Let’s all be Germans

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.



68 Responses to “Let’s all be Germans”

  1. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    22. April 2014 at 08:22

    You should also read this other NYT article:


    Germany is cited as the exception to the pattern “everyone has been doing better than the US”. Really, they are the one country that has been doing almost as bad as the US.

    Also, interesting that nowhere is it mentioned that it could be a good thing that world-wide income differences are narrowing. One would think the NYT would care about such things.

  2. Gravatar of ssumner ssumner
    22. April 2014 at 10:24

    Luis, Horrible article. The data the press is relying on is almost worthless.

  3. Gravatar of Max Max
    22. April 2014 at 10:32

    In a year we will see how some of this can be undone. The grand coalition has enacted a minimum wage law and several other growth reducing laws. These will set in on January 2015. It might be one of the most interesting examples for macro economists

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. April 2014 at 10:39

    Speaking of inequality, funny WSJ review of Piketty’s new book;


    ‘Soaring pay for corporate “supermanagers” has been the largest source of increased inequality, according to Mr. Piketty, and these executives can only have attained their rewards through luck or flaws in corporate governance. It requires only an occasional glance at this newspaper to confirm that this can be the case. But the author believes that no CEO could ever justify his or her pay based on performance. He doesn’t say whether any occupation””athletes? physicians? economics professors who sell zero-marginal-cost e-books for $21.99 a copy?””is entitled to higher earnings because he does not wish to “indulge in constructing a moral hierarchy of wealth.”‘

  5. Gravatar of Joe Joe
    22. April 2014 at 12:35

    Prof. Sumner, I’m curious to know if you think inequality, measured in wealth or income, is a national issue in current U.S. society.

    What type of data would not be worthless to you in this field?

  6. Gravatar of Chun Chun
    22. April 2014 at 13:25

    Germany is a part of Eurozone, so it may be a little off topic. Even if zlb is worldwide, I guess competitive devaluation can lead to higher inflation expectations or ngdp growth expectations as long as central banks are committed to expansionary policy. Each country’s expansionary policy may cancel out the other’s currency depreciation, but it will not prevent domestic inflation, right? Thus, the argument that competitive devaluation does not work at worldwide zlb seems invalid.

  7. Gravatar of ssumner ssumner
    22. April 2014 at 13:54

    Max, I saw that. Let’s hope they keep most of the reforms.

    Patrick, I enjoyed that.

    Joe, Economic inequality is an issue. I don’t regard either wealth or income inequality as significant issues. I’d like to see consumption inequality data–that would be useful.

    Chun, Yes, that’s just one reason why the liquidity trap arguments are nonsense. There are many others.

  8. Gravatar of Philippe Philippe
    22. April 2014 at 16:30


    in order for one country to run a current account surplus, some other country has to run a deficit, which means borrowing money. The problem is that debtor countries want to cut down their debt and borrow less, not borrow more. The hope is that they will be able to do this by increasing exports. The net result is a reduction in demand in deficit countries.

  9. Gravatar of Jim Glass Jim Glass
    22. April 2014 at 17:15

    “I’m curious to know if you think inequality, measured in wealth or income, is a national issue in current U.S. society. What type of data would not be worthless to you in this field?”

    I wouldn’t presume to speak for our host, but in the past he’s appreciated the data presented by Robert Gordon (of CBO, NBER, the Boskin Commission, the popular textbook, etc.):


    “The rise in American inequality has been exaggerated both in magnitude and timing … This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional

    I don’t know but I’d guess he might also appreciate the data presented by Federal Reserve Bank of Minneapolis:

    Middle American incomes rise substantially even while inequality increases

    The U.S. Census Bureau reports that median household income stagnated from 1976 to 2006, growing by only 18 percent.

    In contrast, data from the Bureau of Economic Analysis indicate that income per person was up 80 percent …. inflation-adjusted median household income for most household types is seen to have increased by 44 percent to 62 percent from 1976 to 2006.

