Quote Originally Posted by Dayuhan View Post
Herr Fuchs…

I asked:



And you replied:



I think this reveals a certain lack of comprehension about how business – not economics, but business – functions. Investment in capital stock doesn’t happen because some beady-eyed economic policy gnome decides that it ought to happen. It doesn’t happen because a government decides that investment in capital stock is desirable. It doesn’t happen because society decides to applaud investment in capital stock. It happens because individuals or companies with the capacity to invest determine that an opportunity for profitable investment exists. Decreasing consumption does not present an opportunity for profitable investment, because you don’t profit from your investment unless somebody somewhere buys the products or services that you invest in producing.

Answer I

There is no choice between consumption and production because you can’t have one without the other. If production exceeds consumption, inventories rise. When inventories rise to a certain point, factory orders cease and production stops. Factories don’t produce goods because society esteems production, they produce goods because they have orders for goods… from consumers, or from people who believe they can sell the goods to consumers.

Answer II

Confusion of cause and effect. German industry isn’t strong because SMEs are influential, SMEs are influential because German industry is strong. As you point out, this strength is supported by a favorable currency environment. The US economy didn’t assume its current shape because of policy decisions, it assumed it because an artificially overvalued currency created a long term disincentive to domestic production of goods.

Answer III

Exports depend on foreign consumption. Part of this is the US, part is other places… but if German consumption is constant, German production cannot increase unless overall consumption increases or German goods take market share from other producers in other markets (meaning production somewhere else has to be reduced).

Answer IV

Again, you confuse causes and effects. People don’t invest because they want to be cheered, they invest to make money. Societies will cheer whatever gets results, which is conditioned by the macroeconomic incentive environment.

Answer V

If your currency exchange rate favors export production, export production will succeed and people will cheer it. If your exchange rate environment penalizes exports and subsidizes imports, domestic production will falter, it will not attract investment, and nobody will cheer.

The problem for the US has been that because the dollar is a global currency, both produced and consumed outside the influence of US policy, the ability of policy to influence monetary factors is severely constrained.

Answer VI

I think you drastically overestimate the ability of policy to control economic factors, and the ability of government in a democratic society to develop policies that may not be found congenial by the voting public. It’s terribly easy to make pompous declarations about what the Americans or Germans or Chinese or anyone else should or must do. Influencing them to do it is rather more complicated.

Answer VII

Answer I:
I don't misunderstand anything here. You think of a closed economy, I think of an open economy. The closed economy is the model for beginners.

The U.S. has a trade balance deficit that exceeds a sixth of its industrial production. It could easily have four huge growth years with frozen domestic consumption without even getting rid of its trade balance deficit.

The "consumption drives the economy" myth is extremely powerful, especially in combination with cognitive dissonance. People can be exposed to the fact that the U.S. industry has gone downhill for three decades and still believe in U.S. ways of developing the industry. Amazing.


Answer II:

You completely ignore investment and export. Production output moves on hold, into consumption, into investment or into export.

You forgot half of the channels, and the result is no understanding a tall.

Answer III:

You overestimate the influence on exchange rates. It's not an excuse and explanation for everything. The simple fact that all countries still export even at unfavourable exchange rates hints at the complexity.
I as a German economist are well-entitled to claim to know better about the importance of the German SMEs. Most research about them was never published in another language than German. These either very old family businesses or 1950's origin companies are way more efficient and at the same time much more long-term oriented than the big corporations. They are superior and the backbone of the German industry. We didn't allow them to be ruined by larger corporations or banks.

Answer IV:

Now you're looking too much on the national level. Export is also a business thing, and individual businesses can very well gain additional market shares and turnover on markets with "constant" consumption.
Your point is therefore completely wrong.

Answer V:

"People" rarely invest at all. Companies do most investments. "People" consume and save.

And "people" don't just save because they want to make money - that's just one explanation. Much is being saved as a precaution against risks, much is being saved for buying a house, life insurances, buying a car, pensions and in some countries even things such as being able to afford university for children.

Answer VI:

You do again use exchange rates as a simple explanation / excuse. It's not the only problem.

You're also wrong about the "attract investment" thing. For one, many if not most direct investments are for marketing purposes. Trade balance deficit countries therefore experience much foreign investment. The U.S. does experience much foreign investment. The problem is that the savings rate of the U.S. is close to zero and therefore the U.S. itself does not contribute to substantial domestic net investment.

Answer VII:

Competent politicians with guts can influence the economy very much. Disunity of top politicians can lead to political impotence, but the state itself is extremely powerful. It's the ultimate power in regard to the economy - the politicians merely need to decide to use that power. Those politicians who claim that the state cannot set the direction for the economy are incompetent or liars or both.
The U.S. could pull itself out of the mess in two decades, maybe even just one if the policy is very unusual.
There are thousands of levers to be used, and new instruments can be introduced. The laughable trajectory and result of the health care debate shows the real problem, and probably explains why you don't believe that policy can change much: The U.S. political elite and the political system is dysfunctional.

The same is true in Greece, Italy, Iceland, Poland and several Eastern European states.
The German political elite is dysfunctional as well, but only so if you have above average expectations.