Over at Econlog I have a post discussing the German jobs miracle. One counterargument is that all countries can’t be like Germany, because their success comes from a large current account surplus. And if there is one thing that all economists agree on, it’s that all countries cannot simultaneously run CA surpluses.
Those who have not studied economics might be surprised to discover that standard economic theory suggests CA surpluses have no impact on job creation. Many people draw the wrong implication from an accounting identity:
GDP = C + I + G + (X – M), Where (X – M) is the CA surplus.
It looks like a bigger CA surplus would boost GDP. That ignores the ceteris paribus problem. Here’s another accounting identity:
I = Sp + (T-G) + (M-X) [money for investment comes from private, government, and foreign saving]
If one ignores the ceteris paribus problem, then it looks like a CA surplus reduces investment dollar for dollar. So accounting identities get us nowhere. There is a slightly more sophisticated argument that CA surpluses can have a negative impact on foreign AD when the entire world is at the zero bound. The argument is that CA surpluses created by thrifty Germans will increase global saving and depress global AD for old Keynesian reasons. The monetary authority is assumed not to offset the effect.
I’m skeptical of that argument, but even if true it’s a cyclical argument not a secular argument. If other countries reduce their W/NGDP ratios, then in the long run the number of hours worked should rise. Remember that macro is not a zero sum game; all countries can simultaneously increase employment and output. And even if central banks are letting inflation run a bit below target, surely there are limits as to how low they’ll allow inflation to go. Cut wages by more than that and you create jobs.
By the way, I’m not suggesting everyone should work super hard; German hours per year are fairly low. Their jobs miracle comes from creating more jobs, having fewer people who are completely unemployed. Nor am I suggesting lower living standards. The share of income going to labor in Germany has been rising. If total income also rises (as it should with more employment), then Germans are better off. (Unless you don’t think unemployment is a problem.)
It’s ironic that back in the golden 1990s the Clinton Democrats favored many of these policies. They advocated thrift (budget surpluses). They advocated moving people from welfare to work with welfare reforms and low wage subsidies. Finally a major country adopts the Clinton Democrat plan and achieves great success in job creation relative to other developed economies. And how do Democrats react? All they seem to do today is trash the German model: “Run deficits”, “put more people on welfare and food stamps”, “raise the minimum wage”, “low wage subsides just help fat cat corporations pay workers less.” Very sad.
Take a look at one of the very first articles at the new website “The Upshot”
Sometimes all I have to do is read a post title.