Brad Setser

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Is Adam Posen talking about Germany – or the US?

by Brad Setser
August 21, 2006

Dan Drezner (and Mark Thoma) liked Adam Posen’s critique of Germany’s emphasis on “competitiveness.”  But when I read parts of Posen’s argument, I kept thinking that he was describing the US or China, not Germany.   Posen writes:

If exports are the public criterion of economic success, policymakers can meet that goal only by self-destructive means: depreciating a country's currency, thus eroding the purchasing power and the accumulated wealth of citizens; depressing wages in export sectors, either directly or through relative deflation vis-à-vis trading partners, thus cutting real incomes and domestic demand; subsidizing or protecting exporting companies, thus distorting investment decisions and locking in old technologies and businesses at the expense of new entrants…… No example better illustrates the costs to an economy of distraction by export competitiveness than Germany in recent years. 

A weak currency, restrained wage growth (falling real wages) and tax subsidies for any firm that wants to put up a manufacturing plant … hmmm.    What part of that description doesn't apply to the United States?     

Germany cannot credibly be accused of having a weak currency policy.   Sure, German inflation has been lower than inflation elsewhere in Europe, improving Germany’s position inside the Eurozone.  But the Euro itself is hardly weak.    And Germany sells a lot of goods to countries outside of the eurozone; more than your typical European economy.

The dollar, by contrast, is weak against the currencies of almost all countries whose central banks who do not actively prop the dollar up.   Benign neglect and all.  The US won’t take steps to keep its currency from depreciating – it outsources that task to the Chinese.  The result is that the RMB is weak v the dollar and the dollar is weak v the euro and the RMB is really weak v the euro (the yen is too … ).

The US is hardly immune from the temptation to offer tax breaks for manufacturing firms.    The US may not have a national industrial policy.  Or an exporting Mittelstand.  But most states will offer any firm willing to build a plant in their state rather significant tax breaks.   Ask German auto firms.   Ask South Carolina.  Ask Alabama.

Real wage growth in Germany has been rather restrained.  Posen – and many others – believe Germany has increased its competitiveness by limiting the growth in everyone’s wages rather than engaging in true labor and product market liberalization.    Alas, the US has – compared to Germany – quite liberal labor and product markets.   And the result has been more or less the same, best I can tell.  

Real wage growth has certainly lagged productivity growth in the US.   At least for everyone who is not a CEO, a hedge fund manager or running a private equity shop.

Ironically, the same is true of China.   Wage growth hasn’t kept up with productivity growth.  See Figure 9 of the World Bank’s quarterly report (on p. 14).  That one puzzles me.   Hecksher-Ohlin may explain weak real wage growth in the US and Germany as China integrates into the global economy, but it predicts strong real wage growth in China …  

I am not quite sure it is fair to blame either Germany’s focus on competitiveness or Germany’s labor market institutions for  weak German real wage growth when weak real wage growth seems to be a global phenomenon.  Profits are rising relative to GDP in the US, China and Germany despite differences in their labor market institutions.

Indeed, I think you can make a credible case that weak German domestic demand growth stems directly from the uncertainties associated with reforming German labor market institutions and the resulting rise in household savings.  Germany hasn’t had a policy of restraining aggregate demand so much as a policy of making (limited) reforms in its existing institutions.  And the result of those reforms has been more precautionary savings and weak demand growth. 

Of course, the other reason for weak demand growth is the fact that Germany’s housing market hasn’t had the froth characteristic of the US market – or the English, French or Spanish markets.   I don’t think that is a byproduct of Germany’s emphasis on competitiveness …

Above all, it seemed strange for an American – even one as well-versed in German economics as Posen – to criticize Germany for stimulating exports with a weak currency policy.  Right now, the dollar, not the euro, is weak.   And the dollar’s slide v. the euro has had an impact on the United States “competitiveness” in third party markets.    It is a big reason why US exports have been growing at a nice clip over the past three years.


  • Posted by ABC

    Adam Posen says

    “In contrast, both the United States and Britain have grown strongly since the early 1990s by generally encouraging strong currencies, foreign competition for and investment in the corporate sector, openness to imports and private investment in research and development—all of which was only possible with a healthy disregard for export performance and the fortunate absence of an explicit competitiveness policy”.

