Can We All Export Our Way out of Depression?

Tyler Cowen has a post chastising Keynesians for scolding Germany for advising their Euro counterparts to adopt the virtuous German example of increasing their international competitiveness so that they can increase their exports, thereby increasing GDP and employment. The Keynesian response is that increasing exports is a zero-sum game, so that, far from being a recipe for recovery, the German advice is actually a recipe for continued stagnation.

Tyler doesn’t think much of the Keynesian response.

But that Keynesian counter is a mistake, perhaps brought on by the IS-LM model and its impoverished treatment of banking and credit.

Let’s say all nations could indeed increase their gross exports, although of course the sum of net exports could not go up.  The first effect is that small- and medium-sized enterprises would be more profitable in the currently troubled economies.  They would receive more credit and the broader monetary aggregates would go up in those countries, reflating their economies.  (Price level integration is not so tight in these cases, furthermore much of the reflation could operate through q’s rather than p’s.)  It sometimes feels like the IS-LM users have a mercantilist gold standard model, where the commodity base money can only be shuffled around in zero-sum fashion and not much more can happen in a positive direction.

The problem with Tyler’s rejoinder to the Keynesian response, which, I agree, provides an incomplete picture of what is going on, is that he assumes that which he wants to prove, thereby making his job just a bit too easy. That is, Tyler just assumes that “all nations could indeed increase their gross exports.” Obviously, if all nations increase their gross exports, they will very likely all increase their total output and employment. (It is, I suppose, theoretically possible that all the additional exports could be generated by shifting output from non-tradables to tradables, but that seems an extremely unlikely scenario.) The reaction of credit markets and monetary aggregates would be very much a second-order reaction. It’s the initial assumption–  that all nations could increase gross exports simultaneously — that is doing all the heavy lifting.

Concerning Tyler’s characterization of the IS-LM model as a mercantilist gold-standard model, I agree that IS-LM has serious deficiencies, but that characterization strikes me as unfair. The simple IS-LM model is a closed economy model, with an exogenously determined price level. Such a model certainly has certain similarities to a mercantilist gold standard model, but that doesn’t mean that the two models are essentially the same. There are many ways of augmenting the IS-LM model to turn it into an open-economy model, in which case it would not necessarily resemble the a mercantilist gold-standard model.

Now I am guessing that Tyler would respond to my criticism by asking: “well, why wouldn’t all countries increase their gross exports is they all followed the German advice?”

My response to that question would be that the conclusion that everybody’s exports would increase if everybody became more efficient logically follows only in a comparative-statics framework. But, for purposes of this exercise, we are not starting from an equilibrium, and we have no assurance that, in a disequilibrium environment, the interaction of the overall macro disequilibrium with the posited increase of efficiency would produce, as the comparative-statics exercise would lead us to believe, a straightforward increase in everyone’s exports. Indeed, even the comparative-statics exercise is making an unsubstantiated assumption that the initial equilibrium is locally unique and stable.

Of course, this response might be dismissed as a mere theoretical possibility, though the likelihood that widespread adoption of export-increasing policies in the midst of an international depression, unaccompanied by monetary expansion, would lead to increased output does not seem all that high to me. So let’s think about what might happen if all countries simultaneously adopted export-increasing policies. The first point to consider is that not all countries are the same, and not all are in a position to increase their exports by as much or as quickly as others. Inevitably, some countries would increase their exports faster than others. As a result, it is also inevitable that some countries would lose export markets as other countries penetrated export markets before they did. In addition, some countries would experience declines in domestic output as domestic-import competing industries were forced by import competition to curtail output. In the absence of demand-increasing monetary policies, output and employment in some countries would very likely fall. This is the kernel of truth in the conventional IS-LM analysis that Tyler tries to dismiss. The IS-LM framework abstracts from the output-increasing tendency of export-led growth, but the comparative-statics approach abstracts from aggregate-demand effects that could easily overwhelm the comparative-statics effect.

Now, to be fair, I must acknowledge that Tyler reaches a pretty balanced conclusion:

This interpretation of the meaning of zero-sum net exports is one of the most common economic mistakes you will hear from serious economists in the blogosphere, and yet it is often presented dogmatically or dismissively in a single sentence, without much consideration of more complex or more realistic scenarios.