    There’s lots and lots of data available that presents a picture of the issue that looks a lot different than the straw man cartoon caricature that gets propped up and pushed for so hard for dramatic effect during the political season.

  10. Gravatar of Jim Glass Jim Glass
    22. April 2014 at 17:17

    Hmmm, dropped the link for the Fed of Minneapolis study:


  11. Gravatar of Benjamin Cole Benjamin Cole
    22. April 2014 at 19:27

    The Germans, aside from monetary policy, are doing most things right. And they are German.

    What is really amazing is how high living standards are in Germany (and France too) when they work so much less the Americans.

    If you work in the private-sector in America, you get your two weeks off, and six sick days a year. Go to SE Asia in winter and it is full of Europeans on vacation. They get four to six weeks off a year.

    I honor free markets, but the lack of vacation time in America is pathetic. Academics (ahem) generally do not understand this reality as they get Easter and X-mas and summers off. And a sabbatical every seven years. Plus, pontificating is way more fun than sanding wood, or waitressing.

  12. Gravatar of Philippe Philippe
    22. April 2014 at 21:31

    “I honor free markets, but the lack of vacation time in America is pathetic.”

    sounds like a bit of a contradiction there.

  13. Gravatar of Let’s All Be Germans « Economics Info Let’s All Be Germans « Economics Info
    22. April 2014 at 23:01

    […] Source […]

  14. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. April 2014 at 23:37

    Question for Scott:

    Would Nominal Gross Output (NGO) be a better target than NGDP?


  15. Gravatar of Hypnos Hypnos
    23. April 2014 at 01:26

    The German investment rate is in fact among the lowest in the Eurozone.

    Germany exported its unemployment to peripheral Eurozone countries through wage suppression, in a classic case of beggar-thy-neighbour mercantilism.

    Hardly a model for praise. In 20 years time, the only thing the Hartz IV reforms will be remembered for is blowing up the European Union. As soon as the euro goes, watch German unemployment climb straight back up to 10%+.

    The reduction in unemployment from 11% to 6% over 10 years is transitory. Italy did exactly the same from 1996 to 2007 (12% to 6% unemployment). Didn’t see much press about the Italian job miracle – and for a good reason. Just like Germany’s, it was based on weakening labour protection and allowing employers to hire tons of temporary workers at low pay. All it did was kill productivity growth.

  16. Gravatar of Daniel Daniel
    23. April 2014 at 01:43

    “I honor free markets, but the lack of vacation time in America is pathetic.”

    sounds like a bit of a contradiction there.

    There’s a thing called “hedonic treadmill”. You might wanna learn about it (and its implications).

    Hint – it’s why people work way more than they have to so they can buy thing they don’t need.

  17. Gravatar of Philippe Philippe
    23. April 2014 at 01:55

    was that comment directed at me, Daniel?

  18. Gravatar of libertaer libertaer
    23. April 2014 at 03:02

    “Let’s all be Germans”

    Scott, I’m German and I disagree. The labour market is much more deregulated in the US than here. What the Germans have done, is to create a two-tier labour market. One unionized and highly regulated, the other low wage and subsidized by the state. What’s so great about that? If I were older, this fuss about Germany would remind me of the Japanese craze in the 80es. (By the way, both countries have no children. What’s better being unemployed while existing or being employed but not existing at all?)

    People are right to criticize wage subsidies (and you are not a libertarian by advocating them) and as a reaction we will get a minimum wage in Germany. So it could be that this whole affair will actually hurt labor markets, especially immigrants.

  19. Gravatar of libertaer libertaer
    23. April 2014 at 03:05

    Scott, to be clear, I agree that there shouldn’t be any kind of UI. So instead of Hartz4, Germany should just have abolished or put a time limit on UI and deregulated its entire labour market, first and foremost the unionized ones. That and the right monetary policy would have had the same positive effect without any wage subsidies.

    Wage subsidies are the worst kind of socialism, people are employed but still paid by the state. It’s socialism for corporations. No wonder people are reading Piketty?

