Another Way To Work

For Midwesterners viewing the post-industrial collapse of their region's economy, one big question has to be: how do the Germans do it?  

Germany has all the ingredients of a Midwestern-style economic catastrophe -- a reliance on heavy industry, big health and pension costs, especially unionized workers. Partly because of the unions, Germany has those "rigid labor markets" that have convinced a generation of American economists that the German economy is doomed to obsolescence.

So, once again: how do the Germans do it? German industry is booming and, unlike American industry, it's still in Germany. The global recession, being global, has hit Germany, too, but unemployment there now is 7.6 percent -- not great, but a lot better than the American rate of 9.5 percent. Unemployment among young people aged 16 to 24 in Germany is 10.5 percent. Again, not great. But the U.S. youth jobless rate is 26 percent, which amounts to the economic massacre of a generation.

German labor costs and social costs -- all those pension and health programs -- are high. Its currency, the euro, also is high. This means it should be uncompetitive on world markets, leading to a big trade deficit -- right? Wrong. Germany, as usual, runs a trade surplus and that surplus ($98.7 billion so far this year) is actually up 26% over last year. Meanwhile, the United States, as everybody knows, runs a trade deficit and that deficit in the first five months of this year is up 37%, to $197 billion, over last year. (Don't blame it on on China: $12 billion of that U.S. deficit is with supposedly uncompetitive Germany.)

So yet once again: how do the Germans do it? A new book just out tries to tell how. The answer is not that the German succeed despite their heavy industry, their high costs and their unions. It's that they succeed just because of all those supposed handicaps, including unions.

The book is called "Were You Born on the Wrong Continent?" and it's written by Thomas Geoghegan, a Chicago lawyer and author of five previous books, one of which, "Which Side Are You On?", was a National Book Award finalist. Personal disclaimer: Tom is a friend. He's also a labor lawyer, so you'd expect him to be defending the unions. But in this case, he's got an awful lot of facts on his side, like the above statistics. Somehow, Germany has managed to hang on to its industry and make it thrive.

Germany has outsourced much of its basic, low-skill, assembly-type industry, part of it to the ex-Communist states of eastern Europe, part of it to third-world regions like Alabama and South Carolina. No surprise here: that's just what the big Midwestern manufacturers did, too.

But having got rid of the low-skill factories, Geoghegan writes, Germany switched production to high-skill -- and high-profit -- areas, such as precision machinery, engineering, chemicals, pharmaceuticals, control instruments, even cars, like BMW and Porche. Especially Germany has seized a lead in green manufacturing -- wind turbines, solar panels and the like. (America still exports some computer chips. But a good share of our export earnings these days comes from crops and commodities like soybeans, corn, wood pulp and scrap iron -- the sort of things that the rest of the world used to send here, to be turned into goods.)

Germany leads the world in the quality of these high-value goods mostly because of the skills and knowledge of its workforce, Geoghegan says. A workforce like this doesn't come cheap. Such workers cost a lot to train. They belong to unions, so their pay and benefits are high, and it's almost impossible to fire them.

Then there's "mitbestimmung," or co-determination. This is the peculiar German custom that gives German workers no less than half the seats on the boards of big corporations. It's not that the workers own shares in the company. Rather, it's assumed that, because their jobs depend on the company, they have a right to influence its decisions -- a "stake" in the company, so to speak. If a company is considering outsourcing or even closing a plant, these worker-directors have a right to pour over the books, present alternatives, and demand compensation for both workers and communities.

In Germany, companies cannot simply decide to close a factory without warning, put the workers out of work, and move jobs overseas, arguing the pressures of global competition. The German system effectively prevents a good deal of outsourcing and slows up the rest.

Obviously, this throws a great deal of sand into the corporate gears. No American CEO could abide this. But somehow, it works. 

As Geoghegan says, this is socialism or, rather, social democracy. It makes that alleged "socialist," Barack Obama, look like the University of Chicago product that he is. What it is, of course, is a different form of capitalism, with a defined role for unions and a powerful welfare state.

It gets worse. All that green technology is largely the result of government policy, which promotes and subsidizes the industrialization of sustainable energy. This is "industrial policy," or "picking winners and losers." All proper American economists know this never works. Somehow, in Germany, it does.