That is a reasonable conclusion, but I think it would be just as dogmatic, if not more so, to rely on the comparative-statics analysis that Tyler goes through in the first part of his post without consideration of more complex or more realistic scenarios.

Let me also offer a comment on Scott Sumner’s take on Tyler’s post. Scott tries to translate Tyler’s analysis into macroeconomic terms to support Tyler’s comparative-statics analysis. Scott considers three methods by which exports might be increased: 1) supply-side reforms, 2) monetary stimulus aimed at currency depreciation, and 3) increased government saving (fiscal austerity). The first two, Scott believes, lead to increased output and employment, and that the third is a wash. I agree with Scott about monetary stimulus aimed at currency depreciation, but I disagree (at least in part) about the other two.

Supply-side reforms [to increase exports] boost output under either an inflation target, or a dual mandate.  If you want to use the Keynesian model, these reforms boost the Wicksellian equilibrium interest rate, which makes NGDP grow faster, even at the zero bound.

Scott makes a fair point, but I don’t think it is necessarily true for all inflation targets. Here is how I would put it. Because supply-side reforms to increase exports could cause aggregate demand in some countries to fall, and we have very little ability to predict by how much aggregate demand could go down in some countries adversely affected by increased competition from exports by other countries, it is at least possible that worldwide aggregate demand would fall if such policies were generally adopted. You can’t tell how the Wicksellian natural rate would be affected until you’ve accounted for all the indirect feedback effects on aggregate demand. If the Wicksellian natural rate fell, an inflation target, even if met, might not prevent a slowdown in NGDP growth, and a net reduction in output and employment. To prevent a slowdown in NGDP growth would require increasing the inflation target. Of course, under a real dual mandate (as opposed to the sham dual mandate now in place at the Fed) or an NGDP target, monetary policy would have to be loosened sufficiently to prevent output and employment from falling.

As far as government saving (fiscal austerity), I’d say it’s a net wash, for monetary offset reasons.

I am not sure what Scott means about monetary offset in this context. As I have argued in several earlier posts (here, here, here and here), attempting to increase employment via currency depreciation and increased saving involves tightening monetary policy, not loosening it. So I don’t see how fiscal policy can be used to depreciate a currency at the same time that monetary policy is being loosened. At any rate, if monetary policy is being used to depreciate the currency, then I see no difference between options 2) and 3).

But my general comment is that, like Tyler, Scott seems to be exaggerating the difference between his bottom line and the one that comes out of the IS-LM model, though I am certainly not saying that IS-LM is  last word on the subject.


9 Responses to “Can We All Export Our Way out of Depression?”

  1. 1 djb October 21, 2014 at 5:38 am

    same old tired response by cowen, the euro countries should just increase their exports by increasing their production and then everything will be fine

    they need stop being lazy and get off their fat asses and produce something

    clearly, in an age where productivity is highest in history (more goods and services with less labor than ever before)……clearly cowen implies that the lack of jobs and suffering in the the euro countries other than germany

    is a SUPPLY issue


  2. 2 djb October 21, 2014 at 5:43 am

    oh yes, and if he expects that these countries should internally improve their own economy, without outside help, then their is clearly a way to do this, and that is fiscal stimulus

    but since the highly influenced by germany, euro zone european union prevents this then basically they cant provide fiscal stimulus

    so as usual people like cowen provide a tongue lashing on “economic morality” and support for programs that are causing the problem already


  3. 3 djb October 21, 2014 at 5:50 am

    and fiscal policy is in LS-IM


  4. 4 TC October 21, 2014 at 6:28 am

    Hi David,

    Just remember Tyler is trolling, and not even remotely seriously engaging serious people.

    The zero sum fact about net exports remains true no matter what gross exports equilibrium exists in the real world. Is he really trying to claim the positive consequences of increasing gross exports will swamp the consequences of large net export imbalances? While “nuanced” is one word for it, “implausible” is another more accurate word.

    That’s just one implausibility. As you point out “though the likelihood that widespread adoption of export-increasing policies in the midst of an international depression, unaccompanied by monetary expansion, would lead to increased output does not seem all that high to me”

    You are too kind to say it, but every part of his post is designed to confuse. The reasonable conclusion he reaches is less informative than “We can’t all export our way out of a depression.”, even though this phrase lacks nuance.


