Does Germany know the secret to creating jobs?

My god, this column has just really become a steaming pile since justin left. A couple of suggestions:
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1) quit with the bolding every third sentence. if you have a point to make, do it with better writing, if you have a particular thought that you think is exceptionally important, try italicizing it like most everyone else does. Also, there is no way you have that many important sentences/thoughts per paragraph.
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2) stop talking down to your readers, and try reading, if not various press sources, at least your own magazine. For example, Germany has been seeing its employment go up because it runs a huge trade surplus, the recent G20 meeting identified trade surpluses as significant problems for global economic harmony. Germany also gained huge unearned benefits when Ireland, America, and other countries guaranteed bondholders and counterparties 100cents on the dollar in the various bank bailouts. Many of those underwriters were German-based.
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3) The “aging workforce problem” is endemic in every westernized country + China, with the notable exception of the USA due to lax immigration policies. Germany has access to all the young, low wage semi-skilled workers it wants, it just has to agree to let them come in from Poland and Turkey.
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4) There are also an absurd number of other important factors you left out that are not easily importable/copyable in the US, such as the German education system which sends everyone to post-secondary school, but few to liberal arts programs and makes extensive use of apprenticeships. Or the different pay structures for executives, or the fact that the government is actually committed to preserving a middle class in order to maintain domestic demand, or the fact that German companies don’t really have to deal with health care because the government plays a large role there.
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Bah, this is long and preachy. Just, please, knock off the “highlight everything because everything is important” mentality and increase the level and complexity of your posts, constantly writing for the lowest denominator does nothing but make the denominator lower..

Michael, thanks for the TIME article (though I agree with Sean for you and Stephen Gandel not to overdo the bold text; I get the points made). I like the BASF dude’s quote about not being easy to lay off skilled workers. He gets it: on pure economics alone (let alone morals, but I digress), it costs a lot to replace a skilled worker. That applies to US companies as well as German and Chinese ones. If only our corporate brass would see that. They do have accountants also.
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But do German manufacturers embrace more paid apprenticeships? Whether run by companies or unions, paying new workers to learn new skills – and stay employed long-term to use those skills / lower training costs for cos. – this can be a win-win. It’s easy to say “let’s retrain our 16+% unemployed” (U-6 real umepl. rate, not the fake U-3 used by BLS and media). But how? “Traditional” colleges and tech schools usually don’t guarantee jobs at graduation …but do guarantee debt. Alas, we’d need a big-time biz culture shift to embrace apprenticeships. Michael, do you know of other countries or even better industries here at home who do this? Thanks.

I do not really agree with your article.

I believe the main reason for the German miracle is that Germans are no longer investing their money in southern Europe, but choose to invest it safer at home. Plus, the problems of those southern countries keep the Euro low, making it easier to export outside the Euro-zone. The same thing is happing in the Benelux countries.

Your points about high quality and innovation are true, but these things have always been true. How does that explain German growth?

But saying the German corporate culture could be responsable is is wrong, I think. Medium-sized, family-owned firms, are the backbone of every economy. And Americans are at least as nationalistic then Germans, if you go looking, I am sure you would find an American Stihl.

Germany’s “secret” to employment success is as simple as 1-2-3.

1 – Maintain an undervalued currency like China does. Germany does this easily and without international censure because the Euro’s value is dragged down by the PIIGS.

2 – Export far more than you import. An undervalued currency makes this easy almost regardless of “corporate culture” and all the other soft explanations that are popularly offered for Germany’s success.

3 – Based on export driven growth, employ more workers — even though this means global imbalances and exporting unemployment to other countries like the US.

Solution: We can’t do about the Euro’s value and Germany’s ability to exploit the imperfections of Europe’s common currency system, thereby increasing German exports, output, and employment.

However, the United States can and should take measures such as a small “Capital Inflows Moderation Charge” to increase the ability of America and its talented workers to compete on international markets.

A “CIMC” would make the dollar competitive by moderating the massive inflows of often speculative foreign capital that drive the dollar’s value up to levels where American goods and services cannot compete.

America needs a competitive dollar, one that allows American goods and services — and American workers — to compete fairly with the exports of all countries including Germany and China.

America can have a competitive dollar by implementing a Capital Inflows Moderation Charge. With a competitive dollar, America could enjoy the same kind of “Recovery with Jobs” that Germany is enjoying.

A competitive currency — one that balances imports and exports — is the real secret to employment success.

