structural current account surplus. A neglected opportunity
ESB May 17 2014 p294-298 156 by Dr. H.J. Witteveen (1921), 157 Central Planning Bureau (1947-1963), professor of Economics in Rotterdam (1948-2014), Minister of Finance of The Netherlands (1967-1971), IMF Managing Director (1973-1978)
Comments
May 21 2014
by Thomas Colignatus,
econometrician and teacher of mathematics, Central Planning Bureau (1982-1991)
A
“Our enormous current account surplus has hardly received any attention in the discussion about the government’s budget deficit and the need for large budget cuts."
Part of the problem is that the present Dutch premier Mark Rutte (trained as a historian, of the same political party VVD as Witteveen) has rejected to discuss the issue in depth, leaving Witteveen on the side-line. This is not only disrespectful but also
B 150 http://thomascool.eu/Papers/CSBH/Index.html 151 http://www.economie.nl/artikel/meaning-our-enormous-structural-current-account-surplus 152 http://en.wikipedia.org/wiki/Universal_Sufism 153 http://en.wikipedia.org/wiki/Sufism 154 http://hjwitteveen.com/h-johannes-witteveen/ 155 http://en.wikipedia.org/wiki/Bancor 156 http://www.economie.nl/artikel/meaning-our-enormous-structural-current-account-surplus 157 http://en.wikipedia.org/wiki/Johan_Witteveen
economically disastrous. Dutch readers may look at this interview with Witteveen, Vrij
Nederland Sept 22 2013. 158 One quote:
"Dijsselbloem is only an agricultural economist." The word "only" is an understatement: Dutch farmers want to export. See my note "Dijsselbloem on Dutch
exports". 159
For a long period the Netherlands already have a sizeable surplus on the current account on the balance of payments, the total of trade in goods and services and capital income. From 2000 that surplus was never less than 3.2% of GDP. In 2000, it was 5.2%, in 2007 8.4% and in recent years – 2013 and 2014 – 9.7% and 9¾%. This is a very large amount and among European countries it is the largest. Germany with 7.6% in 2013 is the next big one. [1]
The Dutch surplus actually started in 1981, see my 2009 paper “A macro-economic
lesson from Holland". 160
Gerhard Schröder (BRD Kanzler 1998- 2005) started to copy the Dutch model of wage restraint. The consequence was that Germany and Holland out-competed the rest of Europe, creating the imbalances of the eurozone.
See The Economist "Model Makers", May 2 2002. 161
In VoxEU Feb 3 2014, 162 Dustmann et al. look at wage-bargaining structures and argue that it wasn't Hartz 2002-2005 163 that caused the German low wage policy, but rather the German Reunification in 1989. Okay, but: (1) The Dutch example helped Schröder to target lower rather than higher wages, (2) It remains important to maintain macro-economic co- ordination. Herein lies the main policy objective rather than in such wage-bargaining structures. The analysis by Dustmann et al. might be interpreted as suggesting the abolition of national bargaining but that would be false. My advice is also an Economic Supreme Court per country. 164
C
Ftnt 1: All figures on the Dutch economy have been taken from the Central Economic Plan 2014
Data and analyses from the CPB cannot be trusted given the censorship of economic science there since 1990. The (former) colleagues there may do their best but they lack important scientific information. They are
D 158 http://www.vn.nl/Archief/Politiek/Artikel-Politiek/Interview-Johannes-Witteveen-VVD-Rutte- begrijpt-het-niet.htm 159 http://boycottholland.wordpress.com/2013/08/23/dijsselbloem-on-dutch-exports/ 160 http://thomascool.eu/Papers/Drgtpe/Crisis-2007plus/2009-03-31-MacroLesson.pdf 161 http://archive.today/L6Ol0 162 http://www.voxeu.org/article/german-resurgence-it-wasn-t-hartz-reforms 163 http://en.wikipedia.org/wiki/Hartz_concept 164 http://thomascool.eu/Papers/Drgtpe/Index.html
like doctors who do not wash their hands, even though Ignaz Semmelweis 165 showed that this would be important (and was he censored?).
In our public discussion very little attention has been given to this remarkable aspect of our economy, neither in politics nor in announcements of the Dutch Central Bank has any attention been given to this. Perhaps because it seems to throw some doubt on the need of large economies by the government. In the European Union there is a rule about balance of payments, deficits and surpluses. Surpluses should not at any length of time be higher than 6% of GDP. But neither the European Commission nor the Dutch government seem ever to have evoked this rule in discussions of the budget deficit.