    I thought that it was this “healthy disregard” for export performance that was part of the problem. He seems to be arguing for more of the same nonsense. Some curious thoughts on this.

    Germany has

    1) a long-term strong currency policy, which the Bundesbank appears to have passed to the ECB

    2) the highest labour costs in the world, which it has sustained for some time.

    3) An economy that has integrated another entire economy which was at 40% of GDP per capita, a cost estimated at 1.5 trillion euro’s, which is more than their state debt. To compare, I think the appropriate challenge for the US would be to take onboard Mexico and give a dollar for every Peso.

    4) Remained the paymaster for Europe throughout.

    To be perfectly honest, I think German economic performance has been absolutely remarkable considering the tasks they set themselves.

    Regarding his critique of their industries slipping down the value added chain, I would stress that Germany is investing heavily (alongside Japan) in new tech’s such as hydrogen cells technology, and will most likely be in the vanguard of the next boom which will be decentralised energy products and those products evolving from such technology.

    About savings rates. They have a demographic decline occuring. It seems appropriate that they save. It should be noted that the French and Italians save even more. And since when was the ability to save seen as an economic weakness.

    About high employment. German measurements of unemployment are radically different from the US, and at present are falling. If the US used German measurements it would arguably have a higher unemployment rate.

    About growth. Once again, it depends on how you look at it. I’ll use the IMF’s stats on europe and the US. From 1995 to 2003, US living standards grew by 16.1% (not bad), but by 18.3% in Europe.

    And about labour liberalisation, the Germans and indeed most social democratic countries abandoned that idea along time ago. Staff work with their companies, not just for them. It might explain why from 1990 to 2002 the EU outpaced productivity growth in the US. I got that from

    who cites the Conference Board, who he rightly argues is not exactly a fan of the EU’s way of doing business.

    As you’ve probably guessed I’m from the very same EU and am a friend of Germany. I think that many US commentators seriously underestimate the capacity of the european economy. Of course I don’t refer to you Brad.

    Thanks for the post by the way, great site. Just wanted to offer a counterbalance here.

  • Posted by Gcs

    “Profits are rising relative to GDP in the US, China and Germany despite differences in their labor market institutions”

    but big daddy that’s where its at globe wise

    ” Hecksher-Ohlin may explain weak real wage growth
    in the US and Germany
    as China integrates into the global economy,
    but it predicts strong real wage growth in China ”

    capital can expropriate labors share
    by only paying the cost of the laborer
    and selling for the full value of his labor

  • Posted by Gcs

    what i love is the way
    german wagelings re act to the squeeze
    vs how american wagelings re aact

    my questionwhich is better

    borrow max or save max

    if your currency is headed deeply down

  • Posted by Peter

    In re: “That one puzzles me. Hecksher-Ohlin may explain weak real wage growth in the US and Germany as China integrates into the global economy, but it predicts strong real wage growth in China …”

    Well, this one is not too hard, I think. H-O depends on the assumption of full employment, but this is hardly the case in China. In every country with excess labor supply the level of wages is substantially determined by institutions, culture, politics, etc. Clearly there is a global shift in the determinants of these things, stronger in some places than in others, but visible everywhere. This is related to the discomfort over “globalization”, although the connection can be a bit complex. The simple version, though, is that everyone is competing more against everyone else, and this includes the Chinese. The pressure of this competition gnaws against the buffers that have protected labor surpluses in the past.

    Does this sound right?

  • Posted by bsetser

    I also found Posen’s argument that Germany was slipping down the value-chain a bit thin. OK, Germany isn’t at the center of the PC world (leaving aside SAP). But only some parts of that business generate big profits (top end chips, some software, search). Some parts of the electrical and machinery business also generate lots of value — and can sustain a high-wage economy. Power plant manufacturing. Wind turbines and the like. Posen seem to be implicitly asserting that since Germany’s production structure differed from that of the US, it was technically unsophisticated/ getting left behind. That obviously depends on the industry though.

    I also agree that if you look at per capita GDP growth over say the past ten years, the difference between the US and Europe is not all that huge … and Europe looks to have a clear lead over the US (not sure about Japan) in a lot of technologies linked to energy efficiency.

    Lest I be accused of being top Germanophilic — integrating Mexico into the US at a one dollar to one peso exchange rate would have been a huge mistake. and integrating east germany at an overvalued exchange rate was also a huge mistake ….