John Hansen

Mr. John Hansen with all due respects, but you are totally mistaken in your above comment. You wrote that the reason Germany has been successful in its exports is because of a falling euro thus making German exports more competitive. Wrong. To start with, right now the euro is worth $1.37 US therefore is worth 37 cents more than the US dollar, in fact the euro has steadily been increasing in value in the last 6 months despite the muddy debt problems of the PIIGS. So what do you consider a strongly valued euro? Perhaps 2 US dollars for every euro? Despite the fact that the euro has been increasing in value, not diminishing, Germany nonetheless has been able to increase its high value high quality exports.

Secondly, the US dollar has been steadily eroding in value since the financial collapse in 2008 and especially in the last 6 months its devaluation has increased: Look, the Canadian dollar is now worth $1.03 US, and the Australian dollar is also above parity, at $1.01 US. Therefore your wishes have already come true, as “helicopter” Ben Bernanke keeps on creating unlimited dollars out of thin air then loading them in his helicopter, taking off and showering them from the sky over Wall Street daily, where all the speculators are all grabbing this free cheap funny fiat dollars and keep buying commodities shares like crazy with them, thus driving their prices up……as the prices rise the US dollar loses more value and that in turn increases the price of all commodities because they are all priced in US dollars…..If you bought any groceries lately I am sure you have noticed they are more expensive… this is called inflation.

And by stubbornly keeping the interest rates at a most ridiculous 0% “helicopter” Ben Bernanke is making sure that rampant inflation will go up …. according to his nefarious plan, because he wrongly thinks that the US can inflate his way out of this recession when in fact the rise in commodities prices can only kill any little recovery we have had. Therefore the US dollar is going to keep on devaluating, mark my words.

So there you have it, the US dollar is already way more competitive than the euro and other major currencies, yet we are not seeing any increase in the US exports and the trade imbalance continues unabated.

A competitive currency that balances imports and exports is the real secret to employment success? Sounds good, tickles our ears, but the hard facts do not agree with you….they tell a totally different story. So for as the US is concerned a cheaper competitive dollar hasn’t done the US economy any good at all.

I’d like to weigh in here on a bunch of topics mentioned in the above comments.
First, the currency. Many of Germany’s biggest trading partners use the same currency — the euro — so it’s difficult to make the argument that a weak currency is behind German success.
Secondly, the current account surplus. There’s a lot of analysis on this issue in the magazine story. The surplus is not a reason why Germany is competitive or creates jobs; it is a result, on one level, of German competitiveness. In other words it is a symptom of Germany’s economic system, not a cause. Germany has a current account surplus because its exports are highly competitive while domestic demand doesn’t play a big enough role in economic growth. We could argue, n fact, that Germany would be better off with a lower surplus. If Germany got more growth from domestically oriented sectors, that in theory would create more jobs and higher incomes.
Third, the apprenticeship program. This is a very important aspect behind the high skill level in German manufacturing. But it is not new and can be credited only indirectly with the current improvement in employment.
Fourth, German quality. Yes, German companies have been well-known for a long time for their high quality, well-engineered products. But the point here is that they have maintained their edge versus emerging markets by continuing to invest in R&D to stay one step ahead of the competition. Also, I think German firms have become even better at what they do in recent years, to a degree because on top of the high quality, German companies have also improved their cost competitiveness, due both to national labor reform and improvements at the firm level.
The bottom line here is that jobs are being created through exports and the economic growth those exports are generating. Those exports are a result of the high competitiveness of German industry.

Isn’t the key difference between Germany and other “mature” economies like the US or Britain their embrace of neo-corporatism and neo-mercantilism?

While Germany did liberalize its labor laws, the fact remains that labor, capital and the government all sit down and work out a national policy. In the US, we promulgate class warfare a la Wisconsin. Germany takes a much more harmonic approach to their economy.

It’s no surprise they would endure a downturn better.

Dear Mr. Schuman,

Thanks for your comments on my recent posting. I agree that the Germans do a lot of things right – perhaps more so than anywhere else in the world. For this they deserve success.

But I believe that you give too little credit to the massive benefits that Germany receives from being the most productive and possibly the most thrifty country in a currency zone that includes many countries which few would describe with these adjectives.

Specifically, you suggest that since, “Many of Germany’s biggest trading partners use the same currency –¬ the euro –it’s difficult to make the argument that a weak currency is behind German success.” Actually, it is quite easy to make the argument, which goes as follows:

First, less than half of Germany’s merchandise exports go to eurozone countries. With nearly 60 percent going to countries outside the eurozone, the low current value of the euro gives a massive boost to the majority of Germany’s exports.

Second, even within the eurozone, if countries like the PIIGS could have their own currencies, and if exchange rates reflected their lower productivity, Germany would find exporting much more difficult.

