Posted by: Dirk | November 3, 2009

Obama’s post bubble growth model

US president Barack Obama is thinking about a new model for the US economy. According to the NY Times, he wants to follow Germany’s:

“If Germany, a wealthy, highly unionized industrial nation, can generate 40 percent of its economy as export-based, then it seems to me that there is something we’re missing that they are doing right, and we have got to figure that out,” he told a meeting of his Economic Recovery Advisory Board.

Now some people (hopefully, no economists among them) will say: but Germany had dismal growth rates! To which a trained economist should answer: “Well then, follow the economic policies of the world’s leaders in growth”. The top-10 for 2008 are: Bhutan, Macao, Qatar, Angola, Timor-Leste, Ethiopia, Rwanda, Azerbaijan, Equatorial-Guinea and Turkmenistan.

The idea of export-led growth is that you create extra jobs by exporting more. Of course, this is a zero-sum game on the international scale. What I export somebody else must import. So a Germany with more exports than imports must mean some other countries with more imports than exports. By the way: if you export more than you import, the countries buying your goods must go into debt. They must borrow in order to finance those net imports, or sell some of their assets.

So, Germany has recently accumulated net wealth vis-a-vis the rest of the world. Sadly, part of that wealth was invested into sub-prime assets from the US. A very important question for net exporters is hence whether they can get quality assets or not. For the US, the answer would be easy. Instead of accumulating wealth, they would first repay debt. But what kind of debt should we think of at this point? Of course, the US should repay the debt with higher costs of servicing – high interest rates – first.

Probably this is not government debt. According to the Fed, interest rates on government debt are barely above zero. However, household and private sector debt has to be serviced with high interest rates. This situation is completely different from that in Germany, where households are not very deep in debt and also companies have relatively less debt. Whereas Germany used net exports to pile up net foreign wealth, the US will do so to decrease net foreign debt. And I would say that the US strategy is appropriate for its state of the economy and will result in relatively higher growth rates. However, I believe that German policy-makers made a mistake and – with the help of the ECB – produced the lost decade of 1999-2009 (source: Eurostat; 1999-2010, 2010 is an estimate):


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