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Reform does not work

by Jerome a Paris Wed May 31st, 2006 at 09:54:07 AM EST

Company prowess 'hurts Germany'

German companies' rising competitiveness over the past decade has contributed to the country's economic weakness, the Organisation for Economic Co-operation and Development said yesterday.

In its first survey of Germany since 2004, the organisation said wage moderation, not productivity gains, had been the main factor behind its industry's growing global market share and had weakened demand and economic growth at home.

So, let's see. Germany has done textbook "reforms", keeping wages in check, improving its competitiveness, boosting company profits... and yet the economy has not profited as announced - because workers are spending less (and, unlike their colleagues in other countries, they are not splurging on debt to compensate for lower income).

My conclusion is that "reform" is not good for the economy. "Reform" is good for company profits, and shareholders, so it is legitimate for some to push for it, but it is not good for the economy.

The OECD's conclusion, of course, is that "reform" has not gone far enough.

Overregulated products markets and high barriers to competition in turn constituted the single biggest obstacle to job creation and investment in Germany. Dismantling such regulations and cutting red tape, said Mr Wurzel [the OECD's chief economist on Germany], would help boost real wages, employment creation and productivity gains.

Devices aimed at protecting small businesses - subsidised loans, bans on large hypermarkets, strict regulations for crafts and professions - were in fact protecting insiders from competition and should be dismantled, the report said.

The OECD also slammed the lack of openness in markets ranging from telecommunications to rail and energy.

"Reform" does not work, so let's do more "reform". When will we stop listening to such silliness?


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Do they provide any justification for how competition is going to increase real wages? Unless they mean that prices are going to fall as mega-shops replace smaller ones - the Walmart as driver of the economy theory again.
by Colman (colman at eurotrib.com) on Wed May 31st, 2006 at 10:31:13 AM EST
Presumably by increasing productivity faster than nominal wages drop. That way, people can get more stuff for less money. And, of course, hedonic pricing.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed May 31st, 2006 at 10:35:13 AM EST
[ Parent ]
And if Walmart is the driver of US productivity...
by Colman (colman at eurotrib.com) on Wed May 31st, 2006 at 10:38:37 AM EST
[ Parent ]
"Reform" does not work, so let's do more "reform".
This is a classic case of quackery. Prescribe a treatment. If the patient gets better [as they often do even without treatment] attribute it to the treatment. If the patient gets worse, attribute it to insufficient or badly-applied treatment.

The difference between economics and medicine is that there is no way to run controlled trials. Even "epidemiology" has the problem that the number of distinct economies is too small, while there is no shortage of patients.

So, is economics hopeless?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed May 31st, 2006 at 10:39:33 AM EST
and what few economies there are, are interconnected so you can't to double-blind trials...

Pierre
by Pierre on Wed May 31st, 2006 at 11:17:40 AM EST
[ Parent ]
Liberalisation/globalisation is basically reducing the field to one big economy...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed May 31st, 2006 at 11:32:02 AM EST
[ Parent ]
The conclusion I'm drawing is that consumer spending is now seen as a necessary measure of a healthy economy. The germans aren't spending enough, therefore there is a problem.

So the question is : Does consumer spending have a positive ratio with the long term health of an economy ?

Not really. Japan is regularly cited as a society with low consumer spending (everybody saves), but whilst their economy has problems they seem no worse than others in their region. Meanwhile the US & UK have had consumer-led booms based on loose credit control that have led to bubbles that threaten, not just the national economies, but the western capitalist model itself.

So this has become, not just "Case not proven", but a classic case of a vested interest trying to argue that the sky is polka-dot pink in order to boost their short-term interests. And these people are taken seriously ????

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Wed May 31st, 2006 at 10:59:24 AM EST
I think consumer spending has been at the centre of macroeconomic policy since Keynes demonstrated that weak aggregate demand rather than aggregate supply was the leading contributor to economic recessions. Under neoliberal economic policy, it is wrong for the government to stimulate demand by means of public spending, so the only way to stimulate demand is to stimulate consumer spending. Hence credit bubbles and remortgaging for consumption.

Just my two euro cents.

<disclaimer>I am not an economist and I don't play one on TV, but I have a sindicated column on a blog.</disclaimer>

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed May 31st, 2006 at 11:06:14 AM EST
[ Parent ]
Well, I'm not an economist either.

But what you say suggests that consumers must spend more. And to do that you must put more money into their pockets and give them a feeling of confidence that there is more on the way. Overcome their prudence.

This is done either by paying them more (unpopular under shareholder capitalism) or by lending them more (very popular with banks and credit organisations).

The former leads to wage inflation, the latter leads to credit spirals and the sort of bubbles we see elsewhere. So, despite the pressure for the latter as the instrument of choice, neither represents the perfect solution. I know it's unpopular with free-market nincompoops but government must artificially balance the two for the well-being of the overall economy.

Course it is possible to have both go out of control at the same time, but that really needs IMF-level advice to achieve with any certainty.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Wed May 31st, 2006 at 11:48:07 AM EST
[ Parent ]
Why do you think "consumer confidence" is measured, reported and worried about?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed May 31st, 2006 at 11:51:21 AM EST
[ Parent ]
I just thought it was one of those meaningless bs things journalists invent cos they don't really understand what they're talking about.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Wed May 31st, 2006 at 11:55:11 AM EST
[ Parent ]
In the postmodern economy nothing matters most that consumer confidence.

