Friday, March 3, 2017

German Industrial Policy and Culture

A reader asked me a while back to comment on Germany's industrial sector.  It's an interesting subject to study as we struggle to Make America Great Again, or Not, depending.

I drew from this Deutsche Welle article, this BBC News article, and this Guardian article for this blog post, so if you'd like to read my original sources I encourage you to.  Otherwise please note that the emphases added throughout are mine.

Germany has long had a corporatist bent to its political organization and culture.  Take it away, Wikipedia:

Corporatism, also known as corporativism, is the sociopolitical organization of a society by major interest groups, known as corporate groups, such as agricultural, business, ethnic, labour, military, patronage, or scientific affiliations, on the basis of their common interests.

So in other words, labour and industry do not fight in this system: they get along.  Free love, man.

It sounds too groovy to be true, but actually Germany has long been successful at corporatism, mostly because from the get-go, labor was treated with the dignity and respect it deserves.  Good ol' Otto von Bismark, whose nickname was "the Iron Chancellor" and who unified his nation with the proverbial "blood and iron" (i.e., not a softie), was a historical trend setter in terms of setting up pensions and health care for German workers, at a time when workers in America, Britain and elsewhere were more or less the scum of the earth.  Bismark wanted Germany industry to succeed, to dominate, and he understood that a motivated, loyal labor force would be central to this aim.  

So labor and capital have a long history of working hand in hand in Germany, a bit more harmoniously than in other industrial nations, and in large part that is because capital doesn't view labor with hostility, doesn't view the working person as a disposable cog whose demands for a living wage and basic dignity are communistic attacks on capitalism itself.  (NOTE: this was not the case during the Nazi era, it should go without saying.)  This approach goes a long way.

One manifestation of labor dignity is that people are not overworked in Germany.  In fact, German workers work tremendously fewer hours per year than their counterparts in the United States, or our dread low-wage competitors in Mexico.  The chart to the left is from 2012 but the picture hasn't changed radically.

German workers are only the 7th most productive in the world.  A handful of Western European countries, and the USA, outstrip Germany in terms of worker productivity.  And yet the German industrial sector is quite robust, not "sick" like ours, suggesting that productivity is not necessarily a be-all end-all consideration.

Because German workers are not overworked, it is easier to spread the total number of work-hours around, and thus, employ more people.  In the late 1990s this was not the case; following German unification, wages were rising rapidly.  The government of Gerhard Schroeder struck a deal between organized labor and industry whereby workers voluntarily curtailed their own hours, and created a low-wage pool of labor, which led to higher overall employment.

Please note: this deal (named "Agenda 2010") did create a large pool of low-wage jobs!  So in this regard, modern Germany's industrial arrangement leaves a bit to be desired.  That said, the flexibility of the labor force has meant, in part, continued high overall employment in Germany, even as global recession batters its neighbors, so from a stability perspective, it's worked.

(It's worth nothing that labor and capital voluntarily came to an agreement for low unemployment and a large pool of low-wage jobs in Germany, essentially the same societal arrangement that the United States came to involuntarily over the past eight years, as America recovered by the Great Recession employment-wise, while real salaries have suffered.)

Of course, a low-wage job in Germany is a lot more tenable than a low-wage job in the United States, mostly because entitlements are much more generous.  If you work for minimum wage in the USA and you lose your job, you might be in serious dire straits.  If you lose your low-wage job in Germany, you likely still have your severance pay to fall back on.  For that reason, your employer is likely to be far less likely to terminate you in the first place!

A quick note on severance pay: you'd think the imposition on employers of large sums of severance pay would deter them from hiring new employees.  Is that in fact the case?  Consider this chart:

Look at that.  Other than Spain, every country on that list both mandates longer severance pay than in the United States (which mandates none at a federal level, though states differ) and employs more of their population.  But let's eliminate two regulations for every new one, eh?

