What’s good for Germany is good for the world

Matt Yglesias expresses a widely held view:

6. A “grand coalition” is probably better for the world: The main German parties do not have America-style sharp ideological disagreements on economics issues, but an SPD entry into government would probably add to the current pressures on German firms to raise wages. Higher German wages and a more rapidly unraveling of German’s low-wage export-driven growth strategy would be in the interests of German wage-earners, but also of other people around the world. Higher German earnings would lead to more demand for foreign-made goods and services and also create more opportunities for French or Spanish workers to compete for jobs on the basis of pay.

I have several problems with this argument.  First of all, I see no evidence that Germany’s current account surplus is in any way related to its wages.  The Nordic economies plus the Netherlands and Switzerland have large CA surpluses, indeed generally much larger than Germany, on a per capita basis.  These are the economies most similar to Germany.  But they don’t have low wage policies.  Second, unless I am mistaken, wages are not particularly low in the key German export industries like autos and machines (someone please correct me if this is wrong.)  Germany has a large CA surplus for the same reason that other countries do, they save a lot relative to their investment levels.

Germany’s labor reforms of the early 2000s were an amazing success.  Many people think they failed, and point to the large number of very low paid jobs in Germany.  This is a common logical error, forgetting that all policies fail if the criterion is a problem-free world.  The only valid way of measuring the success of a policy is to compare it to the alternative.  Before the labor reforms Germany had very high unemployment. It no longer does, despite the severe global recession.  That’s all you need to know.  The German government has an extensive welfare state with lots of wage subsidies, so the low wage workers in Germany are not starving.  Alternatively, who has a brighter future; Germany with 7.7% youth unemployment, or Greece with 62% youth unemployment?

Some might argue that the ECB’s tight money policy is good for Germany but not good for the eurozone. Not so, in the long run Germany would have been better off with a faster rate of NGDP growth in the eurozone. German banks and German taxpayers will eventually absorb huge losses from defaults in southern Europe.  The problem is not going away, and it is clear that tight money caused great damage to the entire eurozone.

But let’s not destroy the one success story in the eurozone.  A healthy Germany supplies more tourists to Greece and Spain, and buys more luxury goods from Italy.

It’s not a zero sum game.  If every country tried to make its economy as healthy as possible, with no concern for the rest of the world, we’d be much better off.  In other words, a world of 200 Switzerlands would be a far happier place than the current world we live in.  Indeed countries that (correctly) look out for their own welfare are led by a sort of “invisible hand” to do policies that also are in the best interest of the global economy.

Exceptions?  The only one I can think of is carbon taxes.

The real problem is that most countries don’t know what’s in their own interest. Greece doesn’t understand that it’s in Greece’s interest to privatize and deregulate.  Germany doesn’t know that faster NGDP growth in the eurozone is in Germany’s interest.

TheMoneyIllusion.com officially endorses the Free Democrats in tomorrow’s election. If only America had a parliamentary system where the swing party was always a socially liberal and fiscally conservative group. I could actually vote for someone without holding my nose.

I need to remember to wear my yellow shirt tomorrow.

Update:  Commenter mbka adds the following information:

This low German wage thing is a bit absurd because it’s not even true. Look at these Eurostat data from 2010
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Figure1_Median_gross_hourly_earnings,_all_employees_%28excluding_apprentices%29_2010.png&filetimestamp=20130410120200

Germany’s median hourly wages, amongst others, beat the following countries: Netherlands, Sweden, France, Austria, UK, Italy, and Spain, never mind a long list of much poorer countries.

(And this as well.)

My sense is that the labor reforms allowed for some low wage jobs for low skilled workers in the service sector, topped off with wage subsidies.  I think that’s a good system.  However the “export powerhouse” German firms use highly skilled workers and pay good wages.


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56 Responses to “What’s good for Germany is good for the world”

  1. Gravatar of Justin Irving Justin Irving
    21. September 2013 at 14:38

    This could be really bad for Spain/Greece/Italy. Think about what it would do to the German share of the EMU CPI. Assuming its a negative for AS, higher German inflation means the ECB turns the screws just a little harder on Southern Europe.

  2. Gravatar of Tom Tom
    21. September 2013 at 14:44

    The Free Democrats may not even get the paltry 5 percent they need to enter parliament. It seems economic libertarianism has even less of a future in Germany than it does here.

  3. Gravatar of nickik nickik
    21. September 2013 at 15:13

    Hi Scott,

    I have a question, you indorse the carbon tax. Have you considered David Friedmans arguments, and if you have what do you think of them?

    https://www.youtube.com/watch?v=s-yJ3K9fNos

  4. Gravatar of ssumner ssumner
    21. September 2013 at 16:10

    Justin, Very good point.

    Tom, I take it that you don’t follow German politics very closely. The FDP always polls poorly.

    Nickik, No, I’ve never seen Friedman’s arguments against the carbon tax.

  5. Gravatar of John Soriano John Soriano
    21. September 2013 at 17:53

    This is why JOURNALISTS like Yglesias with no formal economics training need to be taken with a grain of salt.

  6. Gravatar of Geoff Geoff
    21. September 2013 at 18:54

    John,

    Your post should be taken with a grain of salt. Not all “formal training” leaves one more intelligent than every single one without.

    Henry Hazlitt for example had no formal training, but he was more economically bright than my entire graduating class.

