Can Germany Be Saved?: The Malaise of the World's First Welfare State [Hardcover]

Hans-Werner Sinn (Author)

Book Description

ISBN-10: 0262195585 | ISBN-13: 978-0262195584 | Publication Date: June 1, 2007

Winner of the 2003 getAbstract/Financial Times Germany Business Book Award.

What has happened to the German economic miracle? Rebuilding from the rubble and ruin of two world wars, Germany in the second half of the twentieth century recaptured its economic strength. High-quality German-made products ranging from precision tools to automobiles again conquered world markets, and the country experienced stratospheric growth and virtually full employment. Germany (or West Germany, until 1989) returned to its position as the economic powerhouse of Europe and became the world's third-largest economy after the United States and Japan. But in recent years growth has slowed, unemployment has soared, and the economic unification of eastern and western Germany has been mishandled. Europe's largest economy is now outperformed by many of its European neighbors in per capita terms. In Can Germany Be Saved?, Hans-Werner Sinn, one of Germany's leading economists, takes a frank look at his country's economic problems and proposes welfare- and tax-reform measures aimed at returning Germany to its former vigor and vitality.

Germany invented the welfare state in the 1880s when Bismarck introduced government-funded health insurance, disability insurance, and pensions; the German system became a model for other industrialized countries. But, Sinn argues, today's German welfare state has incurred immense fiscal costs and destroyed economic incentives. Unemployment has become so lucrative that the private sector, already under pressure from international low-wage competitors, has increasing difficulties in paying sufficiently attractive wages.

Sinn traces many of his country's economic problems to an increasingly intractable conflict between Germany’s welfare state and the forces of globalization. Can Germany Be Saved? (an updated English-language version of a German bestseller) asks the hard questions—about unions, welfare payments, tax rates, the aging population, and immigration—that all advanced economies need to ask. Its answers, and its call for a radical rethinking of the welfare state, should stir debate and discussion everywhere.

Editorial Reviews

Review

"Although Germany is having a good run at the moment, the general experience on the Continent over the past dozen years (and the dozen before that) has been limping, catch-up growth without indigenous innovations, low labor force participation, and low job satisfaction. Hans-Werner Sinn's book is essential for those who recognize the seriousness of the problem."
—Edmund S. Phelps, McVickar Professor of Political Economy and Director, Center on Capitalism and Society, Columbia University, and Nobel Laureate in Economic Sciences (2006)

"Hans-Werner Sinn is one of the leading European economists of his generation. He cares deeply about the contribution that economists can make to both economic and social policy, and he is clear and articulate in both his views and his writing. Agree with him or not, his contribution to the way Germans now see themselves is immense, and it is set out here with vigor, verve, and a persuasive force that is both highly readable and challenging to those he sees as trapped in the past."
—John Whalley, Professor and William G. Davis Chair in International Trade, University of Western Ontario

"Hans-Werner Sinn provides a well-written and well-reasoned diagnosis of Germany’s economic illness. Weaving together historical discussion and political analysis with a wealth of data, he separates sense from sophistry and elucidates the real choices that Germany faces to adjust its traditional welfare state so as to deal with its high rate of unemployment, its rapidly aging population, its unsustainable budget, and the 'withering east.' For those holding out hope for a painless solution, the news is not good, but Sinn's creative vision of a stronger, viable German economy is illuminating, not just for his country but for the many developed nations that confront similar dilemmas."
—Alan J. Auerbach, Director, Robert D. Burch Center for Tax Policy and Public Finance, University of California, Berkeley

"Finally, an economist who tells it like it is. This book belongs on the desks of every member of the German cabinet and every member of the German parliament."
—Hans-Olaf Henkel, Bank of America (former President of the Leibniz Association and former President of the Federation of German Industries)

"Germany needs a new attitude. In a time when the ifs and hows of reforms are greatly argued over, Professor Sinn and his book are dead right. With his knife-sharp analysis of the dire findings and clear instructions for action, he provides the way. Required reading."
—Heinrich von Pierer, former Chairman of the Supervisory Board, Siemens AG

"What Germany needs: unconventional ideas, creativity, openness, and the courage to address uncomfortable themes quickly and aggressively? Hans-Werner Sinn delivers all of this. Worth reading."
—Dieter Rampl, Chairman of the Board of Directors, UniCredit Group

About the Author

Hans-Werner Sinn is Professor of Economics and Public Finance at the University of Munich. He is President of the Ifo Institute for Economic Research and Director of the Center for Economic Studies at the University of Munich.

Product Details

• Hardcover: 356 pages
• Publisher: The MIT Press (June 1, 2007)
• Language: English
• ISBN-10: 0262195585
• ISBN-13: 978-0262195584
• Product Dimensions: 9.1 x 6 x 0.7 inches
• Shipping Weight: 1.5 pounds
• Average Customer Review: 4.5 out of 5 stars  See all reviews (2 customer reviews)
• Amazon Best Sellers Rank: #1,466,483 in Books (See Top 100 in Books)

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1 of 1 people found the following review helpful:

4.0 out of 5 stars Deutschland Unter Alles?, January 14, 2010

By 

Omer Belsky (Haifa, Israel) - See all my reviews
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This review is from: Can Germany Be Saved?: The Malaise of the World's First Welfare State (Paperback)

It is strange for a book called "Can Germany Be Saved?" to be in its 11th (!) edition; by now, you'd imagine that an answer - one way or the other - would be found.

