October 13, 2014
I would not typically defend Germany’s economic policies against Paul Krugman, but I will say a word in its favor this morning. Krugman trashes Germany for running large trade surpluses, telling us that Germany actually has a weak domestic economy. He concludes a short post by saying that Germany can’t be any sort of model, since we can’t all run large trade surpluses.
While there is much truth to Krugman’s comments, it is worth stepping back for a moment. First, the claim that Germany’s domestic economy is weak means that Germans don’t want to buy lots of stuff. While Germany does certainly have problems of poverty and inequality, they are nothing like what we see in the United States. It would be great for Germany to spend more to address these problems, both because of the direct benefit and also because of the demand it would provide to the world economy, but it is not necessarily a bad thing that a country doesn’t want to buy more stuff.
A really good way to deal with a problem of insufficient demand is to design policies that encourage less supply. Germany has done this to some extent with work sharing, long vacations, paid parental leave, and other policies that have the effect of dividing the available work more evenly among the population. The average work year in Germany is 20 percent shorter than in the United States. Germany can certainly do more to spread the work more evenly and hopefully the income goes with it, but weak domestic demand need not be a problem.
The other point is that, as a rich country with a declining population, we would expect Germany to be running trade surpluses. Capital can be more productively used in poor countries with rapidly growing labor forces. Therefore we should expect capital to flow from rich countries like Germany to developing countries in Asia, Latin America, and Africa.
Of course the size of Germany’s surplus is extraordinary. Furthermore, much of it is going to other European countries like Italy and Spain, which also have slow growing (or shrinking) labor forces. These imbalances are due to the fact that they are locked into the euro and therefore their currency can’t adjust to move them towards a trade balance with Germany.
Like Krugman, I have repeatedly trashed Germany for its role in enforcing contractionary policy on the rest of the euro zone by opposing more expansionary fiscal and monetary policies. And, its obsession with inflation is proving to be an incredibly costly superstition for the region.
But these policies are the real problem. Even if Germany followed the path I would like to see, it would almost certainly still have substantial trade surpluses, albeit not quite as large as the ones it is now running.
Comments