How Germany got it right on the economy

http://www.washingtonpost.com/wp-dyn/content/article/2010/11/23/AR2010112306280.html

by lotusleaf1987 • 16 years ago

81 76 16 years ago

melling• 16 years ago

Weren't the problems with the American economy foretold before the financial crisis? We haven't even hit the big problems. You can only borrow for so long and kick the can down the road.

http://www.imdb.com/title/tt0963807

te_chris• 16 years ago

An excellent article that clearly illustrates how, if you properly educate and invest in your population and provide a societal structure that allows these people to have a say, then, instead of society imploding, it actually flourishes. Not that anyone in western govt's are listening...

wazoox2• 16 years ago

Germany has other serious problems though, demography particularly.

forkandwait7• 16 years ago

I think one of the interesting things about Germany, Japan, and China is that they are NOT strictly capitalist countries, and they do NOT follow Chicago style economic models (which, ahem, seem to be inaccurate when one attempts to verify them empirically). I think a little bit of socialism is necessary to keep a thriving industry (not finance) driven economy going. Trade barriers, spending on long term public education and welfare and infrastructure, long term economic planning not based on this quarters dividends, a dash of regulation to curb the worst abusers, some subsidies to beef up struggling sectors that contribute the greater good, an efficient and highly monitored bureaucracy, and zero tolerance for anti-social behavior (whether by the powerful or the proletariat); these are what made the USA an industrial economy from 1776 to about 1976, and they are still a recipe for success.

nl2• 16 years ago

Well generally I agree except for this:

Trade barriers

WTF?! Trade barriers are very, very bad for industrial economies.

Also, I think the case for subsidies is arguable at best. Subsidies may be useful in emerging market sectors, but are usually better structured as public spending on research etc. (Obviously argument this doesn't apply to health care any more than it does to other areas of public good such as roads, police, defense etc)

forkandwait7• 16 years ago

Trade barriers, in the sense of protective tariffs to prevent outside manufactures selling cheaply in your domestic market, can be very, very, very good for industrial development.

Governing a nation is like cooking a small fish, grasshopper. A little bit of salt (subsidies, tariffs, regulation, taxation to pay for infrastructure, etc) is a wonderful thing, too much salt is unfortunately very easy to apply. And arguments about whether salt "is good" or "is bad" are just plain silly and show that you haven't cooked that many fish.

jacoblyles• 16 years ago

There's an awful lot of assumptions to unpack in this comment so I'm not going to address everything. But can we all agree that a country which had GSEs pouring $500 billion into the mortgage market and a decade's worth of government holding short term interest rates at 0% isn't some kind of laissez-fare paradise?

You had "Chicago style" economists yelling at the government to dismantle Fanny and Freddie for years before the collapse, those shining examples of government long-term economic planning. For decades free market economists advocated replacing the Federal Reserves short-term focus on quarterly GDP with a mandate to maintain long-term price stability. Oh, and they have been railing against both parties for racking up such a huge public debt.

Then when the shit hits the fan, all people remember is a caricature of "Chicago-style" economists, not what they actually said and did.

The narrative that the United States lost its way through too much deregulation and free market fundamentalism is cheap rhetoric that doesn't become any more true the more often it is repeated. It is symptomatic of too much education by the way of opinion articles.

forkandwait7• 16 years ago

You might be right if you said that my argument was too simplistic... but I think there is plenty of "cheap rhetoric" on your side as well, and the ad hominem attack ("too much education by way of reading opinion articles" is pretty slimy, if you ask me. I could easily have said "too much watching of Fox News"....

brc3• 16 years ago

I think this is a bit revisionist at best. One of the defining characteristics of post-war West Germany was the embracing of free markets and de-regulated business. The most influential post-war Economics Minister, Ludwig Erhard was a fierce proponent of liberal economic theory and laid down the foundation for the decades of strong growth that West Germany experienced. He flatly rejected calls for subsidisation of industry and threw out all the price controls that had been in place.

In contrast to the UK, which went the other direction after the war and nationalised and socialised so much that it's economy was moribund by the 1970's, in complete isolation with the emerging powerhouse that was the West German economy.

Sure, the Germans have had a problem with unemployment, and youth unemployment in particular, but they enjoy a high standard of living and a stable and prosperous economy. And the unemployment rate has been dropping since the conservative-minded government has been in power. It is now lower than most US states.