Also, class stratification takes the form of investors/consumers/outcasts.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed May 31st, 2006 at 12:07:20 PM EST
[ Parent ]
er... small crossing of wires there... nothing matters more or consumer confidence matters the most.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed May 31st, 2006 at 12:08:12 PM EST
[ Parent ]
Or in 133t speak: "it's teh matt3rz."

-----
sapere aude
by Number 6 on Thu Jun 1st, 2006 at 12:58:12 PM EST
[ Parent ]
what you say suggests that consumers must spend more
"must" under the premises of neoliberal ideology. I think we'd be fine encouraging savings and investment, and with government spending to pick up the demand slack, funded by taxes on property for wealth redistribution.

But then again, I'm a dangerous pinko commie, or something.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed May 31st, 2006 at 12:16:31 PM EST
[ Parent ]
.. you have to give us/me some insight about the real true working of an economy.

After all it is the believe in the coin you are using...but the dollar/euro you are useing is only backed by confidence.. the same confidence that can make you buy or save. Worst,  what you save now is basically in the bank.. so it really does not exist...You are supposed to be able to recover .. but if every body tries to get at the same time .. well it is like injecting a lot of currency in the economy....inflation?

Basically the economy is a full system of believes as big as religion. It seems like you ahve to balance different believes so that everybosy is roughly happy

When you spend and you are on debt..are you sure you will ever pay.. but then if everybody stops paying nobody pays.. and there is a recession? not really.. you can create a bubble...and even create more money... is inflation going up printing more money...well are you sure? you can put the money you generate in debt.. for future use.

It is all very confusing for a physicist...so Migeru.. is economy hopeless or is there any way to make sense without the impression that we live in a symbolic illusion?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed May 31st, 2006 at 01:12:26 PM EST
[ Parent ]
How am I going to give you (all) what I don't have?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed May 31st, 2006 at 03:04:22 PM EST
[ Parent ]
I think I have an explanation for the modern inflexible insistence on reducing monetary policy to controlling inflation.

There is a "money fallacy" whereby people think they are progressing if they make more money in nominal terms, not in real terms. If the cost of living dropped by 10% peoplle should be happy to take a 5% pay cut, but they probably prefer to have a 5% raise even though the cost of living goes by 10%. This is because the cost of living is an intangible while the numerical amount of your income is tangible.

One way of getting rid of the money fallacy is to educate everyone about the difference between nominal and real value and how to do financial planning on that basis, taking into account the undertainty of future inflation. The other way to get rid of the money fallacy is to keep inflation constant, since that way the way people actually reason about money will more closely approximate reality, and there  will be reduced inflation risk for everyone.

Just a thought.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed May 31st, 2006 at 03:17:50 PM EST
[ Parent ]
I think what matters is the evolution of consumption, and how that comes from revenue change or from a change in the savings rate.

Japan's problem was not high savings rate, it was increasing rates. Similarly, US and UK (and to some extent as well France) have consumption boosted by unsustainable levels of debt despite stagnant revenues. Germany has both stagnant revenues and no increase in debt.

When the debt bubble bursts, those with the less unbalance on the debt side should do a lot better.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed May 31st, 2006 at 11:40:21 AM EST
[ Parent ]
For anyone who is interested, the report is here (though it's a kinda lengthy document in several parts).

An excerpt is offered, on the subject of energy prices (see Deregulation at work.) Opening sentence:

Liberalisation of energy markets in 1998 did not result in sustained reductions in prices.

This leads the OECD to reconsider the entire doctrine of liberalisation of energy markets, and to conclude...

Nah, you knew it wasn't that, didn't you? The OECD concludes that not enough liberalisation stardust was sprinkled around the first time, so now what's needed is another -- liberal -- sprinkle.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed May 31st, 2006 at 12:01:10 PM EST
LOL

Sigh

Grumble

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed May 31st, 2006 at 12:03:33 PM EST
[ Parent ]
There comes a time when you just have to laugh.

Apparently the OECD has repealed the Price/Demand Curve.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed May 31st, 2006 at 12:06:16 PM EST
[ Parent ]
The reforms do work because

  • last month's unemployment fell by a record number of 300.000 persons,

  • companies have begun to invest in record numbers in new production lines and other hardware to overcome the backlog of delayed projects of the last three years (which were meant to harm the Schröder government),

  • for the first time since the late 80s wages for the (trend - or milestone setting) IG Metall workers (automotive, electrical engineering, machine constructing, etc. sector) went up in real terms and national income contracts were set over the current annual inflation rate,

  • consumers are engaged in a spending frenzy unseen since the months of German unification in 1990,

  • companies' order books for the exports of goods and services are full for the next two years, the rate of anticipated increased exports is going to break the record sales of the last 6 months,

  • consumers are happy because they expect Germany to win the Football World Cup.


"The USA appears destined by fate to plague America with misery in the name of liberty." Simon Bolivar, Caracas, 1819
by Ritter on Wed May 31st, 2006 at 02:38:48 PM EST
That's all as a result of the reforms so far.
by Colman (colman at eurotrib.com) on Wed May 31st, 2006 at 03:11:44 PM EST
[ Parent ]


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