Where Germany, U.S. differ: How much should government steer the economy?
By Jia Lynn Yang,
At the White House on Tuesday, German Chancellor Angela Merkel represented a country that boasts the very things President Obama desperately wants as he seeks reelection: record-low unemployment, a strong manufacturing base, and growth that has returned to levels from before the global recession.
Although U.S. policymakers say they’re running low on ammunition to jump-start the economy, the German government has been aggressively instituting policies aimed at protecting jobs — and they’ve worked.
The difference, say some experts, is that the German government has been unafraid to pursue policies that induce companies to preserve high-paying jobs and boost exports, embracing two words that can make lawmakers in Washington recoil: industrial policy.
In the United States, actively interfering in the affairs of big companies to save jobs is a line many politicians are unwilling to cross.
“There’s a pervasive sense in the United States that government and the economy are supposed to be completely distinct and separate realms,” said Jacob Kirkegaard, a research fellow at the Peter G. Peterson Institute For International Economics. “During a deep recession, the fact that you have a more activist government has some advantages.”
In 2009, the German government created a job-sharing program called “Kurzarbeit” in which companies agreed that instead of laying off workers, they would cut back their hours, with the government making up the difference in pay. Germany replaced lost income for at least 1.4 million workers. While they were off the job, many of them took training classes.
The program saved nearly 500,000 jobs, according to a report by the Organization for Economic Co-operation and Development. The result was that as the global economy began to pick up speed again last year, German companies were ready to ramp up with the right workforce in place. The government budgeted about $7.5 billion for the program.
“It is true that other countries are more comfortable with this thing called ‘industrial policy,’ ” said Jared Bernstein, a senior fellow at the Center for Budget and Policy Priorities and a former Obama administration economic adviser. “If you accuse Germans of practicing industrial policy, I’m not sure [Merkel] would automatically take it as an insult. Over here . . . we just don’t like the words.”
Volkswagen’s employment level in Germany last year was back to its 2008 level of 178,000 employees, after dipping by only 5,000 in 2009. Meanwhile, General Motors has 77,000 employees domestically, still down from the 92,000 it had in 2008. Ford has cut its North American workforce by half in the last five years. And many U.S. autoworkers had to take pay cuts.
“We didn’t subsidize companies so they didn’t have to lay off workers,” said Kirkegaard. “We have basically allowed ourselves to drop off into a bigger, deeper hole than was the case in Germany. That has meant we are not as well positioned to take advantage of the fact that the world economy is growing by four percent this year.”
Analysts cautioned, however, there are limits to comparing the United States and Germany because the two countries have different economies. Germany’s is based on exports, while the U.S. economy is driven by consumption and is much costlier to stimulate.
Still, Germany’s actions since the global recession show that governments of the world’s most advanced economies can preserve jobs without losing their manufacturing base.
Beyond Germany, countries such as China have been even more aggressive about creating jobs and shaping their economies, while the U.S. unemployment problem remains maddeningly persistent. Some analysts and business executives worry that if the U.S. government doesn’t act more forcefully to encourage corporations to invest in this country, it will get beaten in the tightening global competition for jobs and growth.
In May, the German government reported 7 percent unemployment, the lowest level for the country since records began after the country’s reunification in 1990. By contrast, the U.S. rate rose to 9.1 percent last month.
The German government said it also expects the country’s economy to grow faster this year than expected at a rate of 3.5 percent. Meanwhile, the U.S. gross domestic product rose just 1.8 percent in the first quarter and Federal Reserve Chairman Ben S. Bernanke conceded Tuesday that growth so far this year had been “somewhat slower than expected.”
Between 1998 and 2008, Germany went from having a trade deficit of $5.9 billion to a surplus of $267.1 billion in 2008. In this country, the deficit has gone from $233.8 billion to $568.8 billion, although President Obama has vowed to double U.S. exports by 2015.
Experts say Germany has been able to preserve its manufacturing sector partly because of the tight cooperation between government, industry and labor unions on the local and national levels.
German executives also must work more closely with labor when they make decisions. By law, large companies must give half of their board seats to employee representatives.
Gary Herrigel, a professor of political science at the University of Chicago, says that in Germany, vocational schools also work closely with small and medium-size firms to figure out what kinds of training workers need. Students are trained in both the classroom and on the shop floors of employers.
Herrigel said German companies are also less focused on their share prices. “A key difference between the U.S. and Germany is the power of the financial sector is much more limited,” said Herrigel. “The circulation of funds for investments is much more driven by the strategies of business than the profit-making interests of financiers.”