Chartbook 242: What is wrong in Germany? And an (interesting) correction.

The drubbing handed out to Germany’s governing parties in the regional elections in Bavaria and Hesse is indicative of the current mood. Each region has its special characteristics, but Hesse and Bavaria are very significant pieces of the German Federal jigsaw puzzle and for Chancellor Scholz’s SPD to come behind the AfD in both states is humiliating.

The SPD had imagined it might do well in Hesse. Instead, it scored a miserable 15.1 to the AfD’s 18.4 percent. Hesse, including the financial center of Frankfurt, has a long tradition of far-right politics. This is the strongest result the AfD has ever put up in West Germany. In Bavaria the SPD rarely does well outside Munich, but it is now reduced to 8.4 percent putting it in 5th place. The AfD scored 14.6 percent.

There are, no doubt, many factors driving the lurch to the right and the resentment towards the current government. I discussed some polling on AfD supporters in Chartbook 235. An electoral share of between 10 and 20 percent for the AfD across Germany is not surprising given underlying sentiment. Roughly 10-14 percent of Germans express far-right views. The uncertain economic situation, the chaotic divisions within the government and acute pressures in the housing market add to that.

The most serious social issue of the moment is the lack of affordable apartments to rent, which spreads anxiety amongst existing tenants and makes life miserable for anyone trying to move home in large parts of the country. Against this backdrop it is not surprising that the migrant issue - the key theme for the AfD -strikes a chord.

In my latest FT column, I argued for the mainstream parties, both the current government and the CDU, to back a program of public investment and social spending to mend the German social safety net and increase the availability of decent and affordable homes. To embrace migration on the scale that Germany does, and should continue to do, without making these investments is to invite zero-sum distributional struggle and to make the case for xenophobia. The hard-core of AfD support may be “unreachable” for reasonable democratic debate, but failing to address basic distributional issues invites a rightward drift amongst voter who are otherwise not aligned with the far-right.

Life in Germany is much less good than it could be on account of specific deficits and shortages that can be addressed by public spending that should be debt-financed. It is obvious why long-term housing construction projects should be financed by debt. And it should not be that difficult to make the same case for investment in early childhood education. It will generate even larger societal rates of return. If a democracy does not respond to such urgent, obvious and well-justified needs, if it instead prioritizes nonsensical principles of fiscal rectitude, it should not be surprised if it loses legitimacy. It is giving itself up for lost.

What does not help serious democratic debate is a mood of generalized malaise about the German model. This goes hand in hand with a revisionist take on the Merkel era. It is tied to fears about deindustrialization and the EV revolution. It is linked also to worries about China. Mixed in with this cocktail are worries about inflation, the cost of living and the decline of the German middle-class or Mittelschicht.

In the middle of a live talk show panel during the summer I suddenly realized with a bump the way in which this kind of diffuse pessimism actually inhibits clear thinking about what the most urgent problems are. I discussed the issue of what you might call polycrisis brain fog in Chartbook 222.

The multiple impact of polycrises encourages thinking in terms of “moods”. For some that renders the very idea of polycrisis suspect. As though identifying the emotional component immediately rendered it invalid. The opposite is true. We should recognize and acknowledge these emotional moments in the current situation of overlapping challenges and crises. And then, if we want to make political progress and actually address the problems at hand, what is called for is precision and also a certain coolness, fortitude, or simply historical and comparative perspective.

In was in this spirit that I really appreciated the commentary of someone I would not necessarily expect to agree with, Holger Schmieding, chief economist at Berenberg bank. In a widely cited newsletter Schmieding argues that what is happening in Germany is not a crisis so much as normalization. He laid out a neat history of recent German success that focused on the long-range impact of the early 2000s labour market and welfare restructuring. He, of course, celebrated the Hartz IV measures - for good reason I am doing my best to avoid the word “reform”. You don’t have to approve of the changes instituted by the Red-Green government, to acknowledge their significance in changing German society.

Schmieding’s argument came with compelling charts, which showed a surge in Germany’s employment rate.

That put it well above the European average.

And incorporated both more women and elderly people into the workforce than in much of the rest of Europe.

Schmieding’s point was that the one-off gains of the changes made in the early 2000s could not go on forever. In due course other European societies would “catch up” and Germany would lose its advantage. Furthermore, the German model had had reached its limit. There were few extra workers to incoporate into the workforce and demographic decline was kicking in. That is what gives such significance to the issue of immigration.

