January 19, 2012
Readers don’t expect much from the Washington Post when it comes to economic issues, so it is notable when an opinion column gets issues at least half right. In that vein, Fareed Zakaria’s piece today noting the ways in which Germany seems to be outperforming the U.S. is worthy of attention.
First, let’s note a couple of the things he gets wrong. Zakaria touts the growth in exports under President Obama, claiming that they have been growing at a 16 percent annual rate. He tells readers that this “means that U.S. exports should double earlier than 2014, the goal President Obama set in 2009.”
Apparently, Zakaria is looking at the nominal value of exports. The real value of exports has increased by a total of just 12.9 percent since the fourth quarter of 2008. At this pace, we won’t see exports double until around 2023. Perhaps Obama meant that he would reach his goal primarily through higher prices, but usually presidents don’t want to boast about higher inflation on their watch.
The second point is that no serious person (okay, this is the Washington Post opinion page) would value exports in isolation. Net exports, exports minus imports, create jobs, not exports alone. If we export car parts to be assembled into a car in Mexico, it certainly does not create more jobs in the United States than when the car was assembled in the United States.
Because imports have exceeded exports by a huge amount over the last 15 years (i.e. we have large trade deficits) the United States has lost millions of jobs. The trade deficit has only declined by about half a percentage point of GDP during the Obama years. So in this sense, trade has contributed little to growth and jobs.
Zakaria also errs in his portrayal of the investment record on Clinton, Bush, and Obama. He tells readers:
“From 2001 to 2007, investment in equipment and software — the kinds of investments that boost productivity and create good jobs — declined 15 percent as a share of gross domestic product. … In contrast, the current recovery, while anemic in terms of number of jobs created, is more broad-based and more durable. Business investment is rising, having boomed 18 percent since the end of 2009.”
Actually, much of the investment in equipment in software at the end of the Clinton years was driven by the bubble in tech stocks. It was wasted establishing operations like Pets.com and other companies that quickly ended up in the dustbin of startup history. While this spending created jobs in the same way that paying people to dig holes and fill them up again will create jobs, it did not boost productivity.
Productivity growth over the Bush years averaged 2.2 percent annually. In the pre-recession period it averaged 2.7 percent. This compares to a 2.0 percent annual rate for the Clinton years taken as a whole and a 2.7 percent rate for the period following the beginning of the productivity speedup in 1995. In other words, there is little basis for saying that the falloff in investment in the Bush years harmed productivity growth.
On the other hand, the boom in investment during the Obama years touted by Zakaria is simply making up for the collapse of investment during the downturn. This is a normal pattern following a recession. Even with the Zakaria boom, equipment and software investment have still not risen back to its pre-recession share of GDP.
Now for the part that Zakaria gets right; Germany has done well because of its different attitude towards its workers. It is German government policy to try to persuade employers to keep workers on their payroll even during a downturn through policies like work sharing. This ensures that the workers continue to stay in the workforce and upgrade their skills. By contrast, many workers in the United States face long-term unemployment and some may never work again.
Germany has been so successful with this policy that its unemployment rate is now 1.6 percentage points lower than it was before the recession began. That is in spite of the fact that its GDP growth has been no better than GDP growth in the United States. The difference has been its labor force policy.
Zakaria notes the importance of the German experience and, citing a paper from the Brookings Institution, holds it up as a model for the United States. At CEPR we are always glad to see Brookings follow our lead so that the Post can write about a topic of importance.
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