Germany as an economic role model

The excuse we Americans give ourselves for the erosion of our manufacturing industries is that we can’t be expected to compete with the sweatshop industries of China and other low-wage countries.  But workers in Germany get higher wages than American workers, and yet Germany enjoys a trade surplus with the world and with China.  While the United States exports soybeans to China, Germany exports high-speed railroad technology.  Germany in fact was the world’s top exporting nation for years, until last year when it took second place to China. That’s amazing, when you consider that Germany has only 83 million people.

There is a good article about Germany’s achievements by a business writer named Eamonn Fingleton in the March issue of The American Prospect magazine. Click on this to read it.

The basic facts about Germany’s economic performance can be found here and here and here and here.  The counter-argument is that although Germany as a nation is more solvent and its workers better-off, the growth of its Gross Domestic Product has lagged behind the United States. But Gross Domestic Product is a poor indicator of national well-being, as has been known for some time.

The basic fact about Germany is that it is run for the benefit of producers rather than consumers.

Germany’s policy of fostering manufacturing industries goes back for more than a century. Unlike Americans and Britons, Germans historically have believed that the unit of economic competition is not the individual nor the firm, but the nation.

Germany never enacted anti-trust laws. When German companies have dominant positions in their industries, like Eastman Kodak Co., Xerox Corp. and IBM Corp. in the 1970s, the German government encourages them, not tries to break them up.  The structure of German industry is like what U.S. industry would be if, a century ago, industrialists and financiers such as John D. Rockefeller Sr. and J.P. Morgan had been given free rein.

As a result, German banks are closely allied to industry in a way that wouldn’t be considered proper in the United States.  Fingleton notes that German manufacturers have hausbanks that keep them going through recessions, and enable them to come back stronger than ever. We have had nothing like that in the United States since the Morgan era.  Big American banks  devote themselves to “financial engineering”; the German banks invest in companies that do actual engineering.

The Germans have more effective means of promoting savings and investment than cutting the top tax rates for millionaires and billionaires.  Fingleton points out that German industrialists early on saw the relationship between scientific research and industrial growth.  When George Eastman decided to establish Kodak Research Laboratories here in Rochester, he traveled to Germany to see how it was done.

The other major force in the German economy is the power of the German labor movement.  German trade unions resist outsourcing, but work with their employers to make their companies more efficient and competitive.  Unions have representation on the boards of directors of large corporations – an innovation introduced in the late 1940s by the British occupation authorities under the then Labor government.

The power of labor unions means German workers have greater job security, which may be a handicap to individual employers but benefits the German economy as a whole, Fingleton claims.  In downturns, German firms tend to cut hours of work rather than employees.  German employers have a greater incentive to increase the productivity of their workers, through training and technology, and as a rule German workers stay with their employers instead of taking new skills elsewhere.

When you look at these achievements, you have to consider that German industry was devastated during the Second World War and Germany had to rebuild their economic structure literally from the ground up, and then that for the past 20 years Germany has been struggling to integrate the dysfunctional East German economy into the larger economic structure.  It’s quite a success story, and if not one to copy in all aspects, one to learn from.

I first wrote about the German model for the Rochester Democrat and Chronicle some 20 or so years ago.  John Summers, then president of the Rochester Tooling and Machining Association, told me in an interview of seeing an examination by which an apprentice German machinist qualified as a journeyman. The apprentice had to build a machine from a blueprint, while detecting and compensating for the error in the blueprint, and then write a report on what he had done in grammatically correct German.

No apprentice in Rochester could have done such a thing.  On the other hand, I don’t know whether Rochester machine shop owners would have been willing to pay German-level wages for such qualifications.

I interviewed two German-born Rochesterians – Fritz Grasberger of the Center for Governmental Research and Klaus Gueldenpfennig, the founder and CEO of Redcom Laboratries, a successful telecommunications company.

They both said the differences between the United States and Germany were a question of tradeoffs. Germany had efficient public services, clean streets and parks, excellent public transportation, a good social safety net, but German prices and taxes were sky-high by American standards, German living quarters typically were cramped by American standards and few Germans owned as many gadgets and other possessions as Americans did.

It is a matter of what you consider more important, they said. As for themselves, they felt that the United States had a more dynamic and creative society, and a certain amount of dirt and disorder was not too high a price to pay.

There’s something to that. The great strength of the United States is that it is a magnet for enterprising people.  We have world-changing companies such as Google and Amazon.  The last comparable German company I can think of was Volkswagen, whose Beetle changed the way we thought of automobiles. But maybe we can be enterprising, and invest in technology and human resources, too.

I remember my friends Steve and Martha, coming back from a budget tour of Europe, talking about spic-and-span everything in Germany was and how everything worked.  Staying as guests of a German friend, they went on a stroll, and were told when they got back that they had been in the bad part of town – the part where the Turkish immigrants lived. It didn’t seem bad to them. They visited a German public school, and saw a big poster of a gorilla, with lots of tiny birds and furry animals on its shoulder and lap; the poster read, “It Is the Duty of the Strong to Protect the Weak.”

[Added 10/9/10]  Click here and here for some more of my thoughts on Germany as an economic role model.

[Added 3/31/11] Click here for “Germany’s new boom: making money by making stuff” and “Germany plans for zero-emission car for victory over petrolheads.”

Tags: Exports, Foreign Trade, Germany