By Republican standards, they're doing everything wrong. So why is it all turning out so right?

Bonn—Especially if it’s Kennedy versus Reagan in 1980, we are likely to have one of the most ideological presidential elections of the century in the U.S. next year. The conservatives already are saying that what America needs is big tax cuts, more incentives for business investment, balanced budgets, reduced government intervention in the economy, less social spending, more defense, reduction of union power, and fewer environmental controls.

Beyond these specific targets, the conservatives (the neoconservatives, particularly) are gearing up for combat over principles. Adopting the gospels of Friedrich Hayek and Milton Friedman, they are arguing (as Commentary put it in a recent symposium) that there is an “inescapable connection between capitalism and democracy” and that there is “something intrinsic in socialism which exposes it ineluctably to the ‘totalitarian temptation,’” Even though “socialism” is the last label U.S. liberals would pin on their program— even “social democracy” is too politically risque—there is no mistaking that the Republicans intend to suggest that conservative economic nostrums are essential to the preservation of our way of life, and that the humane social goals identified with Democrats threaten to produce stagnation, decline, and ultimately a loss of freedom itself.

But visiting West Germany makes one wonder about this equation. Why isn’t it possible to have it both ways? Why can’t the U.S. have a generous welfare state, national health insurance, free university education, adequate welfare, a clean environment, strong unions, and also a healthy, productive, competitive economy, low inflation, and a strong currency? After all, Germany has all of it.

Germany is the living disproof of conservative claims that high taxation, government involvement in the economy, and generous welfare state programs are necessarily the undoing of economic well-being and democracy. From a total wreckage after World War II, West Germany has developed (with U.S. help, of course) into a country whose prosperity matches our own. Its per capita income in 1977 was $8410, compared to $8670 in the U.S.. By this year, Germany may have even passed U.S.. Its inflation rate, of course, is much lower than ours, five percent instead of 13.5 percent. The German growth rate in recent years has been lower than ours, on the average, but it also has been steadier. During the world recession of the mid-1970s, the U.S. gross national product declined 2.1 percent in 1974 and 3.75 percent in 1975, but Germany had negative growth—minus two percent—only in 1975. Right now the German growth rate is four percent, while our economy is shrinking again.


What else do conservatives value as evidence of economic virtue? A strong currency? The German mark is one of the strongest in the world. Productivity rates? Germany’s output per worker is growing at three percent a year. Ours is falling. Capital formation? Per capita, the German level is 34 percent better than ours. High-quality industrial products? Anyone who’s looked at VWs, BMWs, and Audis knows they’re better than Pintos, Chryslers, and Oldsmobiles. Exports to the U.S. have remained brisk, even at the huge prices that the sagging dollar makes U.S. pay for them.

And yet consider what Germany does for its people. A German worker who loses a job gets 68 percent of his or her last year’s income in unemployment benefits for a year, and 58 percent after that for three years. These benefits are lost if a worker turns down an “appropriate” new job offer. If a worker can’t find anything in his or her own field, the government will pay for retraining. Germany has national health insurance that’s obligatory for all low-income workers and also covers retirees and the unemployed. Moderate-income workers can join voluntarily, up to a certain income. The upper middle class has to take out private insurance. Every employee can claim full pay from his or her employer for up to six weeks’ sickness per year, after which health insurance pays benefits for up to 78 weeks at up to 85 percent of regular pay.

All workers are covered by pension insurance. And here, retirees can actually survive on the benefits, which are indexed to rise with average wages in the labor market and with inflation. Germany also provides child allowances to every family—$30 a month for the first child, $60 for the second, and $120 for each additional child. There is more assistance available for the chronically dependent. Germans say that social stigma does attach to being on unemployment aid for more than a year, but, legally speaking, “social basket” benefits are available as a matter of right. The disparagement U.S. welfare bureaucrats show recipients doesn’t apply here. There are far fewer welfare bureaucrats and their duties do not include midnight raids to catch a man in the house or the mass cheat-purgings that characterize the U.S. system.

On top of all this, education is all free, including college tuition. And Germany also has a nationalized passenger railway system which doesn’t make a profit but, unlike Amtrak, is still required to serve out-of-the-way towns and villages.