  7. Gravatar of Geoff Geoff
    21. September 2013 at 18:56

    “The German government has an extensive welfare state with lots of wage subsidies, so the low wage workers in Germany are not starving.”

    Who’s not considering alternatives again?

  8. Gravatar of The more the ‘periphery’ becomes like Germany the more likely the Euro will brake-up | Historinhas The more the ‘periphery’ becomes like Germany the more likely the Euro will brake-up | Historinhas
    21. September 2013 at 19:08

    [...] I thought the title to Scott´s post: “What´s good for Germany is good for the world” was misleading (probably because it´s ‘too blunt’). But it is certainly true [...]

  9. Gravatar of Benjamin Cole Benjamin Cole
    21. September 2013 at 19:09

    Excellent blogging.

    Prosperity is always good. I hope Japan, China and Europe prosper mightily and Latin America too.

    Bring on a global boom. Should not that be the goal of macroeconomics?

  10. Gravatar of Steve Steve
    21. September 2013 at 19:25

    The David Friedman carbon tax arguments are worth listening to, if you have an hour or two to kill. They are similar to my own.

    The main argument is that we don’t know how costly ‘global warming’ is, it has net benefits such as more arable land and longer growing seasons, as well as costs like coastal flooding. It isn’t even clear if this nets out to a benefit or a cost. He emphasizes the uncertainty, and the inefficiency of trying to price that uncertainty.

    But the more interesting part of his talk was the historical and political anecdotes.

    He points out that most people who support a carbon tax would support a carbon tax even if global warming were demonstrably false. A carbon tax simply reflects their ideology about how people should live and/or their own economic self-interest.

    He also makes comparisons between the global warming hysteria, and previous Malthusian hysterias. Running out of land, overpopulation, running out of forests, running out of coal, running out of oil.

    There’s also a reference to Edward Teller. According to Teller, most scientists ‘believed’ the H-Bomb was impossible. Teller thought that reflected the horror that scientists felt over the idea that a single bomb could kill millions, rather than an informed scientific belief.

    My personal view: these last three anecdotes pretty much sum up the global warming problem. The carbon tax idea is simply a “plug” that pretends the world as we know it will still exist in 100 years if only we “priced” carbon. The reality is that we will either 1) adapt, 2) go nuclear, or 3) develop new technology. Each of the three solutions will likely imply radical shifts in economic and (geo)political power relationships in ways people find inconceivable today.

  11. Gravatar of John Papola John Papola
    21. September 2013 at 19:50

    Then there’s the problem that there’s no such thing as “export lead growth” just as there’s no such thing as “consumer lead growth”.

    Growth is lead by increasing productivity and production of value. Period. Growth is not lead by using up that output or shipping it out. Exports are the cost of buying imports, which are the benefit. I maintain a trade deficit with my grocery store. I always import goods from them, and never sell them any goods, only money. Is that unsustainable? Of course not. Drawing a made-up line between us called a “border” has no bearing whatsoever on the nature of the exchange or that it’s mutually beneficial.

    Mr. Yglesias is yet another victim of the deep rot that Keynesian mercantilism has caused in basic economic analysis, even when there aren’t cyclical considerations in the analysis.

  12. Gravatar of mbka mbka
    21. September 2013 at 20:37

    Scott, completely agree, and you could throw in Austria as well in the bunch of EU countries that did well recently without having low wage policies.

    This low German wage thing is a bit absurd because it’s not even true. Look at these Eurostat data from 2010
    http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Figure1_Median_gross_hourly_earnings,_all_employees_%28excluding_apprentices%29_2010.png&filetimestamp=20130410120200

    Germany’s median hourly wages, amongst others, beat the following countries: Netherlands, Sweden, France, Austria, UK, Italy, and Spain, never mind a long list of much poorer countries.

  13. Gravatar of Rien Huizer Rien Huizer
    21. September 2013 at 21:05

    Scott,

    The most attractive outcomes for Germany itself, assuming a zero sum world (in the short term) are in the following order:
    - FDP reaches crosses the threshold and CDU?CSU have enough to continue current joint gvt; continuity and possibly a more expansionist economic stance
    - If FDP fails “grand coalition with SDP (reason: Germany does best if governed by its excellent civil servants; a “grand coalition” leads to US-style deadlock (and the end of Frau Sauer alias Merkel) would give the civil servants a free hand without political interference (managing the status quo).
    - FDP fails and, SDP asks too much and Greens either support or join government: unstable but much more politics than in Grand Coalition
    - FDP fails, Greens disappoint and AfD does very well (unlikely): CDU/CSU faces choice between hard to get SPD and unpalatable AfD: German elite pulls together and engineers fresh elections soon.

    I assume that what you consider “good” for Germany is steadily rising NGDP. Many leading Germans would say: export competitiveness is more important (zero sum bias).

    John Papola

    Incidentally, the differences between North and South have a lot to do with in the north large stocks of productive human and physical capital plus corporate headquarters of globally competitive firms and all Northern governments tailor their policies to preserving those stocks and avoid becoming “branch office” countries. Low wage policies play more of a symbolic role:

    The Low wage aspect in Germany has little to do with the desire to be competitive but the lack of a minimum wage. Statistics tend to ignore the effect of supplementary social transfers to very low wage earners there. But in Holland it is an official feature of policy , “justified” by the knowledge that in such an open economy higher wages just lead to higher imports, more congestion, etc and that the EUR protects the country against the negative (competition-wise) effects of under consumption) anyway. However it is often mentioned wrt Germany. In reality, there are enormous differences in standards of living within Germany despite very few barriers to labor mobility (short distances, same language). There is no official minimum wage but very low wage earners get supplementary assistance from the government and most industrial workers are covered by collective bargaining contracts that contain floors above, for instance the Belgian, Dutch and French minimum wages.