So I would contend that Germany, particularly throughout the period from 1950-1980 was following a classical liberal economic philosophy more closely than just about any other Western country, the US included. And the results showed. Though I would say it was more Austrian school based than Chicago.

I also don't agree with your assertion that socialism is required to keep an industry going. For that you just need an export-led manufacturing sector, good technical training in schools, and to keep the finance sector in it's place, instead of being allowed to dominate the economy and thus wield political power.

Interestingly enough, the Germans haven't had a housing crash because there was no housing boom. And that's because there was no attempt to change the ownership levels amongst people who didn't own a home.

nsvida• 16 years ago

You are completely wrong. Ludwig Erhard like most other German politicians used an economic school named Social market economy. This school has been the main economic model in mainland Western Europe.

nickpinkston4• 16 years ago

While certainly Germany has done a lot right and deserve credit for their current economic strength, we have to recognize that they've both chosen a very different path: i.e. stability over growth, and also have a very different culture than we Anglo-Saxons - which I would argue are quite inter-related.

When it comes to quality manufactured goods, Germany is legendary and has strongly biased its economy over the past 100 years to take advantage.

The US & Briton on the other hand, have always been first movers to adopt breakthrough tech - often at the expense of quality, stability of investments, etc, and are seemingly always better at the "soft" side of business: sales & marketing.

The world needs both the Teutonic and Anglo-Saxon models, and seemingly they both are still going to head down the same paths as before will little change in overall direction - with the exception of America trying to get better educated the Germans trying to become better sales/marketers.

Bertrood2• 16 years ago

Well stated. The US can learn from Germany though. A mild midcourse correction could help.

The US needs to emphasize the value of all stakeholders. With this, the US will have greater growth over the longterm. Its the stable growth economies that grow and prosper over the boom-and-bust economies.

nickpinkston4• 16 years ago

Certainly US system suffers from myopia. Though I'm not sure at what point we stifle the swashbuckling nature that has made us the country of the new in business/tech/research.

I err on the side of increased transparency of financial sector, stronger FTC actions against monopolists, IP reform, etc. than on Germany's more activist bent. Ours is more of an economy of the new, and our Anglo-Saxon nature should be embraced by better regulation - not necessarily more.

edderly2• 16 years ago

I suggest that people don't go too overboard in praising Germany. Their unemployment rate over the past 20 years has been a disgrace and do not forget that though their trade surplus is healthy some consider it also reflects the weakness in German commodity consumption.

Some food for thought (though the later figures don't seem accurate): http://www.wolframalpha.com/input/?i=us+gdp+growth+since+199... http://www.wolframalpha.com/input/?i=us+employment+since+199...

Germany's (previous) economic woes could be reflective of the pain of integrating E. Germany. But then again that illustrates the problem of comparing economies directly. For e.g. could the influx 'cheap' east German labor make the overall German economy more competitive.

michaelchisari2• 16 years ago

Their unemployment is 6.7%, which observing from the US (9% after massive government stimulus), I have a real hard time seeing that as a disgrace.

alextingle• 16 years ago

Given that they absorbed the whole of East Germany only 20 years ago, it seems a little unfair to measure their unemployment rate over that period. Today they are doing pretty well - what an amazing achievement that is, given the circumstances.

forkandwait7• 16 years ago

Just as a plug for German innovation -- consider the 19th century: if you include Austria/ Vienna, people who spoke German (and were often Jewish) basically invented modern thought, ranging from mathematics to chemistry to music to philosophy to psychology etc. England was great in applied physics and math, France in dynamics and biology, but in theoretical math, music, and philosophy Germany TOWERS above anyone in the 19th century.

It all went south with the Kaiser's attempt to imitate Napolean and then National Socialism; but if Germany had avoided militarism and kept the Jews they basically would own Europe by now (they sort of do even with the setbacks of the first half of the twentieth century).

forkandwait7• 16 years ago

What I meant to say was that any statement saying that Germany is an "uninnovative" country is just hogwash. The downvote -- why? Because you disagree?

binomial• 16 years ago

To say that Germans "invented modern thought" is pushing it. Perhaps you can qualify that with an appropriate definition of "modern thought". The first few disciplines were around long before the 19th century.

cdavid2• 16 years ago

I think so-called German "miracle" is mostly a journalist and politics invention. What happened in the last few years is basically forced deflation through salary stagnation (even reduction), since you cannot play with you money anymore in the eurozone. This is very good for the companies which export a lot, but is pretty bad for everyone else (including its neighbours).