In this connection, the following quote from a leading German publication is worth noting: “Within the euro zone, the lack of an exchange rate balancing mechanism has led to growing tensions as economies develop at different rates. If the euro didn’t exist, the deutschmark would likely have become more expensive in recent years, which would have reined in German competitiveness. Many experts believe that if Germany were to withdraw from the euro group today, its currency would immediately appreciate by at least 30 percent ….” (Der Spiegel, 30 June 2010).

Given these facts, we cannot avoid the conclusion that Germany’s membership in the eurozone is very important to its export success — both inside and outside the zone.

Although I fully agree with your points about the importance of the German government’s sound economic and social policies, as well as the people’s willingness to work hard, focus on quality, and live within their means, Germany does not have to run the second largest current account surplus in the world.

Since Germany is locked in and central to the eurozone, any thought of a country-specific exchange rates is impossible. Given this reality, what could be done to reduce Germany’s excessive current account surpluses? Two possibilities are worth mentioning.

First, Germany could expand domestic consumption by implementing policies that would lead to larger wage increases, increased social transfer payments, and infrastructure improvements. It could also encourage shorter work weeks and longer vacations. All this could be done without Germany losing its admirable edge in quality and efficiency.

Second, countries outside the eurozone such as the United States could take measures to reduce their trade deficits with Germany. Without those deficits, Germany would not have the surpluses.

Given that about 70% of Germany’s trade is with European countries (of which about 45% is with other eurozone countries), European countries would have to handle most of the adjustment. But this would be hard.

First, many of the deficit countries in Europe are struggling to recover from the recent world crisis. Imposing the deflationary policies needed to effect sufficient real effective devaluations among the low-performing countries of the area would be economically, socially and politically problematic to say the least.

Second, although country-specific exchange rates that would balance external trade accounts for countries within the zone are not an option, an alternative way to reduce the German trade surplus would be for the US to take action.

The US consistently accounts for nearly twice as much of Germany’s trade surplus as any other single country. Therefore, establishing a more competitive value for the US dollar that would balance US imports and exports would also, by definition, reduce Germany’s trade surplus.

As I have written elsewhere, for the US to change the real effective exchange rate through deflationary domestic policies would certainly be counterproductive in today’s economic environment. A far better approach would be to engineer a modest reduction in the dollar’s nominal exchange rate by implementing a small “Capital Inflows Moderation Charge” (CIMC) on foreign purchases of US assets.

A CIMC would take effect whenever a current account deficit of say 2-3% indicated that the country’s nominal exchange rate was getting out of line with a sustainable balance of imports and exports.

By moderating capital inflows, a small CIMC would reduce the demand of foreign investors and speculators for dollars to buy US assets. This in turn would reduce upward pressures on the dollar’s value, allowing it to move towards levels closer to those of the early 1990s. (Despite substantial recent declines, the dollar is still overvalued by about 15% compared to its trade weighted level in 1991, the last year the US had balanced external trade.)

Establishing a more realistic nominal exchange rate for the USD would certainly not fix Germany’s trade surpluses, but since US deficits are the largest single source of those surpluses, a CIMC would definitely help.

Even more important, since the US trade deficits are the largest single source of global trade deficits (40% of the total in 2010 according to recent IMF WEO estimates), a CIMC-driven adjustment of the dollar’s value to more realistic and competitive levels would make a major contribution to global economic stability by balancing US imports and exports – not only with Germany, but with China and other countries as well.

John Hansen, PhD

Dear Mr. Mateus.

Many thanks for your comments on my recent posting (#4). This note suggests some corrections and alternative interpretations.

First, I did not say “Germany has been successful in its exports … because of a falling euro.” I said that the euro that is undervalued for Germany (though not for the eurozone as a whole), and that this undervaluation is an important factor contributing to Germany’s large trade surplus.

The reasoning is as follows: The presence within the eurozone of economies such as the PIIGS that are far less competitive and productive than Germany means that the overall value of the euro is lower than it would be if (a) Germany were the only country in the eurozone, and (b) Germany maintained a balanced external account with imports equal to exports. (For more on this point, please see my recent reply (#6.1) to Mr. Schuman’s comments on my first posting.)

Second, I hope you agree that the test used here for the under- or overvaluation of a currency – a balance between exports and imports on current account – is appropriate (ref. Hume, Ricardo, et. al). If so, the number of units of one currency that can be exchanged for another – e.g. USD 1.37 per EUR 1.00 – is basically irrelevant.

