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Big wage increases are no use if most of it is eaten up by inflation.

On the contrary, big wage increases matching and matched by inflation serves to erode the debt burden on society.

Germany has pursued a policy of a hard currency with low inflation and low currency fluctuation in order to increase predictability necessary for industrial investment.

Inflation, so long as it is below roughly 10 per cent per year, does not materially impair investment decisions. Lack of aggregate demand, on the other hand, does.

In that context, even low wage increases will improve living standards more than high wage increase in soft currency high inflation economies.

That quite simply is not true of the German experience over the past forty years.

With soft currencies, devaluation is an ongoing process. I.e., one devaluation hides the next devaluation.

And the problem with that is?

There is nothing inherently wrong with running 5-8 % annual inflation and 3-6 % annual depreciation of the currency w.r.t. the D-Mark. It has a different distributional impact between rentiers, entrepreneurs, labor and mature industrial firms than rigidly running 2 % inflation and no depreciation versus the D-Mark. But it is not inherently worse. Just different.

Domestic industry can sell by price and does not have to increase productivity and innovation. Therefore, industry loses competitiveness.

Untrue. Domestic industry under a full employment and balanced foreign trade policy faces two pressures to improve:

First, wages, being kept high relative to the cost of capital by full employment, will push firms to substitute capital for labor. This will not cause unemployment, since the saved labor is kept employed via demand-side intervention. But it will increase the sophistication and extent of the capital plant.

Second, domestic industry is not homogeneous: Firms and sectors can gain at the expense of other firms and sectors in the domestic economy. If you do not innovate and improve, and your neighbor does, then your firm will lose market share. A balanced trade currency policy only ensures that the domestic sector will not lose market share in the aggregate, it does not protect any individual firm from competitive pressure.

German industry has had to face regular increases in the value  its currency. It has become competitive by a) shifting from low-cost to high added value industries b) increasing productivity c) improving technological innovation. Therefore it has become competitive.

b) and c) are simply flat-out false: German productivity per man-hour has grown slower than the rest of Europe.

With the Eurozone, China and the US have been playing middle-man for what was effectively Germany competing with Greece and Spain.

As a percentage of total German exports, exports to the EZone have fallen from 47 to 37% in the last decade. That trend is likely to continue in the future. European markets will continue to loose importance.

Irrelevant. The Euro floats against RoW, meaning that German firms do not compete against Chinese firms - any gain in "competitiveness" vs. China will be (and historically has been) immediately offset by an appreciation of the currency (and vice versa for losses of competitiveness). At the macro level, Germany competes only with those European countries who have pegged their currencies to the D-Mark.

(The argument is identical to the one about firms in an open, floating-rate healthy-inflation economy.)

But I agree that the Euro is too cheap for German industry. This will compromise German competitiveness in the future

That effect has never been observed in the real world.

Anyways, the Germans don't need the exorbitant trade surplus they have now.

They do if they wish to keep being able to pursue hard money quackery with a minimum of social unrest.

But there is no way of decreasing your competitiveness in relation to Spain while at the same time increasing your competitiveness to compete against China or Japan.

Permit the Euro to depreciate. Or depart the Euro, and permit the D-Mark to appreciate gainst the rump Euro, but not against the Yen.

There is nothing wrong with activist currency policy, and there is nothing wrong with a healthy 5-8 % annual inflation rate. Foreclosing on activist currency policy and attempting to push the rate of inflation substantially below where it should be to ensure financial stability in an economy facing 0-1 % annual real growth serves no purpose except to enrich rentiers.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 10th, 2013 at 06:52:11 AM EST
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