Well, I tried to do my best, see the above 2009 paper.
See my VoxEU column 166 and this weblog.
167
In Dutch, see these two entries on Joop.nl: a link to the Great Depression, 168 and a warning for the risk of a greater crisis. 169
Cassandra 170 better entertains a sense of humour 171 though.
E
17.2.1 2 [Gold standard]
In itself, such a surplus is of course favourable. It increases our inter-national reserves and wealth. But is it also favourable for the growth of our economy? In a system where the exchange rate cannot be adjusted – as in the present Monetary Union – the balance of payments cannot be brought to an equilibrium by an adjustment in the exchange rate. As in the old system of the gold standard, equilibrium would then be brought about by movement of the national income. Deficits with gold losses would force a country to follow a restricted policy reducing incomes and imports. Surplus countries on the other hand would receive payment in gold, which would increase their reserves. This
(1) It does not have to be favourable at all. If the reserves are held in a currency that is depreciated, one loses. It may be better to directly spend the sums so that there is no surplus.
We see China accumulating dollars, that later however may depreciate. They may buy up companies in Europe while Europeans are under the money illusion that those dollars are still valuable.
(2) Yes, the EMU works out as a gold standard. While Americans had learned that the gold standard wasn't so smart (because of the deflation in the Great Depression), the EMU-designers targetted it (because of the German fear for hyperinflation).
See my paper Money as gold versus
money as water (2013a). 172 Also see this
F 165 http://en.wikipedia.org/wiki/Ignaz_Semmelweis 166 http://www.voxeu.org/debates/commentaries/current-economic-crisis-solution-lies-buried-and- obscured-mass-false-theory 167 http://boycottholland.wordpress.com/about/ 168 http://www.joop.nl/opinies/detail/artikel/20139/ 169 http://www.joop.nl/opinies/detail/artikel/21935_er_dreigt_een_gigantische_crisis/ 170 http://en.wikipedia.org/wiki/Cassandra 171 http://boycottholland.wordpress.com/2013/05/30/salute-to-art-buchwald/
would enable them also to introduce an expansionary policy, but they would not
be forced to this. They could maintain
their surplus situation and accumulate more gold. This was called the
“deflationary tendency of the gold standard”. The present European Monetary Union also clearly suffers from such a deflationary tendency.
[made bold by TC]
Thus, our enormous balance of payments surplus does not force us to a more expansionary policy, although in itself it would create a tendency for a certain growth of the national income that would increase imports and therefore reduce the surplus. The extra income increased in this process would then also increase consumption, tax payments and savings. A stationary situation would be reached when the total of additions to the income stream would equal the leakages from it. This would be when the budget deficit and the payments surplus would together equal the saving surplus. In this way, a multiplier process can be put in
movement, showing how much the
income would increase as a consequence of an increase in exports, or otherwise, of additional government expenditures. The size of this multiplier depends on how much of extra income flows away from the income stream by imports, savings or taxes. It is also important then in how far these savings would cause larger investments, so that there would be no leakage anymore and whether additional tax receipts would be spent by the government.
paper for the reforms discussed below. The ECB is very prim on printing money. But we don't mind when the USA does, and when China earns those dollars and then starts shopping in Europe. See also Jens Weidmann: "We are not lemmings" 173 while Germans are lemmings on the fear for inflation.
(3) The multiplier is in itself a technical question while for current purposes it is more important to have the proper analysis. (Estimation from a wrong model gives GIGO: garbage in - garbage out.)
(4) The savings - investment issue is quite complicated. The current situation is also special.
(4a) The years 1981-2007 were also Keynesian years because of the deregulation.
174
(4b) Investment bankers are like spoiled children. They could invest in anything in those years and take huge risks (ICT, dotcom) and still show a profit, but now face risks they cannot deal with. We urgently need national investment banks. 175
17.2.2 3 [Export surplus]
In the present Dutch situation, we have a balance of payments surplus of more than 9% and a budget deficit of 3% of GDP. That means, that there should be a
These are important observations.
