[OPE] A profit squeeze in Germany? A study in punk economics

On 12 September 2008 I posted:

UNCTAD notes that "a non-recessionary correction of global imbalances would require stronger stimulation of domestic spending and imports in the major surplus economies, especially in Germany and Japan, as well as a measured appreciation of the Chinese currency. As UNCTAD economists see "a strong likelihood of a sharp and prolonged downturn of the world economy," they deplore that policymakers are unable to tackle this challenge". http://www.unctad.org/Templates/webflyer.asp?docid=10444&intItemID=1528&lang=1

Martin Wolf later argued:

"creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy. (...) We are all in the world economy together." ("Global imbalances threaten the survival of liberal trade", FT 2 dec 2008).

Niels de Hoog, a Dutch policy analyst at the Dutch Reserve Bank http://www.dnb.nl/home/ however claims that if German wages rise, this threatens profits there. ("Loongroei bedreigt Duitse winstmarges", ESB 93 (4550), 19 December 2008, p. 782). http://esbonline.sdu.nl/do/welkom He provides data on wage demands and number of employees affected for 15 German industrial bastions, and calculates the weighted average wage rise that is likely to be realised at 4%, with a spin-off effect on other wage rounds.

His argument is that if workers get more pay, they will in current conditions most likely save it rather than spend it, while industrial employers will then have "additional financing problems".

Adding up the total employees in his table, you get 5,748,000 workers. Let us assume fairly realistically a grand average annual salary per German worker of $31,200 euro. Then that's a total salary bill of 179.3 billion euro, and 4% of that, would be about 7.2 billion euro. (Germany has a GNI of 2.4 trillion euro; the richest 10% of households supposedly get one quarter of the country's personal income, and own about 44% of German asset wealth. The total German-owned asset wealth would be circa 8-10 trillion euro).

The question then is, can a 4% wage rise at a cost of 7.2 billion euro really have much of a macro-economic effect? The answer is no, but obviously Germany has about 38 million employees in total, and then if they earn an average 31,200 euro a year, the annual wage bill is something like 1.2 trillion euro, in which case de Hoog's projected average wage rise "across the board" of 3.2% would imply an extra 40 billion euro or so in pay per year among all German workers if their pay claims succeed reasonably well.

Compare, if you like, the reported German bank losses (write-downs) from the American subprime crisis (in US dollars):

Deutsche Bank 7.7 billion
LBBW 1.1 billion
Hypo Real Estate 0.58 billion
Commerzbank 1.1. billion
WestLB 2.6 billion
BayernLB 6.7 billion
DZ Bank 2.1 billion
IKB Deutsche Industrie Bank 3.45 billion
Dresdner Bank 3.49 billion

If you add all that up, the total loss is $28.8 billion or about 21 billion euro. Well, if German workers get an extra 40 billion euro a year and save it, that solves the bank's problem, right? And if the banks happily accept workers' savings, they are able to finance industry, right?

Maybe some German businesses cannot sustain such a wage rise, but in that case they ought to raise the pay of those on lower incomes, capping the higher incomes. Then the additional costs would be less, and the addition income would be more likely to be spent on consumables. But in reality, although Trichet calls for concerted action by all parties to halt inflation, inflation is not the problem of the moment, and basically everybody goes for what they can get - if they don't, others will.

Never in the whole history of the world has there been a more powerful economic case for a more egalitarian income distribution than today, it's just that the Left isn't making it.

What does Angela Merkel plan to do? She plans to spend "40 billion euro" on improving roads, schools, universities and sports facilities. http://www.spiegel.de/international/germany/0,1518,597539,00.html

Jurriaan

99 red balloons.
floating in the summer sky.
Panic bells, it's red alert.
There's something here from somewhere else.
The war machine springs to life.
Opens up one eager eye.
Focusing it on the sky.
Where 99 red balloons go by.

99 Luftballons
Auf ihrem Weg zum Horizont
Hielt man fuer UFOs aus dem All
Darum schickte ein General
Eine Fliegerstaffel hinterher
Alarm zu geben, wenn es so war
Dabei war da am Horizont
Nur 99 Luftballons

_______________________________________________
ope mailing list
ope@lists.csuchico.edu
https://lists.csuchico.edu/mailman/listinfo/ope
Received on Sun Dec 21 14:13:36 2008