As Geoghegan says, "higher labor costs can make a country more, not less, competitive." In the Midwest, corporations moved manufacturing to the South, then overseas, to escape unions and to lower their labor costs. Unions collapsed. Most were reduced to fighting the companies over severance pay. Many of the companies, especially the auto companies, veered into bankruptcy or government bailouts. One reason, Geoghegan says, is that they no longer had high-skill, high-wage employers making high-quality goods.

Back home, there was nothing substantial to take the place of the outsourced industry. Companies with a commitment to their workers and communities could have moved into higher value-added products. Or a government-enforced industrial policy could have led the way to 21st-century manufacturing. This is what happened in Germany, but not the Midwest.  

Instead, Geoghegan says, American corporations "smashed the unions, in the belief that they had to compete on cost. The result? They quickly ended up wrecking their industrial base."

Unions really do dominate in Germany. No less than 80 percent of the export and manufacturing industries are unionized. This leads to those well-known "labor rigidities," nearly amounting to jobs for life. 

One criticism of this system through the years has been its guarantees of job stability for older workers, making it that much harder for companies to hire younger workers. This should create a generational clash, with high levels of youth unemployment.

But as we've seen, that hasn't happened. Youth unemployment in Germany is lower than it is here. The reason, Geoghegan and others say, is the German apprenticeship situation. Young Germans often leave school at 16, go into an apprenticeship at a local company, and from there into a job.

This system teaches the high-level skills that keeps German industry competitive, which is why companies support it. It leads to high-wage jobs in profitable companies, which is why unions support it. It promotes labor peace, which is why German society supports it.

This system undoubtedly keeps some German youngsters from going on to college. But Geoghegan argues that perhaps a society needs more skills and less education. Seventy-five percent of Americans will never get a college degree, he says. But right now, they aren't getting any skills either. And too many of those college graduates are still living at home and bagging groceries for a living.

"Economists put a premium on education," he writes. "But what some put an even bigger premium on is the development of skills and problem solving in groups. That's just a fancy way of saying that the right kind of corporate governance and the right system of labor laws count for more than which country has the highest percentage of people going to college." 

The Midwest would benefit if more of its people read Geoghegan's book and absorbed his arguments. But don't bet on it. He's arguing for socialism and unions and industrial policy. Which, as we all know, doesn't work. Does it? 

For more information on economic development, visit the In the News section of the Global Midwest Web site.

Comments

[Chris Barnett]

Interesting. I largely agree that more old-fashioned vo-tech training should replace generic "college" for many young US residents.

As I understand it, the German order pretty much forces people onto one or the other track based on test results in the teen years. I have doubts about the intestinal fortitude of the US suburban school superintendents who would have to face Mom and Dad and enforce the decision that darling Timmy or Alice is really only intellectually capable of becoming an electrician or computer tech and can't be on the college track and can't take AP or IB courses at (say) Naperville HS. Kind of cuts against our notions of freedom of choice and our "opportunity society".

What does Geoghegan say about the relative homogeneity of German society versus the heterogeneity of the US? Does he address the second-class, multi-generational, non-citizen Turkish (and other Eastern European) residents?

Does the German military serve as a supplement to the youth employment market, as the all-volunteer military does in the US? (BLS doesn't count the soldiers, sailors, airmen, and Marines as part of our labor force or as employed. Since the forces skew young, that horrid youth unemployment rate would look a lot better if the military were included both in the labor pool and as employed persons.)

[Aaron M. Renn]

Some observations:

1. Germany has their robust "mittlesand" of small and medium sized companies that are their real bread and butter. Many of these are family owned. American industry, while it had more small shops, also had more of what, as Monty Python put it, "The Very Large Corporation of America".

2. Did Geoghagen exclude intra-EU trade in his analysis? If not, it's hardly fair. I'm guessing manufacturing centers in the US, if viewed on a state basis, run huge trade surpluses.

3. How much employment growth has Germany experienced vs. protection of jobs that existed some time ago?

[Global Midwest Initiative]

At our request, Tom Geoghegan, the author of the book, responded to some of the questions raised by this posting. Here are Toms comments:

Of course people can switch tracks. It's hard, but it's done. And in some cases, as I say in the book, they switch from college to vocational.

The real problem is to get more German kids on either the university OR vocational tracks since the latter is shrinking as unions decline. It's being on the third track that's tragic - not the second, as Americans are inclined to think.

Remember how few have college BA's: 15 percent of the adult population v. our 27 percent.