A point is that such relationships aren't "forgotten". The label "forgotten" puts you on
G 172 http://rwer.wordpress.com/2013/07/02/issue-no-64-of-real-world-economics-review/ 173 http://boycottholland.wordpress.com/2014/04/07/jens-weidmann-we-are-not-lemmings/ 174 http://boycottholland.wordpress.com/2012/02/21/the-keynesian-years-1981-2007/ 175 http://boycottholland.wordpress.com/2013/11/23/confirmation-by-krugman-and-summers/
savings surplus of no less than 12% of GDP. That is the other side of the balance of payments surplus. How should we judge that? There are two components of this savings surplus: business saving in the form of retained profits that are not used for investment in our country; and the savings of pension funds and life insurance companies that are not invested within our country. There are no exact figures on the size of these components. But we know from an investigation by DNB that only 14% of the investments of pension funds stays inside our country. As these savings are more than 6% of GDP, it follows that their contribution to the savings surplus must be 5% of GDP. That would then leave 7% of GDP for business companies. This saving surplus has helped to bring down the rate of interest to levels below 2% but investment did not react to this with an increase. In this way a recession developed. This failure of an equilibrium mechanism on the capital market is the essential element of the theory that J.M. Keynes developed in 1936 (The General Theory of Employment, Interest and Money). The experience during this recession completely confirms this theory.
But it is disappointing that policy makers in Europe seem to have completely forgotten these relationships. In the United States, this is also the case in the Republican party, but the chairman of the Federal Reserve system, Ben Bernanke, has shown clear insight in the business cycle mechanism, but could only instigate a very expansionary monetary policy because congress left too little room for stimulating additional expenditures.
the wrong foot.
There was and is competition from a false
theory. That false theory or ideology is the
"need of austerity to create investor confidence again".
If something is merely forgotten, then it would be easy to remind people about it.
In this case, policy makers have been reminded about it, but this didn't help, because they relied on another theory.
That false theoy didn't work and the recession and stagnation continued. This was interpreted as only more evidence that more austerity was needed ... These policy makers and their economists aren't scientists but they form a cult with almost religious faith in Reaganite / Thatcherite "neoliberalism".
It is important to observe that much money was squandered in Southern Europe. The USA had its frauds too.
However, curiously, that squandering and frauding is less investigated. It is easier to squeeze the budget than to investigate mismanagement and fraud within the system.
17.2.3 4 [Return of Keynes]
But we have to recognise that the development of economic science has a great responsibility for this. After the Second World War, new economic
What professor Witteveen calls "neo- classical" should be "neoliberal".
(1) I regard myself as a neoclassical
economist in the sense of Paul Samuelson
theories have been developed on the basis of “rational expectations”. With that assumption they could build on earlier equilibrium theories, as for example the system of Leon Walras (16th December 1834 – 5th January 1910), who formulated a general economic equilibrium with beautiful mathematical equations. These new theories made far- going assumptions, for example letting all markets would always exactly and immediately reach an equilibrium. All economic subjects would act rationally for their own interest and they could completely foresee the future. Because in the markets all economic subjects together create an equilibrium that reflected their preferences, government inter-vention would not be needed. The inventors of these neo-classical [bold TC] theories, as for example Robert Lucas Jr. (American economist, 15th September 1937 - ) have won Noble prizes in economics and were rather generally supported. In these equilibrium systems there could therefore be no business cycle. As there is clearly some fluctuation in the real world, theories were developed that explain fluctuations by changes in real data for the economy. In this way, economists have created a “platonic world” of perfect efficiency, as Robert Skidelski put it in his clear and amusing book “Keynes, the return of the master”. That world has little to do with the real world of unexpected events, mass psychological reactions, with are often unreasonable and dangerous disequilibria. But the political visions developed in the Reagan-Thatcher revolution were strongly influenced by these neo-classical [bold by TC] theories. These theories were in tune with their political instincts: budgets should be balanced and monetary policy should only be focused on price stability
(see his thesis): a synthesis of Walrasian
classicism and equilibrium analysis with
Keynesian dynamic disequilibrium. 176
This does not nessarily mean that we have a complete model how this would work, but the ideas are guiding.
PM. Keynes himself already adjusted the classical approach, thus essentially was a neoclassical economist too. Thus Samuelson's "synthesis" is a bit overdone. But the word has been accepted in the literature.
(2) The Lucas critique was mainly a technical issue. The idea that forecasts can be self-defeating was already known.
(3) The revolution by Reagan and Thatcher didn't come from new theory but from policy failure in the period before that.
