I’m going to start reading this guy regularly and I’m posting a link to China Financial Markets,  his blog, particularly a recent piece explaining national trade and how various policies affect who’s going to have trade surpluses and who’s going to have deficits.  Here’s Pettis’ resume.

Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets. He has taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business.  He is also Chief Strategist at Shenyin Wanguo Securities (HK). 

Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.

I’m particularly interested in having Capt. read this post, entitled How To Become Virtuous And Save More.  So read it Capt!  Here’s a small sample from the piece.

For this week’s blog entry I want to go a little abstract in order to suggest how different countries that participate in the global imbalances are going to adjust.  The debate over the root causes of global imbalances is as fierce and as confused as ever.  The confusion isn’t helped by the vast army of moralizers who like to contrast the hard work and thriftiness of households in high-savings countries with the laziness and binge-buying behavior of households in high-consuming countries.  The world cannot possibly rebalance, they argue, until the later become more like the former…

There are nonetheless some obvious flaws in the argument.  First of all, if the high-consumers become as virtuous as the low-consumers, that just means that global demand will decline, and with it, global unemployment will rise.  In that case global savings won’t go up.  They will go down, since rising unemployment causes income to decline faster than consumption.

Second, lazy spendthrift Americans are actually more productive and work longer hours than people in almost any other rich country, including the harder-working and higher-savings counties in Europe.  Still, the argument does anyway fit in with a lot of cultural stereotypes about Spaniards and Greeks, with their wild lifestyles, long siestas, and dissolute charm, or about Germans and Dutch, whose tasteless food, boring sex lives, and grim movies leave them no choice but to work away at office and factory.

But is this really why people in some countries love to save and people in other countries love to consume?  No, it isn’t.  Aside from the satisfaction it brings, this moralistic argument is almost meaningless.  Individual preferences may cause some of us to save more of our income than others, but we have to be very careful about generalizing.  When entire countries have abnormally high or low savings rates, individual preferences are never the reason.  Abnormally high or low savings rates are almost always caused by trade, industrial or tax policies at home and abroad that distort the relationship between consumption and production.

As with any well written article, particularly one that seems to dismisses cultural tendencies, the article sparked a terrific series of comments, pro and con.  One in particular details a specific German company that the author says exists because of German culture.  My take is that culture does matter, but in most cases not as much as most people assume.  Here’s one of the exceptions.

I really value your blog and read it regularly. But with a caveat: like almost all modern economists you configure the world into monetary relationships and disregard culture, education et al into a black box.
Unfortunately the real world is very different. Spain might devalue its currency as much as it likes; it simply has nothing to the world to sell.
Conversely Germany (or Japan where the Plaza accord of the Eighties had no long term effect on the trade balance) can consistently hike their currencies (as Germany did with the mark appreciation from 4 to the Dollar in 1973 to 1,5 to the Dollar in 1979 and will still run a surplus (in this case with the States).
Case in point is a factory complex making low voltage circuit breakers near Mannheim in South West Germany, which I helped to evaluate for a bank loan. It was formerly called Stotz then became a unit of ABB. (Won´t be more specific for obvious reasons)
The product is not high tech but these 2000 employees churn out a good part of circuit breakers in the world and forced from the market factories in the US and in GB and companies like GE. The workers at ABB are all unionized, get huge salaries, five weeks paid vacations a year and can´t be fired without a very, very good reason.
Now people who are for unions say that is the reason for the success and other people might say it is, because workers are represented in the workers council of the factory. But the real reason why they manage to dominate the market for such a low technology product that could – theoretically – be produced everywhere (they just try in Shanghai up to now in vain) is very simple if you look closer.
It is their production line called Goliath and that was preceded by David. These are in house developments costings upwards of a hundred Million Euro. These are hugely complex machines requiring the harmonisation of workers and engineers skilled in anything from cutting metal to a thousands millimeter to an advanced knowledge of chemistry and take years to build. (Three years in the case of Goliath) These production lines take huge up front investments but once they are in place they deliver a quality product with unbeatable low productions costs. No matter how low the wages anywhere else as wages are anyhow only a small fraction of production costs as soon as something like Goliath is up and running.
And these are not machines like a car that anybody can drive. Only the people who built them can operate them as it just turns out in Shangahi where they shipped David.
First, that something like that is possible has something to do with German business culture. In the US after a take over by private equity they would have never renewed the line but squeezed profits from it until it fell apart. That would have been the end of the factory and it happened in a good many cases which are well know to their German competitors. But that is only one and not even the main point regarding culture.
Goliath and all the other in house developments in German factories are the result of a combination of fabulous in house training of the shop floor people; strong emphasis of tradition (old teaching the young) and the non existence of barriers between engineers and the people implementing their designs.
These are not simply reproducible around the world. ABB is a multinational with branches all over the world and they would love to relocate and get rid of the pesky German wages and workers rights. But they tried and didn´t succed.
In Great Britain you can´t build something like that because there´s no vocational training that´s good enough. Also there´s the problem of the cultural barrier between engineers and workers. (In Mannheim they all talk the same dialect). In the US (as BMW has discovered in its plant in Savannah Georgia) only college graduates have the required reading and mathematics skills to do, what shop floor workers in a German factory are expected to do. But these people are difficult to motivate to get their hands dirty.
In Spain there are similar problems.
These are cultural problems and in China at the moment the greatest problem is, that shop floor workers are afraid to think for themselves. But without it you can´t operate a machine like David.
About China I believe they will learn and eventually become a strong competitor. But only if there is a cultural and probably concurrently also a political shift. Right now the hierarchies are too rigid and there´s no chance for workers to think for themselves. I am confident about China because the Japanese managed this as well. And their culture is ultimately derived from China.
I don´t really see a way out of the crisis along the line that Michael Pettis has sketched. I see no way out in fact. Regarding the situation now in Europe there´s only one solution: for Germany to pay up and shut up. For indeed the advantages of Germany are not due to harder work (they work less hours that Spanish workers) but simply the product of a unique set of historical and cultural circumstances. Best would be for Germany simply to pay the Spanish to buy their products. And the Chinese (which do have the advantage of extremely low wages) to pay the US to buy theirs. Which both did until now in a way. But that will not happen I am afraid so there´s only one solution: default.