All this costs money, of course. Pension insurance costs 18 percent of a worker’s pay, of which the worker and the employer each pay half. Health insurance costs about 11 percent, again paid half-and-half. All told, about 45 percent of the average worker’s income goes to pay taxes, pensions, and insurance. In 1976, “welfare” payments represented 28.6 percent of Germany’s gross national product, as against 19.2 percent in the U.S.. And the crowning reproof to American conservatives is this: though Germany’s economy is more stable, productive, and noninflationary than ours, government expenditures represent 41.3 percent of GNP, as opposed to 32.6 percent in the United States. Clearly government spending and programs to make life more humane do not have to cripple a country and sap its vital juices.

Nor could anyone claim that Germany is not a democracy. In October 1980, it will hold a federal election just as free, and free-swinging, as ours. The conservative Christian Democratic Union, led by Bavaria’s Franz Josef Strauss, probably will charge that pensions are too expensive, that health care costs are rising alarmingly (they are, in spite of cost-containment provisions built into the insurance system), that taxes are too high and business investment is too low. The inflation rate of five percent is scandalous by German standards. The social democratic government of Chancellor Helmut Schmidt is expected to stay in power by pointing to Germany’s prosperity and stability. But both the Christian Democrats and the Social Democrats accept the basic principles of a market economy tempered by generous social programs. According to U.S. conservative dogma, having 41.3 percent of GNP in the public sector ought to spell the beginning of ruin and the onset of despotism. In Germany, though, it spells health and democracy— social democracy.

How is it possible? The flip thing to say is that Germans are Germans: they work harder, follow the rules, click their heels, and produce. There is something in this. But the Germans seem to be getting less “German” all the time. Certainly this is true of young people. If you plucked one teenager from a street in Hamburg and another from Chicago and put them side by side, you could not tell the difference in appearance; and probably there wouldn’t be much difference in their lifestyles either. The Germans on the average take more time off work than Americans do. Ninety- 17seven percent of all workers over 35 years old get paid vacations of four weeks or more. Seventy-three percent get four and a half weeks or more. It isn’t possible to say whether the Germans work harder than Americans when they’re at work, though employers and government officials doubt it.

In other respects, too, Germans seem to be getting Americanized. They are less formal with each other and with visitors than they used to be. Young people and workers, especially, use the familiar “du” on short acquaintance these days, instead of stiffly calling each other “sie” forever. Once Germans never walked across the street against red lights. Now even old ladies do it. German cities still are much cleaner than ours, but parks are starting to get trashy enough that burghers complain. Germans also are distressed that the trains don’t run precisely on time anymore.

There are serious explanations for Germany’s ability to afford a social democracy and be productive too. And if the German example undermines the debating points of American conservatives, it also should give pause to American liberals. Probably the most important single factor in Germany’s economic success is that its population and government regard inflation as a scourge worse than any except war. American liberals historically have pooh-poohed inflation as a conservative bogeyman (except when it becomes a political issue, of course). But Germany regards it as the social and economic cancer that it really is. If liberals want America to enjoy Germany’s social benefits, they will also have to give conservatives their due and find a way to cut inflation. American labor unions, especially, will have to swallow hard.


Germany’s social democracy is more advanced than ours, but its management of the economy is more conservative. Germany hasn’t rejected Keynesian economics. The government intervenes in the economy to temper fluctuations in the business cycle. It cuts taxes in slow-growth times, loosens credit, spends on public works, and goes into budget deficit to stimulate the economy, just as ours does. But unlike ours, the German government reverses course when times are good. It doesn’t respond to political or bureaucratic pressure to keep counter-cyclical programs in force beyond their time. It doesn’t create bureaucracies as big as ours (900 people manage the German housing program, as against 16,000 at HUD), and the political pressures are all in the opposite direction from ours.

It would be politically unthinkable for a German chancellor to do what Richard Nixon did in 1972: superheat the economy to insure full employment in an election year, while imposing wage and price controls to hold down inflation. Right now in Germany, Chancellor Schmidt is running a budget surplus in order to reduce the public debts accumulated in deficit years that followed the mid-1970s recession and also in order to reduce inflation. With a U.S. recession coming on, there is talk of cutting taxes in Germany next year to ease the impact here. But Schmidt has asserted he won’t do the politically popular thing until after next October’s election. Of course, the really popular thing to do in Germany is to resist stimulative (and potentially inflationary) tax cuts. There is just a world of difference between economic politics as practiced in Germany and in the U.S.