  • Posted by Gcs


    u got the H/O deal right

    for what its worth labor receives its factor contribution
    because by assumption in
    H/O profits of enterprise are zero

    now in china

    the huge move from the traditional sector to the modern sector creates a massive opportunity gap

    entrepreneurs need only pay enough to induce the migration
    until the labor force is more or less fully migrated to the modern sector

    wages will not reflect factor contributions of labor

    the diff will be pocketed as profits of enterprise

    this is better said in fewer words above in my earlier post

  • Posted by Gcs


    i’m often accuse of being germano philic

    but not because i love its bankers
    or its corporate titans

    the reason the unification was a horror to me

    is seen more in the wipe out of millions
    of job lives
    in the east over nite
    like in most of the rest
    of the old socialist camp

    the one for one currency bribe
    only made the dole better
    and the goodies more affordable
    as the prole east
    fell out of employment

  • Posted by ABC

    “Lest I be accused of being top Germanophilic — integrating Mexico into the US at a one dollar to one peso exchange rate would have been a huge mistake. and integrating east germany at an overvalued exchange rate was also a huge mistake …. ”

    Granted, it was a blunder of enormous proportions in an economic sense, but it was a political imperative. And the point stands. Could the US have done something of an equivalent magnitude, along with the other three factors of highest labour costs, a strong currency, and at the same time pumped billions into say some Latin American economies? And done that without hollowing out manufacturing or reducing living standards. Remember those world class services. In my book, they deserve a clap on the back, not ever vociferous criticism.

    However enough with the propaganda, they do have some real problems ahead, as do many European countries, but you’re right in implying that there is an implicit assertion in Possens argument that US structures are superior. However I often find this sort of triumphalism from US commentators, and can’t help wondering if they ever take off the jingoistic lenses. Because their assertions most often don’t stand up to reality. Germany and Europe are not in decline, inspite of what is often said.

    BTW I’d say Europe and Japan are neck in neck in the efficiency business. Both are going full tilt at this. The benefits of Kyoto could well outway the costs.

    Further with the commoditisation of carbon, there is a whole new financial market that the US has decided not to enter, and which the net results will be increased productivity on the resource side, and greatly enhanced production methods. An extra burden that will be used to their advantage.

  • Posted by Gcs

    this line of mr P

    “Since adopting the euro Germany has had an inflation rate well below the eurozone average, with the con­sequence that it has suffered real wage deflation compared with its European trading partners.”

    he’s gibberish
    “a low inflation rate”
    ” with the consequence”
    “real wage deflation”
    is evidence of idiocy or knavery


    to me job layoffs are not per se technical innovations

    and job featherbeds are not the worst social policy
    nor do they of necessity inhibit technical change
    in fact they may make it palitable

    a few hard jobs rendered temporary feather beds
    by technical innovationthat wil by attrition n
    lead to productivity gains
    seems a small price to pay
    in short run forgone profits
    if enough incentive remains
    to make the change in the first place

    but here i split hairs

  • Posted by Gcs

    abc very much enjoy your comments

    my take
    is neutral

    no room for triumphalism on either
    side US or FRG
    if you happen to jobble for your living

    i see no evidence of german policy brilliance
    vs us policy stupidity
    any more then visa versa

    only two quite different sets of facts
    as to labor force and industrial structure
    both subjected to the same
    corporate profit
    optimalized policy moves
    for trans nats
    given local conditions

  • Posted by Movie Guy

    Brad – Real wage growth has certainly lagged productivity growth in the US. At least for everyone who is not a CEO, a hedge fund manager or running a private equity shop.

    This should have been anticipated. It is a natural outcome of advanced global trade and U.S. production offshoring. I talked about this a number of times in the past two years.

    Brad – Ironically, the same is true of China. Wage growth hasn’t kept up with productivity growth. See Figure 9 of the World Bank’s quarterly report (on p. 14). That one puzzles me.

    Stormy has been pointing this out for over a year. This, too, should come as no surprise.

    Why are you puzzled?


  • Posted by joshb


    i glanced quickly at the WB quarterly report. it looked to me that it was only comparing wage vs productivity growth in the industrial sector.

    wages and productivity are only supposed to track nationally, not sectorally, so, this may be less than a puzzle than it would appear, no?


