Monday, November 13, 2017

What Are the Secrets of the German Economy — and Should We Steal Them?

It appears that Germany's government policies, industrial relations, and high-end products have helped its manufacturing beat back the threats of globalization. There is much political-rhetoric about the demise of the manufacturing sector in the U.S.:
Bernie SANDERS: We have had, for the last 30+ years, disastrous trade policies.
President TRUMP: We’ve lost 60,000 factories since China joined the World Trade Organization in 2001.
Should the U.S. adopt more protectionist policies similar to the Germans to help maintain the manufacturing sector in the United States? How important were the 2003 Hartz reforms (decreased government assistance to the poor and unemployed;  easier for firms to fire employees; and encouragement of more part-time, low-wage, non-union jobs) in turning the Germany economy around?

At the end of the podcast, Jeromin Zettlemeyer states that the U.S. has had its own comparative advantage and this has had the unfortunate side effect of wounding its manufacturing sector:
ZETTELMEYER: A very important reason why traditional manufacturing has declined in the U.S. which is completely under-emphasized, particularly by the Trump administration is domestic competition; extremely dynamic growth in new sectors in the United States, particularly, of course, the computer industry and the software industry, the platforms, the I.T. giants. This growth sucks away labor and makes it harder for traditional companies to compete.
This has nothing to do with globalization. This has something to do with technical change, but it has a lot to do just with the general dynamism of the U.S. economy. One of the reasons why the manufacturing share is high in Germany is because the German industry lacks this dynamism. The U.S. has traditionally been a much more dynamic economy. The U.S. has a very good model and what the U.S. should focus on is to maintain and improve its model, not about copying the German one.

To what degree does Germany's focus on tradition impact innovation? Is it a reasonable tradeoff? Should the U.S. attempt to adopt institutions of the German economic model?


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    1. I think, fundamentally, Germany’s recent economic success has more to do with their culture which has produced institutions that allow German companies to stay competitive. Post-WWII Germany, the unification of East and West Germany, and the Hartz reforms all created an environment where manufacturing jobs were encouraged and protected by unions, the government, and companies. The Mittelstand, Germany’s wide array of small to middle-sized companies produce a wide array of niche, luxury, and high-value products, and they exist because of market forces, and the lack of large, dominant companies in these niche markets. There is a certain inertia to Germany’s economy, which probably is a result of their culture, that doesn’t exist here in the U.S. While it has protected manufacturing jobs, it has meant that Germany has lost out a bit in high-tech and other high innovation jobs. However, while this argument might be true, the fact that manufacturing jobs are high-paying and respectable in Germany means that there simply isn’t as much of a labor force for the high tech industries we see here in the U.S; the manufacturing sector sucks labor away from other industries.

      Whether the adoption of German economic policies to the U.S. economy will generate economic prosperity is up for debate. As stated earlier, we have very different cultures. Further, our political systems might not be compatible with German work councils/union representation. A good example was when Volkswagen tried to open a factory in Chatanooga, TN. Volkswagen representatives invited the United Auto Workers Union to create a German style of works council. In Germany, union representatives sit on the board of most corporations, particularly manufacturing-based corporations. However, while the UAW was open to the creation of such a council, politicians in Tennessee saw that this idea was not implemented. Even if the works council was created, it was no guarantee that this would have been a successful venture. German and American unions are very different, with German unions working much more cooperatively with German companies. American companies have had a much more contentious relationship with American companies, which has resulted in a much less favorable perception of unions in the U.S. as opposed to the esteem Germans have for unions. Further, one economist compared the German and U.S. economies as being a stakeholder vs. shareholder economy, with the U.S. being the shareholder economy. I think it’s a pretty apt analogy when considering how much profit overrides most other considerations here in the U.S.