Reihan Salam on German Productivity

Germany has been held up as a model for the United States by David Leonhardt and others. Reihan Salam  correctly observes that German offshoring to Eastern Europe has been an essential part of Germany’s apparent success. He also  points out that:

The fall of communism was, as Marin suggests, a positive exogenous shock that proved a tremendous boon the German economy. A 20% increase in productivity is nothing to sneeze at, and I don’t think that David Leonhardt gave the role of offshoring its due in explaining the virtues of the German model.

Of course, the Houseman-Mandel thesis also tell us that German productivity gains, like U.S. productivity gains, might offer less than meets the eye.

Reihan raises a very interesting point which I hadn’t considered. Remember that our recent paper, “Not all productivity gains are the same. Here’s why”, we divided measured productivity growth into three types:

  • Improvements in domestic production processes
  • Gains in global supply chain efficiency
  • Productivity gains at foreign suppliers.

As we noted in the paper, these different types of productivity growth cannot be told apart in the conventional economic statistics. However, the type of productivity growth matters for domestic wages and jobs. For example,  productivity gains from improvements in domestic production processes are more likely to result in rising real wages for domestic factory workers.

We made our argument in terms of the U.S., but it potentially applies to other countries as well. I hadn’t considered Germany until Reihan raised the point, but in fact Germany appears to use a similar import price methodology as the U.S. (see for example Silver 2007) with the potential for similar problems, though I need to take a closer look to make sure.

Here’s something to think about: In a global economy, measured productivity growth in an industrialized country potentially may not measure only the strength of that country’s domestic economy, but also its ability to successfully offshore production to cheaper countries, with implications for domestic wages and jobs.

Why the stock market does not reflect the economy

Steve Pearlstein of the Washington Post has a good piece on measuring the economy in an age of globalization (Self-reflectiveness alert: The piece does mention the work Sue Houseman and I have done).  He writes:

A frequent mistake — one of which I am as guilty as anyone — is using the performance of the broad U.S. stock market indexes, and the companies that comprise them, as a proxy for the performance of the U.S. economy. Until the late 1990s, that might have been a reasonable presumption. Since then, however, most of the large companies reflected in those indexes have transformed themselves into global enterprises with global supply chains, global sales, global workforces and global sources of capital. That their shares are listed on a U.S. stock exchange is something of an historical artifact.

Steve makes a great point, that other journalists need to read very closely as well.  I might write up a list of 10 “do’s and don’ts” for writing about the global economy.



Interpreting the OECD Education Results

Today’s big news: According to a new OECD study, Shanghai’s 15-year olds turned in top scores globally:

The province of Shanghai, China, took part for the first time and scored higher in reading than any country. It also topped the table in maths and science. More than one-quarter of Shanghai’s 15-year-olds demonstrated advanced mathematical thinking skills to solve complex problems, compared to an OECD average of just 3%.

That’s very impressive. Very.  The U.S. was around the OECD average in reading and science, and just below average in math.  All other things being equal, it would be better if our scores were higher, much higher.

This will take a long time to fix. However, the  short-run implication is clear:  American kids coming out of college right now are facing ever-toughening global competition. The question: What sets of skills are most likely to be in global and U.S. demand?

Are Trade Deficits Bad for Long-Term Growth?

Like most economists, I’ve been trained to believe that running a trade deficit is not an indication of economic sin, and running a trade surplus is not an indication of economic virtue. Indeed, I’ve written at various times about the virtue of running a trade deficit, if the foreign borrowing was used to fund investment.

Well, I’ve been changing my views about trade deficits, and the latest European financial crisis just brings me further along those lines. It’s not Greece that troubles me, it’s Spain and Germany.  A few years ago, Spain was the darling of investors and economists. Spain was running a trade deficit, yes, but it was vibrant and growing. From 1995 to 2005, real per capita GDP in Spain grew at an excellent 2.8% annual rate.

By contrast, real per capita GDP growth in Germany poked around at an annual 1.2% rate from 1995 to 2005. Wrote one 2006 paper from the Centre for European Policy Studies:

Germany and Italy have been the laggards in terms of growth since the start of EMU in 1999.

However,  Germany did have one advantage —it ran trade surpluses where Spain ran trade deficits. In fact, the gap between Germany’s surpluses and Spain’s deficits widened over time, even though Spain had stronger growth.

If it turns out that Spain runs into a financial crisis because of all its external debt–accumulated during the good years–then we will have to go back and ask whether that growth was sustainable and real.

And the same thing goes for the U.S. The U.S. had strong per capita GDP growth and a big trade deficit, and then was hit by a massive financial crisis. Score one for the trade deficit as a more accurate signal.

More to come on this topic.