There are worse tragedies: try passing the bar in Germany, even with a university degree. The bar's six months, half fail. And they only get two tries.

Yes, there is a certain rigidity, but as in most European countries, there is more income mobility than here. And the U.S. failure rate in college graduation, the saddling of kids who drop out with tuition, the U.S. type scandal in this respect, is absent there. Which is worse?

The Turks and Turkish Germans are not on the bottom rung. The non Turkish East Germans are. Many Germans believe that, without the Turks, there'd be far fewer small businesses.

Also they're in the unions: that's the point of the May Day story I tell in the book. IG Metall is like the old Steelworkers in Chicago.

Sure I counted exports to EU countries - the stat's do, and why not? Canada and Mexico are two of our biggest trading partners. Would we exclude them because they're next door?

Americans used to say: Oh Poland, Spain, Portugal, they will out compete Germany because of lower labor costs. Now they say: Oh Poland, Spain, etc., you can't count them as the competition.

German employment has gone up a great deal - even when unemployment was high, they weren't losing jobs. As an SPD person told me in 1997, and it's even more true now: "Remember, when you think about unemployment, there have never been so many jobs in all of German history." So why do we think Germany doesn't create jobs? It's because of course women have come into the work force.

[Thomas Welling]

I also say: Interesting!
As a German, I may perhaps provide some detail.
Of course Germany has lost some hundred thousand and more jobs thanks to globalization (e.g. Nokia cell phones who migrated to Romania). On the other hand it is exactly as Mr Renn supposes - there is the majority of small and medium sized companies that are deeply rooted here and in order to survive they have to be innovative. They may perhaps out-source parts of their production into the sweat-shops of the world but as soon as skilled labor is concerned, they prefer German workforce.
Those jobs that have been lost are recovered on the other hand - to a certain extent - by highly innovative production, namely green technology.
We don't have a structure with lots of companies being offered in shares at the stock exchange. Some have already turned back the wheel of time and receded from their plans to start a launch of shares. And I personally think that's a good idea because the laws of shareholder value force companies to be concentrated and vexed on their ever increasing profits - while they are no longer able to invest in their own future.
And a final comment on unions:
In Germany they serve more as a pacifying than as an obstructing force because all possible conflicts are "refined" by them before they can cause serious (= frequent strikes, general strike etc.) trouble. They are accepted, even by the big and small companies although sometimes grudgingly. But in the long run it has paid off.

[Manfred Hoefert]

In his blog Richard gives lots of flowers to Germany and in particular to its economy. For me, however, the article smacks of the stinking dictum: Am deutschen Wesen soll die Welt genesen. (The German sprit shall heal the world). I rather prefer the German proverb stating: Not all is gold what glitters.

Let us compare job security. Traditionally this is much greater in Germany than in the States but it does not mean that one cannot lay off people when they are no longer needed. Since unemployment (comes right after inflation) is such a political issue in Germany firms during the recent economic crisis asked their staff to work fewer hours (Kurzarbeit) crisis instead of laying off part of their work force. This practice was honored by the German government paying most of the difference between full pay and the loss of income due to Kurzarbeit. This measure- in the beginning meant to avoid social tensions and psychological traumata of the workers being unemployed - had an additional benefit. When China re-started ordering massively high technology products the production with the trained workforce still present could be increased without delay. All seems to look good, however, since Germans are notorious Bedenkenträger (worrywards) they ask: But what will in the long run happen if the diligent Chinese have copied Germany's high technology?

Comes in education. We can only keep our export driven economy alive if we always remain a step ahead of our competitors. This means keeping up or even increasing the standard of our intellectual and skilled work force. When comparing our education system to the States we feel quite humble. Most of the Nobel prize winners come from the US and I am convinced that all these people practice life-long learning (LLL).

LLL, lebenslanges Lernen, recently became the catch word in the discussions about Germany’s education system. Education here as in the States comes within federal competence. Compared to France where education is centrally regulated we in Germany boast of as many and even more education systems as we have Länder (States). In European comparisons (PISA Studies) of schooling results German students never even come near to the top, a fact that regularly causes a national outcry. At present the university reforms within the European Union changing e.g. the traditional degrees of diploma to baccalaureus and master cause frustration among students. Will Germany meet the challenge of keeping its educational system at a necessary high standard? Will people accept LLL? Only the future will tell. The discussions about education and formation in Germany are in full swing.