Wolf's Howl is Off-tune:Data Shows Why Macro Stimulus Can't Work

Martin Wolf continues his Keynesian tirade in the Financial Times, “The German model is not for export,” May 8, 2013, page 7. As in the US, a policy debate rages on in Europe as predictions call for impending slower economic growth.  Germany and a few other European countries push austerity.  So Wolf has to beat the Keynesian spending drum even louder to get a hearing for his stimulus advocacy. In this article Wolfe says that much of Europe is doomed to a protracted era of slow growth because Germany and the IMF are encouraging European countries to emulate Germany. Of course it would be difficult for most countries to mirror one of the world’s strongest export champions and so Wolf worries that Europe is in for big trouble.

I have written about the counter-productive results of more stimulus when debts are huge and I won’t repeat all that here. Today I take Wolf to task over misinterpreting the current economic situation in Europe. Wolf says that Germany has been able to replace declining domestic demand by producing more external or foreign sales. He says this causes a big problem for the other European countries because Germany’s surpluses translate into trade deficits among the rest. He says a combination of weak domestic plus weak external spending is killing European countries. I show below that Wolf’s assessment is not the case. Worse, the data shows vividly why more macro stimulus cannot be the answer to our slow growth woes. 

I went to Eurostat – a great place to look at macroeconomic data for the EU countries. http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/  I look at GDP data as a way to see how EU countries have fared since the crisis hit. More specifically I examine key spending data. I looked at changes in the data between 2006 and 2012. In 2006 the EU economy was chugging along before the financial crisis hit and spread. Let’s call that the “before” photo. Sort of like the picture of Terry Bradshaw before he went on his diet. 2012 is the after shot – after the recession and after the economy had several years to recover. Terry says he lost 40 pounds. What happened to the EU?

I first looked at consumer spending. From reading Wolf you might think it had declined – or it was still struggling. If we look at all 27 EU countries together, the total growth of consumer spending increased by about 12%. Germany did a little better – about 14%.  But Germany was among the worst countries. 20 EU countries did better than the EU average. Slovakia led the group with an increase of 61% in consumer spending. Among this group of 20 countries having stronger than 20% increases in consumer spending were Switzerland, Bulgaria, Norway, Poland, and Lithuania. Of course, there were several countries with dismal domestic consumption spending and those included the usual suspects – Iceland, Ireland, Greece, UK, and Portugal. As a benchmark, US consumption grew by about 17% from 2006 to 2012.

What about Germany’s great trade splurge? Germany’s export sales increased by 29% from 2006 to 2012. That was stronger than its domestic consumer spending growth but clearly short of the US export growth of 45%. The overall EU’s export growth was about 24% but 21 EU countries had export sales growth faster than the EU average and 16 of those exceeded Germany’s rate. Slovakia managed an 82% increase in export sales. If most EU countries had bad trade deficit outcomes as Wolf alleged, it was because of their even stronger growth of imports. That means domestic spending must have been increasing – that is, Europeans were consuming more at home – some of the products were produced at home while others were brought in from abroad. That doesn’t sound like deficient domestic demand to me.

So why are these EU countries having such a bad time? The answer which Wolf never discusses is in what the EU calls fixed capital expenditures or what is sometimes called gross private domestic investment. Fixed capital includes domestic spending on plant, equipment, housing, etc. This spending category is interesting. Germany’s fixed capital was 91% lower in 2012 than it was in 2006. For the whole EU the number was -90%. For the USA it was -77%. EVERY EU country showed negative change in fixed capital spending from 2006 to 2012. The worst performance was from Greece (-115%) and the best from Sweden (-63%). If anything has not recovered in the world economy it is business spending on plant and equipment and national spending on housing.

Wolf is so wrapped up in Keynesian macroeconomic stabilization policy that he can’t even see that the main problem with slow growth and a return to stability in the EU and the US is mostly located in one single part of GDP. There is no real export issue and there is no consumer spending issue. The issue is that no country has sufficiently addressed the things that caused the crisis to begin – the housing and financial crises. People are not buying homes and firms are not borrowing to expand. It is pretty simple. The FED and ECB flooded the world with liquidity and drove interest rates to nothing. 

The US government introduced historical levels of fiscal stimulus. Yet we in the US are not growing much faster than our European counterparts.  More stimulus from monetary or fiscal policy means unsustainable debt and financial bubbles. Yet Wolf and other liberals continue to want more of the same. The data suggest that what we need is what we needed from the beginning – a satisfactory response to housing and financial problems. Yet most experts continue to admit after half a decade that they still have not brought forth anything to tackle excessive risk, too-big-to-fail, transparency, and various other elements of the housing/financial crises. I guess it is easier to cry Wolf (for more stimulus).