  • Posted by kaan

    Although I admire much of wirtschaftswunder after WWII, I would be very careful to extrapolate past performance into the future.
    Until now Germany was at technological level that had been only challenged by Japan among upcoming countries. Since Japanese price level was not lower than Germany, an equilibrium has been established.
    If China and India start producing sophisticated machine tools, power turbines, cars and trucks etc you would be suprised how dramatically things will change in Germany.
    In next decades amount of public funds for universities and research institutions will be reduced due to neccessities of welfare state and do not forget seniors vote.

  • Posted by bsetser

    Josh — you may have a point, i need to think about it. but wouldn’t the mechanism that bids up wages nationally be higher wages in the high-productivity (and wealthy) tradables sector, which bids up the price of non-traded services. the key point is that with wages not tracking productivity growth in the industrial sector (and the industrial sector is big in China), wages are falling as a share of national income and profits are rising.

    MG — yeah, i probably shouldn’t be puzzled. good old econ theory got in the way. intregration of a labor rich and capital poor economy into the world economy should push down profits and push up wages in that economy (and do the opposite for the world). that theory does assume full employment. but lots of economic theories assume things that don’t fully hold. I still wouldn’t have expected China’s integration to lead to a huge savings surplus financed by rising business profits.

  • Posted by Gcs

    over all
    non trade sector wages
    rising faster
    then their productivity ????

    that would make for a very interesting scenario

  • Posted by ABC

    Gcs. And I yours, style included. Agree with your comments above completely. My pro-european bias comes naturally due to where I’m from, however i usually try to take a balanced view on things. My arguements are driven more as a need to challenge this Washington Concensus that sometimes drives someone with my type of worldview a bit crazy. I don’t think it matches up to reality, and infact causes very hefty debates on my side of the pond. Many corporates in Europe would love to have US labour laws, though that would not necessarily help anybody but themselves. Some people don’t understand that whilst corporates are a large part of an economy, they are not the economy itself, and small-medium size companies play an arguably more important role. Plus a happy population is an inherently more productive population.

    Kaan, i agree with you about both points, however, i’m not sure of just how fast Chinese/Indians will get to that point, does the fact that they are not producing machine tools now mean that it requires a technical expertise they haven’t mastered yet? I don’t know, maybe, maybe not. No complacency however. Actually the point about outsourcing has been part of the problem in Europe. People saving/not spending because of an uncertain future, combined with age of course. But I think that like in the US, this has been an intensely debated topic. I believe that in certain aspects there is an attempt to deal with this. And here’s where i think green tech comes in big. There is a major emphasis on resource use efficiency. Natural capital use is the most unproductive component of the current industrial setup. If anyone can grab the reins and achieve wholesale reductions in resource requirements, major structural design changes, product conversion to service provision, etc, etc, they will undoubtably be the winners in any emerging system. There is a whole raft of new and old european companies either set up to enable such changes or looking to convert old practices/capital equipment towards such resource efficiencies. I bet japan is doing the same. China in its headlong rush is kinda going backwards in that regard. Someone else can enlighten me about the US. On that i don’t know, but i will say that I think it was a major mistake for the US to stay out of Kyoto, for that is part of the driving force towards such product/service creation, combined with a desire to capture a new comparative advantage. Global wage differentials would be small hat compared to the competitive gain of enhanced/entirely altered resource use.

    On that note was very disappointed with Germany’s new chancellor Merkel, giving into the coal lobby. But we’ll see!

  • Posted by Gcs


    “integrating east germany at an overvalued exchange rate was also a huge mistake …. ”

    look at it this way
    the large west corporations got what they wanted

    the east wage was now artificially way too high
    as weree all eastee production costs

    but since “you ”
    plan shut downs for nearly all
    it any way …..

    and so you’d end up
    paying the eastees
    west dole rates
    cost no more no matter
    what exchange rate was

    the only higher screw
    would have been to set lower dole rates
    in the east
    then west

    that’s where unification
    vs being an independent state
    a “middle poland”
    came in handy

    to help the hapless eastee proles
    get more for their
    “idle hours”
    anything less
    was not politically possible
    for a jobless “fellow german”


    the wage class in the east
    as u may well know
    voted heavily for the cdu the first chance it got

    times and the full shape
    of the new wage and job reality
    have changed those preferences some

