So in the case of Germany, I do think Germany is the world’s greatest mercantilist power right now. It used to be China. China’s surplus has gone down in recent years, but Germany’s trade surplus is almost 9 percent of GDP. And they are essentially exporting deflation and unemployment to the rest of the world. I think the damage, though, is done to the rest of Europe and not the United States. In addition, it is not a trade problem. It is a macro-economic problem. The solution is to get German consumers to spend more and save less and the German state to spend more and to increase German wages. It is not the trade policies of the US or any other country that is going to be able to address this issue. It is similar to the way Trump has picked up grievances about how trade agreements have operated in the United States. These agreements have created loses, and grievances that have not been addressed, and I think there is a lot of truth to those kind of things, but I don’t think he has any realistic way of dealing with those things.This was after Dani noted Trump’s complaints with respect to Germany’s trade surplus were “bonkers”. Now I wish I had said that. Dani next turns to the U.S. trade deficit in response to a question whether it is a problem:
Yes, but I don’t put it on the top of our concerns. There have been times when it is a bigger issue. The U.S. could use more aggregate demand and one of the places it could come from is smaller trade deficit. But you could get the same result more effectively through a more aggressive fiscal stance on the part of the federal government and the states, particularly through expenditure on infrastructure. I do think the low labor force participation is something we should try to bump up and I think there is a place for increasing demand. A lower trade deficit might contribute a little bit to raising it, but I don’t think it’s where the major action is.I’m all for more infrastructure investment – in fact, a lot more. Of course there are couple of qualifiers here. One – if you got a lot more, we probably need to raise taxes to offset any excessive fiscal stimulus. But secondly – it seems this agenda has been put on hold unfortunately. But Dani generally is right – we need a bit more aggregate demand. Rather than use trade protection which will likely strengthen the U.S. dollar with the usual result that net export demand on net will not change, let’s try something novel. I’m talking about lowering U.S. interest rates. Yes – I know the Federal Reserve seems hell bent on doing the opposite but that is a mistake. The ECB has been pursuing an aggressively easy monetary policy which has devalued the Euro with respect to the dollar, which of course raises German net exports and lowers our net exports. If the Federal Reserve reverses course and lowers interest rates, we could get a much needed devaluation of the dollar.