Does it reflate economies if all nations increase their exports?

The Germans lecture the periphery to engage in structural reform and increase their exports.  A variety of IS-LM Keynesians strike back and note that not all nations can increase their net exports, therefore it is a kind of zero-sum game which won’t boost aggregate demand overall.  This is sometimes followed by blaming the Germans for soaking up aggregate demand from other parts of the world.

But that Keynesian counter is a mistake, perhaps brought on by the IS-LM model and its impoverished treatment of banking and credit.

Let’s say all nations could indeed increase their gross exports, although of course the sum of net exports could not go up.  The first effect is that small- and medium-sized enterprises would be more profitable in the currently troubled economies.  They would receive more credit and the broader monetary aggregates would go up in those countries, reflating their economies.  (Price level integration is not so tight in these cases, furthermore much of the reflation could operate through q’s rather than p’s.)  It sometimes feels like the IS-LM users have a mercantilist gold standard model, where the commodity base money can only be shuffled around in zero-sum fashion and not much more can happen in a positive direction.

Second, the higher (gross) exports and higher quantity of trade overall would produce positive wealth effects.  This too would reflate economies through a variety of well-known mechanisms, including but not restricted to the easing of collateral constraints.

In other words, it can help reflate all or most of the economies if they increase their gross exports, even though net exports are a zero-sum magnitude.

This interpretation of the meaning of zero-sum net exports is one of the most common economic mistakes you will hear from serious economists in the blogosphere, and yet it is often presented dogmatically or dismissively in a single sentence, without much consideration of more complex or more realistic scenarios.


depends whether small- and medium- sized enterprises are in the tradable or nontradable sector. shipping is not a small business. tourism isn't really 'exportable' via real rather than nominal adjustment.

not sure that the european south has a comparative advantage in tradable goods, really

So if the Germans are forced to switch to drinking French wine, and the French forced to switch to drinking German wine, both countries could be better off?

Couldn't we just switch the labels on the wine?

Ships carry Canadian wheat to America and return carrying American wheat? Would anyone know the difference if the ships sailed out into the middle of Lake Superior, and then turned around and went home?

Who said anything about "forced"? I am talking about welfare-improving gains from trade, based on productivity increases in each country.

Is all the work being done by the higher levels of productivity? Would non export related efficiency gains have the same effect? I guess different tech compliments labor in different ways, but the same could be said for international trade.

So it's not about increasing exports at all, but increasing productivity.

Put it this way: you are reasoning from an (endogenous) quantity change. What caused gross exports (and gross imports) to rise? Was it a subsidy, or the removal of a tax?

First sentence of the post says "structural reform," i.e., productivity gains.

OK. Suppose a "structural reform" increases productivity in all countries. Would it matter whether those productivity gains were in the exporting sector, the import-competing sector, or in the non-traded goods sector? (Maybe it would matter if it helps some countries pay down their debts to other countries.)

What would matter would be the central banks' response to this. What are they targeting? For example, if central banks peg a rate of interest, then we would ask whether those structural reforms caused a rise or fall in the natural rate of interest.

TC is implicitly just making the claim that the problem with the Euro-area is supply and not demand.

For TC is saying the urging to implement "structural reform and increase (peripheral countries) exports" is reasonable because what this really means is "countries should implement structural reforms that increase productivity". But then this just amounts to a claim that the peripheral economies are really only suffering from a supply side problem.

The advice of the Germans is either incredibly bland "Be productive and trade" or it is incredibly misleading "export targeting policies can lift us all out of poverty.".

These days "structural reforms" appears to mean cutting protections for workers and cutting taxes on higher earners, resulting in the benefits from increased productivity mainly going to a narrow slice of populace.

Tyler has chosen an odd time to start defending Merkelnomics.

As I was reading this post while watching twitch I imagined what it would be like if Econ bloggers live streamed their posts. Twitch chat would have gone bonkers on this one ("SHotZ Fired OMG!1")

If all countries increased their production of things that other countries wanted to buy, that would be good.

True. But if all countries increased their production of things that their own people wanted to buy, that would also be good.

