Saturday, April 18, 2009

Germany's state corporatism

Norman Pearlstine writes a column praising the virtues of Germany's state corporatism, holding up the city of Stuttgart as a shining example of the achievement's of this approach:
Spring has come to Stuttgart. Cafes are full and young people walk arm in arm through the city’s crowded pedestrian malls. The central train station is spotless as are the city’s parks. Germany’s Motown is clearly no Detroit.

...It is increasingly clear that German state corporatism, the bane of right-thinking Anglo-Saxon capitalists, deserves much credit for the relative comfort of Stuttgart’s citizens, as well as those throughout most of Germany. State corporatism is different from state planning. It eschews nationalization of industries or government-mandated five-year plans for them.

State subsidies, a plethora of regulations, are hallmarks of the German way, where industry and labor have been forced into a constructive partnership that each side often finds distasteful. It is the government’s strong role in regulating commerce that has saved the German auto industry from itself. Muted capitalism is alive and relatively well.

For years, Americans criticized Germany and the rest of “Old Europe” for their tax policies and addiction to government subsidies, which now look mild compared with the federal bailout of Detroit. German unemployment, at 8.1 percent, while roughl
y equal to that in the U.S., is actually lower than it was in many earlier years. An elaborate system of pensions, social security and national health care keeps a higher proportion of the costs for retired, unemployed and sick workers off the books of German automakers than is the case in Detroit.

Germany has recently extended government subsidies so that companies can keep workers on payrolls for as long as 18 months -- it used to be six months -- even if layoffs might be easily justified. The government also has bolstered a subsidized “short-work” program. More than 670,000 workers were registered in March, 55 times the number enrolled in the program a year ago.

Consider the implications for Daimler. Although the company threatened a first round of job cuts at its annual meeting last week, management can’t carry it out before the end of 2011 because of a labor agreement. Instead, about half the company’s 140,000 German workers agreed to shorter work weeks and the rest may be subject to pay cuts of 14 percent, Guenther Fleig, Daimler’s management-board member for human resources, said recently. An additional 280 million euros ($370 million) might be saved by delaying profit-sharing payouts.
About a 40 minute drive from Stuttgart is the town of Pforzheim where things aren't so hot. This is the other side of Germany's economic philosophy that goes unmentioned by Pearlstine:
The family-run Opel car dealership here has closed after 80 years. After the local SinnLeffers department store shut down, the grocery store in the basement put beer and pasta displays in the store windows where the mannequins once stood. The unemployment rate is shooting up as industrial jobs vanish.

Until recently, this was a more or less typical scene in eastern Germany. But this was in the west, and in one of its richest regions, the state
of Baden-W├╝rttemberg. Because of the nature of the world economic crisis, rising unemployment in Germany is largely bypassing the poor areas of the east and striking at the heart of the country’s wealthy industrial areas in the western and southern regions.

Nowhere is that more true than in Pforzheim, known as the Golden City for its history as the jewelry capital of Germany, and which now has the fastest-growing unemployment rate of any locality in the country. Unemployment is still far worse in the east, where it hovers around 20 percent in some regions. But the number of unemployed in the west rose by 31,000 in March, versus just 3,000 in the territories of the former east. Over the past year, Pforzheim has had the highest increase in its unemployment rate, rising 2.7 points, to 9.8 percent from 7.1 percent, taking it from below-average unemployment to above the nationwide average of 8.6 percent.

...The country has a strong social safety net. Mr. Frey said he could collect 60 percent of his salary for 18 months, but said he did not know how he would support himself on the more modest welfare payments he would receive if he had not found a job by then. Economists say that the worst is yet to come for workers. Companies have used government-subsidized short working hours — known as kurzarbeit — to avoid mass layoffs, but that still costs them money and is only a temporary solution.

In February exports fell 23 percent compared with the previous year. Industrial output shrank 20.6 percent for the month, compared with the year before. “We would need to see signs of improvement in summer or early autumn. Otherwise it becomes too expensive for companies to continue kurzarbeit,” said Gernot Nerb, director of sector research at the Ifo Institute for Economic Research in Munich.

Last week some 14,000 Thyssen-Krupp employees demonstrated in Duisburg against plans by the company to cut back thousands of jobs. The German automaker Daimler, which has placed some 70,000 workers on short-hour status, said recently that it could no longer rule out job cuts.

That would mean more bad news for Pforzheim, where many people commute to nearby Daimler factories. The local branch of the German Federal Labor Office said that in Pforzheim and the surrounding region, there were roughly 10,000 unemployed but the same number had already been moved to short hours.
Germany's subsidies and shortened working hours can only delay the inevitable. The money spent by the government doesn't appear out of thin air, it is either taxed or borrowed from other, more productive, areas of the economy to fund the less productive sectors. Levying a de facto tax on success while distributing subsidies for failure is not a long-term strategy for prosperity. Germany's fear of the hardships of unemployment is driving policies that deter future sources of employment.

Indeed, it is instructive that Pearlstine concedes that Germany's current unemployment rate -- currently on par with that of the U.S. -- is actually an improvement over recent years. This reveals that high unemployment in the U.S. is actually the norm for Germany, not exactly a ringing endorsement.

Nonetheless, this is the European model that the Obama Administration seems bound and determined to move the U.S. towards.

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