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Post Partisan
Posted at 05:49 PM ET, 06/24/2011

The U.S. does not need to copy Germany


If they ever invent a perpetual economic growth machine, it won’t be made in the USA. Or so I am led to believe by a certain repetitious strain of punditry, according to which other countries keep discovering the secret to prosperity, but never America.   

“Japan, Inc.” used to inspire awe among U.S. journalists and academics. But it went bust in 1989 and the rising-sun theory gave way to today’s vast emulate-China literature. If you go back far enough, in fact, you’ll find eminent authority for the proposition that the Soviet Union had conquered the boom-bust cycles of capitalism.  

Now the foreign flavor of the month is Germany. And it’s not hard to see why: at the moment, the Federal Republic’s unemployment rate is 6.6 percent, two and a half points below that of the U.S. Its economy grew 3.6 percent in 2010, compared to 2.8 percent here. For many years, Germany has enjoyed a more even distribution of income than the U.S., as well as excellent success in manufacturing. Germany came up with a clever idea during the recession, providing a deep governmental wage subsidy to certain workers so as to prevent mass layoffs and the attendant deskilling of their labor force. 

My colleague Harold Meyerson is especially enthusiastic about Germany, having jumped on this bandwagon not once, and not twice, but three times. He’s getting like me and electric cars!

I’m not going to argue with Germany’s recent success. But I do question Meyerson’s account of its origins, and his apparent view that it is readily applicable to the U.S. 

Meyerson lauds the German system under which local banks fund small and medium-sized local manufacturing firms, as well as the labor-management program known as industrial co-determination. In his view, local financing and joint worker-boss management make companies fairer to employees, more concerned about long-term growth and job creation -- and more competitive in the market.

Awesome! All we have to do is redesign the entire U.S. banking system and rewrite our entire law, state and federal, on corporate governance and labor relations! You may as well observe that Germans are no good at baseball.  

But even if we could transplant these long-evolved German institutions, it would hardly guarantee faster economic growth, for the simple reason that both local bank finance and industrial co-determination — mitbestimmung, as the Germans call it — long pre-date Germany’s current boom. Indeed, both were in existence during stretches of relative stagnation, including the period from 1970 to 2005, when the unemployment rate in western Germany rose from 0.6 percent of the labor force to 10.1 percent, as growth consistently lagged the U.S. Indeed, by the beginning of the 21st Century, Germany’s sluggish economic performance had earned it the nickname “sick man” of Europe.

So why is Germany booming now? The country is reaping what it sowed during a sometimes painful restructuring to overcome the aforementioned chronic unemployment. One spur was the opening of Eastern Europe to German investment, which gave firms a low-cost production alternative analogous to the U.S. South. The threat of runaway shops weakened German unions in both collective bargaining and politics, opening the way for more modest wage gains and a series of labor market reforms, enacted under a Social Democratic government – over bitter union opposition, contrary to Meyerson’s account of labor-management Kumbaya-singing. 

The reforms made it easier for employers to hire temporary workers and, by cutting unemployment and other social benefits, made work more attractive vs. the dole.

In short, a lot of people are at work today in Germany because of historical developments and policy changes that made the country a little bit more like – guess who? -- the U.S. That implies that the U.S., too, could improve its competitiveness by reining in wages and reforming unemployment benefits, but I’m not recommending that, because I don’t want to sound like Ebenezer Scrooge.

And then there was the Euro, which went into effect a dozen years ago and helped German exporters in two ways: It prevented competitive devaluations by France and Italy, and fueled a consumption boom in places like Spain and Greece, which German exporters supplied and German banks financed. Europe’s southern tier buys fully 12 percent of German exports – at least it did before the crash.

I think we should all wait to see how the European financial crisis plays out before we decide who really has the better economic mousetrap, don’t you?

Look, there are things Germans just do better than Americans or anyone else. People who get their jollies making complex cuckoo clocks and high-tech screws are probably always going to be highly competitive in manufacturing exports – just as American department stores will be staffed by friendly personnel who say “may I help you” instead of scowling like they do in Germany, and just as radical innovations like jazz, the jumbo jet airliner or Facebook did not originate in Deutschland.

 There’s plenty we can learn from the Germans, Japanese, Chinese, Canadians, Uruguayans and everyone else. But they’ve learned a lot from us, too. Americans need to identify our comparative advantages – social, cultural, political and economic – and exploit them, instead of worrying about copying the competition.

By  |  05:49 PM ET, 06/24/2011

 
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