Wednesday, June 22, 2011

The German Question

At dinner the other night with friends in San Francisco, the question of Germany came up: The German economy seems to be doing well, much better than the rest of Europe, better than the U.S., with much lower unemployment and much higher economic security.
How do they do it?
A friend at the dinner table suggested it was a function of German industrial policy--that Germany was doing today what we accused Japan of doing in the past with its Ministry of International Trade and Industry, namely orchestrating a set of policies that would favor the competitiveness of national industries, particularly manufacturing. So, while the U.S. has largely let the market dictate what has happened with our manufacturing base--and seen jobs move to other, lower-cost parts of the world--Germany has retained its manufacturing base, its jobs, and its overall economic well-being.
Of course, none of us at the table had a lot of facts at our fingertips, just widely divergent opinions. While this would have made us exceptional pundits on every TV talk show, it left me wondering if there were any facts to be had.
In other words, a job for The Global Detective!
Thanks to some friends in Austria, who quickly hustled together a series of banking advisory reports and newspaper and magazine articles, I quickly had some data, facts, and arguments from informed sources that I could draw on.
Some interesting stuff: for instance, not everything we thought was true, or assumed was true, turned out to be true.
One Economist report noted that a study found that Germany's performance with manufacturing jobs wasn't what we all assumed: Over the last 40 years, Germany has lost one-third of its manufacturing jobs, more or less the same percentage as the U.S., despite, as the economists note, a "union density" that is twice that of America.
Another report explained Germany's current economic performance in light of a rather dismal performance in the decade prior--when Germany was thought of as "the sick man of Europe" (which I mistakenly thought had always been Italy's claim to economic fame).
Yet another analysis pointed out that Germany's overall economic growth hasn't been particularly stellar; what's made it look so good is its declining population, which means that when you calculate growth per unit of population, then Germany starts to look very good.
But overall, Germany today has been getting good reviews.
The question is still, why--and secondarily, what can the U.S. learn?
There are a number of explanations that recur.
One answer has to do with historically strong German corporate brands. For a nation its size, Germany has a substantial number of global brand leaders in a wide variety of sectors. These companies have grown from national champions, when economic borders were more closed than today, to global champions, able to compete and win around the world.
Germany has benefited from its well-documented Mittelstand companies--the mid-sized companies that often specialize as top-quality suppliers, producing the parts and components that other companies then assemble into finished products.
What explains those two factors?
You could chalk them up to history, education, and culture: how the German corporate structure has evolved, how young Germans are trained and educated and brought into the workforce, and what German culture values and stresses.
Another broad set of factors involve labor costs, which Germany has managed to keep relatively low, and management-labor relations, which seem to be generally collaborative and highly productive.
This, along with the overall orientation of German firms toward steady, stable, if unspectacular growth, you can attribute to governance: co-determination, which puts union members on the management board, seems to produce decisions that are aimed at a broader sense of social good and public and national well-being, rather than pure individual financial gain or even "shareholder value maximization," which is the mantra in the U.S.
There is geography: Germany is benefiting from its proximity to Eastern Europe, which is experiencing its own economic burst.
There are factors that seem to relate to social habits, cultural patterns, and personal values: a high savings rate, low personal indebtedness, a general lack of interest on the part of average Germans to leverage themselves to the hilt. Germany didn't get hit by the housing bubble and the derivatives disaster the way America (and the PIGS in Europe) did. Perhaps Germans simply have better and longer historical memories that Americans: after World War I, Germany was seared by inflation and monetary collapse, so much so that generations later, the country still seems thoroughly committed to moderation in all things economic.
To me, however, one of the most telling factors in the comparison between Germany and the U.S. today is the difference in economic equality.
When you look at the Gini Coefficient ratings for the two nations, the numbers tell the tale: Germany, at 27, is one of the lowest, if not the lowest, rated nation among all advanced, industrial, capitalist countries. It is, in other words, the most equal.
The U.S., with a rating of 45, is the least equal.
In other words, it is as if we were two countries playing the same game with totally opposite definitions of victory, totally opposite goals, totally opposite values, totally opposite aspirations.
Germans want stability, predictability, equality, social and economic sustainability. They want a society that is coherent and cohesive.
This is not a function of industrial policy. Rather it is an outgrowth of culture, history, and experience.
Americans, apparently, want the opposite.
We want huge disparities within society, great divergences between the haves and the have nots, an economy with vast differentials that holds out the promise of great fortune for individuals who make it, and the certainty of deep misfortune for those who do not.
What can we learn from Germany?
That you can have a capitalist country and still have much greater social and economic equality than the U.S. does today.
That you can rely on markets to perform, while creating "economic design specs" that channel market choices in directions that benefit society as a whole.
And, perhaps, as the old saying goes, that those who do not learn from history are condemned to repeat it.

All Rights Reserved 2009 (c) Alan Webber, Rules Of Thumb