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

Comparative Labor Law & Policy Journal 32 (1), Fall 2010, p. 293 - 298

Can Germany be Saved? seeks to "inform the reader about the state of the German economy, about how a well-functioning market economy operates, and obvious defects of a welfare state of the German type" (p. xiii). Indeed the book presents the diagnosis, rationale, and policy recommendations of a particular, market-liberal perspective on the German labor market crisis systematically and comprehensively, and for this it is laudable: The book explains the economic logic behind the oft-stated necessity of lower wages and social standards, it demonstrates how this necessity plays itself out in a range of specific policy areas such as industrial relations and collective bargaining, income-replacement social benefits, pension policy, and immigration, and it derives a set of policy recommendations from the diagnosis and analysis of Germany's "malaise."

The argument starts with diagnosis. The first two chapters document the decline of Germany's economy by showing how the country is being overtaken by its neighbors and competitors in terms of a number of economic indicators such as growth, net investment, per capita income, and unemployment. The root cause behind this development is a too-high level of wages and social standards, rendering German manufacturing workers uncompetitive in the global economy. This produces "unhealthy specialization patterns," destroys job opportunities for low-skilled workers, and thus causes mass unemployment and fiscal overstrain. The next two chapters turn to the institutional reasons behind "excessive" wage demands. In the industrial relations system (chapter 3), a cartelized structure of labor union organization and industry-wide collective bargaining preclude market-clearing wage rates. In the welfare state (chapter 4), overly generous income replacement benefits act as a reservation wage and prevent job creation, especially in the low-productivity segments of the economy.

The book's remaining chapters address specific policy areas and spell out how overly generous entitlements for low productivity workers aggravate - and at times even engender - the unhealthy economic structures and behaviors. Poor handling of German unification (chapter 5) led to rapid wage increases during the 199Os, undermining economic recovery and rendering East Germany permanently dependent on transfers from the West. The rising burden of social spending and exceedingly high marginal tax rates (chapter 6) are a further obstacle to job creation, just as extremely low birth rates and population ageing (chapter 7) are not only additional signs of Germany's decline into inactivity, but also undesirable results of the country's pay-as-you-go pension system, which becomes increasingly dysfunctional, yet hard to reform. European labor migration (chapter 8) is shown to magnify the problem of mass unemployment, as low wage competition from Eastern Europeans will push low-skilled Germans out of their jobs and into the arms of the welfare state. Further European social integration, moreover, will make German social benefits accessible to labor migrants, so the German welfare state will act as a magnet, attracting immigration far beyond the extent that the labor market and society in Germany can absorb.

Each chapter derives policy recommendations on what a healthier set of incentives would look like. The last chapter summarizes these into "the reform agenda that Germany really needs" (p. 310), one that goes further than recent labor market reforms and amounts to nothing less than "a radical cultural and economic revolution - a revolution as courageous as the one in Great Britain under Margaret Thatcher" (p. x). At the core of this agenda is lowering wages and income replacement benefits. Social assistance is to enhance its activating, workfarist element, subsidizing low-wage employment, rather than inactivity, and even giving local authorities the power "to lease [benefit recipients'] labor to private businesses at the highest possible fee that they can get, which however may be close to zero in particular cases." (p. 299) One widespread objection to large-scale wage subsidies, that this would impair the lower segments of the wage structure, is no objection from Sinn's point of view, because this is actually intended (cf. p. 133).

It would be tempting now to ask a few questions about this agenda: Why it is, for instance, that only the lower segments of German society have to shoulder the burden of economic globalization and secular decline in growth rates? When it comes to ownership claims, profit demands, or social insurance entitlements already built up among the more fortunate members of society, Sinn treads very carefully and is well aware of the legal and political limitations to market-enhancing policies; "the hard laws of economics" (p. 61), it seems, are much less compelling when it comes to withdrawing entitlements from people with more economic and political resources. One must not indulge in such questions, however, as they would only be testimony to the naivete of "the demagogues and the dreamers who now monopolize public discussions" (p. xiii) in Germany, and who fail "to recognize a B-grade movie when they see one ... [resting] their faith in the primacy of politics, behaving as if optimal economic conditions can be willed into existence, with or without the market." (p. xi) Better, therefore, to practice one's ability to recognize a B-grade movie when seeing one and pose a few questions about the analytic and evidentiary aspects of the argument.

Turning to one of the substantive arguments first, the diagnosis of economic decline employs macroeconomic performance indicators (per capita income or unemployment), and Sinn emphatically rejects the widespread industry-specific or firm-specific measures such as productivity or unit labor costs. Interesting that this approach may be for diagnostic purposes, it is fraught with problems when policy recommendations are derived. Actors will tend to keep their microeconomic performance measures in mind when making decisions, and the call for the macroeconomic perspective - measuring productivity by including the zero productivity of our 3.6 million unemployed - is likely to die out unheard and have the character of a moral appeal, rather than a policy recommendation. The performance-indicators informing political decision-making become all the more significant as Sinn disregards his fellow economist Mancur Olson's insight about the greater ability of encompassing organizations to keep macroeconomic goals in mind. Sinn calls for weakening the "union-cartels" and regards company-level bargaining as a solution to some of the German labor market's structural problems. At the time of writing this review, the day when Lufthansa's pilots start a strike that might evolve into the worst of the company's history, one might doubt the wisdom of this proposal. The analytic point here is that the policy proposal - to move toward particularistic wage setting institutions - is at odds with the moral appeal for the macro-economic perspective.

