Drunk on Debt, U.S. Tells Teetotaler to Sober Up
It seems almost laughable for a country that can’t keep its government up and running to criticize other nations, but that’s what the U.S. Treasury did last week in its semiannual report on International Economic and Exchange Rate Policies.
Of course, the report is required under Section 3005 of the Omnibus Trade and Competitiveness Act of 1988, whatever that is. Even when a country artificially depresses the value of its currency to make its exports more competitive, the Treasury is hesitant to label it a currency manipulator. (The last time was in 1994, when it designated China as the villain.) Instead, the Treasury declares a currency to be “significantly undervalued” and leaves it at that.
This time around, the Treasury took issue with Germany, one of the countries in the euro area -- along with the Netherlands -- “with large and persistent surpluses” that “need to take action to boost domestic demand growth.” Last year, Germany’s nominal current account surplus was larger than China’s, according to the report.
What did Germany do to inspire censure from the U.S. Treasury? Mercantilist countries typically intervene to keep their currencies undervalued in order to gain a trade advantage. Germany doesn’t even have its own currency. Instead, it shares the euro with 16 other nations. Nor does Germany have its own central bank, much as it might like. Instead, the European Central Bank sets policy for the euro area.
To the extent that Germany has an advantage, it’s because it shares the one-size-fits-all euro with other, less productive countries such as Greece and Portugal. In other words, the euro “is set at the lowest common denominator,” says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. So yes, Germany has an export advantage compared to its euro-zone compatriots, but so what? Just maybe Germany’s competitive edge has nothing to do with the currency or any other government policy. After all, it was only when Germany relinquished the deutsche mark for the euro in 1999 that its trade surpluses soared.
“The Germans make good stuff that you want to buy,” says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. You don’t have to be an economist to understand that model. Think of it this way, he says: “Germany makes, Europe takes.”
What about tariffs and other forms of trade protectionism, which are characteristic of mercantilist economies? In 2012, 69 percent of German exports went to European countries and 57 percent to members of the European Union. When one considers that practically all of Europe is a free-trade zone, it puts the kibosh on that theory. And as for subsidizing certain domestic manufacturing industries, Germany does “neither more nor less than any other country,” Weinberg says.
The Treasury is concerned that “Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment,” according to the report. “The net result has been a deflationary bias for the euro area, as well as for the world economy.”
Surely the experts at the Treasury know that deflation is a monetary phenomenon, not some fiscal manifestation. Perhaps the 2.1 percent annual growth rate of M3, the ECB’s broad monetary aggregate, has something to do with any deflationary impulse.
How did other countries fare in the Treasury report? China, the usual suspect, needs “greater exchange rate flexibility,” not to mention increased transparency on the management of the renminbi. As for Japan -- whose trade surplus turned into a deficit in 2012 -- the U.S. “will continue to closely monitor” its policies to ensure that it calibrates “the pace of fiscal consolidation to the recovery in domestic demand and take ambitious and effective steps to increase domestic demand.” Without missing a beat, the Treasury cited a projection by the International Monetary Fund that Japan’s gross government debt will reach 247 percent of gross domestic product this year, the highest among advanced economies.
How is it the U.S. is so good at advising other countries and so lousy at running its own? The advice on stimulating domestic demand comes from a country that overconsumes and borrows beyond its means to support its habits. As a nation, we refuse to forgo current consumption -- in fact, spending is a policy goal -- for future consumption. U.S. real personal consumption expenditures exceed 70 percent of GDP, compared with 58 percent in Germany.
While the Treasury was dishing on Germany and China, it wasn’t shy about tooting its own horn. “The Administration’s policies to promote growth and jobs are bearing fruit,” according to the report. “U.S. real GDP grew by an annual rate of 1.8 percent during the first half of 2013, accelerating from the 1.5 percent pace in the second half of last year.”
Talk about splitting hairs. What Treasury didn’t say was that the 1.8 percent “acceleration” was actually a deceleration from real GDP growth of 2 percent in 2012, 2.1 percent in 2011 and 2.8 percent in 2010 (all four-quarter averages, not year-over-year).
In the old days, like the late 1990s, U.S. officials could attend economic summits and feel confident offering advice. After all, growth was strong and the federal budget posted back-to-back surpluses for the first time since the 1950s.
That’s no longer the case. U.S. gross public debt now exceeds nominal GDP and is growing faster than output -- a situation that is “unsustainable,” in economist-speak. Instead of offering unwanted advice to countries that seem to be doing a better job of managing their affairs, the U.S. should figure out how it plans to keep the promises it has made to future generations without imposing usurious taxes on those who are working.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist.)
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