Time It Stopped Snowing

John Snow is in Europe, globetrotting on the G8 round. He had some advice for us here in Europe: “I think the important thing is that Europe continue to focus on the things that need to be done to encourage domestic growth”.

I’m glad he raised the point, since otherwise it might have escaped us. These comments, and other similar ones, are widely interpreted as recommending that we focus on reform. Well I couldn’t agree more, but sometimes isn’t it better to start putting your advice in practice at home. Looking at the state of global trading imbalances I would say that the US has its own problems, and they seem to need attention. Looking at the trade figures, German and Japanese companies don’t seem to have any special problem of being competitive internationally. I don’t want to seem tendentious, but isn’t it the US manufacturing company which is having difficulty being competitive these days, at least if the ability to sell at competitive prices in international markets is anything to go by.

Of course Europe and Japan are light on internal demand growth, but there is precious little we can do about it since this is largely a product of demographic changes, not structural weakness. This is a part of the ‘new global reality’ and the sooner politicians like John Snow face up to this, the better for all of us.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

12 thoughts on “Time It Stopped Snowing

  1. Of course Europe and Japan are light on internal demand growth, but there is precious little we can do about it since this is largely a product of demographic changes, not structural weakness.If this is true, why is it that Britain doesn’t seem to be suffering from such problems?

    As convenient an explanation as your demographic theory may be, it’s simply too pat: to say that Japan, with its hidebound domestic sector and bloated, extraordinarily wasteful public spending, or the likes of France and Germany, with their job markets which exclude millions of able-bodied young people (i.e, the very ones who ought to be most valued given your theory), aren’t in need of deep structural reform … that stretches credulity to the utmost.

  2. “it’s simply too pat:”

    Well so is the other popular explanation when you think about it Abiola. I’m not talking about government spending here, I’m talking corporation to corporation, head on competition, in the global market. Why is the US company not competitive? Do they badly need reform? I guess so.

    Actually the predictive power of age structure on comsumption and investment is fairly strong, so pat as it seems, it may be right. As I keep flagging Greenspan and Bernanke seem to be coming slowly round to this way of thinking, and there is now a growing body of academic work which backs it up.

    I am *not* against the Lisbon agenda, and reform, read the columns.

    On the UK, the demographics are very different from Germany and Japan. France has similar demography with the UK, and growth isn’t that different. France has a hugely inefficient internal labour market, and this is another topic not attributable to demography. EU countries like the UK and the Netherlands have made considerably more progress in reforming their social security systems than the US has and this is not widely discussed (I say systems since there are things like pensions and Medicare to take into account). I think the US politicians would do better to concentrate on their own reform agenda, and leave us to get on with ours.

    I think a stream of EU politicians visiting the US and recommending reform would be counter productive, rather like pressuring the Chinese to revalue the renminbi, so I think its best we don’t do this, but really we are not schoolchildren, and enough of these simplistic explanations is enough.

    There are many things in the US that I appreciate, there are many things in Europe that the US could learn from. Enough ideology, time for some pragmatism.

  3. America does have an enormous trade imbalance and it needs fixing. Part of the problem is due to the availability of inexpensive goods from Asia, the lack of willingness to save and prosperous buyers. Some of this is the result of an economy where less than six percent are unemployed. Job growth appears to be continuing on a steady pace.

    If the Euro were stronger, the international community would be less inclined to support the dollar, and the trade imbalances would be reduced. Strengthening the Euro would involve having more jobs available. The two year hiatus on making a job “permanent” suggested by France is a start, but until the job market is truly subject to the market forces of supply and demand, small startup companies can ill afford to take on the risk of “lifetime” employee obligations.

    The flip side of this position is that when Europe continues to restrict market forces, those countries that have no restrictions will get the sales and the jobs.

  4. “America does have an enormous trade imbalance and it needs fixing. Part of the problem is due to the availability of inexpensive goods from Asia, the lack of willingness to save and prosperous buyers. Some of this is the result of an economy where less than six percent are unemployed. Job growth appears to be continuing on a steady pace.”

    I agree with *all* of this. In addition you could still be selling more to Europe and Japan and you aren’t. So there is a structural problem here that needs addressing. I think Europe needs reforms, but I don’t think that in some key economies – Germany and Italy – internal demand is going to grow very much. I also don’t think a renminbi revaluation will change too much.

    So we have global imbalances, and we are all going to have to learn to live with that. This means the US too. My point is that there is enormous evidence that German and Japanese companies have responded to the challenge of structural reforms. We are not in 2000, yet the discourse is monotonously the same.

