I have on this blog drawn (favourable) attention to Martin Wolf’s long-held view that not everyone can be Germany.  In his latest:

But Germany can be Germany – an economy with fiscal discipline, feeble domestic demand and a huge export surplus – only because others are not.

To my initial surprise, I have read some kickback against this from none other than Marginal Revolution:

They would have higher productivity and higher output.  They would export more.  But with their higher wealth, they would import more too.  That includes more imports from Germany, most likely.  German *net exports* might well decline, as Germans buy more olive oil and high-powered computer software from Albania.  But German exports need not decline *on net* (over a longer run of continuing global growth they certainly will not decline) and that should prove good enough for the German model to sustain itself.

This is Tyler Cowen, not some of the ill-informed commenters strewn over Mr Wolf’s blog, so it deserves consideration.

Wolf’s point is that trade balances have to sum to zero, and so Germany having a suplus mean Greece having a deficit.  NonGermany can’t grow through private consumption or even investment, because these exceed the private incomes and we have reached the limit beyond which the gap can be financed (and no, not just because of wicked speculators, Mr Monks). This means that running a surplus is the only way to save and grow at the same time, and countries with big debts need to do that.  (I am simplifying attrociously).

But one cannot assert such accounting identities as causal relationships, is one implication of Tyler’s post.  There are plenty of ways that the net-exports between Germany and non-Germany might be resolved – some are good, and some are bad.  Let’s have a look:

Now this is a very impartial analysis.  It is price-free – just a totting up of quantities, with the requirement that they add up.  It is a closed system – no non-Eurozone, and above all it is just about the demand components of GDP.  As Wolf would acknowledge, that is what his argument is about: who buys the stuff.  If Germany wants a surplus, NonGermany has to buy more of its stuff than it sells to Germany.

Consider three ways in which the trade balance might fall from the starting position (top left, yellow).

The Green way is Wolf’s way.  German Consumption (C) rises by 100.  Half of this goes into Imports (I) and instead of working for the rest of the world, Germany starts consuming some of the stuff it produces, so Exports fall too.  This leaves Germany’s GDP the same.   Exports for Non-Germany rise, and so NonGermany gets GDP growth, which solves all sorts of problems.

Tyler Cowen poses the Blue way.   NonGermany starts doing things that are intrinsically more interesting to Germany, which then imports more of them and increases its consumption.  I also show NonGermany shifting from consumption (G and C) to Investment (K).   In this version, there is no need to insist that Germany exports less to NonGermany.  Both grow; the world gets richer.  In simplified microcosm, is this the optimistic version of globalisation that Wolf promotes in his book of the same name?

Either of these work, and in a real economy, dynamically driven by prices, it might be hard to tell them apart.  In a model of accounting terms, you cannot specify the driving factor.   But I suppose Tyler’s version could be said to originate in a Greek decision to cut consumption and invest, which would then makes it products more attractive to Germans who then voluntarily buy Greek stuff. In Martin’s version, Germany just increases its consumption, and some of this inevitably leaks overseas, while other parts inevitably take some stuff that had been bound for exports.

BUT.  I would like to pose a risk to Tyler’s version.  Suppose Greece decides to cut Government and Private consumption (G and C), and because the financial markets have no faith in Greece, this does NOT flow into K, investment.   Greece hopes that Germans will buy their stuff.  But without investment or lower prices and wages (which may take a while to come, and be blocked by the institutional failing of Not Being Like Germany), Germany does NOT increase its imports of Greek stuff.   Then what happens?

Observe the pink quadrant.  There is a recession: a straightforward paradox of thrift recession. One part of the system tries to save and the other part doesn’t absorb it.

I think it is because of this possibility that a pure focus on Greek austerity remains misguided, and Wolf’s call on Germany to dip into its financial strength and consume a bit more is still right.   Without some sort of support, Greek austerity will not make their olive oil and computers better.  They don’t have the sort of flexible economy that means they will devalue internally.  Come on Germany, open the wallet.

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5 thoughts on “Second view: blaming the surplus nations too much?

  1. This is exactly the sort of post that the econ blogsphere needs more of–well argued, and just technical enough. Keep it up.

  2. Ack, macroeconomic equations. Never could get my head round these things. Quantum electrodynamics is much easier. In the blue quadrant, how does German C rise by 100 when I only rises by 50?

    And thinking politically, isn’t it more likely, in the green quadrant, that German G would rise and go straight into increasing I?

    1. I haven’t provided any causal relationships between the variables. But G is government consumption, not spending; so it can’t go into I, which includes already all investment, government or otherwise.
      C rises more than I because half the added consumption is imported, the other half comes from higher GDP.

      It is very unscientific indeed.

      1. Oh, I thought in that table that I was, non-standardly, imports? (I mean ‘I’, not the perpendicular pronoun!) I know it’s customarily denoted M, but I and X are cross-tied with no line ‘M’ which suggests I is imports. I think that makes K investment in that table.

      2. whoops, I misinterpreted you in my first para. Yes, K is investment (i wrote the table so I should know). And then when I wrote the second para I did understand. I does not have to rise as fast as C if half of what is bought is produced internally (GDP) …. I think

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