Policy makers didn't properly implement ideas about the Welfare State. As unemployment and inflation exploded in the 1970s, ideologues against the Welfare State gained the political upper hand. The new theory of "rational expectations" and "supply side economics" was only embraced in the capitals of the world because it suited that old ideology.
(4) Dutch readers may look at my discussion in 2013 of the impact of Margaret Thatcher on the Dutch Eduard Bomhoff 177 and Mark Rutte 178 respectively.
176 http://en.wikipedia.org/wiki/Neoclassical_synthesis 177 http://thomascool.eu/Papers/Drgtpe/Crisis-2007plus/2013-04-19-Bomhoff-Thatcher.html 178 http://thomascool.eu/Papers/Drgtpe/Crisis-2007plus/2013-09-02-Schoo-Lezing-Rutte.html
and carried out by independent central banks. The unfortunate deregulation of the financial sector in the United States by the repeal of the Glass-Steagall Act also resulted from this thinking that saw all markets as working perfectly.
17.2.4 5 [The Netherlands]
Returning now to the situation in the Netherlands we have seen a very large savings surplus. (Difference between savings and investments) This surplus started around the year 2000, when investment fell below savings. After that, the saving surplus increased to 6% to 8% of GDP. Saving increased to the highest level ever, while investments sank to a long time low. This is shown clearly in the following graph from an article by Schotten and Leering. [2] [See Figure 7.]
(1) Did it start only after 2000 ? I haven't looked at that particular IS-saldo since 1981 (and haven't even looked whether I could get those data). But above we saw the surplus
on the external account, and it stands to
reason that this is reflected in IS.
But Holland has been losing a lot of capital on investments abroad, so beware of the distinction between ex ante (expenditure) and ex post (effect).
(2) The graph should also use Germany separately, and not hide it in "core EU".
I
Ftnt 2: Schotten en Leering, De puzzel van het Nederlandse spaarover-schot, Me Judice, 2 February 2012
This article clearly suffers from the censorship by the directorate of the CPB.
J
This also shows that saving and investment in the Euro Union and in the core countries of the Euro Union remain close together and are at a much lower level. So, we can say now that this
large saving surplus is a rather unique Dutch phenomenon.[bold by TC] We
must see that as a serious disequilibrium in the economy for although it means that our national wealth increases, it also implies that our production capacity expands inefficiently, so that not enough employment is created for our workers. This could lead to structural unemployment, which would be very damaging, bringing suffering to a part of our working population and limiting growth of our national product.
(1) I would need to see the graph for Germany separately before accepting the "uniqueness" of Holland.
(2) This story is proper from traditional international economics.
(3) However, there is the amendment by three economic scientists from the CPB 1983-1990, namely by Marein van Schaaijk, Anton Bakhoven and my own innovation of these, see my 1996 paper "Differential impact
of the minimum wage on exposed and
sheltered sectors". 179 Dutch readers are
referred to these two books: W&A 180 en D&S. 181
K
17.2.5 6 [Deficits]
The government has worsened the
recession by a policy of severely cutting ideas. One idea is to get more control over (1) The EMU rules are based upon some L 179 http://econpapers.repec.org/paper/wpawuwpgt/9608001.htm 180 http://thomascool.eu/SvHG/Hulst/Persaankondiging.html 181 http://thomascool.eu/SvHG/DenS/Index.html
the budget deficit, in order to satisfy the European maximum of 3% for the budget deficit. European policy makers were strongly influenced by Germany and by
the neo-classical economic theories
[bold by TC] in setting an aim for the necessary coordination of budgetary policies in the Eurozone, so that the final aim has been set very low, at 0.5% while the earlier goal of 3% became an absolute maximum. As most European countries have large budget deficits and the recession tended to increase the deficit still further, this led to very severe and painful austerity measures. In the Netherlands, the budget deficit was still very low at 0.8% in 2000 but in the recession – with falling tax receipts and rising unemployment expenditures – it increased to 5.6%, and that notwithstanding severe budget cutting policies the deficit remained above 3% until 2013, when the recession seemed to end. These budget cuts of course decreased incomes and caused unemployment – setting in motion a negative multiplier mechanism. Economic studies in the International Monetary Fund made it clear that these multipliers were much larger than assumed in the past. Different estimates have been made of this multiplier. It has become clear that the size of it depends on the business cycle situation. In a