    Meantime arguably the Bush administration has been less reform oriented. Deregulation has not proceeded apace. Medicare is getting swollen (I’m not necessarily anti, but you simply cannot throw this one back at Europe). More protectionist and less visionary noises are coming out of the US. I think the world is moving on, and the US politicians need to take stock of this.

  5. Abiola, I know why we are at cross purposes. It is because Snow isn’t specifically talking about labour market reform, which I take it we both agree is necessary.

    He is talking about growth oriented policies:

    “I think the countries of Europe will be able to get to a posture where they reward their citizens with higher growth,”

    The context is different, it is about the US trade deficit and the lack of customers for US goods. Europe doesn’t have this problem as some key countries can survive the China storm: UK, Germany, Netherlands (see my trade post).

    This is where I am saying he has missed the point. Europe needs to reform in order not to go bust, but I don’t think we will see a growth revolution either here or in Japan, so letting that CA deficit get out of hand is higly dangerous and irresponsible, but the solution to that isn’t in Europe, it is in the US.

  6. Edward
    “but the solution is in the US”. How? This sounds like the solution to the referendum problem, ie. dissolve the populace and elect a new one. Reality is necessary. A friend once explained to me that the difference between an optimist and a pessimist was that the pessimist was a former optimist that had gained some experience.

    I keep wondering why the US economy is powering onward with manufacturing slowing up. Part of the reason is low interest rates. The real estate sector is booming with some people saying that this is a “bubble” that will pop. Not.

    The booming real estate market is directly related to low interest rates (where else is the Chinese surplus going?), yet, when I research the property values in Europe vs. the U.S., using the International Herald Tribune, The Times and others, I find that the average American home (new homes now average 2,300 square feet) is one half or less than the price of an equivalent home in Europe. Starter homes that are about 1,500 square feet, still sell for about $150,000 in most of the U.S. and the monthly payment at less than six percent interest is less than what one has to pay for an apartment.

    Interest rates will have to climb appreciably to cool off the real estate market, and for that to happen, the Euro will have to strenghen. For that to happen, the demand will have to increase in Europe for goods. For that to happen, the 10-12 percent unemployment numbers have to decrease dramatically, with the newly employed becoming consumers. For that to happen, market forces on labor must be allowed to function, and the “reward” paid to the unemployed dramatically reduced.

  7. “For that to happen, the demand will have to increase in Europe for goods. For that to happen, the 10-12 percent unemployment numbers have to decrease dramatically, with the newly employed becoming consumers. For that to happen, market forces on labor must be allowed to function, and the “reward” paid to the unemployed dramatically reduced”

    Ray, the US is growing and I wish you well. More or less in demographic terms you are were Germany was twenty years ago, you will be were Germany is now in about 2025. So you have plenty of time to learn from what is happening to us in ‘Ol Europe’.

    As I said to Abiola, not all European countries are the same, and France is not Italy or Germany. Sarkozy will probably come, there will be reforms, but as I say French growth really isn’t the problem here in the EU. France had a bad year in 2003, but seems perfectly able to achieve a 2% growth rate. This by historic standards isn’t bad. You in the US have other demographics, with large numbers of migrant descendents now enetering the market. This is part of the reason for your housing boom, the rate of new household formation is still comparatively high.

    Obviously France needs to address it’s exploding health system costs, but so do you in the US (viz the ‘other’ deficit problem).

    But in Germany and Italy the reforms being suggested will be directly deflationary – the median age is already too high – internal demand, as has happened in Japan, will remain weak, and these countries will need to export to grow, thus compounding, and not easing the problem. This at least is my view. The problem is there are no ‘recipe’ easy solutions here.

  8. Edward,
    As the owner of a real estate firm in the upper midwest, I have never had a “migrant descendent” customer. I also have never had a migrant for a customer. The real estate boom is being fueled by two factors. The first is that former renters find that they can now afford to buy instead of renting. Those that did this three years ago, have found that their homes have appreciated approximately 8% per year and they are using their “equity” to upgrade to a larger home.

    Another market is the “boomers” (those born after 1945) now reaching retirement, and wishing to move into smaller homes and relocate as well. This is the largest demograhic group (78 million) the U.S. has. The boomers are looking for smaller homes located out of the hustle of the cities. They are moving to places like Boise Idaho, Buffalo Wyoming and Rapid City South Dakota. Frequently, they sell their existing home for twice what they have to pay for a home in the above locations.

    If your looking for a good home buy in an absolutely beautiful place Edward, let me know.

  9. “If your looking for a good home buy in an absolutely beautiful place Edward, let me know.”