In general, this historical assessment of the end of the German exception, seemed like a better interpretation of the situation than the alarmism being spread by too many commentators. This was also the spirit of comments I made to Handelsblatt in a long interview, in which normalization became a bit of a buzzword.

So i was predisposed to agree with Schmieding and, following two of my FT colleagues, I made his argument one of the anchors of the argument in my FT piece.

As I hammered out the draft in an airport lounge I remember thinking, “Wow this claim about labour market participation is strong. I hope Schmieding has done his growth accounting right. I am sure he has. He is a serious guy. Everyone is citing the paper … “.

Wooops!

The very day the piece came out, I received a long email from my good friend the indefatigable and hard-hitting investigative journalist Harald Schumann. “Hey Adam, loved the FT piece. Agree entirely about housing and migration. But the growth accounting is wrong. The early 2000s labour market measures did not increase the overall supply of labour, they really just hustled millions of people into dead-end, part-time jobs. Work was redistributed and spread more thinly to the disadvantage of workers.”

Damn. Ok. Should have checked myself. What is going on here?

Well it turns out that Harald is entirely right. As he and his colleague Elisa Simantke reported in Tagespiegel and Christian Odendahl showed in an excellent piece for CER back in 2017. the story of the German labour market miracle is in large part a myth.

To use the crude labour market participation figures as a proxy for overall labout input is highly misleading. Over the period from the late 1990s to the 2010s, full-time employment declined and part-time work and self-employment increased dramatically. Overall, comparing the 2010s relative to 2000 the total input of labour was flat, relative to the early 1990s it was down. One can have different opinions about a more flexible as opposed to more standards form of employment, but it certainly increased inequality and it did not increase overall labour input, which cannot, therefore, have been a major driver of GDP growth.

I cite here the graphs from Susanne Wanger, Roland Weigand and Ines Zapf’s report on “Measuring Hours Worked in Germany”, in the 2016 volume of Journal for Labour Market Research.

But if we confine ourselves to a simple comparison of 2000 with the 2010s we also miss something important, which is the nadir of Germany’s job-market crisis in the mid 2000s.

Between the late 1990s and 2006 full-time employment in Germany suffered a real crisis. The number of jobs contracted by almost 25 percent. It then stabilized at this much lower level. Amongst the self-employed likewise the hours of work declined and then stabilized. What the Hartz IV labour market measures may perhaps be credited with, is not so much an industrious revolution that propelled growth, as a stabilization. As hours of work in the full-time sector stabilized, more and more people were absorbed into part-time work. This had the effect of returning the total labour input of the economy to its 2000 level. This reduced the number of those who were classed as unemployed and suffered the associate stigma (though the changes also reduced the generosity of benefits for the most fortunate). Overall, as Schmieding’s data do confirm, an unprecedentedly large share of the population, including many more women, were brought into one or other form of employment.

These are a very interesting set of points and actually help me understand better one of the aspects of the social thought of Wolfang Streeck. Streeck and I disagree about many things, but one thing that has particularly struck me is his critique of “work-orientated society”, Arbeitsgesellschaft as such. His critique of the incorporation of women into the labour force, clearly responds to a quite dramatic change in Germany between the 1990s and the 2010s that this exchange has illuminated for me.

What are the implications? Clearly, it would seem that labour is a less binding constraint on German economic growth than Schmieding suggested. There are plenty of people who might welcome the chance, with appropriate training and supportive childcare arrangements and suitable housing in the right places, to shift from precarious short-term working to better paid and more secure full-time jobs.

The labour supply as such is not a constraint on the German economy, the unwillingness to invest in people - in their education, housing, supportive social services, job security - is. That is good news and puts the ball squarely back in the court of Germany’s political parties who must overcome the deadlock over debt and public investment.

And before you start asking, well behind the log jam in politics are there not major class interests in play, check out the economic institute of German business, the IW in Cologne. Its chief economist, Michael Hüther, has been one of the leading voices calling for a major investment push in Germany. There will be disagreements in detail and principle on the direction of investment. But the basic suggestion is, in fact, agreed amongst major interest groups. This is truly a case of what Keynes would call “muddle”, a self-inflicted injury as a result of a failure of societal coordination, organization, mobilization and persuasion. It is an authentically political problem.

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I am very grateful to Harald for making this important correction and hope that my response here encourages others to follow his example. Please send me emails that put me right and help us improve our general understanding of our complex world. For me personally it is a reminder not to repress my nagging questions. If you think a claim is bold, check it!