Tyler Cowen on exports

Tyler Cowen has a wonderful new post pointing out that all countries can increase their exports at the same time, and this may boost global output.  I’m going to try to make it even wonderfuler (is that a German word?)

[Update: When I say “exports” I mean “exports”, not “exports minus imports” (a category no one should pay any attention to.)]

Let’s avoid reasoning from an export change, and ask why exports might increase:

1.  Supply-side reforms that boost the efficiency of the export sector, perhaps by removing tax/regulatory barriers.

2.  Monetary stimulus aimed at currency depreciation.

3.  More government saving, which depreciates the real exchange rate.

My claim is that if these things are done on a global scale, the first two are expansionary in net terms, and the third is neutral.

Supply-side reforms boost output under either an inflation target, or a dual mandate.  If you want to use the Keynesian model, these reforms boost the Wicksellian equilibrium interest rate, which makes NGDP grow faster, even at the zero bound.

For years I’ve been pointing out that a (mild) international currency war would be great.  All currencies can depreciate at the same time, against goods and services. We know that monetary stimulus in the US makes European stocks go up, and vice versa.  But it isn’t just market monetarists; Keynesians like Barry Eichengreen have also noted that a currency war would be expansionary, as it was in the 1930s. These first two points are probably what Tyler had in his mind when he criticized the mercantilist mindset.

As far as government saving (fiscal austerity), I’d say it’s a net wash, for monetary offset reasons.

PS.  Roughly 100% of the time when people blame virtue in one country (Germany, China, Japan, etc.) for problems in the global economy, they are working with a flawed model.  Classical economics (Hume’s Of the Jealousy of Trade) was supposed to be about overcoming that xenophobia.  We still have work to do.

PPS,  I once published a paper claiming that IS-LM was essentially a gold standard model.  Here’s Tyler:

It sometimes feels like the IS-LM users have a mercantilist gold standard model, where the commodity base money can only be shuffled around in zero-sum fashion and not much more can happen in a positive direction.






38 Responses to “Tyler Cowen on exports”

  1. Gravatar of Frances Coppola Frances Coppola
    20. October 2014 at 06:38

    Scott, you have omitted to mention Tyler’s very careful distinction between gross and net exports:

    “Let’s say all nations could indeed increase their gross exports, although of course the sum of net exports could not go up.”

    Tyler is correct to distinguish between net and gross exports. The sum of net exports cannot increase, unless we start trading with Mars: therefore if some nations increase net exports, others must reduce net exports. But the sum of GROSS exports can increase. All nations can indeed increase their gross exports, and by so doing they will increase global prosperity. Bring it on.

    However, neither you nor Tyler mention that for gross exports to increase, gross imports must also increase by the same amount. The problem is that mercantilist countries such as Germany that advocate increasing gross exports fail also to recommend increasing gross imports. The result is, of course, that everyone tries to increase their NET exports not their gross exports, everyone fails to do this (since we don’t trade with Mars) and then everyone claims that exports can’t be increased.

  2. Gravatar of Nick Rowe Nick Rowe
    20. October 2014 at 06:41

    Scott: hmmm. Dunno. I think you might be reading something into Tyler’s post that’s not there. OK, structural reforms that increase productivity can also increase real output, if monetary policy is sensible (but might not if it’s silly). But that would be true whether or not there’s an increase in exports or in production of non-traded goods.

  3. Gravatar of Scott Sumner Scott Sumner
    20. October 2014 at 07:11

    Frances, Obviously I’m aware of the difference between gross and net exports.

    You said:

    “The problem is that mercantilist countries such as Germany that advocate increasing gross exports fail also to recommend increasing gross imports.”

    I’m not sure why that’s a “problem”, unless Germans activity oppose gross world imports rising with gross world exports. Do they? I find it hard to believe the Germans are that stupid. They tend to be (relatively) free traders.

    There is nothing wrong with Germans advocating that other countries follow their thrifty model, with the understanding that the average country will always have zero net exports, even if they all behave like Germans. German success has nothing to do with trade surpluses. Nor does Australia’s have anything to do with huge deficits.

    Nick, OK, but any sensible reform might not increase output if monetary policy is “silly.” And even assuming a Keynesian liquidity trap, a higher Wicksellian equilibrium rate is expansionary.

    I would encourage you to think about the three reasons why exports might rise. Yes, one reason is good monetary policy. Another assumes neutral monetary policy.

  4. Gravatar of Saturos Saturos
    20. October 2014 at 07:13

    Can we get a link to that paper of yours Scott?