    Speaking of Piketty, even as a libertarian I like his book. I think he is mostly talking not about capital but about rent. Isn’t his finding that r is most of the time higher than g, just the old insight that in the long run under perfect competition there can be no profit, neither for capital nor for labor, so any surplus flows to owners of assets in fixed supply (be it naturally fixed like land or site, be it artificially fixed like IP). So even if we have perfect competition and even if monetary policy creates full employment, rentiers are the big winners. We all end up working for the landowners, the IP owners, owners of natural monopolies…

    Since rents are defined by having no connection to incentives, taxing rents is the best possible tax you can imagine. And you could redistribute tax income in a way that the state gets nothing (citizen dividends, a national wealth fund…). So what’s not to like about Piketty? Vive la revolution?

  20. Gravatar of Ari Ari
    23. April 2014 at 03:08

    Good blog post etc.

    The problem is that pragmatic and evidence-based approach doesn’t sell nearly as well as emotions. And a lot of these things come easily bundled with lot of not-so-smart ideas (whether left or right). Anyone can learn to defend free markets, but it takes varied life experience, travel, years of study, age etc. to learn deeper philosophical perspectives. I think we all should be more like Tyler, and this world would be a much better place.

    I always feel kind of bad for economists, because they have to read so much nonsense in political discourse. We should teach more economics in schools. Somehow I think if more economists participated in political discussions it would be more useful for the society (and economic growth!) on the margin than the marginal paper. Maybe I’m wrong.

    I think it is wishful thinking it is possible to influence policy if most of people don’t understand the arguments being made. I also think it is kind of fatherly wisdom to not take political positions a person doesn’t understand. When you trace the process how people adopt political positions, I think you can do real gains (something Tyler again has realised).

    p.s. My friend is moving back to Europe from silicon valley, and one (certainly not the major) of the reasons was vacation time.

  21. Gravatar of ssumner ssumner
    23. April 2014 at 05:26

    Philippe, You said;

    “in order for one country to run a current account surplus, some other country has to run a deficit, which means borrowing money.”

    Nope, it does not (necessarily) mean borrowing money. It means selling assets for goods and services. And no country “has” to run a deficit, that’s up to its citizens.

    Demand is determined by monetary policy, trade has nothing at all to do with it.

    Jim Glass, Thanks for the data. The data most people use to show the amount of inequality is almost worthless.

    Ben, Keep in mind that Germany was doing poorly in 2004, so their success is not (only) because they are Germans.

    Hypnos, You said;

    “Germany exported its unemployment to peripheral Eurozone countries through wage suppression, in a classic case of beggar-thy-neighbour mercantilism.”

    There is no such thing as “beggar thy neighbor” policies. Mercantilism as an economic philosophy was discredited 200 years ago. Exports are not good and imports are not bad.

    Libertaer, There are certainly many things in Germany not worth emulating. My three models are Switzerland, Denmark and Singapore. But you are completely wrong about the labor reforms, they turned Germany from the sick man of Europe into its shining star. And you want to go back to the bad old days of 2004.

    Rents have nothing to do with profits. Nothing at all. It Piketty was talking about taxing rents I’d be all on board, but he obviously is not. He’s talking about taxing saving and investment.

    Your comments are always good for a few laughs. First you announce to the world that I’m am not a libertarian, as if you are the judge, and then say the following:

    “Speaking of Piketty, even as a libertarian I like his book.”

    It’s always a worrisome sign when one cannot tell if a commenter is joking. But at least you’ve proven that Germans do in fact have a sense of humor.

  22. Gravatar of ssumner ssumner
    23. April 2014 at 05:30

    Vivian, I’m blocked by that article, but isn’t value added by industry more sensible?

  23. Gravatar of Morgan Warstler Morgan Warstler
    23. April 2014 at 05:59

    As a self-loathing German, I take great pleasure in that joke.

  24. Gravatar of Cory Cory
    23. April 2014 at 06:29

    If we’re to all be Germans, shouldn’t a country like the United States that is running a large current account deficit counter by running a federal budget deficit?