  • Posted by Robert

    There is irony in that although the biz of constructng PCs and parts is pedestrian (of which the Germans have little market share), the biz of de-constructing the same PCs and recycling the heavy metals and rescuing hazardous waste from landfills (of which the Germans are the world leaders) is rather more profitable. Such are the positive externalities that result from requiring manufacturers to take back the rubbish they’ve spawned. BTW, for anyone interested: Dell Corporatio of Austin Texas was the most voiciferous political opponent to California legislation that would have required the same for electronic devices sold in the Golden State. They said: “people will be impoverished by the higher prices they will UNnecessarily pay for their PCs. Let “the market” arrive at the wisest solutions…..” Ha ha ha. I sent an e-mail to Mike. Asked if he had kids. Wondered if he shat on their plates too……

  • Posted by joshb


    I think that the aggregate wage/profit dynamics you point to in China are definitely interesting, and, surely counter-intuitive from an HO/Stolper-Samuelson perspective.

    I think, however, on the more esoteric point of wage/productivity tracking by sector, the HO/Stolper-Samuelson process doesn’t really have a view. I may have to think more on this, too.

    I would note, however, that Feenstra and Hanson have a great paper from the mid-1990s that predicts both the US and its poorer trading partners (they had Mexico in mind) will engage in production that is more capital/skill intensive as a result of globalization. It’s a great, great paper, and, I think explains a lot about how the world works these days.

    The punchline is that, yes, the production shed by the US as a result of globalization is labor-intensive relative to the rest of the US economy, but, this same production is capital/skill-intensive relative to what (say) China was doing previously. So, globalization bids up the returns to skill/capital in both countries.


    It’s probably obvious already that I’m no expert on the Chinese economy, but, given that they have pulled an incredible amount of resources into the export sector, I wouldn’t be shocked if labor demand in other sectors had increased, letting wages rise faster than (what is probably very slow) productivity growth in the non-modern export part of the economy.


  • Posted by HK

    Brad–Your criticism on Adam Posen is absolutely right. Germany tends to be underestimated in the US. In fact, Germany is very strong in auto, machine tool, aeroplane, optical, pharmeceutical, and other sophisticated industries. Please note that these industries are very difficult for emerging economies to emulate, while electronics and software industries are relatively easy to catch up. Therefore, Germany may be able to keep competitiveness vis-a-vis emerging economies much better than the US without resorting so much to out-sourcing.

  • Posted by Guest

    re: “Of course, the other reason for weak demand growth is the fact that Germany’s housing market hasn’t had the froth characteristic of the US market…”

    “…The surge, fueled by low borrowing costs, growth in the economy and a rush of private equity funds into German real estate, adds up to a bubble, according to money manager Heiko Bienek… “The more a wave is rising, the more dramatically it will break… “The first U.S. private equity funds who were the main drivers of the property boom in Germany are looking for the exit…”

  • Posted by Guest

    Oh – and while Berlin was ranked among the top dozen the most expensive cities in the world, unofficial unemployment was at least 25%, according to local East German estimates:

    “…The unemployment rate in Chemnitz is over 20 percent, and the city’s population is shrinking, having lost more than a fifth of its population since 1990…”,,2138258,00.html

  • Posted by Guest

    Your tone interpretation is your own and not at all what I was observing or saying. So I guess I could return some of your own advice to you.

  • Posted by bsetser

    I’ll take a look at Feenstra and Hanson, sounds interesting

  • Posted by psh

    It’s like there’s a segmented market for German equities: part is rational but a significant US real money segment is addled by this ideological Feindlichkeit for some hopeless stagnant strawman, old Europe full of limp effete Brünos. It’s been a fabülous market inefficiency, particularly with recent data ambiguities. The big question going forward: will we drag them down or will we pump them up with levered loans?

  • Posted by DF

    Hey Brad don t blame that guy too much, it s just the result of 30 years of supply side policies. Everywhere in the world right now wages do not keep up with productivity and everywhere in the world right now there is no general glut only because asset holders – producers agree to lend to their workers-consumers.
    This is crazy. The washington consensus was crazy. Chile has been turned into a major example, a major success. But once all countries try to get demand from foreign countries while reducing wage based demand at home … There s a problem.