Archive for January, 2016

Stormy Fantasies about Labor Cost Competitiveness

Jörg Bibow | January 27, 2016

Lamenting that intellectual inertia is responsible for slow progress in economics, Servaas Storm sets out to teach a lesson to everyone who may still be foolish enough to believe that relative labor costs matter for international competitiveness and that diverging unit labor cost trends – specifically persistent wage moderation in Europe’s largest economy, Germany – may have played a rather critical role in sinking Europe’s monetary union. It is a dangerous myth, Storm proclaims, that labor costs drive competitiveness. He suggests that the eurozone crisis originated from a different set of causes altogether; German wages are little more than trivia.

I fear that Servaas Storm will further add to existing confusions about both German wages and the widely misdiagnosed and never-ending eurozone crisis more generally. His blog of January 8, 2016 titled “German wage moderation and the eurozone crisis: a critical analysis” (see here) is hardly a masterpiece in analytical coherence. I will focus on some key issues.

Storm appears to be making three big points. First, German wage moderation is a mere fiction. If Germany’s competitiveness improved at all under the euro, that was the result of nothing else but its engineering ingenuity: “It was German engineering ingenuity, not nominal wage restraint or the Hartz ‘reforms’, which reduced its unit labor costs. Any talk of Germany deliberately undercutting its Eurozone neighbors is therefore beside the point.” Second, Storm essentially agrees with the “consensus narrative” recently proposed by a group of CEPR-associated researchers (see here) which sees the origin of the eurozone crisis in rampant capital flows causing massive intra-eurozone current account imbalances. German wage moderation does not feature at all in the consensus narrative, a conspicuous neglect that prompted Peter Bofinger’s recent critical response (see here; and also here). Storm’s attack therefore reserves some special venom for Bofinger (amongst various other proponents of the wage moderation hypothesis, including this author). Third, the eurozone’s real underlying problem, according to Storm, is that the euro has “not led to a convergence of member countries’ production, employment, and trade structures, but rather to a centrifugal process of structural divergence in production.” Somehow – but other than through wage moderation! – Germany got even stronger in high value-added, higher-tech manufacturing under the euro, while the eurozone South remained stuck with low value-added, lower-tech manufacturing.

In the course of presenting these three points (or hypotheses) Storm not only thoroughly misrepresents the “wage moderation hypothesis,” he also fails to shed any new light on the supposed role of capital flows, while ending up with the rather disheartening proposition that the euro is essentially nonviable until the eurozone’s production structures converge to the German standard.

Regarding the first point, the idea that German wage moderation may be fiction rather than fact, I am simply baffled. The wage moderation hypothesis (at least as I have presented it; see here, here, and here, for instance), starts from the following facts (data courtesy of Eurostat and the OECD). First, Germany’s unit labor cost trend stayed persistently below the common stability norm as set by the ECB; reneging on the golden rule of currency union. Second, German wage inflation was the clear outlier in the downward direction. Third, German productivity growth barely met the euro area average. continue reading…


Why Minsky Matters, Reviewed in Times Higher Education

Michael Stephens | January 13, 2016

L. Randall Wray’s recently published book on the work of Hyman Minsky (Why Minsky Matters: An Introduction to the Work of a Maverick Economist) was reviewed by Victoria Bateman for Times Higher Education. Here’s a taste:

Having experienced the pain of a new Great Depression, the very least we should expect is that economists try to learn from it. Unfortunately, still too few of them understand the importance of what Minsky had to say …. While Minsky is now quite well known, his contributions are still widely ignored or misunderstood.

In terms of name recognition or casual citation, there’s been a lot of progress made in raising Minsky’s profile. As for comprehension of his vision of economics and public policy (or the influence of that vision on policymaking), there’s a tremendous amount of work ahead. Here’s hoping the book helps us move a little further along that path. Read the entire review here.


The Only Graph Needed to Explain the New Year’s Dive of 2016: Larry Summers Sort-Of Gets It, the Fed Doesn’t Seem to Get It, and the Media Seems Hardly Aware of It

Michael Stephens | January 11, 2016

by Daniel Alpert

A practically unnoticed phenomenon underpins the negative U.S. economic data trends we saw in Q4 2015 and the enormous increase in market volatility in the first week of 2016: the United States’ global competitors are—once again—using vast pools of low-wage, underutilized labor, a huge excess of domestic production capacity, and/or the ever-stronger U.S. dollar, to grab whatever share of demand they can in order to maintain/recover growth in a sluggish global economy.

While the plummeting price of energy—the result of insufficient global demand and huge new oversupply from North America itself—has cut America’s energy deficit to a level less than 20 percent of its 2008 peak, the overall current account deficit of the U.S. grew rapidly in 2014 and, more alarmingly, in 2015.  The nation’s current account is the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.

But here’s the brutal bottom-line: the non-energy portion of the U.S. current account deficit, relative to GDP, has ballooned by 236 percent since its low in December 2013, during which period the energy deficit fell by 57 percent.

Alpert_The Only Graph_Fig1

The U.S. economy is showing weakness in Nearly Everything But Employment (“NEBE”) and even its salutary pace of job formation is plagued by an unusual level of temporary and low wage hiring, painfully low labor force participation and very low levels of nominal wage growth. Consumption is therefore not rising in a manner anywhere near the rise in headline job formation. And the demand-push inflation that one would normally expect to have emerged with the creation of 5.6 million jobs over 24 months is nowhere to be found.  In fact, the U.S. is joining the rest of the world in a persistent pattern of alternating deflation and disinflation (“lowflation”).

The substantial slowdown in China, the evident failure of Abenomics in Japan, the collapse of the Brazilian and Argentinian economies, and a failure of the eurozone to get off the mat despite the “anything it takes” monetary posture of the European Central Bank, have all contributed to declining global aggregate demand for all sorts of production. This has been reflected particularly acutely in the energy and other commodities sectors.

All of the foregoing constitute a bitter pill for the United States economy which, better than any other, was able to substantially reduce its trade deficit from the end of the recession through 2013 and to lever its size, its willingness to engage in extraordinary monetary easing early and often during and following the Great Recession, and its inherent resiliency to produce at least a tepid recovery while other regions slowed or remained mired in slump.

After all its deft maneuvering, the U.S. is once again being inundated by cheap imports and seeing its ability to export severely impaired, because of a combination of its competitors’ internal deflation and efforts (direct and indirect) to devalue their currencies relative to the U.S. dollar and each other’s.  This is vastly constraining U.S. economic growth and may result in its contraction at some point during 2016.

This nearly universal beggar-thy-neighbor behavior has all the makings of a very serious global economic disruption and proceeds from the same global economic imbalances that we saw before, during and after the Great Recession; the vast oversupply of labor, production, and capital relative to aggregate demand for all three.

Where is this coming from? continue reading…