    “In a sense the budget deficit can be considered as an artificial export surplus”
    ~Michal Kalecki, Chapter 3, The Determinants of Profits, p. 51

  25. Gravatar of Vivian Darkbloom Vivian Darkbloom
    23. April 2014 at 07:24

    “Vivian, I’m blocked by that article, but isn’t value added by industry more sensible?”

    The author of this piece, Mark Skousen, argues that NGO would better capture intermediate stages of production and thus the supply side of the economy better than NGDP which focuses to heavily on consumption.

    Some excerpts:

    “Starting April 25, the Bureau of Economic Analysis will release a new way to measure the economy each quarter. It’s called gross output, and it’s the first significant macroeconomic tool to come into regular use since gross domestic product was developed in the 1940s.

    Steven Landsfeld, director of the BEA, says this new macroeconomic tool offers a “unique perspective” and a “powerful new set of tools of analysis.” Gross output is an attempt to measure what the BEA calls the “make” economy””the total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. Valued at more than $30 trillion at the end of 2013, it’s almost twice the size of gross domestic product, and far more volatile.

    Although consumer spending accounts for about 70% of GDP, if you use gross output as a broader measure of total sales or spending, it represents less than 40% of the economy. The reality is that business outlays””adding capital investment and all business spending in intermediate stages of the supply chain””are substantially larger than consumer spending in the economy. They make up more than 50% of economic activity. The 2012 data are gross output $28,693 billion, and GDP $16,420 billion.

    The critical importance of business activity is clear when you look at employment statistics and leading economic indicators. Employees in the consumer side of the economy (retail outlets and leisure businesses) account for about 20% of the labor force, and another 15% work for various levels of government. Yet the vast majority of employees, 65%, work in mining, manufacturing and the service industries.

    Gross output also does a better job of gauging the ups and downs of the business cycle. For example, in 2008-09, nominal GDP declined only 2% while nominal gross output fell sharply by 8%, far more indicative of the depths of the recession. Interestingly, since the 2009 trough, gross output has been rising faster than GDP, suggesting a more robust recovery.”

  26. Gravatar of Tom Brown Tom Brown
    23. April 2014 at 07:51

    “And no country “has” to run a deficit, that’s up to its citizens.”

    Or in some cases, one particular citizen. Or perhaps a small group of key citizens.

  27. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. April 2014 at 08:44

    There’s no reason to be blocked from a WSJ article. Just copy the article title and put it into your search box. In this case, ‘At Last, a Better Economic Measure’

    Then look for the result–usually the first one–from the WSJ and click on it.

  28. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. April 2014 at 08:49

    Btw, Skousen is an ‘Austrian’;


  29. Gravatar of TallDave TallDave
    23. April 2014 at 08:51

    …1990s the Clinton Democrats…They advocated thrift (budget surpluses).

    It would be more accurate to say they were dragged kicking and screaming into budget surpluses they advocated as being heartless, monstrously unfair to the poor, and quite possibly grounds for war crimes trials, then later hailed as their greatest achievement.

  30. Gravatar of TallDave TallDave
    23. April 2014 at 09:06

    What is really amazing is how high living standards are in Germany (and France too) when they work so much less the Americans.

    On average they’re much lower than in America.


    Also, Singapore and South Korea are the real outliers in hours worked. Germany and France have just declined faster than the United States.


    I honor free markets, but the lack of vacation time in America is pathetic.

    You mean, the lack of being forced to take vacations you don’t want? You can negotiate with employers for more vacation and less pay, and lots of people do.

    I last took vacation several years ago when I got married. Had I taken one month of vacation per year over that period, I would have foregone around $100K in direct income, before even considering ancillary effects.

  31. Gravatar of TallDave TallDave
    23. April 2014 at 09:25

    I’d like to see consumption inequality data-that would be useful.

    It tends to look like this.