Undisputed. There is, however, only so much bauxite Rwanda can consume. And structural reforms enabling greater exports are probably easier to accomplish than greater self-reliance.

What is the evidence that the obstacle to Rwanda producing more bauxite is its own problems with supply rather than the state of world demand for bauxite?

No mention of monetary policy.

Welp, I guess the pain in the Eurozone will go on for quite a while.

Let me put it this way: if two individuals trade, there are (usually) gains from that trade. And those gains from trade do not depend on whether those two individuals live in the same country or in different countries. "Exports" are not (really) an economic concept.


Trade and exports are sold as some sort of magic solution, while in reality their just normal economic transactions.

Ah, but then this applies in both directions, Foosion. It undercuts, as it should, trade restrictions.

@NR -- Exports are a proxy for gains from trade. Because inputs for one city are exports from another. No city is an autarky. When countries are exporting more, it means somebody is importing more, and the world as a whole has its welfare increased. Healthy exports simply mean a healthy world economy. But it's a bit like saying: "do structural reforms, become better, and you will be able to export more'; easier said than done. As you say the 'become better' might mean the countries pay off their debts, or maybe stop importing as much by living beyond their means.

I think Nick is right that "all countries export more" is no different from saying "all countries produce more."

Domestic sales create gains from trade just like foreign sales do. There is no magic in an American firm selling increased production to Canadians as opposed to Americans.

Yes, growth is good and it doesn't matter where it occurs, but it borders on stupid to say everyone should grow because it is not about them growing but about how to get them growing and not at all whether that growth is domestic or foreign.

Export surpluses - the sort of problem that Americans don't need to worry about.

From one of the economists who does not make that particular blogosphere error - 'I would not typically defend Germany's economic policies against Paul Krugman, but I will say a word in its favor this morning. Krugman trashes Germany for running large trade surpluses, telling us that Germany actually has a weak domestic economy. He concludes a short post by saying that Germany can't be any sort of model, since we can't all run large trade surpluses.

While there is much truth to Krugman's comments, it is worth stepping back for a moment. First, the claim that Germany's domestic economy is weak means that Germans don't want to buy lots of stuff. While Germany does certainly have problems of poverty and inequality, they are nothing like what we see in the United States. It would be great for Germany to spend more to address these problems, both because of the direct benefit and also because of the demand it would provide to the world economy, but it is not necessarily a bad thing that a country doesn't want to buy more stuff.'

It's worth focusing on Dean Baker's usual points on trade - a strong dollar policy decreases US jobs and trade agreements have become tools for increasing competition for low paid workers (while insulating doctors, lawyers, etc.) and increasing benefits for corporations (increasing regulation that adds to profits, such as patent protections, while decreasing regulation that benefits others, such as environmental).

I'm sorry, but this is nonsense. If one country produces more stuff, but the countries to which it wishes to export don't want to buy more stuff, it either has to sell the stuff to its domestic consumers or warehouse it in the hopes that importing countries might change their minds. Or stop producing it, of course. For export-led economies, other countries choosing not to buy more stuff is a VERY bad thing.

'For export-led economies, other countries choosing not to buy more stuff is a VERY bad thing.'

Sure - but for an export led economy to be uninterested in acquiring more stuff is pretty much where Germany is these days.

Whereas the Chinese, to give one concrete example, are extremely interested in buying German technology, because unlike Germany, China is far away from being in the comfortable position of not needing to acquire more goods.

Thankfully for the Germans, the Chinese have found a sucker to allow the Chinese to pay for German goods without the Germans needing to import shoddy Chinese goods.

Want to take a guess who that sucker is? The same one that ensures very comfortable profit margins for the six of the top ten sized pharma companies not based in the U.S., if that helps.

A little more context from Dean Baker - 'It is really bizarre how folks find it so difficult to mention the trade deficit as the obvious source of weak demand in the economy. This is not a debatable point. We have a trade deficit of around $500 billion a year or roughly 3.0 percent of GDP. This is money that is creating demand elsewhere, not in the United States.'

I'd suggest you have another look at German exports to China. Largely intermediate goods and falling quite fast.