    I think far too little attention is given to very large differences in stocks (and productive quality) of capital, infrastructure capacity and effective openness to foreign direct investment within the EU in explaining the tensions that lead to recurrent crises.

  14. Gravatar of mbka mbka
    21. September 2013 at 21:12

    Oh and there’s more. Going to wage distributions now, OECD data from
    http://stats.oecd.org/Index.aspx#
    Choose labour/earnings/decile ratios of gross earnings.
    Amongst the bunch of Denmark, France, Germany, Switzerland, UK and US, who’s the most egalitarian in wages expressed as low incidence of low wage jobs?
    Switzerland. OK granted some countries do not furnish these data but in the list, Germany is average. UK is worse than Germany. US is the worst.
    By ratios of upper percentile wages to lower percentage wages the countries are fairly similar but again the US is worst and the UK not far behind.
    I am not saying any of this is good or bad but it seems to me that w.r.t. Germany, two statements are NOT supported by the data – that Germany were somehow low wage, or that Germany were to have a high percentage of low wage jobs. All of course compared to similarly industrialised countries.

  15. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    21. September 2013 at 23:47

    “TheMoneyIllusion.com officially endorses the Free Democrats in tomorrow’s election. If only America had a parliamentary system where the swing party was always a socially liberal and fiscally conservative group. I could actually vote for someone without holding my nose.”

    Yes, the Free Democrats are an excellent party, one of the best in the world.

    *

    Yesterday, one of the reference Portuguese newspapers had a feature on Portuguese people living in Germany. Some of the salaries they cited as high which justified the move to a different country were exactly the kind that in Germany are called “low wages”! I mean, they had a Greek guy making less than 1000 EUR for an internship as a positive example of how great the German labour market is (in Berlin, which in German terms is still behind the rich states).

    I always take this sort of thing as evidence against overly believing in positional-utility arguments: there are millions of people who change countries so they can gain in absolute terms, while losing in relative terms: people move from Portugal to Germany so that you can get a low-wage German job, which is more than your middle-class class Portuguese job, not the other way around (except for 25yo Americans who teach English for 1200 USD in Southern Europe, I don’t see that many people who take an absolute hit for a relative gain; and the Americans eventually grow up and go get a corporate job at American wages).

    This same newspaper will sometimes have a feature on low-wage Germany and how awful it is. In those features, they never cite any wage numbers, or use numbers for a part-time job as if they referred to a full-time job. The French press likes this game too: “people in Germany, with mini-jobs, are making 400/mo! They need two jobs to get by” — this is all true, but maybe the newspapers should mention that you get 400/mo for working a maximum of 10 hours per week. 10 euros per hour is not spectacular, but hardly abject poverty either. And two 10hrs/week jobs is 20hrs/week, not sunrise to sunset.

  16. Gravatar of Brian Donohue Brian Donohue
    22. September 2013 at 04:30

    Scott, you’re on a roll.

    John Papola, preach, brother!

  17. Gravatar of How to vote today in Germany | Tim Worstall How to vote today in Germany | Tim Worstall
    22. September 2013 at 05:01

    [...] TheMoneyIllusion.com officially endorses the Free Democrats in tomorrow’s election. If only America had a parliamentary system where the swing party was always a socially liberal and fiscally conservative group. I could actually vote for someone without holding my nose. [...]

  18. Gravatar of ssumner ssumner
    22. September 2013 at 05:29

    Steve, You said;

    He points out that most people who support a carbon tax would support a carbon tax even if global warming were demonstrably false. A carbon tax simply reflects their ideology about how people should live and/or their own economic self-interest.”

    I have doubts about this. The tax is popular on the left, despite its perceived regressiveness. And that’s certainly not my motivation.

    I don’t think the Teller example is relevant. Yes, sometimes scientists are wrong, but the consensus is usually right. You go with the best information you have. As far as damage, I think the net effects will be strongly negative. Sea level rise is a 100% negative and agricultural effects are a mixed bag.

    And unfortunately I never have “an hour or two to kill”. Not anymore.

    Thanks mbka, I’ll add an update.

    Luis, Good observation.

    Thanks, Brian.

  19. Gravatar of John Soriano John Soriano
    22. September 2013 at 05:58

    Geoff- Upon reflection, to an extent I agree with you. My comment was too absolute. There are those like Hazlitt who are exceptions to the rule. However, in this instance I do attribute Yglesias’ logical error on his lack of training. I’ve seen him, and other journalists make similar errors. Believe it or not…there are actually gains from studying a discipline at the graduate level (Yglesias didn’t even study econ as an undergrad).

    While I could read a lot about physics and analyze issues in physics and perhaps be correct at times, I certainly would make logical errors that someone who had received tutoring from professionals, and spent years developing their intuition by actually doing physics problems and research, would not make.

  20. Gravatar of Morgan Warstler Morgan Warstler
    22. September 2013 at 06:20

    The progressive upside to GI / CYB, is that removing wage supports, increases what the wage subsidy buys.

    Minimum Wage and Welfare work against each other to reduce the consumption of the poor.

