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Mein Gott! What Germany Inc. Can Teach America About Economics
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As German voters go to the polls today, it is interesting to consider their rather self-confident world view – and how sharply it contrasts with the increasing self-doubts that have gripped the American people in recent years.

The German economy’s vigorous good health is most obvious in jobs. The German unemployment rate has remained consistently one of the developed world’s lowest and, at last count, on an American accounting basis, stood at a mere 5.5 percent. This was the second lowest of ten advanced nations surveyed by the U.S. Bureau of Labor Statistics and compares with 7.6 percent for the United States. Only Japan, with a rate of 3.4 percent, did better.

Perhaps even more impressive is Germany’s international competitiveness. As of 2012, Germany ran a balance of payments surplus of $208 billion – the second highest in the world after China’s $214 billion. On a per-capita basis, Germany’s surplus was more than 16 times China’s.

Another telling statistic is Germany’s net foreign assets. At $1,437 billion recently, they rank among the world’s largest. By comparison America’s foreign assets have long since been exceeded by its liabilities, and its net foreign liabilities at last count were a shocking $4,277 billion.

As for per-capita incomes, Germans have seen growth of 49.2 percent as measured in current dollars in the most recent ten years – easily trumping growth of just 27.7 percent in the United States.

The most interesting thing about all this is that Germany does not believe in American-style free markets, and never has. The German labor market, for instance, is extensively regulated to discourage layoffs and in downturns German corporations are generally obligated to carry more labor than they can fully use. Even so such huge German employers as Daimler have remained profitable in the last few years.

Another sharp deviation from American ideas of good economics is in anti-trust regulation. Although cartels are officially illegal in Germany, they are generally tolerated if not actively encouraged, with the result that it is almost impossible for new entrants to penetrate many areas of German industry.

Meanwhile German regulators have contrived to ensure extraordinary concentration of power in the financial system, which is now dominated by two duopolies – Deutsche Bank and Commerzbank in banking and Allianz and Munich Re in reinsurance. These corporations directly or indirectly control large swathes of industry and commerce. Adding to the concentration of power is that the reinsurance companies own large stakes in the banks. (Disclosure: I am a stockholder in Munich Re.)

Given its flouting of so much of the canon of “good economics,” why has Germany been so successful? The short answer is that free markets are greatly exaggerated as a source of economic success (they come up short in safeguarding a nation’s endowment of advanced production technology, for instance).


A longer answer would point out that Germany’s economic structuring closely parallels that of the miracle economies of East Asia and can be presumed to be designed to achieve the same objectives. Indeed for those who know their economic history, it is East Asia that has copied German economic ideas, not the other way around. The story goes all the way back to the 1870s and 1880s when Bismarck set Germany on the road to economic superpowerdom with a strongly mercantilist approach to trade. One of Germany’s first imitators was Meiji Japan.

This is a big subject and cannot be adequately addressed in a short note. A basic problem is that in commenting on economies that deviate from Anglo-American textbook norms, the Anglophone press is highly unreliable. Commentators seek to make reality conform to theory either by “pruning” their accounts of contradictory facts or, worse, by utterly misrepresenting undeniable facts. A classic example of the genre was a recent article by Adam Posen in the Financial Times in which he seemed to suggest that Germany has been underperforming in income growth in recent years. For an ideologue like Posen, who runs the Peterson Institute for International Economics, the idea that German incomes could have outperformed American ones in recent years may seem impossible – but that is no reason to misstate fundamental facts.

For now the key point is that Americans should simply take note that their mainstream economic commentators — the same ones whose theories paved the way for the Wall Street crash — are even less reliable on economies like Germany and Japan than they are on the United States.

(Republished from Forbes by permission of author or representative)
• Category: Economics • Tags: Germany 
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