Hans Verner Sinn, a German economist, argues that Germany should undergo a quasi-Thatcherite revolution that would revitalize its economy. Some of the data Sims posts is genuinely troubling: Germany today has about 1.5 million more unemployed than it had had in the early 1990s; Its population is rapidly aging, and its economic growth in the last decade was one of Europe's weakest.

The main thesis of Sinn's book, and the main focus of discussion is the need to lower Germany's wages. Germany's mighty labor unions and its welfare state increase wages above market clearing levels, leading to distorted incentives and unemployment.

An interesting chapter discusses Germany's robust export sector: Germany is a world leader in manufactured goods. But Sinn argues that this robustness is something of a mirage: Germany's exports are designed by German engineers and completed in Germany, but much of the actual manufacturing is done elsewhere, particularly in Eastern Europe. The rigid wage structure leads German manufacturers to produce less and less in Germany itself. Indeed, the high concentration of German industries in the design and completion of goods is an over-concentration, Sims argues, caused by Capital's flight from labor intensive production to high end, labor non-intensive ones.

Much of this is credible, but is Germany's welfare state really a primary cause of this process? I find that hard to believe. Sinn makes no effort of estimating how large the effect of Germany's welfare state on wages is. But he does estimate that German wages are eight times higher than Eastern European wages. If this is true, how large an effect can any reform of the welfare state have? Suppose after reforms, wages fall down 10% on average (which would mean dramatic changes in the lives of millions of people). German wages would now be an average of 7.2 times higher than Eastern European wages. How much of a difference would that make for the profitability of German manufacturing?

Sinn argues that the German welfare state discourages work. By offering fairly generous terms for those who fail to work, it creates an effective minimum wage. For example, a janitor's net wage for a 155 hours months is 968 EUR. An unemployed person would get 673 EUR from "social assistance". This means an effective wage of 1.9 EUR/hour. At such a rate, it doesn't pay to work (p.111).

But when Sinn argues that the lack of income inequality growth in Germany compared to the UK and the US is evidence that the latter are responding better to the changing economic situation, he is not as surely correct. It may be (as Paul Krugman argues in The Conscience of a Liberal) that the growth of income inequalities in the US and the UK is a consequence of a political redistribution of wealth from the poor to the rich, not of underlying economic realities.

Sinn offers, but fails to discuss, evidence that goes against his thesis. The one European country whose economic performance in the decade since 1995 was worse than Germany's has been Italy (p.9); Yet during this period, Italian wages hardly increased at all, while Germany's wages increased by more than 50% (p.63). Of course, there may have been other factors at work - but two factors, discussed by Sinn, should have worked in Italy's favor; Its industry has enjoyed lower interest rates due to the transition to the Euro (p.53), and it did not have the huge expenses of Reunification that Germany had.

This is only one example of a general point - Germany is not unique. It may be "the world's first welfare state", but it is hardly a European outlier in anyway. Germany's government's share of the economy puts it in a comfortable place in Europe (pp.178-180). And indeed, Sinn calls for similar reforms of all of Europe's welfare states. But the data showed that Germany was doing much worse than Europe's other countries, while pursuing similar policies. It makes one doubt Sinn's diagnosis.

None of this is to suggest that Germany shouldn't reform its economy, though; Some of Sinn's criticism certainly hit home. Particularly, the German marginal tax rate is high by European standards, seriously distorting incentives (pp. 120, 197-200). A tax reform that would broaden the tax base somewhat and reduce the marginal tax rates would probably do Germany some good. Germany has also a serious demographic problem, and Sinn's proposal for creating incentives for childbirths should be followed.

Perhaps the most troubling thing about Sinn's book is that, although it is clearly not meant that way, it can easily be read as a protectionist manifesto: Germany's woes are caused by Globalization (cheap competition with China and India), the European Market (the absence of tariffs takes away the Germany's economies of scale), Immigration, the Eastern enlargement of the EU (which leads to companies going East) and the Euro (which reduces Germany's low interest rate advantage). As this review indicates, I'm not certain that these things really do harm Germany; But if they do, it is difficult to see why Germany should adapt to Globalization rather than reject it. If "Low wages are a reality, if we want to compete abroad", as Bob Dylan asks, surely the natural question is "Do we?"

Sinn's book is fascinating, informative, and could serve as a model of how to discuss complicated questions of public policy intelligently. It is far from an easy book to read, and obviously I don't share many of Sinn's concerns, but his book is strongly recommended.

P.S.
The title of the review should probably be something like "Deutschland Nach Alle?", but then it would be even less clever.

1 of 2 people found the following review helpful:

5.0 out of 5 stars Deeply Insightful, July 10, 2008

By 

Michael S. Valle (Mesa, AZ) - See all my reviews
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This review is from: Can Germany Be Saved?: The Malaise of the World's First Welfare State (Hardcover)

Although a bit technical even for the educated layperson, this book is an amazing analysis of the economic situation in Germany. We in the United States should study this material carefully in order that we may avoid the problems that afflict welfare states, including a precipitous drop in reproduction rates, which tends to be an unintended but very serious consequence of such systems.