    Prices should be dramatically lower wherever there are more subsidized local poor.

    Also, Scott, you own a yellow shirt?

  21. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. September 2013 at 09:02

    ‘If we don’t export, we’ll die.’

    The above is a line from this movie;

    http://viooz.co/movies/13654-im-all-right-jack-1959.html

    Which might be the best movie ever made about economics. Peter Sellers as a Communist shop steward in a missile factory, is priceless.

    If you ever wondered why England turned to Thatcher, it was the situation depicted here. You’ll have to download their video player to watch, but it’s worth it.

  22. Gravatar of Geoff Geoff
    22. September 2013 at 09:20

    John:

    “However, in this instance I do attribute Yglesias’ logical error on his lack of training.”

    If you agree that lack of formal training is not necessarily the reason for why a person isn’t intellectually adequate in a particular field of inquiry, how can you know that is the reason in Yglesias’ case? Couldn’t a PhD make the same error as Yglesias?

    Maybe it isn’t his lack of formal training, it is the flawed intellectual choices he has made in the past, formal training or not, which has gotten him to where he is now, incapable of handling this topic without making errors.

    The individual is ultimately responsible for their own intellectual development.

    You seem to want to retain the conviction that a lack of formal training is a cause. Is it because we have all heard it so often by others that it is now a sort of default go to reason? In my view, that reason, the lack of formal training, was originated by those with formal training who wanted to convince others that they are right, when their actual arguments were weak. Razzle dazzle the target victim with awards, degrees, and recognitions, to distract them away from the weaknesses of one’s actual substantive argument.

    It’s an appeal to authority at the end of the day.

  23. Gravatar of Davide Davide
    22. September 2013 at 10:53

    Ok, so you say that wages are not a significant component of the German CA Surplus. So… why are the Germans asking to the peripheral countries to slash workers wages in order to be more competitive (and export more)?

    Truth is that about 7 MILLION people in Germany live with less than 1000€/month, which is the sum of mini-job (max 400€/month) plus some state benefits. This wage moderation helps to keep internal demand low, and, as a consequence, leads to low inflation, which in a single currency area determines the real exchange rate between countries.

    To sum up: wages moderation -> low inflation -> low relative prices -> huge CA surplus.

  24. Gravatar of Steve Steve
    22. September 2013 at 11:23

    “Yes, sometimes scientists are wrong, but the consensus is usually right.”

    The point of the Teller example wasn’t that a scientific consensus turned out to be wrong. The point was that the scientists said the bomb was impossible because they wanted it to be impossible and didn’t want to study the alternative.

  25. Gravatar of Steve Steve
    22. September 2013 at 11:28

    http://www.nature.com/nature/journal/v499/n7458/full/nature12291.html

    Nature 499, 324–327 (18 July 2013)

    Increase in forest water-use efficiency as atmospheric carbon dioxide concentrations rise

    The results suggest a partial closure of stomata1—small pores on the leaf surface that regulate gas exchange—to maintain a near-constant concentration of CO2 inside the leaf even under continually increasing atmospheric CO2 levels. The observed increase in forest water-use efficiency is larger than that predicted by existing theory and 13 terrestrial biosphere models. The increase is associated with trends of increasing ecosystem-level photosynthesis and net carbon uptake, and decreasing evapotranspiration.

  26. Gravatar of Steve Steve
    22. September 2013 at 11:31

    As Trevor Keenan of Harvard University, a lead author on the paper, put it in a statement:

    “This could be considered a beneficial effect of increased atmospheric carbon dioxide. What’s surprising is we didn’t expect the effect to be this big.”

    Read more: http://science.time.com/2013/07/11/in-the-greenhouse-forests-get-more-water-efficient-as-carbon-dioxide-levels-rise/#ixzz2feSl4Mla

  27. Gravatar of MFFA MFFA
    22. September 2013 at 11:44

    Looks like the Sumner endorsal is not yet as powerful as the Colbert bump, FDP is out of the parlement (below 5% of votes)

  28. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. September 2013 at 12:01

    “Tom, I take it that you don’t follow German politics very closely. The FDP always polls poorly.”

    Tom, Ich glaube Sie haben es gut gesehen. Die FDP liegt unter dem fuenf prozent. Und, dass bedeutet kein gelbes Hemd fuer Scott, aber ganz sicher eine gelbe Karte.

    http://www.faz.net/op900/event/landtagswahl-in-hessen/live/#/live-source01

  29. Gravatar of Tom Tom
    22. September 2013 at 12:31

    Thanks Vivian. From your link it looks like the FDP did significantly worse this time. Every time a pro-plutocracy party loses, an angel gets his wings.

