German grand strategy and economics

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(Trust me, there is a link between this text and defence, at least in a wider sense.)

Germany's culture produces a birth rate lower than the mortality rate. This has been resistant to political efforts (some of them quite costly) to change it, even to those efforts which copied seemingly successful policies from abroad. This cultural characteristic extends to immigrants; the fertility among Turks in Germany has dropped below 2 per female long ago as well.

Immigration is being kept moderate and insufficient to compensate the shrinking of the population, for more immigration would provoke greater problems than the shrinking population does (we saw that already). Germany also fails to attract a large share of well-qualified immigrants (and even when they arrive we typically dismiss their official job qualification in jobs such as teacher, physician or nurse), as do many countries with substantial immigration.

It's thus a rather safe bet to assume that Germany will experience a moderate shrinking of the population for decades to come. The German population doesn't disappear, of course. Official scenarios predict a reduction from a zenith of about 82.5 million to about 65 or 70 million by 2060.

The change of the working age population is more troublesome. The changes are slow and thus allow us to get used to the future, but there's nevertheless a widespread expectation that the ratio between working and not working people in Germany will deteriorate. (Articles tend to exaggerate a bit by looking at working-to-retiree ratio, neglecting that a small youth  share is a partial counterweight to this.)

So this a long-term background for German policy, and one determinant of a German grand strategy (as it  forms accidentally and incrementally).

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One of the concerns caused by the demographic change for decades (began in the 80's) is that the current system of pensions may fail us and not provide enough income to retirees in the future. It is a transfer system with current working population paying for current retirees. This may indeed look ugly by 2040 with fewer people working and more people being retirees, although I expect us to get used to it and to adapt easily, not the least because the rate of technical progress is still well above 1% per annum. Retirees of 2040 will probably live better than today's retirees.

This way of financing pensions is the only approach for a nation as a whole which made sense. Back in the 50's "we" knew that fortunes were destroyed in two world wars, a hyperinflation, a great depression and then again in Nazi disrimination of minorities and political opponents - all in the previous 40 years. A savings-based pension systems wouldn't have survived this.

There's an increased effort to provoke more width of savings in Germany, with the middle class being asked to save for extra pension income in order to improve on their pensions. This seems sensible for middle class families, but how does it make sense on the national level? What could these savings do? The really, really durable investmens are typically investments in public infrastructure. I can tell that I often ride a train along a route which was obviously cleared and fortified more than four generations ago, for example.

Very little but family homes is as durable. But we already have badly scattered settlements in Germany. The lesser efficiency of public services in for scattered settlements in comparison to cities points against the idea that every middle class family buying a family home could make sense. Even if they did; the low income groups in Germany cannot save much, especially not since the Schröder reforms ten years ago.

Nevertheless, the promotion of family savings for retirement - especially based on subsidised plans offered by insurance companies - is an important reaction to the demographic change expectations. Insurance companies and many individual savers don't buy family homes, though: They invest in financial markets.

Now how exactly could this be helpful on the national level? How could savings now reap benefits in 2050?

This is simple, outright trivial, in microeconomics. Meanwhile, it only works in macroeconomics (the nationwide view) if we export capital.

After all, machines built now won't last till 2050, so they won't raise incomes in 2050. Private capital investment now is a very poor substitute for missing workers in 2050.

We can invest now and expect this money to somehow keep working till 2050, then in conjunction with foreign workers. We can invest savings abroad.

This means capital exports now and capital imports in 2030-2060. In fact, it means net capital exports and imports. There's an entity between capital export and goods and services exports in macroeconomics; we can only build up our savings abroad by exporting more goods and services than we do import (save for a couple usually unimportant exceptions such as transfers).

This still doesn't help German low income groups, but at least it kind of makes sense for our middle class. Fact is, much of the saving is actually being done by the rich instead, but that's our very own distribution and allocation issue and not felt by foreigners.

Now with capital exports being the same as goods and services exports and us having a huge net export, there's a lot of criticism about that. Famous Nobel prize winner and columnist/blogger Krugman and now even the EU appear to led a charge against this, demanding a more balanced trade (I would actually like that, but it's not compatible with the grand strategy elements laid out so far). They look at the short term, and at how the export strength requires a depressed wage level (since the other balancing mechanism, the common currency, fixed the exchange rates between Germany and many other European countries). This demand makes a lot of sense in the short term, but it completely fails to appreciate why this behaviour actually makes sense (= is a somewhat promising stratey) for Germany in the long term. Well, if our savings don't evaporate.

The Euro crisis is in part so horrible to Germans because it threatens the idea that we could have our savings work for us abroad and recall them piecemeal only at retirement age. Such investments need to be reliable, low risk, in order to make sense. It's especially pointless to maintain depressed wage levels, work hard, save and export much if this only means you'd be forced to support those who did the opposite in order to balance out your deviation from the average.

So that's the economic policy short / long term conflict between Germany and much of the EU. Notorious short-term-only thinkers such as Krugman don't get this, but now maybe readers of Defence and Freedom get this.

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I promised a link to defence. Well, remember what I wrote before; world wars wiped out savings twice. Unreliable foreign governments can decimate savings, too.

The optimum world for this new German grand strategy element (to counter the demographic change's consequences at least for the middle class) is a world of reliability, of the rule of law (the rule of rules), of no wars between great powers, of cooperation instead of confrontation. "We" want stability and reliability. 

Countries with a decade of trade balance deficits as their background may be first and foremost be concerned about trade or political crusades; but countries with a decade of trade balance surpluses as their background may actually be most concerned about the risk to savings abroad.

Assume a country turns into a troublemaker after being a net import of German goods for a decade. This could lead to less trade, and Germany as a whole would lose annual benefits from trade equal to a few per cent of that trade (profits, savings). Meanwhile, losing savings invested in that troublemaker country could easily be twenty times as great and thus be much worse than years of no trade with the country in itself.

The classic post-1945 grand strategy of West Germany was about the integration with the Western world and the industrial pursuit of wealth for the masses. The grand strategy of the 90's was about pulling East Germany up to West Germany's level of prosperity and sensibly remove the shackles and attitude of Cold War's Germany; which was on both sides of the wall coined by limited sovereignty and little freedom of action. The common Euro currency finally led in conjunction with the wages-depressing Schröder reforms to what I described above. It wasn't really figured out by one or two geniuses (as was the Cold War strategy of Adenauer and Erhard) and then enacted, but grew as different actions and outcomes compounded to a whole, not being changed because it seemed to make some sense.

S O

defence_and_freedom@gmx.de

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