History explains the difference between the German and American attitudes toward economics. Americans remember the Great Depression as their worst time of suffering, and the New Deal as the beginning of social salvation. Without a real “social basket,” we still— liberals especially—regard recession and its resulting unemployment as the most terrible economic danger. In Germany social insurance began in the 1880s under Bismarck. The Germans’ worst historical memories are of the ruinous inflations of the 1920s and the postwar 1940s. From 1955 to 1970, Germany let its inflation rate go above 3.5 percent only once, and the all-time high, after the great OPEC oil gouge of 1974, was seven percent.

As a result, Germany is not plagued by the inflation psychology that prevails now in the United States. Americans think it’s senseless to save money because, with inflation in double digits, savings will be worth less tomorrow than they are today. So we spend, but the Germans don’t. Though their per capita income is just as high as ours, Germany’s consumption rate is 66 percent of that in the U.S. On the average, Germans have far fewer TV sets, cars, and telephones than we do. The money that doesn’t go for taxes goes for savings. The German savings rate is 15 percent of income, double ours. This money is available for capital investment, which increases productivity, which increases the competitive strength of the economy, which makes for a stronger currency, which makes for cheaper imports, which contributes to lower inflation. Germany is in a virtuous cycle of price stability, whereas we are in a vicious one of inflation. It’s no wonder that Schmidt balked when the Carter administration tried to get Germany to inflate its economy in 1977 to serve as the “locomotive” to pull along weaker economies in Europe. In Germany’s interest, he was dead right to refuse to drive a train to nowhere.

Also unlike the U.S., which discourages savings through ceilings on bank deposit interest rates, the German government offers incentives to save. Bank interest is untaxed up to a sizable amount, and the government offers matching funds to people who commit themselves to buying a house. The government also gives matching money to small savers who have their money in the stock market. There is nothing like the American’s level of consumer credit buying in Germany.

Corporate profits are taxed at 56 percent in Germany, nominally higher than in the U.S., but profits are not double-taxed. An investor pays tax on his dividend income, above a certain level, but the corporation isn’t taxed on distributed profits. As in the U.S., Germany has an investment tax credit. Government gives grants and loans for corporate expansion and also helps out companies in trouble. High-income Germans are taxed at a maximum of 56 percent, a lower rate than in the U.S.

Besides an anti-inflation, pro-investment, productivity psychology, the other most important contributor to Germany’s economic strength is labor union restraint, German labor and management view themselves as “social partners,” The unions are as dedicated as management and government to holding down inflation on the theory that—as a labor ministry official said—“You don’t slaughter the cow that gives you milk,” As a matter of policy, the unions tailor wage demands to productivity, predicted growth rates, and inflation, rather than aiming to take what they can get.


Since 1973 the German Labor Federation has even dropped the objective of redistributing national wealth from capital to workers. Anticipating a 10 percent inflation rate in 1974, the unions asked for and got increases of 10 percent to 13 percent. When inflation actually rose only to seven or eight percent, the unions honestly felt they had gotten more than their fair share, “We haven’t given back the extra we got in 1974,” a union official said, “but we made the unspoken concession to moderate our demands. We understand the need of industry for profits to reinvest. The profit rate had fallen continuously since 1970, We accepted the fact that they needed a re-creation period, so we dropped our redistribution demands in 1973, What happened in 1974 was an accident. These are things we don’t talk about. It’s unspoken, but we knew that profits had to go up faster, and so we kept back a bit. Profits have been back up since 1975, more than increases for the workers, and we’re back to the same distribution (of income) as in 1972; we say, ‘now, it’s enough.’”

An American or British labor leader who exhibited such concern about the welfare of corporate capital might be tried for treason, “I know we’re considered tame in England and the U.S.,” this union official said, “but you have to understand the psychology here. We’re not against industry. We’re with it,” It will please conservatives to know that Germany not only has picturebook unions, but that federal law forbids the closed shop and that there is no statutory minimum wage. Unionists say, though, that workers never are paid less than the prevailing union contract wage for similar work.

A lot has been written about the German union participation device, mitbestimmung (co-determination), as a contributor to labor stability, but it’s overrated. In big corporations, unions by law hold half the seats on the board of directors, and they probably get more information about company finances than American unions do. In practice, though, the union bloc always gets outvoted in board meetings. Unionists say that codetermination leads more to conflict than to cooperation, and that it also puts a strain on union leaders to represent diligently their members and the company at the same time.

