Monday, October 6, 2014

Trade Surpluses are Not Morally Superior to Trade Deficits

The Economist has a new Special Report on the impact of technological change (you'll need to register to read) which contained the following graphic.

First, it shows that Australian real median wages have increased more than the rest of the set as would be expected in an economy that didn't suffer a recession. 

Secondly, and more importantly, it shows how German wages have been repressed. This has occurred through policy, rather than being reflective of some amazing German cultural propensity for thrift. German policies have led to an increase in saving (and as a corollary this means reduced German consumption). The excess saving (that is not invested) has to be exported, which means that consumption increases in Germany's export partners. This increases their trade deficits making it difficult for them to adjust to higher unemployment. In effect Germany is exporting unemployment. 

Given that the troubled Southern European economies all use the Euro, they can't adjust their economies through a lower exchange rate. While the Euro now burdens Southern Europe, it benefits Germany enormously. If Germany had its own currency, it would be much higher than the Euro, helping to reduce Germany's current account surplus. So Southern Europe needs a lower exchange rate and Germany should have a higher rate. 

They only way that Southern Europe can adjust is through higher unemployment or through a change in German policies that led to higher wages and  consumption and therefore provided the possibility to import demand rather than export it. 

In an interconnected global economy policy changes in one country can have unintended effects in other countries - in other words globalisation involves interdependence effects. 

For the European and world economies to function properly it is not just the deficit countries that need to adjust it is the surplus countries as well. 

At any one time point in time world trade is a zero sum game. Every surplus must be matched by a deficit elsewhere. So while we often moralise about countries that run deficits, the surplus countries couldn't run their surpluses without them.  

The export-focused model can't be a model for everyone unless we start trading with the moon or Mars (and expect them to run deficits!). 

Trade (current account) surpluses are not morally superior to deficits and indeed excessive surpluses contribute to the sort of imbalances in the world economy that were a major contributing factor to the global economic crisis

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