July22,2019 BARRON’S 15
THE ECONOMY n By Matthew C. Klein
No, Sen. Warren, Germany Is Not a Model for U.S.
Its big trade surplus came at the expense of workers, exacerbating income inequality
SEN. ELIZABETH WARREN
(D., Mass.) thinks the
U.S. should learn from
Germany.“America,”she
recentlywrote,“choseto
pursue a trade policy
thatprioritizedtheinter-
estsofcapitalovertheinterestsofAmeri-
canworkers,”unlikeGermany,which,she
says, “chose a different path.”
A new report from the International
Monetary Fund suggests otherwise. Ger-
manyexportsfarmorethanitimports,un-
like the U.S., but this is largely a conse-
quence of depressed domestic spending.
Importshavebeenrestrainedbyregressive
policiesthathavebenefitedtherichestGer-
mans at the expense of everyone else.
Germanyisnotarolemodel,butacau-
tionary tale.
AstheIMFexplainsinitsreport,falling
worker wages lifted corporate profits and
shiftedpurchasingpowerawayfrompeople
whospendwhattheyearnonnewgoodsand
servicestopeoplewhosquirrelawaysavings
inlow-yieldingfinancialassets.Facedwith
astagnantdomesticmarket,Germancompa-
niesflushwithcashrefusedtoinvestdomes-
tically.Thesedynamicswereexacerbatedby
government policies that limited worker
bargainingpower,loweredtaxesontherich,
andcutinfrastructureinvestment.
Theneteffectwastostrangleconsump-
tion and companies’ capital expenditures,
which grew far more slowly than German
production. The widening gap between
whatGermansmakeandwhattheycanaf-
fordtobuyforthemselvesisnowresponsi-
ble for the largest trade surplus in the
world. The IMF found an almost perfect
correlation between the change in Ger-
many’stradebalanceandthechangeinthe
share of German national income going to
the rich and the companies they control.
At first blush, criticizing Germany’s
economicmanagementseemsabsurd.The
country has one of the world’s lowest un-
employmentrates,highwages,agenerous
social safety net, and a large, technologi-
callyadvancedmanufacturingsector.Look
beneath the surface and focus on how
thingshavechangedinthethreedecades
since reunification, however, and a dis-
tinctly different picture emerges.
Germanworkerssufferedinthe1990s
as their employers shifted jobs to coun-
triesinCentralandEasternEuropethat
hadjustbeenliberatedfromCommunism.
Thenumberoffull-timeGermanworkers
dropped by 11% between 1991 and 1998,
withthelossesconcentratedinthemanu-
facturing sector. Germany has lost about
25% of its manufacturing jobs since the
early 1990s—almost identical to the U.S.
At first, the wages of those who kept
their jobs rose in line with productivity.
That changed by the late 1990s. Relative
to the value of what they produced, Ger-
man workers saw pay fall 13% between
1999 and 2007. The corollary was a mas-
sive increase in corporate profitability as
salestoforeigncustomersgrewinexcess
ofdomesticexpenses.Exportandimport
volumesbothgrewsubstantiallyslowerin
the2000sthaninthe1990s,buttheimport
slowdown was substantially more severe.
Between 2000 and 2007, 75% of the in-
creaseinthetotalamountofincomeearned
byGermanswenttoinvestors,ratherthan
toworkers.Thatliftedthecapitalshareof
income from 27.5% of the total to 36.5%.
SincemostcompaniesinGermanyarefam-
ily-owned—andeffectivelyexemptfromin-
heritancetaxthankstoquirksintheGerman
legalsystem—theIMFnotesthoseprofits
“mostly accrued to the wealthiest house-
holds.”Overthesameperiod,Germanywent
from having a balanced trade account to a
surplusof7%ofgrossdomesticproduct.The
tradebalanceandcorporatecashflowgrew
almostoneforone.Germany’sgrowingtrade
surplushasnotbenefitedmostGermans.
Thetransfersfromlabortocapitalwere
encouraged by government rhetoric and
policy,particularlytheunemploymentben-
efitreductionsknownasHartzIV.AsGer-
hardSchröder,Germany’sSocialDemocrat
chancellor,putitatthetime,“nobodywill
beallowedtoliveoffthecommunity:ifyou
refusetoacceptareasonablejob,youwill
have to expect to face sanctions.”
Officially, this solved the problem of
joblessness. Between 1995 and the time
the new rules took effect in 2005, Ger-
many’s unemployment rate consistently
averaged around 10%. Today, its jobless
rate is just 3.1%. Moreover, unlike the
U.S., the share of Germans with a job is
currently at an all-time high.
Theproblemisthatthejobgrowthhas
come from low-paying part-time work.
Schröder’sdefinitionofa“reasonablejob”
drove millions of Germans into penury.
The number of Germans with full-time
jobs is still lower than in the mid-1990s,
while the number of Germans with part-
time jobs has more than doubled.
Mostoftheincreaseinemploymenthas
come from elderly workers who lost the
abilitytoretireearly.Thepovertyrateof
Germans with jobs rose from 5% in 2005
to 7.5% by 2007. It now stands at 9%.
German wages have risen since the fi-
nancialcrisis,whichhashelpedliftworkers’
shareofnationalincome,butthishasdone
little to reduce either overall income in-
equality or Germany’s trade surplus. The
reasonisthattheGermangovernmenthas
effectively leaned against the improving
economybyraisingtaxesandstranglingin-
frastructure investment. The government
now has a budget surplus of 2% of GDP
even as its bridges and ports continue to
deteriorate from lack of maintenance.
Sen.Warrenshouldfindanothercoun-
try to emulate.
Manufacturing Malaise
Germany and the U.S. have lost the same amount of manufacturing jobs since 1991.
Note: 1991 Q1=100 Sources: Bureau of Labor Statistics; Destatis; Barron's calculationsGermany USA
1995 2000 2005 2010 2015 2019
60
70
80
90
100
110
Employees in Manufacturing
Germany's “Jobs Miracle”
Cumulative change in employment since 1995, millions of jobs
Sources: Destatis; Barron’s calculations