This severance pay may in part explain the lower youth employment in Germany than in the United States.  But guess what?  In Germany, college is free, and students are given stipends.  So of course the youth aren't working: they're studying to become the engineers and business people of tomorrow.

Germany takes this youth-nurturing pretty seriously.  Vocational school is not a joke in Germany.  To ponder German education from an American perspective is mind-blowing:

School finishes at lunchtime across much of Germany due to what Mr Woergoetter calls a "societal preference", designed to allow children to spend more time with their families.

But it's in the later years of schooling that the German model really stands apart.

"Half of all youngsters in upper secondary school are in vocational training, and half of these are in apprenticeships," says Mr Woergoetter.

Apprentices aged 15 to 16 spend more time in the workplace receiving on-the-job training than they do in school, and after three to four years are almost guaranteed a full-time job.

And in Germany, there is less stigma attached to vocational training and technical colleges than in many countries.

"They are not considered a dead end," says Mr Woergoetter. "In some countries, company management come from those who attended business school, but in Germany, if you're ambitious and talented, you can make it to the top of even the very biggest companies."

No wonder Germany produces 100,000 engineers per year.

Germany as a state does not simply rely on strong education and the imperatives of the free market to stay ahead.  There is the Fraunhofer-Gesellschaft, a research institute funded by both by private contracts and directly by the German federal and state governments.  The Fraunhofer guarantees that Germany remains at the cutting edge of engineering research.  Direct federal funding for research!  In this country, we call that dirty socialism, but it seems to have worked well for the land of BWM.

Why else does the Germany industrial sector flourish come hell or high water?  A significant reason is that both German individuals and corporations are largely debt-free.  This has kept individuals and corporations afloat during times of economic distress.

However, while frugality is great for the individual, business would not be booming in Germany if it did not benefit from that bete noire we fear from China: an undervalued currency.

By getting into bed with more sluggish economies in southern Europe, Germany adopted a much weaker currency than would otherwise have been the case - as one of the very few countries in the world running a balance of payments surplus, the deutschmark would have been a great deal stronger than the euro. 

This has provided a terrific boost to German exports, which are cheaper to overseas consumers as a result.

Reminder: a strong currency is not necessarily a good thing to have, even though the word "strong" is employed!

The final notable feature of German industry is how comparatively small the companies that dominate it are:

[The educational system] provides the German economy with a reliable stream of skilled workers, from which mid-sized companies benefit the most. These, defined as companies that employ no more than 500 people - the so-called "Mittelstand" - are the backbone of the German economy. They stand for 99 percent of the approximately three million companies in Germany, most of them family-owned.

For Klaus-Heiner Röhl of the Cologne Institute for Economic Research (IW), this is another reason why industry still makes up around 26 percent of the economy, while de-industrialization is much further advanced in other countries. "That means that the family owns this company and nothing else, while in Britain a company may have long since been put on the stock market, the shares possibly bought up by a large corporation, who may then close down the British factory and move production abroad," said Röhl. Since the family's whole life is invested in the company, they keep it in Germany.

Most of these families have a good cushion of capital, and so don't float their company on the market. That makes long-term planning more of a possibility. "You don't pin everything on certain statistics from one quarter to the next, you make long-term plans, which you then follow," said Röhl. "You don't get hasty. You don't expand faster than is good for the company."

Slow and steady wins the race.


So what have we learned about German industry?

1. German workers work fewer hours than American workers, which allows for more overall employment;

2. Working a low-wage job is less burdensome than in Germany than in the United States due to the strong German social safety network, which includes lengthy severance pay;

3. German industry is dominated by small/mid-sized companies, not huge behemoths;

4. The government directly invests in research, in collaboration with the private sector, to keep industry competitive;

5. German companies and individuals do not load up on debt; and

6. Germany exploits its undervalued currency to power exports.

So there you have it!  Food for thought.  Personally speaking, I wouldn't have a huge problem with the United States just copying this approach to industry wholesale.  But then again, I'm just some loser with a blog.

Everyone have a terrific weekend!

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