interest rates. Real rates are determined in global markets. But a large public debt can be a huge public policy problem even if rates are low. It means we must either stay in recession (to keep rates low), or recover, in which case the burden of the debt on taxpayers will suddenly become much higher. I’m “worried” that we won’t face that “worry.” I’m worried that we won’t recover, and that rates will stay low. So yes, the financial markets are predicting exactly what Baker says, but that’s extremely bad news.
[I'm not sure Baker disagrees, this is meant to be another spin, not a rebuttal.]
I also think there is a touch of naivete in Baker’s criticism of the press, although one could find 100 similar examples in my criticism of the press (so consider the following to be philosophical musing, not a critique of Baker.)
Baker also complains that the financial markets don’t fear deficits. Yes, and the financial markets tell us that the economy is not in a liquidity trap, every time they respond strongly to hints of Fed stimulus (QE2, etc.) But the press thinks we are. And we constantly hear the press talk about how the sub-prime crash caused the Great Recession, as if it’s an assumption so obvious there’s no reason to even justify it. Yet the financial markets (and the economic consensus) were not predicting a big recession as of mid-2008, even though the sub-prime fiasco was fully understood. There are all sorts of ways that the financial markets tell us we are wrong, but we pay little attention.
Yes, the WaPo blindly assumed debt is bad, but our press coverage is saturated with hidden assumptions about causality, and about morality. We talk about “unfavorable” trade balances, even though economic theory provides no reason to view surpluses as better or worse than deficits. We talk about “good inflation news” being lower inflation, even when the Fed is trying to raise inflation from excessively low levels. And except when the housing component of the CPI falls–then it’s “bad news.”
None of this should be any surprise, as humans tend shape their views of causality in a context saturated with notions of “good” and bad.” A few years ago I discussed a study by Joshua Knobe:
An experimental philosopher named Joshua Knobe reported some interesting findings in an interview on Bloggingheads.tv. (I believe this example is mentioned in his new book, Experimental Philosophy, but I am not sure. (And, no, the title is not an oxymoron.)) Knobe said that two groups of people were given two slightly different stories, and then asked a question. The first group heard a story where an engineer went to the CEO of a company with a project that he said would dramatically boost profits. But there was one drawback; it would seriously harm the environment. The CEO said “I don’t care about the environment, I only care about profits. Do the project.” For the second group, everything in the story was exactly the same except that project was said to actually help the environment. Again the CEO said “I don’t care about the environment, I only care about profits. Do the project.” In both cases the listener was asked whether the CEO intentionally hurt (or helped) the environment. Most people in the first group said the CEO did intentionally hurt the environment, but most in the second group said that he did not intentionally help the environment.
As I recall many commenters tried to justify this asymmetry, although I didn’t find any of their explanations to be at all convincing. Here’s what I think was going on. Readers immediately understood that their thinking about causality exhibited the same asymmetry as the people in Knobe’s study. Of course my readers tend to be much brighter and more logical than average. So they were outraged that I seemed to accuse them of “human tendencies,” whereas they saw themselves as being as strictly logical, like the character Spock in Star Trek. How dare you insinuate that I’m human!
Being a good economist is all about learning when one should think autistically, and when one should not. If I ever figure it out I’ll let you know.
PS. If you’re wondering whether the Australian case applies to the US, consider this:
Former Citigroup chairman Sandy Weill listed his 6,744-sq-ft apartment at 15 Central Park West for an astonishing $88 million in November, promising to donate the proceeds of the sale to charity.
Now comes news that Ekaterina Rybolovleva, the 22-year-old daughter of Russian billionaire Dmitriy Rybolovlev, is buying the condominium. Rybolovleva is currently studying at an undisclosed U.S. university and plans to stay in the apartment when visiting New York. According to a source familiar with the sale, she paid the full asking price of $88 million, setting a record for highest individual transaction in New York City history.
Here is the official statement from her representatives:
A company associated with Ekaterina Rybolovleva, daughter of a well-known businessman Dmitriy Rybolovlev, has signed a contract to purchase an apartment at 15 Central Park West, New York. The apartment is a condominium currently owned by the Sanford Weill Family.
Ms. Rybolovleva is currently studying at a US university. She plans to stay in the apartment when visiting New York. Ms. Rybolovleva was born in Russia, is a resident of Monaco and has resided in Monaco and Switzerland for the past 15 years.”
Australia’s not the only “lucky country.”