  30. Gravatar of Luis Luis
    22. September 2013 at 14:56

    Scott, you are a terrible Economist in relation to Europe and the Euro. You seem to think that the only problem is the ECB not to follow your magic kit of the NGDP.
    It is años insult for We, Europeans, tp be said so silly ideas on a Big and intrincate problem that can end ver bad.
    Your very simple idea that any problem would be solved By a CB which follow a NGDP is so simple that o don’t understand how is today seriusly considered.
    European Economy is far away of the característics of the US ones. Your magic kit is not usefull here.
    We have a fundamental problem. The euro is not an OCA. So, if is not an OCA, monetary rules are not valid for every countries.
    There are many other problem than that of which are solved By you poor magic kit.
    Bonne Journée

  31. Gravatar of Luis Luis
    22. September 2013 at 14:58

    Scott, you are a terrible Economist in relation to Europe and the Euro. You seem to think that the only problem is the ECB not to follow your magic kit of the NGDP.
    It is an insult for We, Europeans, tp be said so silly ideas on a Big and intrincate problem that can end ver bad.
    Your very simple idea that any problem would be solved By a CB which follow a NGDP is so simple that I don’t understand how is today seriously considered.
    European Economy is far away of the característics of the US ones. Your magic kit is not usefull here.
    We have a fundamental problem. The euro is not an OCA. So, if is not an OCA, monetary rules are not valid for every countries.
    There are many other problem than that of which are solved By you poor magic kit.
    Bonne Journée

  32. Gravatar of Martin Martin
    22. September 2013 at 15:08

    Mister Sumner, the Free Democrats want to let you know that they are really, really, I mean, really sorry that you could not actually vote for them.

    Steve,

    carbon taxes are usually based on the net present value of the (future) benefits/damages caused by one more ton of carbon emitted now (the social costs of carbon, SCC). Meaning that it is a marginal cost – and almost certainly a net cost, and not a benefit. Uncertainty increases those costs, espececially as there are some factors the estimates of which hint of fat (right) tales (e.g. climate sensitivity, google “Weitzman dismal theorem”). But even a straighforward IAM based CBA analysis of the problem gives you, almost certainly, a positive SCC. Thus, in a first-best policy setting at least, CO2 emissions should be taxed based on those SCC estimates (slowly below, to factor in emission reductions caused by the tax). There is a recent overview over the literature on the topic by Richard Tol:

    http://ideas.repec.org/a/eee/dyncon/v37y2013i5p911-928.html

    As indicated, talking about uncertainty of global warming does your argument no favor if you factor in risk aversion and are confronted by fat tails, on the contrary. As to why it should be a carbon tax on an externality (i.e. a Pigovian tax) Coase and a certainly not first-best policy setting notwithstanding (“Everything is second-best at best”, as, I think, Avinash Dixit says), you can start to search for the same author.

  33. Gravatar of Martin Martin
    22. September 2013 at 15:10

    Luis,

    I am a Yurpean, too, and I’d ask you not to speak for me, srsly. Thanks.

    Bonne journée à toi aussi, ou bien bonne nuit.

  34. Gravatar of ssumner ssumner
    22. September 2013 at 17:15

    Davide, You said;

    “Ok, so you say that wages are not a significant component of the German CA Surplus. So… why are the Germans asking to the peripheral countries to slash workers wages in order to be more competitive”

    Yes, they want them to be more competitive, but that has nothing to do with CA surpluses. Germany had big surpluses when their economy was not “competitive,” ditto for Japan.

    Surpluses reflect saving investment imbalances, they have nothing to do with wages.

    Tom, You said;

    “Every time a pro-plutocracy party loses, an angel gets his wings.”

    Once again showing you don’t follow German politics. I’d encourage you to stick to topics you know something about.

    Luis, You said;

    “Scott, you are a terrible Economist in relation to Europe and the Euro. You seem to think that the only problem is the ECB not to follow your magic kit of the NGDP.”

    I stopped reading here. When something starts this idiotic, it cannot end well.

  35. Gravatar of Chris H Chris H
    22. September 2013 at 21:53

    Whelp we have some results in http://www.bbc.co.uk/news/world-europe-24197994. The CDU/CSU almost won a majority! That’s crazy for German politics! Sadly the FDP (I do love those guys) and the AfD (which is way more interesting than what most countries manage in terms of a Euro-skeptic party, and in this case it’s pretty much just “Euro” rather than “EU” skeptics) both made slightly less than 5%. If only some of those CDU/CSU voters had gone liberal! Ah well, the coalition that results from this should be interesting, hopefully Merkel won’t have to compromise too much on labor market changes like a minimum wage.

  36. Gravatar of MFFA MFFA
    22. September 2013 at 22:54

    “As indicated, talking about uncertainty of global warming does your argument no favor if you factor in risk aversion and are confronted by fat tails, on the contrary”

    Aren’t you forgetting the “uncertainty” that global warming will actually end up doing more good than bad? If you want to include terrible outcomes that have very low probability but will be very bad, don’t you ought to include as well the low probability outcomes that could lead to a very good outcome (like David Friedman says, maybe global warming is currently preventing the next ice age, and considering that in the last ice age most of europe was covered in ice, that’s surely a huge potential benefit… this is just one example). Overall the case that we can know for sure the sign of the externality isn’t as strong as most people claim (I should note that I am still a mild supporter of a carbon tax)

  37. Gravatar of ssumner ssumner
    23. September 2013 at 03:21

    Chris, Merkel campaigned against the FDP, that’s why they fell short. And I wouldn’t worry about the leftists pushing Merkel into a higher minimum wage, she already favors the policy.

    I agree with your views on both the FDP and the AfD.

  38. Gravatar of Steve Steve
    23. September 2013 at 08:25

    Martin,

    The “uncertainty with fat tails” and “Weitzman Dismal Theorem” are just modern day incarnations of Pascal’s Wager.

    We’ve gone from “scientific” analysis based on priors regarding God’s malevolence toward non-believers, to “scientific” analysis based on priors regarding statistical distributions with sample size zero.

    It’s so so sad that this is coming from the Harvard economics department no less.

