October 24th, 2011
01:30 PM ET

America must learn from Germany - before it’s too late

Editor’s Note: Rob Atkinson is president of the Information Technology and Innovation Foundation, an economic and technology policy think tank based in Washington.

By Robert D. Atkinson – Special to CNN

Too many American policy elites - pundits, economists and policymakers – tragically accept the ongoing catastrophic decline of American manufacturing as inevitable. As some 5.5 million jobs and 54,000 factories have disappeared over the last decade, many U.S. elites have noted that intense competition from low-wage countries has caused other industrialized countries to experience similar declines. This view is wrong.

In fact, the United States’ precipitous drop in manufacturing is actually atypical. Indeed, the manufacturing employment, output and market share of many other comparable countries has actually been stable in recent years.  Between 1997 and 2010, U.S. manufacturing job growth was the worst among a group of ten OECD countries while Germany’s was the best.

At an event this month, the Information Technology and Innovation Foundation hosted a number of German government officials and probed why Germany has managed to retain and create research-intensive, high-wage manufacturing jobs.  Why tried to understand how Germany could boast an unemployment rate of 6.6% while the U.S. unemployment rate is stuck at 9%.

It must be because wages in Germany are much lower than in the United States, right?  Hardly. In fact, German industrial workers actually make about 40% more than their U.S. counterparts. Well then, it is because of the onerous regulatory burdens companies operating in the United States must shoulder. Wrong again. Germany takes environmental stewardship, worker health and safety and other matters just as seriously as the United States, if not more so.  Even when it comes to tax rates, Germany and the U.S. are nearly identical, each with relatively high effective rates of around 28%. In addition, both countries face similar macroeconomic challenges.

So why has Germany emerged from the recession in relatively robust economic health, poised for continued job growth and enhanced competitiveness? One key reason is that Germany has put in place a strategic, well-funded industry research institute that forges partnerships in applied research in key areas. In other words, while the United States focuses most of its R&D investment on mission-oriented research (e.g., defense and health) or basic research, Germany focuses on industrially-relevant applied research that gives their manufacturers and technology firms a leg up in global competition.  This is why almost one third of German firms in a 2009 survey credited their innovations to German government research and innovation policies!

Not only does Germany focus on applied industrially relevant research, they invest a lot in it.  As ITIF noted in International Benchmarking of Countries’ Policies and Programs Supporting SME Manufacturers, which looked at national efforts to harness and encourage innovation in small and medium-sized enterprises (SMEs), Germany invests about 20 times more as a share of GDP in industrially relevant research than the United States does.

One key way the Germans help their manufacturers and tech companies compete is through the Fraunhofer system, made up of 60 research institutes and 18,000 employees working with universities, private companies and government agencies throughout Germany in fields as diverse as life sciences, microelectronics and materials and components.  And while the U.S. federal government has been cutting investments in research, Germany has been expanding these investments.  The Fraunhofer system alone has a budget of over $2 billion and Germany’s expenditures on R&D, now at 2.8%, are at their highest levels since unification 20 years ago. While combined U.S. public and private R&D levels are comparable, the critical difference is Germany’s focus on applied research in key sectors.

With the largest government investment in R&D in the country’s history and a commitment to reforming and redesigning its innovation ecosystem, Germany has declared its intention to be the most research-friendly nation in the world by 2020.

A central reason why the Germans have been able to move forward so decisively is that there is a high level of consensus and cooperation among Germany’s public and private sector stakeholders.  First, they recognized that other countries are engaged in innovation-based competition to win and then they identified what Germany as a whole and what individual German enterprises need to do better compete.  In the United States, we have yet to agree that nations, and not merely companies, compete and we continue to fight about which failed approach should be tried again. Moreover, in Germany, there was none of the knee-jerk hostility that is common in the United States to the federal government’s role as a partner of the private sector in creating a dynamic economy.

In the United States we remain tethered to the idea that if we simply fund basic research and ensure a good K-12 system, then private companies will do the rest. We are wary of anything that hints of government intrusion. While we have programs at the Department of Commerce and the National Science Foundation to spur industry research partnerships, we underfund and limit them. State and federal support for SMEs through programs such as the Manufacturing Extension Program has either been flat or declining at a time when most U.S. competitors are boosting government support for their private sector innovators.

Finally, Germany has mustered the discipline to think long-term and not merely about the next quarter. With guidance and vision from Germany’s High-Tech Strategy, German companies’ R&D investment has gone up 19% from 2005 to 2008 and the number of researchers and lab technicians has gone up 12%.  During this period, U.S. capital was squandered on real estate and today, companies are sitting on some $2 trillion in cash. As ITIF has noted many times, if we were to restore federal support for R&D as share of GDP as it was from the 1950s through the 1980s, we would have to increase federal support for R&D by almost $150 billion per year, more than double what we are on track to spend this year

Restructuring for an age of heightened global competition and rapid innovation has not been painless in Germany.  Just as in the United States, German experienced declines in some of its lower-wage sectors.  But unlike the United States, Germany countered these declines with investments that allowed it to retain higher-wage, higher-value industrial activities. To date, the United States has devoted time and energy to arguing who or what caused the decline than to moving ahead on restructuring. We have to turn this around quickly.