Third, you note that “the euro has steadily been increasing in value in the last 6 months.” This is mildly interesting but largely irrelevant to the analysis here for two reasons: (a) Short-term exchange movements mean little except to currency speculators and are of little or no use when examining a basic structural issue such as the persistent current account surpluses of Germany, which with the exception of the decade after the fall of the Berlin Wall, have been going on for at least 30 years. (b) Taking a somewhat more meaningful period, the value of the euro as measured by the real effective exchange rate has not risen but rather has fallen by over 12 percent since the middle of 2008 according to the latest BIS data.

Fourth, you say that “the US dollar has been steadily eroding in value since the financial collapse in 2008.” This is not true. In fact, the dollar actually rose by 19% between March of 2008 and March 2009, a reflection of the flight of foreign capital to the relative “safety” of the US financial markets. Since then, however, it has declined by about 14%, but is still above its previous trough in March 2008.

Far more important, the dollar is still about 15% higher than it was in 1991 – the last time that US imports and exports were balanced.

Given that a trade balance is the only meaningful measure of the over- or under-valuation of a currency, all the ups and downs in exchange rates that we are talking about here are really just noise. The bottom line is that the US has a serious and growing trade deficit, and this means the USD is overvalued.

And as long as the US maintains an overvalued exchange rate and continues to sell its assets to foreign investors to cover the trade deficit, economic recovery with jobs will remain a dream.

With an appropriate exchange rate, a trade deficit can be closed by producing goods domestically that compete successfully with imported alternatives, and by increasing the production of goods that compete in world export markets.

Do the numbers: According to the Dept. of Commerce, the US merchandise trade deficit for 2010 was $646.5 billion. Each billion dollars of trade deficit represents the loss of roughly 10,000 jobs because the overvalued exchange rate makes goods produced by American workers too expensive to compete with imports and too expensive to compete in export markets.

At 10,000 jobs per billion dollars, the overvalued dollar cost America nearly 6.5 million jobs last year.

A competitive US dollar could put over 6 million people back to work.

America needs a competitive dollar, and it needs it now.

John Hansen, PhD

Gamesmith94134: Does Germany know the secret to creating jobs?
I do not think Germany know the secret to creating jobs, however, the trade surplus reflects what Mr. Der Spiegel’s description of Germany’s position among the PIIGS that may provide the opportunity to build up its assets through the loans to PIIGS in EU; otherwise, the relatively higher exchange rate on deutschmark would have cut its edge in exports. Since it is more stable and balanced compared to its trading partners in the EU, its accumulated cash flow from other members made it easy to finance and produce.
“If Germany were to withdraw from the euro group today, its currency would immediately appreciate by at least 30 percent ….” (Der Spiegel, 30 June 2010)
The PIIGS is under the shadow of Euro for their under-performance that shifted the cash flow to flood the emerging market nation like Germany too if EU was not the monetarily sovereignty for all its members utilize Euro dollars; and Germans would face inflation and unemployment instead of trade surplus for the benefits under-priced currency relatively to its deutschmarks from the umbrella of the Euros and after Euro devalued. If Germany must buy back the loans from its members and refinance it to keep the Euro alive, then, it may not enjoy the trade surplus for long.
Perhaps, it is time to admit significance of the cash flow that fluidity makes a nation like Ireland anemic from devaluation, infused with a nation like German bloom with surpluses and causes a nation like China busted from inflation; when currencies cash flow control must be sustainable. At the same time, in the free trade setting, good long-term investment and monopoly invasion must be identified as well. In order to protect ones resources, each nation must be protected under the jurisdiction of the Zones and monitored by monetarily sovereignties that is accountable by it communities.

a CIMC-driven adjustment of the dollar’s value to more realistic and competitive levels would make a major contribution to global economic stability by balancing US imports and exports – not only with Germany, but with China and other countries as well.”
However, I worry that Mr. Hansen’s suggestion from the fear of foreigners purchasing American assets or any other nations’ assets and balance of trade by engineer a modest reduction in the dollar’s nominal exchange rate by implementing a small “Capital Inflows Moderation Charge” (CIMC) on foreign purchases of US assets. Unilaterally ? What if the purchase is a multi-national corporation? And ,if it comes bilaterally? It would be counterproductive.
(Despite substantial recent declines, the dollar is still overvalued by about 15% compared to its trade weighted level in 1991, the last year the US had balanced external trade.) “
It Mr. Hansen suggested to return the 1990 level would make the balance external trade, should America have less foreclosures and unemployment? Or we did over spent. It is two individual cases of micro and macro economics that America must look deeper on how over-valued in external trade and over-priced asset and workmanship internally. I hope to see the definition of price and value that he quoted and I am not picky.
Mr. Hansen, you information is inspiring and I think single-handedly answer to solution may not be sufficient for the formula to the complicit.
May the Buddha bless you?