  5. Gravatar of Frances Coppola Frances Coppola
    20. October 2014 at 07:21


    If every country behaved like Germany – deliberately repressed domestic wages in order to subsidize the export sector – then everyone, including Germany, would indeed have zero net exports. Indeed they would not only have zero net exports, they would very nearly have zero gross exports, too. A “thrifty” model, if it involves repressing domestic consumption (and by implication imports), only results in export success if others are adopting a “profligate” model.

  6. Gravatar of Peter K. Peter K.
    20. October 2014 at 09:15

    As a thoughtful liberal, I agree with Eichengreen that a “currency war” would be a good thing, but I don’t know if Cowen is saying that.

    Without linking to Krugman, I believe he is attempting to critique Krugman’s criticism of Germany’s stance towards the rest of Europe:

    “Germany’s Sin
    AUGUST 29, 2014 9:16 AM

    …In Germany, there’s a strong tendency to moralize, with appeals to the country’s own recent economic history. We pulled ourselves out of our late 90s doldrums, the Germans say, so why can’t Southern Europe do the same?

    But a key part of the answer is that Southern Europe now faces a much less favorable environment than Germany did then “” and Germany is the reason why.”

    Look at core inflation (excluding energy, food, alcohol, and tobacco). During the years when Germany was gaining competitiveness, euro area inflation was running at around 2 percent, and inflation in Southern Europe was running considerably higher. So Germany could gain competitiveness simply by having lowish inflation “” no need to actually deflate. But these days German inflation is only one percent, euro area inflation is lower, and the only way for Southern Europe to gain ground is to have zero or negative inflation:


    This makes the adjustment problem incredibly difficult, both because wages are downwardly sticky and because deflation worsens the debt burden. Add onto this the fact that the eurozone as a whole remains depressed thanks to fiscal austerity and inadequate monetary expansion, and Germany is in effect demanding that Spain and others accomplish a task vastly harder than the Germans themselves had to achieve.

    And the worst of it is that there’s no sign that Berlin understands, or is willing to understand, this reality. And if the euro fails, that refusal to think clearly will be the fundamental cause.”

    Cowen seems to say that Germany and the South can both boost exports if they both gain in productivity. As usual he ignores how needlessly painful a process it is. Frances Coppola seems to be saying the same thing as Krugman if I understand her correctly.

  7. Gravatar of ssumner ssumner
    20. October 2014 at 09:28




    Note that both papers have very poor out of sample properties.

    Frances, I wouldn’t say German wage policies “subsidized” exports, but it did help bring down German unemployment, from the very high levels of 2004 (when they also ran trade surpluses, BTW.) Their positive net exports reflect thift, not low weages. Bangladesh has even lower wages. Germany’s strong gross exports reflects high productivity in tradable goods.

    A model that shifts resources from consumer goods production to investment goods production need not have any impact on employment, although of course it may coincide with either higher or lower total employment, depending on whether monetary policy is sensible or stupid.

    Again, all countries can export more, employ more workers, and produce more goods and services at the same time, if the global economy has slack. It merely requires sensible policies. The Germans have sensible fiscal/labor policies and very stupid monetary policy views. But the ECB policy is set by 18 countries, 17 of whom can outvote Germany whenever they like.

  8. Gravatar of ssumner ssumner
    20. October 2014 at 09:36

    Peter, I agree that tight money (which Germany strongly supports) is making things much tougher on the south. No argument there. I’m pretty sure Tyler agrees, at least to some extent (i.e. the recent eurozone disinflation is not helpful). But still, at the margin there are other things the PIIGS could do.

  9. Gravatar of Frances Coppola Frances Coppola
    20. October 2014 at 09:40


    Germany’s labour policies may have been appropriate after reunification when unemployment was a considerable problem. They are not appropriate now. By redefining deliberate wage repression to generate exports as “thrift” you buy into the German morality play. The wages of Bangladeshis have nothing to do with this. Germany does not compete with Bangladesh.

  10. Gravatar of Mark Mark
    20. October 2014 at 09:42

    The original point used by ‘merch

    I’m with Nick. Point 1) and 2) could apply to any sector…or just GDP.

    1. Supply-side reforms that boost the efficiency of the [consumption] sector, perhaps by removing tax/regulatory barriers.

    2. [Global scale] Monetary stimulus aimed at currency depreciation.

    Point 2, monetary stimulus would boost everything, not just exports.

  11. Gravatar of ssumner ssumner
    20. October 2014 at 09:55

    Frances, Germany is still doing well, so the policies are still wise. But you may get your wish, as Merkel has begun abandoning those low wage policies.

    It makes more sense to criticize Germany for the things they do poorly, like offering bad monetary policy advice.

