Germany as a model

Governor Snyder and others have suggested Germany as a model for what they would like the Michigan economy to be. Largely a place that makes products that are in demand across the planet. A Michigan that once again is a global manufacturing force.

Germany has a strong and prosperous economy. Although it has lost about the same share of its manufacturing jobs over the past two decades as America. But if Michigan’s economy could look more like Germany’s that would be a good thing. The question is “what do we have to do to get there?”

We have long argued that you can’t get Minnesota’s economy (high employment and personal income) by pursuing Mississippi’s policies. The same is true if you want to like Germany. Its easy to say that you want Germany’s results. The question is “are you willing to follow the path Germany has taken to get those results?”

David Leonhardt in a New York Times article provides an overview of Germany’s economic growth policies. Worth reading. Leonhardt writes: ” The brief story is that, despite its reputation for austerity, Germany has been far more willing than the United States to use the power of government to help its economy (emphasis added). Yet it has also been more ruthless about cutting wasteful parts of government. The results are intriguing. After performing worse than the American economy for years, the German economy has grown faster since the middle of last decade. (It did better than our economy before the crisis and has endured the crisis about equally.) Just as important, most Germans have fared much better than most Americans, because the bounty of their growth has not been concentrated among a small slice of the affluent.”

More specifically, as Leonhardt explores, Germany’s formula for economic success involves far higher taxes than America, stronger unions, more regulation and an increasing emphasis on education attainment. And they have a more comprehensive safety net (although they have been trimming it back to decrease the disincentives for people to work) including government funded universal health coverage. As Leonhardt writes:

But the German story is not merely about making government more efficient. It’s also about understanding the unique role that government must play in a market economy. That role starts with serious regulation. American regulators stood idle as the housing bubble inflated. German banks often required a down payment of 40 percent. Unlike what happened here, German laws and regulators have also prevented the decimation of their labor unions. The clout of German unions, at individual companies and in the political system, is one reason the middle class there has fared decently in recent decades. In fact, middle-class pay has risen at roughly the same rate as top incomes. The top 1 percent of German households earns about 11 percent of all income, virtually unchanged relative to 1970, according to recent estimates. In the United States, the top 1 percent makes more than 20 percent of all income, up from 9 percent in 1970. That’s right: only 40 years ago, Germany was more unequal than this country. Finally, there are taxes. Germany does not have a smaller budget deficit because it spends less. Germany, you’ll recall, is the original welfare state. It has a smaller deficit because it is more willing to match the benefits it wants with the needed taxes.

Its hard to imagine how Michigan gets Germany’s economic results by not following the path Germany takes to get those results. In many ways the policy path Germany is following is the exact opposite of what Michigan has been pursuing for the last decade or so. And is now accelerating. Rather than smaller government, lower taxes, less regulation and weaker unions that we have been told over and over again are the path to prosperity, the German mass middle class––what we should want here––has been built on a policy formula that in Leonhardt’s words understands “ the unique role government must play in a market economy”.

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