Customer Reviews

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

5 star:		(1)
4 star:		(1)
3 star:		(0)
2 star:		(0)
1 star:		(0)

 

 

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.

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.