In Economics, Doing the Right Thing Is Evil

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Last month the U.S. criticized Germany for exporting too many goods and not consuming enough as part of the same report in which it criticized China over maintaining the value of its currency instead of encouraging it to appreciate. This week, the European Commission criticized Germany again for its trade surplus and for its low level of consumption. The idea seems to be that if only Germany pursued a different economic and trade policy, other countries would benefit.

Left unasked and unanswered is why Germany (or China) should undertake national policies designed to help other countries at the expense of its own economy. The question goes unasked because the answer is so obvious.

It is a well-established, though much ignored, economic fact that higher levels of investment and lower levels of consumption lead to a higher standard of living (measured in terms of consumption per capita) in the long run. Yet the majority of countries, smitten with the Keynesian bug and full of politicians with their eyes on the next election, still pursue economic policies favoring immediate consumption over investment.

Germany and China are two countries that have steadily followed their own (different) paths, designing their economic policies to fit their national needs and temperaments. Both, by world standards, have high personal savings, low consumption measured as a percent of GDP, high levels of capital investments, and large trade surpluses. Yet, rather than being praised for doggedly pursuing and mostly achieving their economic goals, they are repeatedly criticized on the world stage because their success is perceived to be contributing to the failure of others.

In Germany's case a little weight can be given to the fact that it is part of the EU so in some sense might be expected to shape its policies for the greater good. Still, the essential fact of political reality is that countries do not go very far down the path of pursuing policies for the good of their neighbors or rivals at the expense of their own citizens.

To the extent that foreign aid is a pure case of national policy designed to benefit others (ignoring for the moment that much foreign aid is really designed to create customers for the donor nation's products), the small scale of foreign aid is proof positive of the above political reality. Foreign aid worldwide amounts to a few tenths of one percent of the gross world product, and is still only a few tenths of a percent if you measure it only as a share of the sum of developed countries' GDPs. Nations do not do charity on anything approaching a large scale.

The debate over the proper national economic and trade policies is really quite simple if one boils it down to its essence. Option one is for countries to pursue policies designed to produce long run economic growth and wealth for their citizens. Option two is for countries to follow policies that impoverish their citizens in order to provide benefits to people living in other countries. Said impoverishment can come directly by collecting tax dollars and then sending them abroad as foreign aid or indirectly by pursuing economic and trade policies that lead to suboptimal outcomes for their domestic economies because other nations' politicians believe such policies will provide benefits to their citizens.

This is really a case of how to equalize outcomes among nations. The hard way is for those that are falling behind to do the actual work of saving money, perhaps suffering in the short run as investments are made, and in the long run being able to reap the benefits of their farsightedness. The easy way is to pull more successful countries down to your level. One policy has an eventual outcome where everybody wins. The other believes it is better if everyone loses together rather than allow some to lose while others win. Clearly, the world's future will be brighter if countries take the harder road of building their own lasting success, rather than trying to beg short term gains from their currently more successful neighbors.

This idea of convincing countries to hurt themselves in order to help others is simply a transnational example of the common income redistribution that takes place within the borders of most wealthy nations. There are two essential differences, however, when one takes redistribution across national borders. First, the poor people being "helped" by the policy are not one's neighbors but some more distant group whose welfare is likely to be much less important to those doing the helping. Second, the beneficiaries are not constituents of the political leaders who must institute the policy.

The EU believes that Germany's trade surplus and economic success represent an "imbalance" which threatens the stability of the EU. In plain English (or French, Italian, Spanish, Portuguese, Irish, or Greek), the other countries in the EU mean that Germany is making them look bad and should be forced to pay some of the costs of boosting the other economies in the European Union. They believe that if Germany will export less and consume more, other countries will grow faster, eventually allowing German growth to rise again. Even if this is true, one wonders what German politicians are supposed to tell their citizens in the meantime.

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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