1/12
Sorry for another long post but I’ve had several responses to this thread arguing that this cannot apply to Germany because German wages are higher than those of most of their trade partners. That may be true in absolute terms, but what matters is relative wages.
Sorry for another long post but I’ve had several responses to this thread arguing that this cannot apply to Germany because German wages are higher than those of most of their trade partners. That may be true in absolute terms, but what matters is relative wages.
https://twitter.com/michaelxpettis/status/1456883104216322058
2/12
For example absolute German wages may be higher than absolute Spanish wages, but so is German productivity, and if the difference in their wages is less than the difference in productivity, then German wages are relatively lower than those of Spain.
For example absolute German wages may be higher than absolute Spanish wages, but so is German productivity, and if the difference in their wages is less than the difference in productivity, then German wages are relatively lower than those of Spain.
3/12
Consider the case in which Spanish manufacturers can produce 100 widgets while paying €80 in wages, whereas German manufacturers can produce 100 widgets while paying €70 in wages. In that case the wage share in Germany is lower than that in Spain, and if...
Consider the case in which Spanish manufacturers can produce 100 widgets while paying €80 in wages, whereas German manufacturers can produce 100 widgets while paying €70 in wages. In that case the wage share in Germany is lower than that in Spain, and if...
4/12
absolute German wages are higher than absolute Spanish wages, that just means that it takes fewer German workers than Spanish workers to produce the widgets, perhaps because German workers are better trained, or benefit from better infrastructure and administration.
absolute German wages are higher than absolute Spanish wages, that just means that it takes fewer German workers than Spanish workers to produce the widgets, perhaps because German workers are better trained, or benefit from better infrastructure and administration.
5/12
Now consider what happens when the Spanish manufacturer moves its factory to Germany to take advantage of Germany’s relatively lower labor costs, and exports the widgets from Germany to Spain.
Now consider what happens when the Spanish manufacturer moves its factory to Germany to take advantage of Germany’s relatively lower labor costs, and exports the widgets from Germany to Spain.
6/12
The same number of widgets are produced, but moving production from Spain to Germany means that now workers in the aggregate receive €10 less, and business profits are €10 more.
The same number of widgets are produced, but moving production from Spain to Germany means that now workers in the aggregate receive €10 less, and business profits are €10 more.
7/12
Whether that leaves the two economies collectively better or worse off depends on whether business investment in Germany or Spain is constrained by scarce savings (in which case they can be better off) or is constrained by weak demand (in which case they are worse off).
Whether that leaves the two economies collectively better or worse off depends on whether business investment in Germany or Spain is constrained by scarce savings (in which case they can be better off) or is constrained by weak demand (in which case they are worse off).
8/12
The problem is that for for fifty years we've lived in a world in which demand, not savings, is the main constraint on business investment in all advanced economies (and some developing ones, like China) .
The problem is that for for fifty years we've lived in a world in which demand, not savings, is the main constraint on business investment in all advanced economies (and some developing ones, like China) .
9/12
In that case we should be boosting consumption, not savings, which means boosting the wage share of production. But when countries like Germany increase international competitiveness by directly or indirectly reducing wages, this forces Spanish workers either to replace...
In that case we should be boosting consumption, not savings, which means boosting the wage share of production. But when countries like Germany increase international competitiveness by directly or indirectly reducing wages, this forces Spanish workers either to replace...
10/12
the reduction in demand with household debt, which ultimately isn't sustainable, or to choose between unemployment or lower wages, which forces an even greater demand problem onto to the rest of the world, as Marriner Eccles explained in the 1930s.
fraser.stlouisfed.org/files/docs/mel…
the reduction in demand with household debt, which ultimately isn't sustainable, or to choose between unemployment or lower wages, which forces an even greater demand problem onto to the rest of the world, as Marriner Eccles explained in the 1930s.
fraser.stlouisfed.org/files/docs/mel…
11/12
The point is that Germany's trade surpluses are the consequence of German wages being lower, relative to German productivity, than that of their trade partners, and for that reason suppress growth in global demand. When many countries like Germany compete internationally...
The point is that Germany's trade surpluses are the consequence of German wages being lower, relative to German productivity, than that of their trade partners, and for that reason suppress growth in global demand. When many countries like Germany compete internationally...
12/12
by suppressing relative wages, the "winner" is the country that can most reduce the household share of GDP, and so run the largest trade surplus. This must lock the global economy into a process of rising debt and stagnant wages.
by suppressing relative wages, the "winner" is the country that can most reduce the household share of GDP, and so run the largest trade surplus. This must lock the global economy into a process of rising debt and stagnant wages.
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