Can U. S. Industry Learn to Learn From Germany?

And Get Rid of the “We Don’t Learn from Other Countries, We Teach Other Countries” Aspect of American Exceptionalism

“I am not paying high wages because I have a lot of money, but I have a lot of money because I pay high wages,” Robert Bosch, the late founder of the German car parts and engineering group, once said.

Amidst the stagnating economies of the Western world, the U. S. included, Germany continues to stand out as a success story in a sea of failure.  In the interests of promoting the concept that “if others are doing better than we are, maybe we ought to look and see what they are doing” The Dismal Political Economist has taken a look at the German economic recovery in the hope that maybe, just maybe, there are some lessons to be learned.

The first place to look, as usual,  is with The Economist magazine.  A key part of German success has been the Mittelstand,

a legion of mainly small and medium-sized firms, typically family-owned and highly specialised, that build products that dominate obscure branches of industry.

One key to success, the right values

Mittelstand values: attention to detail, financial caution and co-operation between bosses and employees.

And one key value is employer/union cooperation

Employers and unions have also made agreements to establish flexible working hours: workers put in extra shifts at busy times and have time off when things are slack. “We had to learn to breathe with the cycle,” says Ralph Wiechers, the chief economist of the VDMA, an industry group.

But the element that The Dismal Political Economist wants to focus on is the relationship between business and government.

German industry’s steely ability to hold down costs was also helped by the Hartz reforms, introduced when Gerhard Schröder, a Social Democrat, was chancellor between 1998 and 2005. Many in business credit the economy’s rebound to these reforms, which freed up labour markets and made work more attractive than life on unemployment benefits.

For workers, who conceded flexibility and agreed to wage restraint, the bargain has meant they have kept their jobs, even during the depths of the downturn when most German firms cut working hours instead of firing people. This was especially true in the Mittelstand. Engineering firms, which saw orders collapse by almost a quarter during the recession, cut employment by about 8%. About 10% of smaller firms had to reject orders because they could not get credit, says Mario Ohoven, president of the German Association of Small and Medium-sized Businesses. Only a small fraction of these shed workers.

And unlike in the U. S., where the prevailing attitude is that government cannot and should not pick winners and losers in the global economy, Germany has done things differently and successfully.

The state has helped with research support as well as with the Hartz reforms, doling out cash in support of industries that it thinks are important areas of growth such as green energy, security or biotechnology. It supports an extensive research infrastructure that small and medium-sized firms can tap into when they need help, lowering the barriers to innovation. The Fraunhofer research centres spend about €1.6 billion a year and employ more than 18,000 people. Most of their work (and about two-thirds of their funding) is related to helping firms with specific projects.

Green machine

The government has tried to create winners as well as support them. Germany’s growing green-energy industries are largely creations of the state. Generous subsidies have made the country the world’s biggest market for solar-power installations. It may have sucked up half of global production in 2010. Almost a quarter of patents awarded in 2007 for renewable-energy technologies went to German firms.

Has their record been a 100% success, no.  But which economy would you rather have in June 2011, the U. S. or Germany?

The lessons are clear, labor flexibility and co-operation in return for a no-layoff policy, high wages and generous benefits along with active government involvement.  And an industry attitude that laying off workers to cut costs was not the way to manage long term profitability.  A formula for economic success.

A final comment from a recent FT article says it all,

“The truce between the unions and the employers has been a very decisive [success] factor,” says Thomas Lindner, president of VDMA, the German engineering association. “We had a very broad consensus that forced redundancies would only be the last resort, and the unions have shown a great amount of flexibility to achieve this.”

Can it be that Labor Unions are not the great enemy of the economy as they have been portrayed?