The book's arguments are based on a careful reading of the core claims of economic theory, so that there is no problem with understanding the economic rationale of the predictions and recommendations. However, given that the arguments are full of assertions about political dynamics and individual behavior in institutional settings, the author pays strikingly little attention to the large institutionalist literatures specializing in the analysis of precisely these institutional settings under scrutiny. The book has no bibliography, and its twenty pages of endnotes acknowledge many of the key insights of classical and contemporary economic theory, but they convey practically no appraisal of the empirical and theoretical research on the institutional settings so boldly declared dysfunctional. Perhaps as a result, a whole range of smaller and larger errors and distortions enter the picture. Work obligations for social assistance recipients were not an invention of the Ifo-institute's concept of "Activating social assistance"; this was not a new idea, not even at the time when the book's first German edition (2003) was published. Their lineages go back to the very first instances or local poor relief, and a large literature on workfare schemes has the careful analyses of such policies' potential promise and limitations that one misses in this book's treatment of labor market activation. Actuarial deductions from pension benefits in the case of early retirement are a reality in the German public pension system, not an intelligent policy proposal. Attention to the birth rate entered German family policy under family minister Renate Schmidt's tenure (2002-2005). Again, it was not quite as novel an idea as this book suggests; since then it has been in the center of much public discussion; by the time this English edition of Can Germany be Saved? was published in 2007, policy measures explicitly designed to boost birth rates were already implemented, and currently the topic of demography is pervasive to an extent that we really need no further reform agenda alerting us to its importance.

Long passages about the labor market and collective bargaining institutions take no observable notice of the large literatures on social democratic corporatism, on varieties of capitalism, or on collective bargaining organization in Germany. As a result, perhaps, statements enter the argument, which are grossly exaggerated, if not plain wrong. Clearly, not "virtually each law passed in the Bundestag ... has to be approved by the unions" (p. 79); there is, of course, no "prohibition of night work and of overtime" (p. 85) in Germany, nor is it the case that "all major decisions made by big German companies have to be coordinated with the unions" (p. 80); codetermination rights and the works council's prerogatives, instead, are tightly circumscribed by law. Similarly, the large body of comparative welfare state research and the large historiographic literature on German social policy development do not enter the narrative of Germany's decay, Accordingly misguided are some of the claims in that area: Not ev~ry European welfare state is modeled on the German example. Bismarck (or, for that matter, the formative 1889 legislation associated with his name) invented neither the income-replacing pension, nor the pay-as-you-go financing mode; it created invalidity pensions emphatically not wage replacing, and as a financing mode policymakers envisioned a funded system. There is a long time-gap between the time (industrialization) when children ceased to be a source of livelihood during old age and the time (1957) when livingstandards protection became a major goal of the public pension. As a result, the second demographic transition can hardly be attributed to this particular set of pension institutions. The "original sin" of pension expansion - the dynamic pension, connected with the promise of living-standards protection and pay-as-you-go financing - was Konrad Adenauer's doing. Not all the big expansionary decisions in the development of German welfare institutions can be attributed to Social Democratic folly. Furthermore, the narrative is strewn with assertions about "public sentiment in Germany" or "what Germans think," but none of these quote any of the existing survey data. There is, for instance, little evidence as of now that policy preferences and voting patterns indeed cleave by age, as alleged in the prediction of Germany's future "gerontocracy" (p. 219).

Finally, most importantly, the author quotes the number of social assistance and unemployment assistance recipients as 7.3 million (in May 2006). This conveys a stark impression about the magnitude of inactivity and dependence on the German welfare state, but Sinn does not provide some of the important details. Social assistance recipients are not employable (for reasons of disability and age, mainly), and even among the unemployment assistance (ALG II) recipients, there were 2.3 million people in May 2006, who did not sit at home and enjoy "the continuous flow of money for a dolce vita far niente lifestyle" (p. 170). They were, instead, either sick, they wenl to school, they were single parents raising children, or they were actively involved in precisely the activity that Sinn presents us as much-needed policy innovation: working in low-paid occupations and receiving unemployment assistance as a subsidy to their low wages. Furthermore Sinn writes about the mere theoretical possibility of sanctions, when benefit recipients refuse to take on gainful employment. Yet the author fails to mention the more than lOO.()(X) cases (at the time of publication, January 2007) in which sanction" were not a theoretical possibility, but a very practical reality.

Some of these objections are major points; many are small instances of misrepresentation. It makes no difference whether they enter the argument as a rhetorical device or as a result of insufficiently acknowledging what we actually know about German labor market institutions. Taken together, they seriously undermine our trust in the far-reaching predictions and prescriptions that come with them. So it is not so much the "demagogues and dreamers" that stand in the way of broad public support for tough economic reform. More often than not, it is the ambivalent status of institutional arguments that make us wary of wholeheartedly embracing policy recommendations that, after all, depend on information about institutions and their defects. Information about the institutions of the German political economy tends to be sketchy at times and theory-based predictions of their economic effects become speculative as a result, so the book's declared intention - to provide the knowledge-base that makes it impossible to oppose the reform agenda - is seriously undermined. Besides information, though, the book has another intention, a pedagogical one, concerned with fighting the many "demagogues and dreamers," the illusions and half-baked arguments that Sinn encounters in the public discussions about welfare reform. That intention is plain and clear throughout. And in this perspective I would suggest the book should be read: Not as providing information and analysis, but as elucidating a particular position - and a partisan one, one might say - in the economic and social policy debate. As such it is systematic, and comprehensive, and good.

Margitta Mätzke
Professor, Institute for Sociology, University of Göttingen, Germany.