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Posted at 09:09 PM ET, 06/28/2011

Two cheers for Germany


Charles Lane has taken me to task for my repeated championing of the German economic model – a topic, he notes, to which I return as frequently as he does to electric cars. What’s the point of this German obsession, he wonders. Do I really think the United States can make the kind of structural changes to the economy that have served Germany so well? And do I really think we can do it quickly enough to help us find a way out of the Great Recession?

The short answer is No and No. The German economic miracle — unemployment is lower than at any time since the West absorbed the East, its trade balance is larger than any nation’s except China’s, inequality has not increased like it has here — is the result of institutional arrangements that have been decades, and in some cases, centuries in the making, and that are largely alien to the American way of doing things. Germany has retained a large manufacturing sector – it comprises twice the share of gross domestic product that ours does – that turns out world-class products. Most of that manufacturing takes place at small and mid-sized firms that are financed by local banks, not, as is routine in the United States, by capital markets. Many of these firms are family-owned, so they don’t have to worry about shareholders and can focus on long-term development rather than share value. The larger firms are required by law to have an equal number of worker and management representatives on their boards, an arrangement that has led such firms as Volkswagen, Daimler and Siemens to offshore their more routine work but keep their highest-value-added work (and their best-paid jobs) at home.

Do I really think those things can happen here? Unless America undergoes changes that I can’t readily imagine,  I don’t. I suppose the closest we came to those kinds of changes in how we do business was the UAW’s 1946 strike at General Motors, when UAW Vice President (soon to become president) Walter Reuther demanded that GM deliver a fair wage increase — its fairness to be determined by GM making its finances privy to the union and public representatives.  The UAW won its wage increase, but GM adamantly refused to let the union in on the kind of management-only information that is routinely shared by companies under Germany’s system of co-determination, as the joint membership on German corporate boards is called. And if America’s strongest union at a time when union strength in America was at its apogee couldn’t win this kind of arrangement, it’s inconceivable that it could happen today — or anytime soon.

Lane doesn’t quarrel with Germany’s success, but he questions if I understand the factors behind it. Germany, he argues, has been succeeding because its economy has been becoming more American: Half a decade ago, unions agreed to hold wages down, the Social Democratic government of Gerhard Schroeder reduced some of the guarantees and increased some of the flexibility in the German welfare state, and so on (these are points that I’ve made, too). Lane also points out that many of the features of the German economy were in place for years before that economy really began purring, in the middle of the last decade, so maybe it’s the Germans’ move to a more American model that did the trick for them.

Still, it doesn’t follow that if the German economy went completely American, it would be performing better – the current condition of the American economy rather forcefully argues against that view.

In response to Lane, I’d argue first that it took Germany a long time to absorb the East, whose economy had languished under communism. Second, more fundamentally, it was at the very point when most multinational corporations began to see themselves and behave as global corporations – that is, since China was admitted to the World Trade Organization at the beginning of the century, opening up a huge pool of cheap labor – that the advantages of the German model over the American one really began to play out. At that point, American companies put their offshoring on fast-forward. Fully 57,000 factories were shuttered here during the past decade. U.S.-based multinationals, according to the Commerce Department’s Bureau of Economic Analysis, added 2.2 million employees abroad during that decade, and reduced their domestic employment by 2.9 million.  Almost all of our iconic newer manufacturers, such as Apple, never even considered manufacturing their products at home – they’re made entirely abroad, largely in China. This wasn’t because Apple and their ilk feared unionization at home – because the protections for workers seeking to organize were so weak, there was no prospect that unions would seek to organize Silicon Valley. These companies went abroad simply because China offered cheaper labor than Apple et al could find here and because China went out of its way to bestow favors on companies manufacturing within its borders.

Germany’s institutional arrangements were the key factor in keeping Germany’s multinationals from going the American route. Yes, German unions agreed to hold their wages down, but the average compensation for a German manufacturing worker is still 50 percent higher than that of his U.S. counterpart. To keep work at home, German unions also agreed to continual productivity and efficiency increases. They can afford to do this because, as is not the case in the United States, such increases don’t necessarily mean their members will be sacked. 

Still, why do I harp on the German model if it’s not remotely on the agenda for the United States? I do so largely to make the point that in a period of unprecedented globalization and capital mobility, the kind of stakeholder capitalism that Germany practices renders a national economy far stronger, far less vulnerable to offshoring and gutting, than the kind of shareholder capitalism that we practice. In the United States today, the fortunes of our global corporations and their shareholders are decoupled, as they’ve never been before, from the fortunes of the American people. That’s one reason corporate profits and stock prices have recovered smartly even though hiring has not resumed and wages are somewhere between flat and declining.

I write about Germany to emphasize how dysfunctional (and dysfunctionally inegalitarian) our finance-and-retail-dominated economy, our Wall Street-Wal-Mart economy, has become, and how important it is to maintain a vibrant manufacturing sector. I write about Germany to let readers know that a nation doesn’t have to compete with China on price to shore up its economy — indeed, that the road to a vibrant economy doesn’t require our becoming competitive with the low-wage export platforms of the developing world. I write about Germany to make clear that a developed nation doesn’t have to be downwardly mobile, as we have been, in a time of globalization.

And if the German model is too far removed from ours to be a plausible solution to our current economic woes – well, I don’t believe that there are plausible solutions to our current economic woes within the current playbook of American politics. The Fed has given up on quantitative easing. The administration has given up on another round of economic stimulus. The Republicans argue that slashing public-sector jobs will increase private-sector jobs, though reducing aggregate purchasing power through throwing people out of work seems an odd way to boost the economy.

 I write about Germany because I believe we need to look outside of the American model of capitalism — the American model of the past 30 years, that is — if we’re to restore the American economy. Germany certainly doesn’t have all the answers, for us or for itself. But if Germany didn’t exist, I’d have to sketch an economic model substantially like its to advance the ideas I believe could help us. That’s why I write about Germany.

By  |  09:09 PM ET, 06/28/2011

 
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