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Thursday, 30 January 2014

Why do the United States and The Netherlands see totally opposite actions as THE solution for spurring economic growth?

Both the United States and The Netherlands have been severely hit by the economic crisis, which started in 2008.  But where the US seem to have almost left the crisis behind them, The Netherlands are still fully in it.

This has something to do with the crisis lifecycle that the US and The Netherlands have been in, since the crisis started in 2008. And… it had also something to do with the Dutch solution for fighting the economic crisis, which is battering the country these days.

A few years ago – in January 2012 - I created the following graph to describe this crisis lifecycle.  Although it refered to the Euro-zone as a whole, it has been very much applicable to The Netherlands, as one of the formerly leading countries in The Euro-zone.

Today, I added some new text balloons and arrows to the graph, in order to show the progress both countries made:

Crisis lifecycle graph
Ernst's Economy for You
Click to enlarge
Where my graph has been very much correct, is in the fact that the worst had yet to come for the Euro-zone and especially The Netherlands in 2012; something that many employers, politicians and some of the economic pundits didn’t want to see in those days.

Although the crisis lifecycle has been different for  the US and The Netherlands, the effects of the crisis have been largely the seem in both countries:
  • High unemployment;
  • Struggling and defaulting retailers and Small and Medium Enterprises;
  • Increasing poverty and austerity among the population;
  • Large companies that became highly profitable again, while small companies continued to struggle until this day;

In other words: although there are definitely differences between both countries, the general economic situation and the effects of the crisis were rather equivalent. 

When it comes to the desired solution, however, the difference between both countries is almost 180 degrees opposite!

Today, Het Financieele Dagblad wrote an article about the United States, where economic growth in 2013HY2 had been spurred by increasing consumption:

When the 2013Q4 results would be annualized, the US economy would have grown by 3.2%. Consumer spending was an important stimulant, as it increased by the strongest rate in three years.

This was announced by the American Ministry of Trade, this Thursday. The 3.2% growth rate was in synch with the forecast of economists inquired by Bloomberg.

On top of that, this growth took place at a time, in which the cash-strapped American government went through its shutdown period. And also in those days were the aggressive  arguments and negotiations between Democrats and Republicans,  about the solution for avoiding the debt ceiling. Before, the annualized Q3 growth had yet reached 4.1%.

“For a period in which a government shutdown took place, 2013Q4 has been a quite successful quarter”, according to economist Sam Coffin of UBS against Bloomberg.

The data disclosed that government spending dropped in Q4 and housing construction stood under pressure. However, consumer spending increased by 3.3% and also the corporate investments and the smaller deficit on the current account added to the growth rate.

Well, there you have it. In spite of the decreasing government spending and dropping housing construction, the US economy grew, due to strongly increased consumer spending and increasing exports. Like so often before, it seems that the American consumers are saving the day for the US economy…

Sometimes I wish that we had such consumers in The Netherlands. But seemingly… we don’t. 

And the worst thing is: nobody in The Hague and in 'corporate Holland' seems to give a rat’s behind about it, that we don’t have such consumers. 

Like I stated last Monday at BNR Newsroom in my question to professor Lex Hoogduin:

How can we re-enable economic growth in The Netherlands, when the consumers don't get more purchase power? During the last five years, ‘our’ purchase power only diminished, as a consequence of enduring wage restraint and (largely) government-spurred inflation. The Dutch export can't supply the whole economic growth, can it?!

Professor Lex Hoogduin, during BNR Newsroom
Picture copyright of: Ernst Labruyère
Click to enlarge
Lex Hoogduin, who is definitely on my side in this, answered:

I know what you mean... 

What stands out blatantly when you look at the development of wage expenses in The Netherlands, is that this development has been extremely moderate during the last thirty years.

In the eighties, the reason for this moderate wage development was crystal-clear. With our soaring wages in those days, we had outpriced ourselves. This had a very negative influence on the profitability of companies.