  39. Gravatar of Martin Martin
    23. September 2013 at 09:42

    Steve,

    you somehow ignore the point. SCC are almost certainly positive, the literature is very clear about that, the link is above. But as soon as you bring uncertainty in either direction into the discussion, your cost estimates get higher, not lower (link again above). This flows directly from how we model uncertainty in relation to social preference parameters – and as long as you do not assume that there is something like negative risk aversion, these models make a very important, and real point (not about climate change per se, but real nonetheless; and it’s not purely philosophical, there is an empirical claim, see literature about the elasticity of marginal utiliy of consumption in this context). If you see a relation to Pascal’s wager, so what? The point is that your own argument leads either to higher social costs (in terms of certainty eqivalents, no fat tails required, at all) in standard economic analysis, or makes standard economic analysis break down completely (fat tails required; in which case there are alternative criteria, like minimax regret, that also lead to higher costs).

    If you think you have something other to add to the discussion than making a claim about Pascal’s wager that has no consequences whatsoever, go on – this would be a rather phenomenal overhaul of standard theories. Merely quoting a paper that you interpret to point to climate change being a lesser problem than commonly assumed – when the very assumption under which you operate actually works against your case – won’t cut it.

  40. Gravatar of Chris H Chris H
    23. September 2013 at 10:04

    Ah well thanks for those updates on German politics Scott! Hadn’t realized Merkel was against her own coalition partner. Well then I suspect that the only thing keeping a CDU/SPD coalition from forming would be intransigence on the latter party’s side (perhaps because whoever is Merkel’s coalition partner seems to get crushed come the next election).

  41. Gravatar of Martin Martin
    23. September 2013 at 10:29

    Chris,

    I think this could be slightly misunderstood. German electoral organization is a bit confusing. There is a “first vote” (Erststimme) that merely affects the ordering of candiadates within a given (or slightly varying according to very complicated mechanisms) number of seats. The crucial thing is the “second vote” (Zweitstimme) that actually decides about how many seats a party will have in the parliament. There is a phenomenon called “second vote campaign” (Zweitstimmenkampagne) that consists in asking the voter to vote strategically rather than for his preferred party: if you want, for example, to have a CDU-CSU/FDP coalition, but it is not clear that the FDP will get into the parliament, give your second vote to the FDP (because CDU-CSU can cope with the loss that translates into a lifesaving gain for the FDP). This is not the first time something like this happened: they did it in various constellation on the Länder level. Rösler and the old white guy the shoehorned in for Germanness asked for those second votes, again (which is already a bit humiliating), and Merkel said no (being afraid that voter turnout could be low for her party, and taking into account that the CDU usually got less than predicted under Merkel, anyway). While this is somehow ‘against’ her own coalition partner if you work under the assumption that she really, really wanted that coalition, what she did in fact ask is nothing more than to vote for the CDU-CSU if you prefer it, and not strategically for the FDP.

  42. Gravatar of Steve Steve
    23. September 2013 at 11:09

    Martin,

    I’m sure you are very good with models, but you are wrong to ignore the Pascal’s wager comparison. When you start taking infinitesimals and multiplying by infinities and then discounting over a century, you end up with a model that is predetermined by the narrowness of your own enumeration of risks and consequences. That is a model that is nice and intellectually coherent. It is also persuasive to people with the same cognitive linguistic biases. But it completely useless in the real world.

    When I studied this stuff in school it was called Metaphysics and Epistemology. Now it’s called Economics.

  43. Gravatar of Martin Martin
    23. September 2013 at 11:35

    Steve,

    come on, you are not 200 years old – this was almost certainly called economics when you where in school. We are talking about CRRA functions and stuff like that, not some brand-new stuff like the microwave or nuclear fission (or was it fusion?).

    I do not ignore the Pascal’s wager comparison, but it doesn’t illustrate anything if you do not make a specific claim with regard to the problem at hand (there are, for example, very specific condition under which Weitzman’s Dismal Theorem holds, it’s not some vague allusion to low probability/high-impact events, though that’s part of it; you still ignore risk aversion and the empirical case for it; you still ignore uncertainty that has nothing to do with fat tales etc.). Loose allusions by free association with some general concepts make for nice talking point at my aunt’s coffe parties, but that’s about it. All I mentioned has been pointed out in much detail, and in specific contexts (if you can’t find the papers, I can link them), there is ample space to show where they go wrong, if you think you can do so.

    This: “taking infinitesimals and multiplying by infinities and then discounting over a century” is a potpourri of concepts and notions that can make sense in specific contexts within the economics of climate change, but as it stands it makes no sense at all (save for illustrating how dismissive you are regarding the topic – what about all those infinitesimal imaginary numbers divided by the nth root of j nonsense, and such… STOOOOPID electrodynamics).

    If you master the history of thinking of Human Beans well enough to make a devastating case (if there is one) for economic thinking from the sidelines of Metaphysics and Epistemology with excurses to cognitive linguistics, and probably semiology and semantic theory, too, just make it, don’t talk about it.

  44. Gravatar of Steve Steve
    23. September 2013 at 12:32

    “taking infinitesimals and multiplying by infinities and then discounting over a century” is a potpourri of concepts and notions”

    It’s not an aromatic potpourri, it’s the foundation of calculus. I don’t care if Weitzman “discovered” that for some n, x^n integrates to a finite number while for others x^n integrate to an infinite one. He’s just appropriating Pascal, Newton, or other philosopher/mathematicians. Then rename special cases the “Weitzman Dismal Theorem” so that it’s catchy, self-congratulatory, and superficially profound. That’s been a pattern in certain segments of economics for the past half century.

