06.05.11

What Germany's Economy Can Teach Obama

When Germany’s Angela Merkel is in Washington on Tuesday, President Obama should ask her to explain how her country manages to succeed with jobs and exports despite high taxes and welfare, says Leslie H. Gelb.

As President Obama decorates German Chancellor Angela Merkel with the Medal of Freedom on Tuesday, he might reflect on her economy, rolling along in ways that shame America’s foundering recovery. Obama and non-hallucinatory Republicans might ask her about the solidity of German growth and jobs, despite high taxes, high social-welfare benefits, and high wages, all the things many Americans scorn as business killers. If the scorners would listen for a change, here’s what they would hear from Merkel about a successful German economy:

Exports, especially high-quality manufactured goods, are the driving force of Germany’s gains in a global economy. German sales abroad rank second in the world, just behind China, which has 16 times its population, and ahead of the U.S., which has four times its population.

German business and labor leaders set aside differences to pursue common interests in jobs and profits in the national economic interest.

German economic policymaking is more pragmatic than partisan. German leaders do not say that the answer can only be this or only be that; they accept the common-sense conclusion that it has to be this and that. Thus they pursue a combination of budget stimulus and austerity, higher taxes to reduce their deficits and maintain welfare benefits, and governmental investments for jobs and future competitiveness.

In other words, U.S. leaders just might learn something from Merkel about how to run a 21st-century industrial economy in a democracy. (If readers aren’t interested in how and why this is so, or if they can’t count, or just like pontificating without facts, they can skip to the last paragraph.)

Here’s what the German economy looks like:

The German growth rate is good, not great, about on par with the U.S. (Germany’s projected growth for 2011 is 2.5 percent, while the United States’ is 2.8 percent.) After the recent global recession, Germany fell further and faster than most others because global demand decreased and the German economy relies so heavily on exports. But it also recovered more quickly. It did all this while heavily subsidizing its Eastern half, which still lags economically after decades of Communist rule.

The German economy is performing in a very solid fashion, even as it is collecting the highest taxes in the Western world.

The German economy is performing in a very solid fashion, even as it is collecting the highest taxes in the Western world.

Strikingly, the growth rate stayed at positive levels despite Germany’s high tax burden, nearly the highest in the world. Its average tax rate, including social security contributions, is 50.9 percent, as compared to 29.4 percent for America, which has one of the lowest rates in the world. Most impressively, Germany’s unemployment rate stands at 7 percent against 9.1 percent for the United States.

More surprising still is how much Germany spends to take care of its people in need, or aging, or sick, or out of work. According to the OECD fact-keeping organization, German social spending in 2009 was 31.1 percent of net national income, while Americans spent only 18.1 percent, and OECD industrialized countries averaged 24.4 percent.

How does Germany manage to grow despite this tax burden?

Exports and manufactured goods lead the way. Germany was a close second to China in 2010, exporting $1.34 trillion as compared to China’s $1.51 trillion. Even more telling is that while Germany ran a trade surplus of $218 billion in 2010, the United States had a trade deficit of $497.8 billion.

Exports are historically a German strong point. Germany takes great pains to train and retrain workers. German workers also take their jobs seriously and turn out highly competitive products. And worker representatives sit on their companies' boards. German business leaders are marvelous at finding sales opportunities abroad and looking for even small manufacturing niches to fill for widgets and gadgets, and then responding rapidly with the product. They also have the highest reputation for servicing their goods. The result is that Germany, on a population basis, punches well above its weight.

Germans also observe a kind of social contract. Klaus Kleinfeld ought to know about this and the American economy as well. He now serves as chairman and CEO of Alcoa Inc. and once headed the giant German firm Siemens. Kleinfeld, who’s admiring of many things about the American economy, stresses one particular reason for German success: “the social contract, the willingness of business, labor, and political leaders to put aside some of their differences and make agreements in the national interest. This approach finds its roots in the rebuilding of the nation after the Second World War and more recently in the reunification of East and West Germany.”

Kleinfeld and others saw this tradition of compromise coming together in a series of agreed-upon reforms initiated several years ago. The reforms were intended to loosen labor-market rules, reduce unemployment, and lift Germany’s economy after three years of stagnation. In sum, labor unions gave up benefits and some power, while business committed to continue investing and keeping jobs in Germany rather than exporting jobs. For its part, government spearheaded creative labor initiatives, such as work-time accounts, which allow firms to reduce the hours worked by employees during downturns and save them in an “account” for growth years.

Finally, and despite fierce political fights, political parties agreed on a pragmatic economic policy, including both stimulus and deficit reduction. In 2009, Merkel presided over a $72.4 billion stimulus package, the biggest stimulus plan since World War II. Last year, Merkel oversaw budget cuts to save nearly $123 billion by 2014, the biggest austerity plan since World War II. The package cuts federal jobs and reduces military personnel, but also removes some energy subsidies and institutes several new taxes. As part of this deal, Merkel agrees to maintain spending on education and research without raising income and value-added taxes.

Obviously, modern Germans do not march in lock-step like their ancestors. Like Westerners generally, they’re now independent and assertive. Equally obviously, no one has been more productive than the American worker, and American manufacturing is rebounding. But there is one point that cannot be denied: The German economy is performing in a very solid fashion, even as it is collecting the highest taxes in the Western world, taxes to provide a sense of collective equity and allow for pragmatic economic problem solving. For the most part, Americans don’t think they have anything to learn from anybody—but they do, especially from Germany