    In 2005, the typical poor household, as defined by the federal government, had air conditioning and a car. For entertainment, the household had two color TVs, cable or satellite TV, a DVD player and a VCR. In the kitchen, it had a refrigerator, an oven and stove, and a microwave. Other household conveniences included a clothes washer, clothes dryer, ceiling fans, a cordless phone, and a coffee maker. The family was able to obtain medical care when needed. Their home was not overcrowded and was in good repair. By its own report, the family was not hungry and had sufficient funds during the past year to meet all essential needs.

    Contrast this to the early 20th century, when being poor meant missing a lot of meals and even the richest people didn’t have air conditioning or TVs. It’s pretty clear consumption inequality is always falling.

    Scott is absolutely right that income/wealth “inequality” is unhelpful, really no more meaningful than “IQ inequality” or “grade point average inequality.” There is a distribution of income which is determined (largely) by free exchange. If flatter distributions were better, people would choose to engage in transaction that resulted in them. They don’t, because they aren’t.

  32. Gravatar of Doug M Doug M
    23. April 2014 at 09:26

    Clinton was a right-winger.

  33. Gravatar of Daniel Daniel
    23. April 2014 at 09:28


    Thank you for confirming my point about the hedonic treadmill.

  34. Gravatar of TallDave TallDave
    23. April 2014 at 10:44


    I actually think about that a lot. I was happy enough making little more than minimum wage as a grad student, and I think I would be again if I were to return to that level of consumption. I try to avoid expensive hobbies and eschew positional goods.

    That said I don’t think there’s anything wrong with lower living standards per se, you do have to remember that being poor today is generally better on an absolute scale than being rich during any time pre-1950s.

    Of course kids change the equation considerably.

  35. Gravatar of Joe Joe
    23. April 2014 at 10:51

    Or it could looks like this:


  36. Gravatar of TallDave TallDave
    23. April 2014 at 11:02


    We show that despite the fact that consumption and income inequality increased dramatically between high and low educated households during this time period, the change in actual utility differences between the two groups was muted by the fact that low educated households were spending
    much more time in leisure relative to their high educated counterparts

    Yep, in fact some studies say the entire growth of “income inequality” can be explained by the difference in hours worked.

    The problem is they find consumption inequality increased, which is true in dollar terms but is definitely not true in terms of utility. That is to say, the country where 99% of the people are living near starvation and 1% are well-fed has much greater consumption inequality than a country where 100% of the people are well-fed but 1% have Maseratis and mansions, even though in dollars terms that’s not true. People care a lot more about sufficient food than about they do about nice cars and houses.

  37. Gravatar of Joe Joe
    23. April 2014 at 11:12

    Tall Dave,

    You said a few comments above: “It’s pretty clear consumption inequality is always falling.” Not true.

  38. Gravatar of TallDave TallDave
    23. April 2014 at 11:18

    It clearly is true. Consumption equality is always falling, and is lower today than it ever has been before in the history of mankind.

  39. Gravatar of TallDave TallDave
    23. April 2014 at 11:18


  40. Gravatar of TravisV TravisV
    23. April 2014 at 11:24

    Noah Smith cites a lot of macroeconomists in this new post…..


  41. Gravatar of Joe Joe
    23. April 2014 at 11:25

    Clearly, it isn’t.

    “Across every other measure of consumption we analyzed, consumption inequality increased substantially”

  42. Gravatar of TallDave TallDave
    23. April 2014 at 11:27

    Clearly it is, if people care more about food than Maseratis, which they do.

    If your measurement system leads to absurd conclusions, it’s wrong.

    Consumption inequality is always falling, because the things people want most are always becoming available to more people. If you don’t adjust for that fact, your measurements and the claims based on them are unhelpful.

  43. Gravatar of Joe Joe
    23. April 2014 at 11:35

    I strive to have your clarity of reason and understanding.

  44. Gravatar of TallDave TallDave
    23. April 2014 at 11:38

    It’s not that complicated. Measurements have to be meaningful.

  45. Gravatar of Joe Joe
    23. April 2014 at 11:46

    Something tells me the only meaningful measurements for you are the ones which confirm your priors.