Cowen isn't promoting a trade war. Certainly not! Beggar thy neighbor policies didn't work so well in the 1930s and wouldn't work so well today. Cowen's "productivity" magic asterisk is like the supply siders "tax cut" magic asterisk: both based on magic and both held dear by believers.

Oh, there's plenty of magical thinking going around these days. Can we think of some others? How about "equality?"

In the classic equation MV = PT, you're talking about increasing T, the number of Transactions. That's semantically equivalent to "increasing gross exports without increasing net exports".

The hard part is working out how to increase T. Lower oil prices help; so do faster payment systems (Bitcoin, Apple Pay, faster check clearing); so do more efficient distribution & logistics systems (Amazon). Eliminating trade tariffs obviously helps, although that's not an issue within Europe. Reducing barriers to hiring for companies helps too, because if they can't increase production, they can't increase T. Cutting taxes probably helps, but it will take a while to have an effect. Eliminate uncertainty: the risk of a four-hour delay is as upsetting to trade as an actual two-hour delay. If you're trying to boost trade between two isolated towns, build a fast road/bridge/tunnel between them. For the US and Canada, e-passport tech has dramatically improved border crossing times. And so on.

There's no single magic bullet: the best solution depends on specific local circumstances.

@ Andrew M -yes there is a magic bullet. Since TC is taking about structural reforms, not incremental stuff like faster check clearing, the magic bullet is patent reform. Offer prizes for inventors meeting milestones and you get radical new technologies springing to life. Already, on this board, we have a poster (MT) who has an idea for a better fusion device. And that's just one board. I myself had very many promising technologies in my mind's eye when I was younger (some of them have been discovered by others), but society does not pay innovators so I never pursued them. It's much better being a middleman and rent seeker. Me and mine got rich from DC real estate, not science, though I did make a comfortable living from science. Marginal revolution and small steps is not going to move the needle for structural reform. It will just lower the price on existing goods and make them a bit more like commodities.

What about Domestic Trade? Why doesn’t anyone come up with plans to increase domestic trade?

I know that Goldman Sachs and other international banksters won’t make as much money but does the whole economy have to revolve around “What’s good for International Banksters”.

After all since 1970 the US has increased the percentage of international trade from 8% to 30% all on the advice of the international banksters and this has made them rich but why not do something for domestic trade for once. Is the only thing that can be considered is “lets increase international trade”? At what point does this end, 40% GDP, 50%, 60%??????. When will the answer to every economic question stop being increasing international trade?

"where the commodity base money can only be shuffled around in zero-sum fashion"
Well, you know, talking strict quantity theory of MV=PY, assuming M and V and P are all fixed, then, yeah, Y has to be fixed, too. You can't fix broken demand-side management with structural reform. There's only so much "global demand" and there's not enough of it.

It seems to me that increased exports by all countries could also unlock benefits of comparative advantage, no?

More to the point, if both EU and the US tried to debase their currencies to increase net exports, one or both would fail, but who cares; both would have done the monetary stimulation that both need.

The "structural reform" Germany engaged at the end of the 90s was a bargain between then chancellor Schröder and the heads of the big trade unions not to offset the creation of a new cheap labor market with higher wage demands. For this reason, there have been no wage gains for German workers in 10 years and neither could the currency rise independently since the Deutschmark went up inside the Euro. The trade surplus is therefore just the result of rigging both the labor and the currency market.

Why this could or should be a model for other countries is beyond me. While there probably was a need in flexibilizing labor markets in the 90s, there was never a macroeconomic reason for keeping labor costs artificially low. There is only a microeconomic one: shifting rents from labor to capital. A lot of German workers don't mind because their living standard is still comparatively high, but still wages should be up at least 30% from where they are now. Then of course the trade surplus would be gone in no time, but Germany did not have a surplus before the introduction of the Euro and thrived nevertheless. And they wouldn't have a trade surplus today because an ever rising Deutschmark would have counteracted any productivity gains.

Increasing gross exports world wide as a result of decreased trade restrictions would indeed increase world wide income. OTOH, increasing gross exports world wide as the result of export subsidies would decrease world wide income. Export subsidies are just another form of protectionism.

1. Where do

"The Germans lecture the periphery to ....increase their exports" ?

