Look to Germany and China for a model economic solution

Bummer! You work hard. You save your money. You make a product and sell it at a profit. Everybody’s happy. And then, your customers, the silly spendthrifts, go broke. And what do you know? Everybody points his finger and blames you!

“World leaders are choosing recession,” charges The Financial Times. The “world leaders” the FT is talking about are Premier Wen Jiabao of China and Germany’s Finance Minister, Wolfgang Schauble.

The FT says they should loosen up; have some fun. China should raise the value of the yuan, adds Nobel Prize winner Paul Krugman, backed by 130 members of Congress. Germany should raise wages, says France’s finance minister Christine Lagarde. That is, they should be more like grasshoppers than ants.

But neither the Germans nor the Chinese prospered by being grasshoppers. They got rich by being ants. And they’re still at it. China is still exporting…and making a $291 billion current account surplus this year. Germany will clear $187 billion. And now everyone is on their backs. La Tribune, in Paris, even dusts off a prophecy from a defunct 19th century critic, Friedrich Engels: “They will ruin not only other nations’ industries but those of their own country too.”

Economists are normally reserved. This is not because they are well mannered. It is because they have nothing to say. But occasionally, timid bewilderment gives way to dangerous bursts of confident opinion. An opinion that has the support of The Financial Times, Paul Krugman, Christine Lagarde, Friedrich Engels and 130 congressmen is almost by definition a threat to the public weal and thereby a suitable subject for today’s back page.

To bring us all up-to-date, the world appeared to prosper in the boom years ’97 to ’07 years (the micro-recession of ’01 excepted). The big exporters – China and Germany, who Martin Wolf calls “Chermany” – ran big trade surpluses. The big spenders – notably Greece and the US, who we will call Gremerica – ran large trade deficits. From these facts, Mr. Wolf infers that if the Cherman ants prosper by making, someone must impoverish himself by taking. In this case, the Gremericans…along with other grasshopper nations such a Great Britain.

The gist of the Krugman, Wolf, and Lagarde et al position is that in the world economy is ruled neither by good nor by evil, but by mathematics. An exporter, such as China or Germany, can only run a trade surplus equal and opposite to the deficits of other nations. What’s more, a grasshopper nation – such as the US – can only run a deficit insofar as the ants are willing to finance it. A deficit is no sin. Nor is hard work and savings anything to be proud of.

We have heard this value-free line of talk before. Ben Bernanke claimed that the US was not making a mistake by spending too much; instead, it was doing the world a favor by consuming its “surplus savings.” Lately, between them, Britain and America consumed as much as 70% of the world’s total savings. While this couldn’t go on forever, it went on long enough to give China a $2 trillion pile of the grasshoppers’ money…and long enough to make Germany the moneybags of Europe. But by 2007, the consumer nations of Gremerica were completely spent. The cost of continuing to live beyond their means was too great. They couldn’t afford to go on. And now, the world appears to suffer. The grasshoppers are laid up. Who will buy? The proposed remedy, in a nutshell… where it belongs, is to stimulate consumer demand in Chermany.

It is hard enough for a sensible man to turn the knobs and adjust the levers of his own family budget. He wouldn’t dare fiddle with a whole economy, let alone the economy of a foreign nation. The meddlers, though, are ready to throw the switch on the whole worldwide shebang. And as usual, those who presume to tell others what to do are those whose presumptions are idiotic. The math says it works. But common sense tells us it is absurd to pressure the world’s most thrifty and productive people into not working so hard.

Trade balances must sum out to zero, but that doesn’t mean that consuming goods is just as good as producing them. Alas, the world economy is not organized in a way that makes it easy for an economist with a calculator. Instead, it’s infinitely complex. Turn any knob you want; you’ll get results you didn’t expect. Turn the ants into grasshoppers? Maybe. But the bugs have ideas too – shaped by experience, culture and calculations of their own.

Wolf’s math tells him that raising German wages will make Greece more competitive. But don’t expect the Greeks to build a Maybach any time soon. Instead of turning Germans into grasshoppers it will more likely turn them into unemployed ants. Likewise, you can raise the yuan. But China’s export economy already looks like a bubble. And making it harder for Chinese manufacturers to sell their wares looks like a pin. Even the threat of sanctions has a sharp edge to it. It was just this sort of high-minded central planning – led by Misters Smoot & Hawley in the ’30s, with their sharp pencils and dull wits – that tipped the world into a deeper, darker depression.

Chermany isn’t responsible for Gremerica’s problems. Chermany can’t solve them. Gremerica made mistakes. It must now correct them.

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