    Sorry if you think I’m being too dismissive by critizing re-branded calculus (“Dismal Theorem”) which then becomes rebranded philosophy (“Climate Policy”). But if you want to claim to be doing economics (which is an APPLIED science last I checked), the burden of proof is on you to connect the model to the real world.

  45. Gravatar of Martin Martin
    23. September 2013 at 13:35

    Steve,

    might I suggest that you pause a bit and look some stuff up before churning out your next comment? One could be under the impression that you are producing incoherent gobbledygook.

    I am not sure how “taking infinitesimals and multiplying by infinities” is the foundation of calculus, but perhaps one could bend over backwards to make sense of this (though I don’t see how). However, I am almost certain that “then discounting over a century” figures not among the foundations of calculus, or really anything other than optimal growth theory.

    I am not sure what you think Weitzman’s Dismal Theorem is about (and it’s not ‘renamed’ this way, that’s simply how I refer to it as a shortcut, as to distinguish it from, say, the Malthusian catastrophe, Weitzman calls it simply “Dismal Theorem”). A heavy portion of it is Bayesian statistics, which last time I checked wasn’t exactly “calculus” (be it at its foundation or today), and not related to Pascal either. The paper is here:

    http://dash.harvard.edu/bitstream/handle/1/3693423/Weitzman_OnModeling.pdf?sequence=2

    I don’t think you know what the paper says, as you seem to believe it contains (or “gets rebranded”) “climate policy”. But it got sort of famous exactly because it contains no policy and concludes with nothing else but that under certain conditions, ‘standard’ CBA analyses pertaining to climate change are invalidated (which is also not a policy, but the assertion of the absence of decision criterion for one). Thus, we need an alternative decision criterion: I mentioned minimax regret (see Anthoff/Tol); Weitzman suggested (rather ad-hoc, but in detail) a change in the convexity of the damage function (say a polynomial of degree six, or an exponential one, rather than quadratic-polynomial as in DICE); others suggested that it’s all about the CRRA function, etc.

    For good measure, I recommend Nordhaus’ critical comment that you can easily find via google.

    Look, I think this:”for some n, x^n integrates to a finite number while for others x^n integrate to an infinite one.” you don’t even take seriously yourself. Weitzman didn’t discover or “discover” anything the like, didn’t claim so (also not ‘in effect’, or whatever). This makes no sense. What does it mean that “for some n, x^n integrates to a finite number”? Really, this seems awfully nonsensical. For a given real number x and natural n, x^n is always “finite”; if you integrate it over a finite interval, the integral will also be “finite”, but this has nothing to do with n; and the antiderivative itself is finite, if the function is (it’s just a function of degree n+1, but containing exactly the sames parameters). Again, I don’t think your sentence makes any sense.

    You know, apart from that, I really don’t think our knowledge about the world stopped to develop somewhere where great names where still Great (say, Newton, Pascal, and such). This seems a bit like claims that Apophis’ figurative and depicted embrace of space and time anticipates the more recent concept of a space-time continuum; or that the synecdoche of the eternal fight between the Horus of Nekhen and the Seth of Nubt anticipates particle-wave theory. I am open to the suggestion that archetypes of human imagination influence the way how we frame things in ways that are hard to pin down at times, and that all these examples are not necessarily coincidences. But however conceptual, these (modern) concepts are very real as far as it concerns everyday life – which is where I’d like to have policies placed. So is climate change, and so is the question whether we should tax carbon dioxide emissions (and the literature says clearly yes). If there is a fundamental problem you spotted, point it out, specifically, don’t duck it by talking about less an less coherent concepts without any obvious relation to the problem at hand.

  46. Gravatar of Luis Luis
    23. September 2013 at 14:43

    “The real problem is that most countries don’t know what’s in their own interest. Greece doesn’t understand that it’s in Greece’s interest to privatize and deregulate. Germany doesn’t know that faster NGDP growth in the eurozone is in Germany’s interest.”

    That is idiotic!

  47. Gravatar of Steve Steve
    23. September 2013 at 17:00

    Martin,

    I’ve encountered your type many times in life, and I’ve never been impressed. You are the intellectual analog of the testosterone laced ex-football stock salesman. You try to bowl people over by insulting the intelligence of anyone who hasn’t read all the same obscure papers you have. And if anyone actually bothers to read them they discover that, like the Wizard of Oz, you are all smoke and mirrors and no substance. Then you throw out more obscure papers as a counterargument, insisting that all argumentation must be done through your particular lexicon or else the person is a troglodyte. Of course bowling people over is a successful strategy to get tenure in certain discipline and at certain schools, but is otherwise is rather counterproductive.

  48. Gravatar of Steve Steve
    23. September 2013 at 17:06

    Martin,

    By the way, the paper appears to be doing exactly what I thought.

    First Weitzman asserts (with no scientific basis) a 1% probability of a 40 degree warming.

    The he states:
    the probability
    of a disaster declines polynomially in the scale s of the
    disaster from equation (20), while the marginal-utility impact
    of a disaster increases exponentially in the scale s of
    the disaster

    So he’s constructing a density function with fat tails, i.e., the declines in polynomial fashion (x^n) rather than exponential like a normal distribution,

    Then he constructs a cost function that increases exponentially (e^x), which is even worse than I thought because it is faster than polynomial.