    Thanks for the offer, I’m sure it is lovely :).

    “As the owner of a real estate firm in the upper midwest, I have never had a “migrant descendent” customer.”

    C’mon Ray, this is obviously going to vary from opne part of the US to another: I am simply citing the explanations of Alan Greenspan and Glen Hubbard about why there isn’t a bubble. I am completely agnostic btw on the US ‘bubble’: we’ll really know when it bursts, or doesn’t.

    But from a macro viewpoint there are sound reasons why it might not be, and one of those is migration. This was even built into the theory of the US business cycle at one stage, by Nobel Economist Samuel Kuznets (one of the last important US economists to take population seriously as a macro issue). There was even a sub-cycle named after him, the Kuznets cycle: to be expected a wave of construction activity with approximately a 15 year lag after the begining of a major migration wave. This is roughly what we have. I tend to like theories which are borne out by facts.

    Now, the main issue.

    I feel frustrated, since I feel I am not communicating the main problem as I see it. So lets take a football example (european *foot* ball). Now I happen to be a Bar?a supporter, and we have one main rival here in Spain, Real Madrid.

    So the current Bar?a trainer (Frank Rikjard) has a policy, win all your games and forget about Madrid. That way you depend only on yourself. Well, this would be my advice for the US, concentrate on winning *your* games, forget about the French, the Japanese, the Chinese etc, just try to be the best. Something isn’t working. Put it straight. We – the Real Madrid of the example – here in Europe will do likewise.

    But it’s funny, our debate is all about what we should do, not about what you need to do. I don’t know if I am making sense.

    The bottom line is that the demographic theory may be ‘too pat’, but if it just did happen to be right (what % would you be willing to put on it 75%:25%) then you really could find yourselves up the proverbial s**t creek without the requisite paddle. Come to think of it ‘waiting for Godot’ would be appropriate. You need to be aware, he just might not turn up.

  10. Edward,
    I think that the immigration issue has to be broken down into two components. Legal and illegal. The vast majority of immigration is illegal. We now have over ten million illegals in the U.S. from Mexico. I am unaware of any of the illegals being able to purchase housing. To do so would require cash because they would not qualify for a mortgage. A mortgage requires a social security number and an income history. This is not available to the illegal immigrants.

    I should add that these “illegals” are somewhat different from the Muslim immigrants in Europe. The Mexican illegals are very industrious and law abiding. We are fortunate to have a large group of people that ultimately will make very good citizens. There is great debate about how and when this will happen.

    Which brings me to this modest proposal. Why not begin using Mexican labor in Europe? You won’t have any more Van Gogh problems, and no complaints about working more than thirty five hours a week. These people are more like the thirty five hour per day variety.

    And now a point about the elephant in the room. The imbalance of trade problem that both the U.S. and the E.U. have with China (and soon with India) has an eventual solution. They are slowly building up armies of consumers. The question is, what will they buy from us? Guess we need some of those locust capitalists to figure it out!

    One thing that they bought from us was some of our industrial base. I’m told that 40% of the foreign cars that Americans purchase, are made in the U.S. They have an advantage in that they don’t have the enormous “overhead” of supporting the retired union pensions and medical benefits that our domestic car makers have. Basically, they started with a clean slate. Few companies are doing much in the U.S. now with pensions (other than dumping them on the government) and instead are suggesting that the 401K program should take it’s place. This is of course nonsense, and sooner or later, our congress will come to it’s senses and develop a program replacing social security with a combination of private accounts and investment accounts that have inheritance rights. I am sure that it will be a progressive system that puts higher income workers helping to build lower income workers accounts.

    In the meantime, I am also worried about the elephant in the room, and hope that we can figure out something to sell the Asians other than castles on the Rhine (or the Thames).

    I have enjoyed our discussion Edward.

  11. “I have enjoyed our discussion Edward.”

    Me too Ray, nice meeting you.

    (Which doesn’t mean I agree with everything you have just said, but all good things must come to an end sometime 🙂 )

  12. “Looking at the state of global trading imbalances I would say that the US has its own problems, and they seem to need attention. Looking at the trade figures, German and Japanese companies don?t seem to have any special problem of being competitive internationally.”

    Two things about this:

    First, it’s easier to trade with/establish a business in the U.S. than just about anywhere else in the world.

    Second, the U.S. doesn’t have the U.S. to sell exports to.

    Anyway, the U.S. import/export ratio has always gone (more) into the negative when the U.S. economy is doing well. As far as I can tell, it’s only useful in an inverse-function for determining how the U.S. economy is performing now and in the short-term.

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