    Mark, Well most policies that affect exports also affect other sectors. So what’s the point? But even policies targeted specifically at trade, like lower trade barriers, will also boost both exports and GDP, even if done at a global level.

  12. Gravatar of am am
    20. October 2014 at 10:00

    What is the difference between a currency war and a price war. Do price wars increase trade.

  13. Gravatar of Matt McOsker Matt McOsker
    20. October 2014 at 11:08

    Regarding ISLM, Warren Mosler refers to it as a fixed FX model, and I believe Nick Rowe calls it a closed economy model.

  14. Gravatar of bill bill
    20. October 2014 at 12:21

    In case no one got to it, yes, German has a word that means “wonderfuler”. English uses the “-er” form for short words and “more ______” for long ones. German always just adds the “er”. 🙂

  15. Gravatar of Major.Freedom Major.Freedom
    20. October 2014 at 13:28

    The reason exports can increase for all countries internationally is the same reason exports can increase for all cities or states nationally.

    I hate it that such simple truths have to be explained to adults like it’s talking to 5 year olds.

  16. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    20. October 2014 at 13:34

    I don’t really understand what these “low wages policies” that I hear about all the time are. I understand the fact that on a productivity adjusted basis, German workers are cheap, I understand the fact that labour unions tend to be on the reasonable side with their increase demands (although, there have been a series of train strikes recently, demanding higher wages). Still, what were the low wage policies?

    There is no minimum wage, but there never was (there will be one starting next year, so I suppose that, if anything, the current gov has been pursuing “high wage policies”).

    Does this just mean “welfare reform?” The welfare reform (Harz IV) did push many long-term unemployed to get jobs, which paid, typically, below the average of the long-term employed. This did mean that average wage seemed to be going down even as everybody was better off. Hasn’t Scott repeatedly posted numbers that more money was going to wage earners in Germany during this period? Should we fault Germans for their “full employment policies”?

    Or does it just mean “high productivity?” Because on a per-hour basis, Germans don’t do so poorly. I mean, it’s not very rich, but better than any of the PIGS. It sounds silly to say “Germany needs to stop their high productivity policies as it makes everyone else look bad.”


    Of course, no mood affiliation: German ideas on inflation are the most dangerous thing on the eurozone. They are popular in the PIGS, too, though.

  17. Gravatar of Dan W. Dan W.
    20. October 2014 at 16:01

    More exports equate to more trade. More trade equates to greater voluntary mutually beneficial exchange. Everyone goes home a winner.

    But is not currency depreciation a zero-sum game? Those who have already converted their currency to assets are better off. Those who have not are worse off. Technology and productivity gains should have lowered the cost of living. But currency depreciation robs the saver of those gains and instead transfers them to others.

    There is nothing voluntary about having one’s currency deliberately robbed of its value. So why do it except to reward a certain class of citizens with greater profits?

  18. Gravatar of Gordon Gordon
    20. October 2014 at 16:33

    Scott, you said, “Classical economics (Hume’s Of the Jealousy of Trade) was supposed to be about overcoming that xenophobia. We still have work to do.” One major obstacle overcoming this xenophobia is that politicians have much to gain from fostering it even if they know that such xenophobia is irrational. Obama engaged in Japan bashing and Romney engaged in China bashing. I’m certain their economic advisers educated them on this issue before they engaged in such bashing but that matters little if political points can be gained by doing it. And groups like Fact Check do very little about challenging the economic nonsense of politicians.

  19. Gravatar of Zachary Bartsch Zachary Bartsch
    20. October 2014 at 17:16

    Do I have this straight?

    We’re not talking about net exports, I got that. We are saying that there are simultaneous devaluations. In a world of instant price adjustment, then the exchange rates remain unchanged and the cheapness of importing be no more/less attractive. That’s in terms of reals.

    *Regardless*, the NOMINAL value of exports would certainly increase everywhere. Is that the thrust? In the short run I know that, save for expectations, nominals=reals. I guess that I should have inferred that we were talking about short run/nominals since we’re also discussing ISLM. The only reference I saw in regard to nominals was in Tyler’s post in the 1st paragraph where he mentions “AD”. Skimming over that was an initial source of confusion for me.

  20. Gravatar of benjamin cole benjamin cole
    20. October 2014 at 18:03

    Excellent blogging. It is so obvious….The BoJ, ECB, PBoC and Fed need monerary laxatives…egads how obvious can it get?

    Remember, central bankers are not real estate developers or venture capitalists…left to central bank culture, they prefer zero inflation to real growth….