Real union power and industrial democracy in Germany reside in plant-level work councils, elected by employees, which must be consulted on work rules, hours, layoffs, and automation. They do not have veto power, but can take a company to labor court in a dispute. The councils’ powers of obstruction are great enough that management has an incentive to negotiate rather than fight. Big layoffs are rare in German industry. In a recession, the preferred custom is to put employees on shorter weeks. They receive partial unemployment compensation.

To adapt to German practice, U.S. unions would have to strike less and drop their demands for protection against foreign competition and “runaway pl ant s /’ Strikes are illegal except during contract bargaining, and they also are unpopular. From 1960 to 1975, Germany lost only 6,8 million worker days in strikes, compared to 63 million in France and 155 million in Britain, A labor ministry official said that greater union cooperativeness in Germany, as compared with the U.S., was matched by the fact that “our industry is not constantly looking for a ‘sunbelt’ to move to in order to be free of unions,” Of course it would be useless for firms to move within Germany to escape unions—they are everywhere—but there is nothing to keep capital from going abroad to find cheaper labor and better currency exchange rates, Volkswagen, for example, has opened plants in Pennsylvania and Brazil, and labor’s man on Volkswagen’s board even voted for it because it made economic sense for the company. The unions do not lobby for laws to keep imports out or capital in, “We can’t be protectionist,” said a union official, “Germany lives on exports and we have to welcome imports, Anjerica shouldn’t be protectionist either, because we’d have to take revenge, and it would bring the collapse of the world economy, as in the 1920s and 1930s.

“According to this union official, Germany is now exporting more capital than is coming in, “Jobs are down and industry is shrinking,” he said, “You can be angry about it, but what can you do about the weather?” Germany now has 800,000 unemployed workers and is not growing fast enough to provide employment for all of the 100,000 new workers entering the labor market each year. Unemployment insurance, though, takes much of the pain out of joblessness, and unionists figure unemployment will decline radically in the 1980s, when the effects of below-zero population growth begin to shrink the labor force. In the late 1980s, in fact, Germany should be suffering from a labor shortage. That will require new importing of foreign workers.

There are no energy price controls here. When OPEC raises prices, they go up correspondingly at the gas pump. Gasoline now costs $2.30 a gallon here. The Germans stubbornly refuse to establish speed limits on the intercity autobahns. But they have absorbed energy price increases without ruinous inflation and without gas lines. Per capita energy consumption in Germany is just over half what it is in the U.S., “If we see a house with all its lights on,” a German diplomat said, “we say to each other, ‘that’s where the Americans live.’”

The comfortable, non-inflationary German lifestyle depends on several advantages that the U.S. doesn’t have. For one, Germany spends just 3.5 percent of its GNP on defense, whereas the U.S. spends six percent. The Germans have promised, along with the U.S. and the rest of NATO, to raise defense expenditures by three percent annually for the next five years; but in holding down inflation this year, they will fall short of their pledge. This obviously isn’t fair, and some honest Germans will admit the fact. Also, the German economy doesn’t bear the weight of large, chronically depressed minority groups, although two million foreign workers and their families—Turks especially— are beginning to present a poverty problem.

Germany’s prosperous society is rather dull. As a U.S. expert said, “The Germans have about reached the limits of the welfare state. They haven’t overdone it, as in Britain and Sweden. They haven’t pushed for too much welfare and redistribution of income. They’ve kept up productivity. They’ve got it nice, and they’ll probably keep it. Slow growth, a high standard of living—a happy, satisfied, stagnant country.”

It’s fine for the Germans, They’ve given the world and themselves all too much excitement for more than a century. With our penchant for growth, our need to provide an escape from poverty for blacks and other poor people, and our role as the guarantor of the free world’s freedom, we obviously can’t adopt the contemporary German model completely. But Germany demonstrates that we don’t have to adopt conservative writ and abandon the welfare state in order to be productive and powerful. The principle of German social democracy is adaptable Germany is able to keep inflation low and productivity high precisely because its citizens are protected by a social net. At the same time, social benefits can be kept generous because that economy is productive and non-inflationary. The U.S., if it wants to, can have it both ways too.

This article originally ran in the September 29, 1979 issue of the magazine.