Economic improvemnts are mainly coming from productivity gains - artificially lowering your costs instead of trying to build more with less is not a sustainable past. But this kind of story is gold for newspapers: export (good !) vs import (bad !), family capitalism (good !) vs shareholders (bad !). All the usual cliches are there.

This story has been told for years in Europe, especially in France, where it is said we should follow the German way. It is very ingrained in the news reporting and the general level of discussions. One striking example is the French left and right discussing about Germany: both will assume that German growth has been better than France, and the left will claim that it shows growths is not well shared, and the right will use it as the proof that salaries are too high in France. Even though until 2008, Germany per year gdp growth has always been lower than France since the reunification.(http://www.wolframalpha.com/input/?i=gdp+growth+france+germa...). The OP article basically tells the same story from an Americain POV, even though the data do not back it up at all.

forkandwait7• 16 years ago

> What happened in the last few years is basically forced deflation through salary stagnation (even reduction).

As I understand it (which is too say barely), German salaries at the high end are nowhere near the UK or the USA.... Some of us think that might be a good thing, but if that is your metric, yeah, Germany probably sucks.

arethuza2• 16 years ago

On the point of Germans becoming better sales/marketers - it is perhaps interesting to note that one of the most durable company taglines here in the UK is in German:

Vorsprung durch Technik

kleiba• 16 years ago

Back in the 90's there was a song called "Parklife" by "Blur", and in it you can hear actor Phil Daniels reference this expression. I was always puzzled where that came from (had to look up the lyrics though - it's difficult to understand the phrase as pronounced by an Englishman).

lispm7• 16 years ago

When I was young it was in to drive Jaguar here in Hamburg. Now they are mostly gone...

The UK was strong in manufacturing for a long time, and still is. But the 'masters of the universe' decided it was easier to earn money by selling oil and financial products. The result: the oil runs out and the financial products were ponzi schemes.

Bertrood2• 16 years ago

Gordon Gekko, in the original Wallstreet said greed is good for all stakeholder interests because it eliminates wastes.

Shareholder vs. Stakeholder (employees, customers, community,and investors as opposed to just investors) is an important consideration for CEOs. Wallstreet makes it difficult for companies to plan longterm, and many companies speak of the importance of the CUSTOMER (and the community), but mean INVESTOR.

CEO Entreprenuers get the chance to choose for themselves, stakeholders vs just shareholders. The work of some German companies over the last two decades is an encouraging example.

Stormbringer• 16 years ago

I find it interesting that over the last hundred years or so, especially in the US, the 'hidden cause' of financial upheavals is usually legal - often something as simple and innocuous as changes to the rules for how savings/superannuation are taxed.

When you think about this it makes sense, the rich pay attention to these changes, and move their money accordingly. It's like trying to stabilise a rowboat, you notice that the starboard is a little low, so you order everyone to rush to the port side...

Another interesting parallel is between Apple and Germany. Apple's detractors have been screaming at them for over a decade about how they are going to lose because they don't have market share. Meanwhile, the computer manufacturers who pursue market share at the expense of profitability go bankrupt in droves ("we're making a loss on each unit, but we'll make it up in volume").

Disclaimer: I'm not German, but I do drive a German car :D

arethuza2• 16 years ago

I too favor German cars - although I did have a BMW that was manufactured in the US and I wasn't too impressed with it.

Having said that, I wouldn't mind owning the product of a certain Italian VW/Audi brand...

wheaties• 16 years ago

The problem with this article is that is glosses over one major problem: if Germany's currency moved in accordance with its economy rather than the entire European Union then its exports would be grossly overpriced and uncompetitive. It's the formation of the EU and a single currency that has allowed it to remain an exporting country rather. The article can not compare apples to oranges and make sense.

brc3• 16 years ago

But you could make the same argument against any US state that remains cost competitive due to the currency. And it also discounts the fact that Germany did very well during the period when it did have it's own currency. As it is, German economic performance does have an effect on the Euro, being the largest member state.

whakojacko• 16 years ago

>But you could make the same argument against any US state that remains cost competitive due to the currency.

