Monday, August 23, 2010

Zakaria on The German System Kicking U.S. Butt

Germany could teach a few things.

So, the American economy is stalling. Applications for unemployment insurance reached the half-million mark last week, the first time to cross this threshold since last November.
The housing sector is weakening. Private business is not hiring. And the consumer is not spending.

But meanwhile, there is a major global economy that's booming. No, it's not China or India or any other emerging market. It's Germany, the world's fourth largest economy, which grew at 2.2 percent last quarter. That was its best quarter in 20 years, and it blew the other major EU economies out of the water.

Germany, you might say, isn't that part of old Europe that Americans always make fun of, high taxes, big welfare state, strong unions, lots of regulation? None of that sounds conducive to economic growth. But Germany is powering ahead, bouncing back from the financial crisis and the economic recession. So how did they do it?

First, the German consumer was prudent and didn't spend more money than he had. While much of the rest of the first world was on a spending spree in the last decade, especially the United States and Britain, Germans held back. They never maxed out on their credit cards. They never took out home equity loans.

One reason that American consumers aren't spending right now is that they are still working off mountains of debt. The average American has a debt load that is 122 percent of his annual income. The German average is a more manageable 100 percent.

Second, Germany has a strong manufacturing sector that exports products around the world. The United States and many other rich countries have essentially outsourced their manufacturing over the last three or four decades. It's cheaper to have things made in China or India.

But Germany managed to keep a lot of its manufacturing right there in Germany. It maintained technical institutes, apprenticeship programs, and in many other ways has encouraged and built and sustained manufacturing. So when it sells a Porsche or a BMW, that money comes right back into Germany. Germans are also attentive to the risks of losing technical skills. So while U.S. businesses shed jobs the minute they see the demand for their products drying up, German businesses are more careful. They are more likely to keep their workers, perhaps on half time, or even quarter time, rather than fire them. They believe that this retains the workers' skills and his loyalty so that when the economy revives, the company has trained workers ready to ramp up.

Finally, reform. The Germans have reformed their pension system, they've raised the retirement age, they've trimmed workers' benefits, they've freed up their labor market, and of course they have an affordable national health care system, one that costs half as much as ours. So their workers are actually a lot less expensive to their businesses than American workers are to theirs with the huge pension and health care costs that come along with them.

The result of all this, while the U.S. this week announced another round of bad unemployment figures, German unemployment fell in July for the 13th straight month. Germany has now regained almost all of the jobs it lost during the recession.

Maybe we could learn something from what's going on across the Atlantic in another high-wage, high-tax, high-regulation economy.

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1 comment:

  1. "maintained technical institutes, apprenticeship programs, and in many other ways has encouraged and built and sustained manufacturing"
    that's exactly the problem. us businesses send much of the real work overseas, then complain that there are no experienced workers here. no point in educating engineers if the starter jobs are in china.