  21. Gravatar of Major.Freedom Major.Freedom
    20. October 2014 at 18:40

    Higher growth is associated with a higher, not lower, “Wicksellian” interest rate.

    The more productive expenditures there are relative to consumption expenditures, the higher business costs will be relative to revenues. The higher costs are relative to revenues, the lower the RATE of profit and interest will be.

    Or, in other words, an increase in the ratio of investment to consumption will lower the “Wicksellian” interest rate.

  22. Gravatar of TravisV TravisV
    20. October 2014 at 18:45

    Dear Commenters,

    Is this the right way to think about “when profit margins mean-revert, stock prices will fall!!”



  23. Gravatar of Mark2 Mark2
    20. October 2014 at 21:54

    I think Tyler is thinking a lot about the freer capital movement side of the equation. There is a really good point to made about that. Under the right conditions, excess saving from developed countries could flow into poorer countries where it could be VERY productive and these countries could take off growing at high rates. As long as they are not pegging their currencies, and developed countries are not running huge deficits, these countries currencies would appreciate. Their growth would be balanced and world demand would increase substantially. Developed countries could put idle productive resourced to good use and everyone could be much better off.

    But unfortunately it’s not the world we live in yet. Poor countries would need strong institutions and political stability, and developed countries would need to get their financial houses in order. But I hope that’s the direction we move in!

  24. Gravatar of Mark2 Mark2
    20. October 2014 at 21:55

    Scott, I don’t get your point about currency devaluation. I’m guessing you mean that if everyone *tried* to devalue their currencies through monetary stimulus, even though it wouldn’t work, at least there would be more monetary stimulus. It seems a little extreme to me to wish for a currency war (even a mild one) for the sake of monetary stimulus. A (mild) currency war among large developed economies could cause a lot of damage in smaller developing ones.

  25. Gravatar of ssumner ssumner
    21. October 2014 at 03:10

    am, I’m not sure what a price war is.

    Matt, Is that the first time my views are closer to Warren Mosler’s than Nick Rowe’s? Seriously, there is some truth in both those views.

    Thanks Bill.

    Luis, Very good points. I suppose it also includes policies encouraging unions to moderate their pay increase demands. But a German could answer your question better than I could.

    Gordon, Good point.

    Dan, Obviously it’s not zero sum if there is slack in the global economy.

    Zachary, We are talking about many things—three to be precise. One is sticky wages/prices and simultaneous currency depreciation, in terms of goods and services.

    Mark2. If all develop countries depreciate their currencies (against goods and services) at the same time, it boosts global growth and helps developing countries.

  26. Gravatar of Nick Nick
    21. October 2014 at 05:56

    I liked those posts. But there’s no right way to think about mean-reversion in profit margins. It isn’t like a batting average in baseball, there’s no mean to revert to. There’s no BABIP: these companies don’t have high profits due to a hot run of luck with the laws of physics. They are on a good run with respect to the laws of the United States, and that can continue. When profit margins fall, the cause of those falling margins will determine the markets outlook. It could be very negative … or not.

  27. Gravatar of Steven Kopits Steven Kopits
    21. October 2014 at 06:02

    Kristof, over at my blog, asks the following regarding employment to population ratios (still more eyeballs over here):

    “What are the main drivers for the [employment to population] trend in the US?

    Is the discouragement from the labour force because of a lack of jobs or rather health reasons i.e. low quality food high in sugar and fat leading to high obesity rates rendering the a decent proportion of population unfit for work (and presumably on some kind of disability allowance).

    Germany clearly has reaped the fruits from Hartz IV reforms & Japan has an exceptionally healthy & harmonious society where at government level overall employment levels are prioritized over a sound fiscal position.”

    Answer: The expansion of disability coverage in the US over the last decade is sufficient to explain the entire difference between US and, say, Japan or Germany.

    I would add that labor force participation has been most acutely changed in the 16-25 age group, leading one to suppose that the vast increase in student loans also affected labor force participation for this cohort. However, the student to population ratio has been volatile over the last decade or so, and therefore it is very difficult to determine what the “right” ratio should be, as I noted here earlier, ie, whether this change is transient or permanent.

    The post is here: http://www.prienga.com/blog/2014/10/6/employment-to-population-ratios

    The spreadsheet is here: http://www.prienga.com/blog/2014/10/3/employment-tables

  28. Gravatar of TravisV TravisV
    21. October 2014 at 09:54

    Is this why U.S. stocks are higher?