    The result is small probability of infinite cost, i.e., Pascal’s Wager.

    If I want to waste a week of my life I could debunk it further, but I have nothing to gain from doing that. It’s a classic collective action problem. You have an incentive to bowl people over with junk research, but no one individual has an incentive to debunk it. As an economist I’m sure you’ll understand that.

  49. Gravatar of Steve Steve
    23. September 2013 at 17:29

    Keep in mind, Martin weitzman’s 1% probability of 40 degree warming is based on an incomplete and incorrect view of physics, not a correct model with sampling error.

    It would be like a Christian Evangelical saying there’s a 1% chance God will smite us with the End of the World this year. Why? The Evangelical’s uncertainty in God’s will is very fat tailed. From his perspective that’s a perfectly reasonable world view, if it it’s scientifically uninformed. Come to think of it, this discussion pretty much explains the political problems we have today.

  50. Gravatar of Steve Steve
    23. September 2013 at 18:45

    Actually, the Martin Weitzman piece is a teaching lesson in bad economics.

    Normal distributions have a knack for being a bad representation of reality, especially in economics and finance. And especially in financial crisis.

    Enter the fat-tail distribution. Fat tail distributions appear to better represent economic reality, because they more realistically represent things like financial crisis and flash crashes. But that’s not because the world is sampled from a fat-tailed distribution, nor is it because of estimation error of the known parameters of a normal distributed model. It’s because of model error itself, i.e., an incomplete understanding of the world.

    The implication of this is that the brave new world of fat-tailed models is going to overpredict extreme outlier events. Things like 90% GDP contractions, M11 earthquakes, and 40 degree global warming. That’s because the fat tail is a kluge for an incorrect underlying model, and nowhere is that more obvious than in Martin Weitzman’s Pascal Wager, I mean, Climate Change model.

  51. Gravatar of Steve Steve
    23. September 2013 at 20:10

    If I ever have a week to kill, I’m going to calculate the probabilty that planet Earth will spontaneously self-combust, due to the excessive fatness of Martin Weitzman’s fat tailed climate model. I doubt I will have the time, but it would be fun!!!

  52. Gravatar of Steve Steve
    23. September 2013 at 20:53

    Scott Sumner,

    I hope you have a minute to read this. I know you are busy, so I’m asking for a minute rather than an hour.

    I not a climate crackpot, really…

    But I think there are three approaches:

    #1: Cap and trade. This puts a price on carbon, especially if the government buys or sells a few permits at the margin. It also deals with the distributional effects, because money goes back to prior emitters.

    #2: Pure carbon tax. Left unstated is where the money goes. Presumably, it goes to the wealthy (through reduced income taxes) and to residents of the two coasts (through subsidies). People in manufacturing jobs or manufacturing states get completely screwed.

    #3: Hodgepodge regulation. What we have now. In this system, affluent individuals pay a lot for carbon. CAFE standards mean paying for efficiency tech, and also paying more for big guzzling vehicles because automakers need to hit CAFE… Also, EnergyStar subsidy programs and solar/wind mandates mean retail electric consumers pay extra for carbon to subsidize these programs. But the poor can buy 15 year old non-compliant vehicles and get affordable gas. Grandma can get home heating assistance so she can live alone in her 1950s house. And manufacturing can generate its own power to avoid wind/solar subsidies and remain globally competitive.

    My conclusion:

    As inefficient as it seems, society’s revealed preference is that option #3 is best. Any carbon tax scheme will eventually morph, through subsidy and exemption, back into option #3. Affluent individuals pay, and we hope for new technology.

    Also, one of my concerns with a carbon tax is that it will screw up the dark spread and spark spread for electric generation. Effectively, a carbon tax would produce an instaneous spike in natural gas prices, and a huge fracking BOOM! This would absolutely piss off a lot of liberals and enviros, who would begin calling for a windfall profits tax on natural gas, or arguing that fracking is an externality with infinite cost due to fatal water pollution. And we’d migrate back toward a socialized, complex, variant of #3…

    Hope you had time to read this post, Scott.

    – Steve

  53. Gravatar of Jan Jan
    24. September 2013 at 08:51

    “Germany has a large CA surplus for the same reason that other countries do, they save a lot relative to their investment levels.”

    That is an accounting identity, you are just stating the obvious. A CA surplus per definition implies a surplus of savings over investment. It means that a country does not absorb all that it produces. The question is: what causes this? Only then the discussion becomes interesting. Why does Southern Europe spend more than it produces? Why does Germany spend less than it produces? There can be many answers, but yours does not clarify anything.

  54. Gravatar of Jan Jan
    24. September 2013 at 08:57

    “It means that a country does not absorb all that it produces.”

    Before someone misinterprets this: I am not referring to exports, but to the earnings from exports that are not spent on imports, but are invested abroad.

  55. Gravatar of Bill Ellis Bill Ellis
    25. September 2013 at 08:01

    Are “bubbles” a purely monetary phenomenon ?

  56. Gravatar of ssumner ssumner
    26. September 2013 at 10:45

    Steve, I think it makes sense to phase in the carbon tax over time. At first the levels would be quite low, so that people would have time to adjust.

    The money could be used for subsidies to people with low wages per hour. Less carbon, more work effort. What’s not to like?

    Jan, That’s true, I should have been clearer. I meant it’s not clear why wages would affect the S/I imbalance.

    Bill, No.

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