Please cite !

What we want and only very politely mention from time to time, so far, is that Euro members stick to treaties and balance their budgets a.k.a. fiscal compact rules.

2. According to CIA World Factbook

German export China fraction 5.91%
German import China fraction 6.25%

where is "without the Germans needing to import shoddy Chinese goods " according to prior_approval ?

And I reject the qualification as "shoddy". The same prejudice and hubris as it happened to Japan in the 1970ties

I agree with the conclusion.

However, it strikes me that this is an example of the model treating structural reform as a substitute for competent monetary policy. One can "reflate" an economy without engaging in structural reforms simply by printing money. It also presumes that increased gross exports is a feasible goal on a world scale. Exports are usually thought of as the result of arbitrage of comparative advantage, which suggests the following critique:

Where is all the new comparative advantage coming from?

Maybe the answer is that the current global economic system is inefficient through lack of sufficient trade. But that certainly isn't the critique of the global economic system I'm used to hearing.

I thought that every country trying to institute an export oriented economic strategy at the same time was supposed to be one of the causes of the Great Depression.

No you're one hundred percent wrong. A "currency war" would be a good thing. The sooner countries went off Gold in the Great Depression, the sooner they recovered. And then there was the fiscal stimulus of WWII.

1. A structural change that caused all countries to be more productive should increased demand for labor and wages/income to absorb the productivity increase.
2. Increases in export surpluses (and offsetting deficits) that simply increase asset price increases are likely to produce the same result as they did in 1929/2008 unless the capital inflow funds productive investment.
3. The size of the Euro surplus is projected to be quite large:

fix link: Special Report - Etf - Deutsche Bank

Link doesn't work, try this:

Although the scenario would make countries better off, I don't think it works for reflation, because the relative economic positions of the countries still matters for the position of one country's situation as against the others.

OMG...Yah think, Don? Anyway, you get the point.

Just seems+ to me that Cowen is echoing the German view and attempting to counter Krugman's criticisms. Here's one of many blog posts about it:

Any more words of wisdom? The unemployed should find jobs? The poor should make more money? Most of us could stand to be taller?

Increase growth to 5%. All problems solved. And people have this ridiculous idea economics is difficult. Time to party.

I agree with Johann above. Germany has a trade surplus because they're more "competitive" because they kept wage costs down. They're taxing labor and subsidizing the export industry giving them a trade surplus. As Johann points out, German wages were high relatively speaking, plus they have the dreaded welfare state. Now Germany and apparently Cowen want Southern Europe just to repeat what Germany has done, but as Krugman points out, in a much more difficult context.

If you're naturally exporting more because your nation's goods are desired more across borders, that's not really a meaningful export targeting policy.

If we're asking, would the world be better off if productivity increased then... er, yeah, that's pretty self explanatory.

If we're asking, would the world be better of if productivity increased while free, cross border exchange also did... well, this is balanced with how much governments can capture and tax trade.

If we're asking whether targeting exports uber alles is a good idea... well, probably better than targeting autarky, but its still a weird, bad distorting bias.

Tyler, I think you have an excellent point. You touched upon the capital side but you didn't bring it out very much. With much freer capital movement, huge gains are possible.

Here's how I think about it: Many developed countries are stuck in demand ruts because people are trying to save to much relative to productive investment in these countries. If some of this savings can go to productive investment opportunities in developing countries that really need it, then many poor countries could take off. Their currencies would appreciate so their growth would be more balanced than, say, China's. These developing countries would increase world demand, much of it would help developed countries since the currencies are better aligned. Developed countries would stop suffering from shortfalls in demand and productive resources could be fully utilized.

Isn't that how things should work in theory (capital flowing to where it is most productive)? It would be a beautiful thing. But developed countries would have to bring down their deficits, and developing countries would have to be politically and otherwise stable. Central banks would have to stop pegging their currencies low to increase exports, and governments would have to be willing to open their economies more. But if there was an international recognition of the possibilities, and a world wide push to make it happen, then a lot could be done in this direction.

I realize I probably sound naive, but it doesn't hurt to hope for a better world!

Trade creates wealth.

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