    “A Rumor About Quantitative Easing Is Igniting European Markets”

  29. Gravatar of Dan W. Dan W.
    21. October 2014 at 09:57


    Is there not always slack in the global economy and is not the goal of progress to create more slack? I mean people used to work from sunrise to sundown. No slack! Now half the adults (in America) don’t work at all. That is a lot of slack and technology will create even more of it!

    I understand your desire to run the economy much faster than it is. But for whose benefit? Does your economic model allow people to step out of the squirrel cage or does it presume more people need to get back in the wheel and sprint ever faster?

    Personally, I am all for people working as much or as little as their individual indifference curve guides. I do not favor disincentives to work but I am also cautious of monetary schemes that rob people of their savings or otherwise force them to put savings at risk just to avoid falling behind.

  30. Gravatar of am am
    21. October 2014 at 10:57

    A price war, I would say, is an attempt by one to put another out of business or capture more market share, even at a lower price or margin. It doesn’t necessarily increase the volume of goods sold just the volume of goods sold by the winner. Perhaps the Saudi’s and the US frackers are a relevant example.

    What I am trying to get at is this, that without the coordination on an international basis of the devaluation mentioned in the post, a price war of exports results, which does not necessarily result in an increase of exports worldwide, just an increase in market share capture by some. I am assuming a devaluation of currency with a retention of export prices at pre devaluation levels. Although devaluations are domestically inflationary, I think.

    A better term may be a trade war.

  31. Gravatar of TravisV TravisV
    21. October 2014 at 11:01

    “William Dudley Gave Wall Street A Chilling Ultimatum”


    “The inevitable conclusion will be reached that your firms are too big and complex to manage effectively,” New York Fed president William Dudley said. “In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively…..”

  32. Gravatar of TravisV TravisV
    21. October 2014 at 11:06

    Pethokoukis has written some great stuff lately, along with Matt O’Brien:





  33. Gravatar of Jason Smith Jason Smith
    21. October 2014 at 17:32


    This may be an interesting way to think about it: a world with more total exports must be a world with higher levels of trust, which leads to better economic performance.

    Causality might be going the other way, though. Periods with higher exports are periods occur when economies are doing well (so are more trusting).

  34. Gravatar of TravisV TravisV
    21. October 2014 at 19:51

    My feeling: the market is more reliable than general trader opinions.

    I think they are underestimating rumors of possible QE from the ECB……

    “Traders Say Three Changes Have Sent The Stock Market Surging Back”


  35. Gravatar of ssumner ssumner
    22. October 2014 at 01:59

    Dan, You said:

    “Is there not always slack in the global economy and is not the goal of progress to create more slack? I mean people used to work from sunrise to sundown. No slack!”

    This blog assumes a EC101 knowledge of macro. To answer your question. No, and No, and that’s not what slack means.

    You said:

    “I am also cautious of monetary schemes that rob people of their savings”

    Either you are new here or you haven’t been paying attention.

    am, Countries don’t compete with each other like companies do. I’d strongly recommend Krugman’s “Pop Internationalism,” which debunks a lot of those myths.

  36. Gravatar of TravisV TravisV
    22. October 2014 at 07:23

    Bernanke gave his first-ever speech in Japan to institutional investors this week:


    “Bernanke told attendees that he believes Central Banks around the world have the power to fight our current #1 economic fear “” deflation.

    He told attendees that Japan’s ‘Abenomics’ policy is working, and that likes that the Bank of Japan is generating more inflation than the European Central Bank.

    ECB head Mario Draghi, he added, should continue to expand the ECB’s balance sheet.”

  37. Gravatar of ssumner ssumner
    22. October 2014 at 17:44

    TravisV, I always new his heart was in the right place.

  38. Gravatar of Alex Alex
    24. October 2014 at 14:27

    Hi, nice blog, main idea is rational.Only to suggest that there are variations how gross exports will boost output,without in parallel to be increased AD eg in dynamic export countries, given the fact that there is a need to rise gross fixed capital formation (eg in southern europe) mostly with foreign capital directed to industrial equipment in order the recipient countries produce more or expand the value of their gross exports.
    About supply side, in practice main target was-only-to reduce unit labor costs in order a country to regain competitive advantage (in Greece we have more than 25% reduction of GDP) under the misleading premise that real exchange rate is the only indicator of lost competitiveness and throught real exhange rate to change nominal exchange rate.Increasing capital strenght-liquidity, lending, are thought not so important, are demand side functions.
    Germany has -0.2 GDP rate and personal savings reduced around 10% compared to Q4 2013.
    Germany was right about loss of competitiveness in south however the means are ineffective as long as there are signs of deterioration in Asia and in europe.
    A mild currency war is good idea and maybe,just like the reduced oil prices.

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