However, such is not the case at all nowadays. Nevertheless, the wage increases are still extremely moderate, which has negative effects upon the income development in The Netherlands. Hence, it has definitely negative effects on Dutch consumption too

This very question emphasizes perhaps the most important difference between the United States and The Netherlands: the United States know that an elevated level of consumption by the middle and upper class Americans is paramount for the wellbeing of the American economy.

So while the unemployment figures in the United States reacted much quicker and more violently to the start of the crisis in 2008, there has never been a ubiquitous government or corporate demand for wage restraint or wage reduction in the US. 

And this, in spite of the terrible economic situation in 2009 or 2010. Unlike in The Netherlands…

Consequently, when the US unemployment started to drop in the years after 2010 and more people regained a job and a stable income, consumption started to slowly, but surely increase again, as we could see in the aforementioned article.

However, such a scheme seems NOT to be the ideal solution for The Netherlands.  Here ‘we’ think that economic growth should come from exports, more exports and yet more exports.

Government officials, captains of industry and many economic pundits think that the yields and additional jobs, coming from these increased exports, will trickle down in the whole Dutch economy. In their eyes, everybody is happy again in the end, as a result of our increasing exports, and will consequently start to consume again. And this, in spite of the almost continuous wage restraint that The Netherlands went through since the Eighties. 

At least: so they think.

Everybody who masters Dutch, should for instance listen to the whole broadcast of last Monday’s BNR Newsroom radio show, as this discloses very clearly how much the Dutch economic growth paradigm is intertwined with the need for expanding exports and how little with increasing consumption.

You have to know something: my aforementioned question at BNR Newsroom, about the faltering Dutch consumption, was initially answered by one of the other guests, Thecla Bodewes of Bodewes Shipyards.

Thecla Bodewes of Bodewes Shipyards, during BNR Newsroom
Picture copyright of: Ernst Labruyère
Click to enlarge
[I didn’t make a transcript for the other guests of BNR Newsroom, due to the importance of Hoogduin’s statement and a general lack of time – EL].

Instead of saying something about the need for Dutch consumers to restart spending, in order to help the Dutch economy grow again, Thecla Bodewes talked about preserving the Dutch crown jewels (i.e. successful companies) for (you guessed it probably) … successful exports. 

She didn't mention a single word about the Dutch consumers! 

Thecla Bodewes is a very bright woman, but she either didn’t understand (the impact of) my question or she didn’t WANT to understand it. She is also a ‘belieber’ in continuous and unrestrained exports. 

And for successful exports..., the wages have to remain low!

This is exactly the reason that, in spite of the already gargantuous surplus on the Dutch current account, we always maintained our policy of moderate wage development during the last thirty years. And since the crisis started, we added yet more wage restraint and even wage reduction to the mix.

The consequences are that the Dutch middle-class consumers are so much cash-strapped, due to the continuous wage restraint and their still very high mortgages, that they went on strike in 2009 and beyond: a movement that still didn’t stop and probably won’t stop in years to come.

Unfortunately, virtually nobody at the large employers in The Netherlands – the large companies, institutions and the central and local governments – asks himself the question: “Gee, shouldn’t we perhaps pay our personnel and our subcontractors and freelancers a little bit more salary and fees, as we have ample money to do so?!”

To the contrary: the large employers are choking their personnel and especially their subcontractors and freelancers, in order to force them to further lower their salaries and fees. This increases the problems of Dutch consumers.

And now the Million Dollar questions of this article are: 
  • Are the United States wrong, with their focus on consumption? 
  • Or are The Netherlands wrong with their single focus on exports? 
  • Or are perhaps both countries right with their 180 degrees opposite solutions?! Is this perhaps a question of more routes leading to Rome?! 

Well, at this time, I am so arrogant to state that the Dutch government and companies are blatantly wrong! 

And I have hundreds of thousands of cash-strapped consumers, tens of thousands of corporate and private defaults and many thousands of vacant stores and commercial buildings to prove it!

I predict that the crisis in The Netherlands will indeed last until 2017 (at least), if nothing dramatically changes in the remuneration of employees and freelancers. 

In this case, the consumers in The Netherlands will remain on strike in years and years to come!

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