  5. 5 Frank Restly October 21, 2014 at 7:05 am


    “Scott considers three methods by which exports might be increased:
    1) supply-side reforms
    2) monetary stimulus aimed at currency depreciation
    3) increased government saving (fiscal austerity).”

    I disagree with #3. A current account deficit (including trade) is always matched with a capital account surplus. And so to eliminate a current account deficit, increased government saving is not a pre-requisite. The only thing that needs to happen is that any government deficit (dissaving) is financed internally.

    Sure currency depreciation makes consumer goods produced by the depreciating country less expensive. It also makes capital goods and financial contracts produced in the depreciating country less expensive as well. Until a country manages to eliminate capital account surpluses, it will tend to run current account deficits.


  6. 6 Peter K. October 21, 2014 at 8:29 am

    As an amateur it always helps me to think about past historical case studies. Ryan Avent has a good summary here of what happened during the years leading up to the Great Depression and what brought it on:

    How does a country maintain growth and adjust? Having responsible trading partners inflate under the gold standard:

    “Should a country develop a big balance of payments deficit, adjustment ought to occur automatically. To pay for imports in excess of exports gold needs to flow out of the deficit economy. Because all the money in circulation in an economy should be backed by gold at some ratio, gold outflows force the central bank to pull money out of the economy, generating deflation. Falling prices raise the competitiveness of the deficit economy, and eventually the deficit closes and the gold outflows stop. The adjustment is made easier by a parallel process in the surplus economy; gold inflows allow an expansion of the monetary supply and inflation, which reduces competitiveness and stems the gold inflow.”

    Cowen and Germany seem to be arguing that this doesn’t need to happen. Germany doesn’t want inflation (just as France horded gold) so they tell Southern Europe to deflate themselves to competitiveness. But aren’t we seeing that Southern Europeans are Germany’s customers so as they fail to grow, it’s tougher for Germany to grow? They need to export out of the Euro area. And so the dollar has risen against the Euro. But that may be in part a flight to safety.


  7. 7 David Glasner October 21, 2014 at 2:27 pm

    djb, Tyler may not be wrong in arguing for increased supply-side reforms to make the Southern European countries lower-cost producers, thereby increasing the competitiveness of their tradable-goods industries. But historically that has rarely, if ever, worked as a cure for a depression, which is the result of insufficient aggregate demand. So he may be offering a correct, but partial, diagnosis, and is therefore prescribing the wrong remedy. You have to get the patient well enough to start walking, before you can start him on an aerobics program.

    TC, Well, I will leave it you and others to discuss Tyler’s motivations. I am just trying to make his implicit assumptions explicit, and show that his conclusions depend on some very strong implicit assumptions.

    Frank, All Scott is saying that if the government uses fiscal policy to force the economy to save a lot, it will run a current account surplus. Excess saving over investment will create the capital account deficit to finance the current account surplus.

    Peter, Thanks for the link. The basic point Ryan is making is correct, but unfortunately he lapses into the nearly ubiquitous misunderstanding according to which the gold standard implies that “all the money in circulation in an economy should be backed by gold at some ratio.” The gold standard, as such, implies no such thing. Countries may (foolishly) legislate some gold cover requirement (which is not the same thing as backing), such legislation is neither necessary nor sufficient for the operation of the gold standard. The problem in the Great Depression was that two countries, France (deliberately) and the United States (more or less inadvertently) began adding huge amounts of gold to their reserves, thereby imposing deflation on the rest of the world. At present, the problem is that Germany, which effectively controls the ECB, is unwilling to allow sufficient monetary expansion and inflation to provide the aggregate demand required for an economic recovery.


  8. 8 robertoviera1 October 28, 2014 at 5:49 pm

    Big corporations have no problems for export, they move they facilityes to China, India, Vietnam, etc. and have low payed workers, no pay for contamination rules, no conditions on labor health, long day of work and 7 work days for week. This means strong competitivity, high profits and EXPORTS. For Europe, Japan left leavings.


  9. 9 DSK November 1, 2014 at 4:47 pm

    So nations should increase their gross exports? This means an increase in gross imports, so obviously the solution is a pact between governments, first running a deficit that can only be used to purchase imported goods. I think Germany should start, since they have a leadership position in Europe. Thanks Tyler.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


Enter your email address to follow this blog and receive notifications of new posts by email.

Join 3,263 other subscribers
Follow Uneasy Money on

%d bloggers like this: