The sick man’s lesson

This editorial appeared in Friday’s Los Angeles Times:

Pop quiz: Which country is the world’s biggest exporter? Nope, it isn’t China – at least not yet. It’s Germany. That “sick man of Europe” is often associated with high unemployment, lack of competitiveness and a bloated public sector. Yet propelled by high-end exports of autos, machinery and chemicals, Germany racked up a record trade surplus of $288.5 billion last year.

Meanwhile, the U.S. trade deficit narrowed last year for the first time since 2001, the Commerce Department announced Thursday. The deficit for 2007 fell 6.2 percent to a merely stratospheric $711.6 billion. The good news is that a weaker dollar contributed to a 12 percent surge in U.S. exports. But much of the improvement in the trade statistics came from a weaker U.S. economy that sucked up fewer imports.

So, with the U.S. economy reeling under twin housing and credit crises, should America be looking over its shoulder at Germany for lessons? Certainly, the “sick man” is showing unexpected signs of vigor. Fueled by its exports, Germany’s growth last year was 2.8 percent, compared with about 2.2 percent for the United States. And while Germany’s economic performance and per-capita income have lagged behind the U.S. for most of the last 30 years, its bloated government spending hasn’t actually been quite as bloated as ours of late. In 2009, the U.S. national debt will amount to nearly 66 percent of gross national product. Germany’s national debt, while still hefty, will fall to 63 percent of GDP.

The long-standing debate about how much trade deficits and budget deficits matter has been settled: They start to matter a lot when you’re running deep into the red in both accounts, decade after decade. Making matters worse is the record U.S. consumer debt, which equals about 300 percent of GNP.

The danger isn’t that dollar-flush foreigners will keep buying up American assets such as Citigroup on the cheap. In the 1990s, Japanese investors snapped up such trophy properties as Rockefeller Center and the Pebble Beach golf course. In the end, the Japanese sold at a loss, and their investment money helped the U.S. recapitalize its industries. What is worrisome is when public debt levels become so high as to require higher taxes while private indebtedness depresses consumer spending. Both could become a drag on U.S. economic growth.

The U.S. should not try to emulate Germany’s export-dependent economy; its sluggish growth is likely to continue to underperform the U.S. in the long run, argues economist Adam Posen. Yet it surely couldn’t hurt to export more and borrow less.