How come?

Beezer here.  Pettis writes clearly and I believe very accurately.  That said, the comment reproduced above, clearly shows that culture does matter.  This doesn’t negate Pettis’ arguments but it does show that strong cultural preferences (another comment points out the Japanese and Chinese preference for liquidity) do matter and cannot be dismissed entirely.  Great post and several great comments too. 

Beezernotes is basically a series of narratives comprised from writings across the internet, selected by Beezer.  The point is that very few of these posts are original to Beezer, who’s basic training is print journalism.  It’s reporting, not academic.

Due to the recession, most of the posts deal with the financial world.  This has been the primary narrative of Beezernotes, but not the only one.    This preface is entered just as a reminder about what Beezernotes is, and is not.

That said, there are two sub themes in the financial world, deflation/inflation and trade surplus/deficit, that provide a lot of gist for what’s in Beezernotes and in many other blogs on the internet.  Understanding these two themes is important to understanding the recession.

Economist Paul Krugman, of Princeton, the New York Times and the Nobel Prize, addresses in a very succinct way what’s important to remember when considering these two sub themes.  From a NYT blog post by Krugman:

“One Size Doesn’t Fit …

Many of the reactions to my writing, both in comments here and more generally, seem to be along one of the following lines:

(a) You say devaluation/inflation is good — but how did it work out in the 1970s/Zimbabwe? Hah!

(b) You say Germany is being evil by running a trade surplus — but you praise it in Iceland. Inconsistent!

What such comments betray is a mindset that relies on slogans, not models — or, more kindly, a failure to appreciate that economic policy requires that you pay attention to circumstances.

Thus, on the devaluation issue: devaluation is helpful when your problem is one of inadequate demand, so that an improvement in the cost-competitiveness of your industry can help you expand. It’s not good if you’re suffering from an overheating, inflation-prone economy. It depends on the nature of your unhappiness.

On the trade issue: the world’s problem is that it’s facing a deleveraging shock, in which highly indebted players are being forced to cut spending sharply; what we need is for those not deeply in debt to spend more to compensate. Iceland is in the first category, Germany in the second.

I realize that this isn’t how some understand economics; they want it to be stable prices and free markets, hallelujah and amen. But life, and economics, aren’t that simple.”

Beezer here.  Krugman is a talented, award winning economist who just happens to have the gift of sorting out the chaff and thus reducing what are often complicated dynamics into relatively understandable explanations of events.  Beezer often cites Krugman because Krugman’s predictions of what will happen have been spot on.  Will Krugman always be right?  Most probably not. 

But even when he inevitably falls short, a reader will understand where Krugman has gone wrong because Krugman is understandable.  You don’t need a thorough understanding of differential calculus to follow his reasoning.  And no doubt Krugman will explain his failure as well as he explains his successes.

His post today basically asks that readers keep an open mind and always accept the truth that the world is not a simple, predictable place.  Circumstances need to be understood.  Composition needs to be understood.  And thanks to people like Krugman, sorting out both is explained and, if need be, itemized.

Wonderful Thanksgiving at the Beezer household and, it is hoped, at yours too.  Now on to Christmas!

Beezer has long maintained that, within sensible boundaries, taxes are not the most important driver of strong economies.  Progressive tax tables are just, if not more, positively correlated to strong job and income growth in the US as are periods where there are broad based tax cuts.

Where the correlation breaks down is regarding deficits.  Broad based tax cuts strongly correlate to larger deficits, whereas progressive tax rates don’t. 

The point is that if we’re searching for the causes of strong job and income growth we’re wasting our time arguing over tax rates.  We’re asking the wrong question, so we don’t get the right answer.

The recent dustup over Greece in the European Union, where Greece is running a debt of 115% of its Gross Domestic Product (GDP) and can’t make the bond payments so it needs a bailout, made Beezer look at some relevant statistics.

One is the percent of GDP the government (federal, state and local) gets in revenue.  The other is the percent of government spending as a percent of GDP.

Greece has a low percent of government revenue to its GDP, 37%.  By contrast Germany’s is 44.3%.  So Germans are taxed more than Greeks.  Yet Germany has the stronger economy.  Obviously higher taxes didn’t hurt German economic strength.  On the other hand, Greece’s lower taxes didn’t build a better economy.  The low rate, however, has increased Greece’s deficit and thus it’s debt levels.

Germany’s debt is running at 73.2%  of GDP.

Now consider the US.  Our tax revenues run about 28.3% of GDP and, during the current recession, our government expenditures are 45% of GDP.  Normally this spending would run about 35%, at least during the past decade.  Hence the much larger deficits right now.

Greece is currently spending about 50% of its GDP and Germany about 47.6%.  In both cases, as in the US, expenditures increased dramatically due to the ongoing recession.  

So running a low total tax revenue didn’t much help the US economy anymore than it helped the economy of Greece.  And now that both Europe and the US are in recession, the low tax rates in the US and Greece just caused larger budget deficits.

Lesson.  If you’re a government and you want to pay your bills tax enough to do so.  And if you want a strong economy, keep tax rates progressive and look for the real drivers of strong job and income growth.  If you just want to run larger deficits, don’t tax.