How Has Germany Done It?

June 8, 2011

One of the questions that lurks in the background of the United States’ lingering economic crisis has been, “Germany has robust growth and effective governance. How has it done it? And why can’t the United States?”

The always excellent David Leonhardt of the New York Times has a fascinating look at this question in today’s issue. You can read the whole thing here. But, for the non-Times subscribers, I’ll offer a few of his comments below:

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“The brief story is that, despite its reputation for austerity, Germany has been far more willing than the United States to use the power of government to help its economy. Yet it has also been more ruthless about cutting wasteful parts of government.

The results are intriguing. After performing worse than the American economy for years, the German economy has grown faster since the middle of last decade. (It did better than our economy before the crisis and has endured the crisis about equally.) Just as important, most Germans have fared much better than most Americans, because the bounty of their growth has not been concentrated among a small slice of the affluent.

Inflation-adjusted average hourly pay has risen almost 30 percent since 1985 in Germany, the kind of gains American workers have not enjoyed since the ’50s and ’60s. In this country, hourly pay has risen a scant 6 percent since 1985.” …

“It cut many benefits, in both duration and level, and it reduced the incentives to retire early. It also began trying to move the long-term unemployed into the labor force.

Specifically, the government took a fresh look at people who had not worked in years to determine who could and couldn’t work. The able and healthy were matched with potential employers. If they took a low-paying job, which was often the case, they would still receive a small portion of their benefits for a time. If they refused to work, their benefits were reduced anyway.” ….

“Beyond the job market, Germany has also made a big effort to improve its education system. Eric Hanushek, a Stanford University economist, notes that Germany’s performance on the main international math, reading and science tests have become such a matter of national concern that the name of the tests — Pisa — is now a household word. “In the U.S.,” he says, “Pisa is still a bell tower in Italy.”…..

"But the German story is not merely about making government more efficient. It’s also about understanding the unique role that government must play in a market economy.

That role starts with serious regulation. American regulators stood idle as the housing bubble inflated. German banks often required a down payment of 40 percent.

Unlike what happened here, German laws and regulators have also prevented the decimation of their labor unions. The clout of German unions, at individual companies and in the political system, is one reason the middle class there has fared decently in recent decades. In fact, middle-class pay has risen at roughly the same rate as top incomes.

The top 1 percent of German households earns about 11 percent of all income, virtually unchanged relative to 1970, according to recent estimates. In the United States, the top 1 percent makes more than 20 percent of all income, up from 9 percent in 1970. That’s right: only 40 years ago, Germany was more unequal than this country.

Finally, there are taxes. Germany does not have a smaller budget deficit because it spends less. Germany, you’ll recall, is the original welfare state. It has a smaller deficit because it is more willing to match the benefits it wants with the needed taxes. The current deficit-reduction plan includes about 60 percent spending cuts and 40 percent tax increases, Mr. Hüfner says. It’s like trying to lose weight by both eating less and exercising more.”

12:58pm | URL: https://tmblr.co/ZPUuPy5v0wjn

(Notes: 64)