By Dominic Pino
Thursday, January 30, 2025
On January 26, the Wall Street Journal published a
long article headlined, “Germany’s economic
model is broken, and no one has a plan B.” One of the reasons no one has a plan
B is that Germany was not supposed to need one. Just ask a non-free-market
commentator from the past decade or so: Germany had gotten away from all that
“market fundamentalism” nonsense and had figured out how to prosper with big
government and powerful unions.
It seems that Germany’s economic planners believed all
the glowing press they were getting about how they had triumphed over
“neoliberalism” and ushered in a golden age of manufacturing, proving those
American capitalists wrong. Now, the American
economy has been leading the developed world in economic growth since the
pandemic, and Germany is stagnating under the weight of its own policies.
What Germany Was Supposed to Be
“Economists have caught a case of Germanophilia,” wrote Derek Thompson for The
Atlantic in October 2010. “Americans have looked across the ocean with
envy. As we cut costs, outsource jobs, drown at double-digit unemployment and
run up huge trade deficits, Germany seems to be doing the opposite: reaping the
benefits of cheaper labor, keeping German workers in German jobs, and running
surreal trade surplus numbers.”
The Washington Post reported in June 2011, “The German
government has been unafraid to pursue policies that induce companies to
preserve high-paying jobs and boost exports, embracing two words that can make
lawmakers in Washington recoil: industrial policy.” Industrial policy, which
has become more popular among policymakers since then, involves close
cooperation between government, businesses, and labor unions to structure the
economy in the national interest.
Germany’s labor model eschews that icky competition stuff
that greedy Americans are obsessed with. “Employers group together in what
would probably be considered illegal cartels in the United States to work with
government officials to define what kinds of certifications and training
programs they need,” wrote Matt Yglesias for Vox in
April 2014. “But that strong employer-state collaboration is tempered by a much
more powerful voice for organized labor than exists in the United States.”
That includes worker representation on corporate boards,
often called “co-determination” in the German model. In a December 2018 column headlined “American Capitalism
Isn’t Working,” David Leonhardt of the New York Times praised a bill
from Elizabeth Warren that would have brought that idea to the United States.
Susan Holmberg of the Roosevelt Institute wrote for the New York Times in
January 2019, “German workers have fared well under co-determination. . . .
Workers traded raises for job security, but that investment has paid off.”
The German model has also drawn praise from the
self-described conservative group American Compass, which published an article in September 2020 called “Workers of the World” praising
Germany’s labor policies. Despite using poor methodology to perpetuate the
myth of U.S. wage stagnation since the 1970s in other articles, American
Compass in this article echoes Holmberg in praising the German model for
encouraging lower pay for the greater good, noting that “trade unions have
agreed to set wages below marginal productivity in order to
increase the competitiveness of export sectors.”
Those export sectors, guided along by the wise hand of
government, were supposed to be the evidence of Germany’s economic success.
Unlike the financialized and tech-heavy American economy, Germany was focused
on making physical stuff and sending it to the world. Harold Meyerson wrote for the Washington Post in
September 2014 that Germany’s “economic optimism” could be explained in part by
“the strength of the country’s manufacturing sector and the concomitant
weakness of its financial sector.” Because many major German companies are
privately held, German CEOs aren’t as subjected to shareholder pressure in
decision-making, which had “ensured that prosperity is widely shared in Germany
— not concentrated at the top, as it is in the United States.”
Germany put aside rapacious American-style capitalism to
keep more employees in manufacturing even when it was less profitable to do so.
“American companies are looking to make money — they have a pretty
single-minded commitment to profitability,” Martin Baily of the Brookings
Institution told the Washington Post in
February 2017. “German companies make money too, but they’re a little more
committed to the long term and to their workforce.” That same article also
quoted Peter Navarro, an anti-trade adviser to Donald Trump, who said, “We
envision a more Germany-style economy, where 20 percent of our workforce is in
manufacturing.”
In addition to manufacturing tons of cars, Germany was
also manufacturing the transition to renewable energy. This other
industrial-policy choice was also supposed to be a masterstroke by the German
government, praised as “ambitious” by sophisticated commentators around the
world. Chancellor Angela Merkel was Time’s Person of the Year in 2015,
the same year The Economist named her “the indispensable European.”
What Actually Happened
It has all come to a grinding halt. “Germany’s
manufacturing industry, the world’s third largest, has shrunk steadily for
seven years,” that Wall Street Journal article from Sunday reports.
“Germany’s industrial output has fallen by 15% since 2018, and the total number
of people employed in the manufacturing sector is down 3%.” (For perspective,
U.S. industrial
output has grown by 10 percent since 2018, and manufacturing
employment has grown by 2 percent.)
“Gross domestic product has roughly flatlined since 2019,
before the start of the Covid-19 pandemic—the longest period of stagnation
since the end of World War II,” the story continues. “Most economists expect it
will stagnate again this year.”
Germany’s economic planners actually did what free
markets are accused of doing: They made Germany’s economy dependent on China
and have encouraged the consumption of dirtier sources of energy. China was
buying a lot of those exports Germany was producing, but as China’s economy has
slowed, so has Germany’s. And the predictable — and predicted — failure of
Germany’s energy transition has led to use of coal and purchases of Russian
natural gas whenever the wind doesn’t blow or the sun doesn’t shine.
As always, one of the major problems with economic
planning is the inability to adapt when circumstances change. The market system
is a trial-and-error process guided by profits and losses — with emphasis on
the errors and losses, which help in discovering what works. German
policymakers who thought they could outsmart market prices are now out of
ideas. “I see no serious initiative to try and develop a new economic model,” a
German economics professor told the Journal.
“Trade in goods is more critical to Germany’s economy
than oil is to Texas or tech to California—an overdependence that is the result
of decades of government policy that supported export manufacturing while
creating hurdles to investment in new sectors such as IT or in the country’s
infrastructure,” the story continues. The U.S. is home to 61 of the 100 most valuable technology companies in
the world, including eight of the top ten. Germany is home to two: SAP at No.
14 and Infineon at No. 85. Neither of them was founded this century.
But Germany was able to make a company town out of
Ingolstadt, a city in Bavaria. “Today, nearly half of the jobs in Ingolstadt
are in the auto industry. Many of the rest provide services to those auto
workers,” the Journal reports. And now that the auto industry is
struggling, “there are signs of a Detroit effect,” a hotel owner in the city
said.
The energy transition has yielded energy prices sometimes
ten times as high as those in Texas. “Over a third of industrial companies in
Germany are cutting investments in core processes due to high energy costs,”
the story says. On top of that, residents face a heavy tax burden, with the
average single worker paying 47.9 percent of his income to the government. (But
universal health care!)
There was a brief moment in 2010–2011 when Germany was
closing the gap on the United States in GDP per capita. But the U.S. has left Germany in the dust
since then. The U.S. was about $6,000 per person ahead of Germany in 2012 and
is about $11,000 ahead today, adjusted for inflation.
Ten years ago, U.S. commentators did the same thing with Canada as they have done with Germany, hailing it as the new, genteel
economic model that would triumph over rough-and-tumble American capitalism.
Today, the richest Canadian province has lower median earnings per person than
the poorest U.S. state. As the failures of Germany’s economic planning become
apparent, maybe it’ll click that there’s something to those dusty old ideas
about free markets.
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