  46. Gravatar of TallDave TallDave
    23. April 2014 at 11:47

    Here’s a simple Vox-style illustration of why using data from the Interview survey of the CE as a measure of “consumption inequality” is not very meaningful.

    Country A: roughly 99% of the people do not get sufficient food, while one percent do. Let’s say they have food consumption of $5K and $10K, respectively.

    Country B: 99% of the people get sufficient food, while 1% eat enormous amounts of caviar and rare wines. Let’s say they consume 10K and 100K respectively.

    By the analysis you cited, Country A has lower consumption inequality.

    However, if you measure the utility of the consumption, you find that the 99% in Country A are suffering a lot more relative to the 1% than the people in Country B.

    So, should Country A try to be more like Country B, or vice versa? I leave it to you.

  47. Gravatar of TravisV TravisV
    23. April 2014 at 12:38

    David Henderson and Arnold Kling disagree with Robert Solow on Piketty:


  48. Gravatar of Joe Joe
    23. April 2014 at 12:53

    Perhaps doing more than merely glancing at the paper with the intention of discrediting it isn’t the best way to form conclusions. I don’t think you read the whole thing in 9 minutes.

  49. Gravatar of Kolobok Kolobok
    23. April 2014 at 13:46

    Prof Sumner,

    (X-M) is not the current account balance. According to national accounts, it is the so-called resource gap. That is the balance pertaining to goods and services in the external account (mirror image of the balance of payments).

  50. Gravatar of Steven Kopits Steven Kopits
    23. April 2014 at 14:29

    The very high debt loads of many of the OCED economies are causing them to run budget and current account surpluses. If the global total sums to zero, does that mean that some countries with traditional surpluses (China, Germany) must go to deficit?

  51. Gravatar of TallDave TallDave
    23. April 2014 at 16:13

    Joe, if you’re not going to make or respond to any actual arguments, I’m afraid I’ve lost interest. There are at least half a dozen papers on the logarithmic returns in utility to increased spending on consumption.

  52. Gravatar of Dustin Dustin
    23. April 2014 at 17:26

    So Country B clearly has higher consumption inequality. If your point is to argue that utility of consumption is a better measure, fine, but that is sort of changing the rules of the discussion.

    Basically, inequality of consumption is a bad thing. Beyond the maths, the psychological component of inequality is just as important if not significantly more so. Peer comparison is human nature, and humans aren’t comparing utility of consumption, they are comparing inequality of.

    Ever hear that the least wealthy person in a wealthy neighborhood is less happy than the wealthiest person in a middle class neighborhood? ‘Tis true! So the definition of ‘utility’ as you’ve introduced seems rather limited to suit the need of your argument.

  53. Gravatar of TallDave TallDave
    23. April 2014 at 20:43


    Which definition of consumption inequality should drive policy, the one that has more or less relevance to the human condition? In economics no less than physics, your results will be a function of the measure you target.

    By your logic, we should all be North Korean style communists, because then we’d be happier even though a few percent of us might starve every few years. Any definition of utility that results in this outcome is clearly wrong.

    The North Korean with an extra bowl of rice might indeed be happier than a laid-off steelworker in Detroit. That doesn’t mean he’s better off.

  54. Gravatar of libertaer libertaer
    24. April 2014 at 00:55

    “And you want to go back to the bad old days of 2004.”
    No, but I’m against wage subsidies. And there is direct connection between the Hartz reforms and the fact that 2015 Germany will get a minimum wage. So this is not over yet.

    “Rents have nothing to do with profits. Nothing at all. It Piketty was talking about taxing rents I’d be all on board, but he obviously is not.”

    Piketty is counting anything which is not labour (or human capital) as capital. So he is definitely talking about rent, too. How much is open for discussion. This is interesting: http://ftalphaville.ft.com/2014/02/03/1759582/piketty-and-the-case-for-land-capital/

    “Speaking of Piketty, even as a libertarian I like his book.”

