3 Things to Learn From the German Economy, and 3 Things Not To
When the news broke that Germany, the fourth largest economy in the world, grew nearly six times faster than the United States in the second quarter of 2010, some commentators responded the way commentators tend to respond. They demanded that we be more like Germany, right away. The United States spent trillions of dollars only to see unemployment double. Germany enacted a far smaller stimulus and unemployment is down to pre-recession levels.
The above graph offered a good opportunity to jump to conclusions. David Brooks called the U.S. a "weakling" compared to Germany. US News and World Report writer Brandon Greife said Germany's big quarter proved that big stimulus cannot work. Fareed Zakaria called Germany an enviable economic model.
Why did Germany grow so quickly coming out of the recession, and what lessons should the United States learn from it? Here are some lessons we should -- and shouldn't -- draw from comparisons between the U.S. and German economies.
1. Save more. In the good times, the German consumer saved as much as the U.S. consumer over-spent. Today, we're playing a game of catch-up by dedicating more money to paying off debt and paying up savings. That's one reason why the tax cuts in the stimulus haven't stimulated much additional consumption. If we had saved more like the Germans, we wouldn't be underwater and we'd be spending more of our new income of dryers instead of than debt.
2. Work sharing works. One reason why Germany's unemployment rate hasn't spiked like ours is the German government pays companies not to fire workers. It's called "work sharing," and here's how it works. Let's say you're a company with 100 employees and you want to cut 10 percent of your payroll. In the U.S., you might fire 10 workers. In Germany, if you fire nobody but instead reduce every worker's hours by 10 percent, the government will pay the rest of their wages. In short, you "share" your workers with the government. Work sharing, which has been proposed by some economists like Kevin Hassett and Dean Baker in the United States, helps employers avoid layoffs and promotes employment.
3. Health care costs matter. Germany spends half as much as the United States per capita on care. That's key because in the United States, the burden of paying for health care often falls on the employer. That makes U.S. workers increasingly expensive for reasons that have nothing to do with the quality of their work or experience. Like the United States, Germany is a high-wage, high-tax, relatively high-regulation country, but it's not an astronomically costly health care country, and that makes workers easier to afford, and add.
1. Big government stimulus doesn't work. Why didn't the Recovery Act stop job losses? Economists will debate this question for years. But one compelling explanation is that the entire U.S. economy entered the recession in debt. As a result, consumers and businesses and states didn't spend the stimulus money to pay for new things (equipment, workers, goods). It used the money to pay back old things (debt, life savings, pension funds). In the U.S., the average consumer has a debt load of 122 percent of his annual income. In Germany, that number is 100 percent. German consumers and businesses saved during the boom. That's one reason why they're healthier during the recovery.
2. We can copy Germany's monster quarter. The easiest way to recover from a financial crisis is to bring in new money in exchange for new goods. In other words: exports. This makes the export-dominated German economy sound alluring. But Germany's model is not particularly, well, exportable.
If Germany were still on its own currency and growing rapidly, the Deutschmark would have gained value against other currencies, raising the cost of German products, hurting exports, and bringing its trade surplus down. Instead, the Eurozone crisis has battered the Euro, making German products cheap overseas. At the same time, developing countries experiencing healthy recoveries are looking for industrial machines to build new factories: precisely the thing Germany excels in producing cheaply. Germany's record quarter is something of a fluke, according to Dr. Tim H. Stuchtey, director of the Business & Economics Program at American Institute For Contemporary German Studies. "It's a historical coincidence," he told me, "not an intended effect of some wise political measures."
3. Reversing outsourcing would key an export-driven recovery. Europe accounts for about two-thirds of Germany's exports. But Germany both sells to Europe and outsources to Europe. "There is only so much German in a German car," Stuchtey said. "The wheels come from Italy. The motor comes from Hungary. We outsource quite a bit, but to Europe more than the rest of the world."
What's keeping U.S. companies from seeking out overseas markets? Stuchtey has a surprising answer: U.S. geography. "Smaller companies in the United States are satisfied with huge size of the North American continent and market," he said. "I think the size of your home market makes small companies lazy about exports.
"Germans don't spend like Americans," he continued. "Since our home market is not big enough, companies have to go abroad. If you're a small company in Amsterdam, it's not a big deal to sell in Germany. If you are a small company in Iowa, selling in Japan or Germany is a huge step -- culturally and business-wise. "
I asked Dr. Stuchtey what he would tell the president if he were appointed czar of U.S. exports. Here's what he said: "Promote bilateral trade agreements. Refrain from protectionist measures. Open up your markets to other countries products. Sign the bilateral trade agreements with Korea and other countries., Deregulate the transportation sector to lower costs for companies who are willing to export. Offer some administrative help and consulting and financing to small and mid size companies who are interested in exporting."