Indeed you can.

>And it also discounts the fact that Germany did very well during the period when it did have it's own currency.

This is true. However Germany also gets decent manufacturing benefits from the income disparity in the east.

>As it is, German economic performance does have an effect on the Euro, being the largest member state.

Of course. However, about half of Germany's exports are to Eurozone, for which EUR flucations have no effect.

dublinclontarf• 16 years ago

Ireland and Greece are a blessing to the German economy, without these two economic ancors the Euro would be rocketing up and pricing Germany out of the market.

_grrr3• 16 years ago

>But you could make the same argument against any US state that remains cost competitive due to the currency

True, but, there is a policial union of states in the US that doesn't exist in the EU. The EU is a monetary union without a political union, this means that it's politically unpalatable to explicitly redistribute tax money from the relatively rich to poor regions (Germany/France to Greece/Portugal) in the same way as Washington or London might to W.Virginia or Newcastle.

wazoox2• 16 years ago

The problem comes more from the fact that 70% or so of German exports go to the rest of European Union and mostly the Euro zone.

Germany actually kept itself out of the water largely by lifting itself upon its neighbours' heads. Then Merkel will rant about the "lazy greeks" and other amenities.

Actually the problem arises from the disparity between a monetary union without financial, fiscal and debt union. Unsurprisingly, the biggest boy did better than the rest of the pack.

Derbasti5• 16 years ago

What you are missing here is that the Euro only works if the stronger countries support the weaker ones financially. Without this, the Euro could not be a stable currency.

If a country like Greece or Ireland is basically collapsing, it survives because countries like Germany and France pay for it. There is no such thing as a free lunch. What Germany gains now because of the weak Euro, it had to pay a few months ago to help Greece.

However, Greece has been paid by the government, not small businesses. Small businesses only have to bear that burden gradually by paying taxes.

InclinedPlane• 16 years ago

And Ireland, which has been recently bailed out to the tune of a significant fraction of its GDP.

lispm7• 16 years ago

Ireland and Greece were not supposed to be 'weak' countries.

Ireland just a few years ago was seen as a model for economic growth (supported by very low tax rates for companies). Ireland is a victim of its own misguided policies (housing bubble, banking system, ...) and its orientation to anglo-saxon economic policies.

Greece also failed to reform its economic policies (after cheating on the economic data for quite some time). There was time enough to do that.

I also don't think these countries are 'collapsing'. But adjusting their economic policies will be tough.

lispm7• 16 years ago

Germany has been consistently exporting its goods over two decades, independent of the exchange rates. The German export success is not tied to the exchange rate. German companies learned to live with high exchange rates. For example the automotive industry has factories in the US, Mexico, Brasil, ...

DanielN• 16 years ago

I'm not sure I understand the impetus for articles like this. It's the same as the articles arguing why Taiwan's education system is better than the US' or arguing that Canada's healthcare system is better.

Certainly it is valuable and important to understand foreign policy systems and lessons can be learned from these observations. But it is equally important to remember that they are foreign systems. I am yet to be presented with an example of a foreign system that would directly transport to the US and be equally successful.

The US has problems in healthcare, in education and possibly in its economic systems, but non of it is a result (at least in my opinion) of picking the wrong policy system. Largely the policy systems countries choose are based on the demographic, values, economic values, etc. Germany's economic systems work for Germany because they are build for Germany.

I recognize that this article is not directly making the argument that the US should convert to a German style trade and employment system, but it implied multiple times. I would appreciate articles like this much more if they focused more on exploring the system for itself and less time comparing it to the system in the US.

Having said all that, Germany's co-determination system, as described in the article, is an interesting concept. I guess the down side would be a fear of causing separation between the interests of labor leaders and labor workers.

Benjo• 16 years ago

Okay fine, but the article doesn't really tell us anything about why Germany is able to base their economy on export and manufacturing. Is it simply a matter of political will? What do worker wages and income distribution look like? How about education? Without examining these elements, the implication that other economies should be more like Germany seems pointless.

How Germany got it right on the economy

Related Stories