    If “right-wing liberal” is a serious classification, why not “Marxist libertarian”?

  55. Gravatar of Anand Anand
    24. April 2014 at 01:06

    The discussion here seems to be much more active than over at the Econlog post, so I’m repeating my points here. (I have no idea if this is correct etiquette, but please correct me if it is not).

    I made basically three points:

    a) According to the OECD study (http://search.oecd.org/officialdocuments/displaydocumentpdf/?cote=ECO/WKP%282012%2929&docLanguage=En) cited by the Guardian article cited by Scott, disposable income growth among the bottom 4 deciles were negative or 0 in the period 1995-2008. I can’t find disaggregated figures.

    b) There have been other measures enacted by Germany which affect the unemployment rate, like work sharing. As Scott notes in the post here, hours worked has been decreasing in Germany. Here is one progressive (Dean Baker) advocating people be more like Germany, but emphasizing other things as compared to Scott: http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/reducing-unemployment-lessons-from-germany

    c) Scott made the point that the alternative was massive unemployment, so the reforms coupled with wage subsidies for the bottom should be the preferable way. I am still skeptical about it, since the way I see it, employment is not a goal in itself, only if it leads to better outcomes. The poverty measure, both before and after tax and transfers has stayed flat in the post 2004 period and has been slightly higher than in the earlier period, though most of the increase occured before 2004. Data from Eurostat and OECD stat.

    As an unrelated point, from what I understand, the Clinton surpluses had very little to do with legislative policies and everything to do with the stock boom: http://www.cepr.net/index.php/blogs/cepr-blog/getting-rid-of-the-budget-deficit-the-clintongingrich-way

    So one should not confuse Clintonian rhetoric with policy.

  56. Gravatar of TravisV TravisV
    24. April 2014 at 04:42

    “A New Riksbank Dove Emerges”


  57. Gravatar of TravisV TravisV
    24. April 2014 at 04:42

    “Draghi Prepares Ground for ECB Bond Purchases If Needed”


  58. Gravatar of TravisV TravisV
    24. April 2014 at 04:43

    “Gold Slammed To Fresh 10-Week Lows Below Key Technical Level”


  59. Gravatar of TravisV TravisV
    24. April 2014 at 04:54

    Yglesias interviews Piketty:


  60. Gravatar of TravisV TravisV
    24. April 2014 at 04:55


    “How unequal is the US? It’s really hard to measure”

  61. Gravatar of ssumner ssumner
    24. April 2014 at 06:17

    Cory, Nope, just boost AD.

    Vivian, I just don’t see the benefits of that approach, which seems to double or triple count the exact same production. I prefer the valued added approach (GDP)

    Thanks Patrick.

    Kolobok, There are so many slightly different definitions here that it’s easy to get confused. In any case, X – M is pretty close to what most people have in mind when they talk about CA deficits. But I grant you that it’s not exactly the same. In any case, I find it the more interesting concept.

    Steven, Yes, all surpluses and deficits at the global level net to zero.

    libertaer, Yes, he favors taxing rent, which is fine. But he also favors taxing profit, which is not fine. That was my point.

    As an analogy profit and wages are both “income” but that doesn’t make profit and wages the same thing.

    Anand, Good comment.

    a. I don’t trust any income data, for reasons that have recently been widely discussed in the blogosphere. It’s clear to me that in recent decades the living standards of the poor in America have risen faster than for the middle class. I believe there is consumption data showing this. “Income” doesn’t even come close to measuring the economic resources available to the poor.

    The poorest town in America income-wise is Athens Ohio, which is full of middle class college students with very low “incomes.”

    By the way, I’m not denying that inequality has gotten worse in some respects. I think the left is correct in claiming that the rich have been pulling away from the middle class.

    b. Fair point.

    c. I’m going to do a post on this. I believe liberals rightly castigate the right for models that imply depressions are “the Great Vacation”. Unemployment is very very different from “leisure.” So I continue to believe that a low wage job with government subsidy is better than unemployment.

