from Follow the Money

Is Adam Posen talking about Germany - or the US?

August 21, 2006

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Dan Drezner (and Mark Thoma) liked Adam Posen’s critique of Germany’s emphasis on “competitiveness.”  But when I read parts of Posen’s argument, I kept thinking that he was describing the US or China, not Germany.   Posen writes:

If exports are the public criterion of economic success, policymakers can meet that goal only by self-destructive means: depreciating a country's currency, thus eroding the purchasing power and the accumulated wealth of citizens; depressing wages in export sectors, either directly or through relative deflation vis-à-vis trading partners, thus cutting real incomes and domestic demand; subsidizing or protecting exporting companies, thus distorting investment decisions and locking in old technologies and businesses at the expense of new entrants…… No example better illustrates the costs to an economy of distraction by export competitiveness than Germany in recent years. 

A weak currency, restrained wage growth (falling real wages) and tax subsidies for any firm that wants to put up a manufacturing plant … hmmm.    What part of that description doesn't apply to the United States?     

Germany cannot credibly be accused of having a weak currency policy.   Sure, German inflation has been lower than inflation elsewhere in Europe, improving Germany’s position inside the Eurozone.  But the Euro itself is hardly weak.    And Germany sells a lot of goods to countries outside of the eurozone; more than your typical European economy.

The dollar, by contrast, is weak against the currencies of almost all countries whose central banks who do not actively prop the dollar up.   Benign neglect and all.  The US won’t take steps to keep its currency from depreciating – it outsources that task to the Chinese.  The result is that the RMB is weak v the dollar and the dollar is weak v the euro and the RMB is really weak v the euro (the yen is too … ).

The US is hardly immune from the temptation to offer tax breaks for manufacturing firms.    The US may not have a national industrial policy.  Or an exporting Mittelstand.  But most states will offer any firm willing to build a plant in their state rather significant tax breaks.   Ask German auto firms.   Ask South Carolina.  Ask Alabama.

Real wage growth in Germany has been rather restrained.  Posen – and many others – believe Germany has increased its competitiveness by limiting the growth in everyone’s wages rather than engaging in true labor and product market liberalization.    Alas, the US has – compared to Germany – quite liberal labor and product markets.   And the result has been more or less the same, best I can tell.  

Real wage growth has certainly lagged productivity growth in the US.   At least for everyone who is not a CEO, a hedge fund manager or running a private equity shop.

Ironically, the same is true of China.   Wage growth hasn’t kept up with productivity growth.  See Figure 9 of the World Bank’s quarterly report (on p. 14).  That one puzzles me.   Hecksher-Ohlin may explain weak real wage growth in the US and Germany as China integrates into the global economy, but it predicts strong real wage growth in China …  

I am not quite sure it is fair to blame either Germany’s focus on competitiveness or Germany’s labor market institutions for  weak German real wage growth when weak real wage growth seems to be a global phenomenon.  Profits are rising relative to GDP in the US, China and Germany despite differences in their labor market institutions.

Indeed, I think you can make a credible case that weak German domestic demand growth stems directly from the uncertainties associated with reforming German labor market institutions and the resulting rise in household savings.  Germany hasn’t had a policy of restraining aggregate demand so much as a policy of making (limited) reforms in its existing institutions.  And the result of those reforms has been more precautionary savings and weak demand growth. 

Of course, the other reason for weak demand growth is the fact that Germany’s housing market hasn’t had the froth characteristic of the US market – or the English, French or Spanish markets.   I don’t think that is a byproduct of Germany’s emphasis on competitiveness …

Above all, it seemed strange for an American – even one as well-versed in German economics as Posen – to criticize Germany for stimulating exports with a weak currency policy.  Right now, the dollar, not the euro, is weak.   And the dollar’s slide v. the euro has had an impact on the United States “competitiveness” in third party markets.    It is a big reason why US exports have been growing at a nice clip over the past three years.

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