Surplus nations vs deficit nations

The Germans are mad. On Friday, German Finance Minister Wolfgang Schäuble called US economic policy, “clueless,” adding in an interview with Der Spiegel, “the American growth model is in deep crisis. Americans have lived far too long on credit.” He said the $600 billion quantitative easing programme embarked on by the Fed is merely an attempt to drive down the value of the dollar.  G20 finance ministers’ meeting are not generally fonts of transparency and candour.  We must really be in trouble for Schäuble to speak so honestly.

The central split in the world economy is between the countries with a trade surplus (Germany, China, Japan) and those with a trade deficit (The US, UK, Spain, Portugal, Italy).  The former export more than they import and so need to lend to the rest of us in order that we can afford to buy their stuff. Imagine China and Germany as stores with installment plans. We get flatscreen TVs for nothing but a promise to pay later. They get sales. We get to live beyond our means; they get jobs for their export sectors. In the happy days of the boom this arrangement satisfied everyone.

The trigger for the German finance minister’s ire is an American request that the countries with large trade surplus voluntarily agree to limit those surpluses to less than 4% of GDP.  The Germans (and the Chinese) find this intolerable.  It will cost them jobs and limit their growth.  German export prowess, Schäuble reminds us, is not due to currency manipulation but rather because of competitive advantage.  They make better stuff, more cheaply than we do, so why should they be punished?

But the world isn’t always fair. In 2009, the countries that got hit the hardest from the global downturn were not the profligate bubble economies (UK, US) but rather the durable manufactures exporters (Germany, Japan) that sold to the bubble nations.  Their export sectors have since recovered but today, with consumption and investment stagnant, every country hopes to grow by stimulating exports.

In his first editorial after his midterm defeats, Barack Obama talked about increasing US exports. “We want to be known not just for what we consume, but for what we produce. And the more we export abroad, the more jobs we create in America. In fact, every $1 billion we export supports more than 5,000 jobs at home.”  David Cameron is also placing his hopes on a larger export sector to take up the slack from reduced government spending. But since one nation’s exports are another nation’s imports, all of us cannot export our way to prosperity.

Although they are filled with righteous anger, the Germans and Chinese should not underestimate the strength of the deficit nations.  Power ultimately lies with the consumer.  You can make the best stuff in the world but if you can’t get it to market, you won’t be selling it. Large segments of US public opinion blame globalisation for America’s economic woes. Protectionism would find deep popular support in America, and China and Germany can do nothing about that. Schäuble’s resentment may well stem from his realization of his country’s ultimate impotence—why should Germany suffer just because we lived beyond our means? But if the debtor nations strive to limit imports, there is little Schäuble can do to stop us. And our living beyond our means created jobs in Stuttgart.

Back in the early 1930s Keynes wrote cogently about trade imbalances. In those days, of course, the US was the creditor, Germany and the UK debtors.  His point was that forcing Britain to save more and buy less without making America buy more and save less is inherently deflationary. To avoid a shrinking economy, he said the surplus nations must increase their consumption.  That remains true today.

Schäuble is correct that we in the profligate nations need to get our own houses in order.   But the recession has already forced much of that correction.  Private sector saving as a percentage of GDP has gone through the roof, which of course is part of the reason for our slow growth.  If the surplus nations—China, Germany, Japan—don’t stimulate consumption at home, global demand will inevitably shrink.  Keynes was right. The surplus nations cannot force all the costs of adjustment on us.  If they try, it may well backfire on them.  For 60 years, German economic growth has been focused on their expanding export sector.  Perhaps, if they don’t watch out, it might be their growth model that soon will be in deep crisis.