    There are left leaning pundits in France that have come to believe they need to be more like Germany, despite a relatively high living standard in France. I think they correctly see the French model as leading to deteriorating outcomes over time, and the high employment model as having all sorts of positive externality spinoffs.

    Regarding poverty, do they included social benefits? Also recall that recent years have been bad everywhere—how has Germany done relative to other countries (since 2007?)

  62. Gravatar of Vivian Darkbloom Vivian Darkbloom
    24. April 2014 at 07:24

    “Vivian, I just don’t see the benefits of that approach, which seems to double or triple count the exact same production. I prefer the valued added approach (GDP)”.

    I don’t see the double counting as a huge issue here—what you are presumably targeting is a trend line and not an absolute number. By giving weight to earlier stages of production it appears that one could identify trends earlier than if one waits until goods produced throughout the production process are consumed.

  63. Gravatar of TravisV TravisV
    24. April 2014 at 07:57

    Noah Smith wrote this below. You have got to be KIDDING me! Will market monetarists respond?


    “why do I find myself unable to convince myself that the Neo-Fisherite idea is wrong? Well, like Cochrane, I don’t really “believe” in any of these specific models (or any others). But two things make me unwilling to discount the Neo-Fisherites. The first is a thought experiment, and the second is the evidence.

    The thought experiment is this: Suppose there was no government debt, and the Fed raised nominal interest rates to 20% and held them there forever. What would happen to real rates? Well, they wouldn’t rise to 20% forever, because there’s just no way that our society can physically, technologically deliver a 20% riskless rate of return to bondholders. Eventually, one of two things would have to happen: either 1) the Fed’s control over the nominal interest rate would break down, or 2) inflation would rise (the Neo-Fisherite result). If the Fed can’t control the nominal interest rate, then our standard models of monetary policy all break down, and we have to think about the microeconomics of money demand, which is hard to do. But the only alternative would be the Neo-Fisherite result.

    As for the evidence, the U.S. case is more interesting to me than the case of Japan.


    for now, count me on the side of the Neo-Fisherite rebels, just because I think the idea is neat, and potentially very important, and I want to see where it leads.”

  64. Gravatar of TravisV TravisV
    24. April 2014 at 08:00

    Also in that post, notice that Noah Smith links to……Edward Lambert!

    Someone should Noah whether he agrees with Lambert’s “Breaking Bones” Volcker theory……

  65. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. April 2014 at 08:35

    ‘The discussion here seems to be much more active than over at the Econlog post….’

    The Legacy of Lauren.

  66. Gravatar of W. Peden W. Peden
    24. April 2014 at 08:42


    I suppose that does it for Noah as far as having a Keynesian reputation, since there’s no ZLB if raising interest rates is inflationary. Even were this idea true and a central bank reached 0% as it tried to control inflation, it could always raise reserve requirements and thus the demand to hold base money. I don’t see how one salvages the liquidity trap in such a theory.

    That’s why Noah makes no sense to me when he says-

    “The Neo-Fisherite idea doesn’t just discount the effectiveness of monetary policy(like RBC models do, or like the MMT people do) – it stands that whole monetary policy universe on its head.”

    I don’t see how it can BOTH (i) reverse the causal relation AND (ii) discount the effectiveness of monetary policy. How can raising interest rates be inflationary, if monetary policy is ineffective?

  67. Gravatar of TravisV TravisV
    24. April 2014 at 08:50

    Prof. Sumner,

    Did Bloomberg ask you?

    “100% of economists think yields will rise within six months”


  68. Gravatar of ssumner ssumner
    24. April 2014 at 18:21

    Vivian, I favor targeting future expected NGDP. I would not rule out current nominal gross output as providing early warning signs of future movements in NGDP. My point is that stable NGDP is more likely to be consistent with economic stability. But I’ll keep an open mind.

    Travis, I have no objection to the idea that higher interest rates are associated with higher inflation. But you don’t want to claim that you can achieve higher inflation with a tight money policy.

    And no, Bloomberg did not contact me.

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