We must become pragmatic and adopt strategies and policies that have worked for our competitors, of course, tailoring them to U.S. culture and economic structures. A national innovation strategy that reinvigorates U.S. value-added manufacturing activities and marshals the country’s ample public and private resources for leadership in critical sectors is needed immediately.  The sooner we recognize that incremental tinkering with the ineffective policies of the last 15 years is a ticket to a lost decade, the better chance we have of looking forward to future prosperity.

While there are cultural and historical differences between the United States and Germany that makes consensus and cooperation more of a challenge here, the United States is no stranger to the idea of a shared sense of mission. The mobilization of American factories at the start of World War II and moon landing are dramatic examples of this.  Less dramatic but equally impressive were changes in trade, education, tax and R&D policies adopted in the late 1980s to meet the economic challenge of Japan and other countries.  The economic peril we face today pales in comparison to what we faced in the late 1980s. Only time will tell if we will look back at 2011 as the fourth year of a lost decade and 2012 as another year we continued to accept the end of American economic primacy.


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Topics: Germany • Jobs

soundoff (19 Responses)
  1. Onesmallvoice

    What Germany now needs to learn that the idea of the Eurozone is not a good one at all. The Germans would be wise to go back to using the strong Deutschmark and not to bail out other countries. Let the Greeks try a form of Maoism. It worked for China!!!

    October 24, 2011 at 5:46 pm |
    • kris

      I agree with you that the Eurozone may not be the best idea, but going back is not an option anymore, for financial and political reasons. Germany is the strongest and most influential power in Europe and has been driving the process of unity for decades. What has to change is the corruption at Europe's head quarters in Bruessels to share resources and money with countries that don't deserve it and have never been willing to contribute or giving back!

      October 26, 2011 at 12:26 pm |
    • Kieran

      Not at all. Germany created the Euro and has every reason to keep it. If Germany still had the Deutsche Mark, its currency would be so over-valued right now due to its economic strength that it wouldn't be able to ship anything outside its own borders. By having the Euro massively deflated, Germany has a free-for-all – it can ship BMWs and Mercs like there's no tomorrow! Get it?! Germany is in an incredibly powerful place because of the Euro – the Euro crisis has played right into their hands. They are sitting around log fires at night relishing the prospect of Greece, Italy, and Spain being in a crisis – it let's them rule Europe and strengthen their own economy with an artificially devalued Euro. I.e. Germany is like China in this scenario

      November 6, 2011 at 1:40 pm |
      • Paul

        Inevitably, Germany will rule over Europe. Thankfully it's a peaceful, well-intentioned Germany.

        November 13, 2011 at 7:13 am |
  2. Tyler

    Very nice article I hope we will change.. sometime..

    October 24, 2011 at 10:05 pm |
  3. j. von hettlingen

    The recipe for Germany’s success is its old-fashioned "Ordnungspolitik", adopted in the era of the "economic wonder" after World War II. It was an economic order, which laid down a concept of rules, rendering discretionary government action unnecessary. Market forces are allowed to work – within predetermined rules. Germany’s success lies in the mentality of its people. In America, if a policymaker sees a problem, he fixes it and moves on, while in Germany, one develops a framework to stop it from happening again.
    Ludwig Erhard, minister of economics after World War II and later chancellor was seen as “father of the economic wonder" and this social market economy.

    October 25, 2011 at 9:59 am |
  4. george thorn

    Two things, one, defense spending in the US is beyond, way beyond sustainability and a huge drain on our overall economy, the rest of the world is laughing while we pick up the tab for their defense, two, civil law and our ridiculous jury awards are bankrupting us and those awards and the insurance against them are also a major drain of economic power. Both are easily and equatibly fixed and with fair trade we'd be back on top or at least solvent in a short while. To bad.

    October 27, 2011 at 11:24 am |
    • Tim Fisher

      You have it, this would explain the decline of the American dollar in comparison to the rest of the world and many currencies. I couldn't believe that our dollar is worth less than a penny in comparison to countries that we are dumping support into. We receive nothing in return and our dollar and its worth is proof of that. I researched this yesterday and was stunned at the comparison chart of currency in the world.

      November 9, 2011 at 1:31 pm |
  5. Jim

    I was worried that this would be just another article warning that the USA needs to keep its eyes on Jews like Germany did and like some in the OWS movement have urged. I am glad it is a serious article about Germany's emergence. Recall that many thought the West could not absorb the East into its economy, yet Germany has emerged as the strongest economy in Europe despite a culture that still bears remnants of the East's reliance on government for all its needs. I submit that Germany's unification was more difficult than finding common ground in the USA (at least at any time since the Civil War).

    October 29, 2011 at 7:38 pm |
  6. Lilly

    Basically the Germans just make far better products than Americans. They are united in their desire to produce quality. It's part of their culture and has been for centuries. American's like to talk big about quality but usually put their own personal interests ahead of it. They are unwilling to make sacrifices for the reputation of their company. They view their employees as enemies. Nothing is going to change that.

    November 5, 2011 at 12:32 pm |
    • Tim Fisher

      Oh, but we must change what the major corporations that consider their employees as enemies to become unified in our quest to be true Americans. They don't directly consider the employees as enemies, but put out corporate goals that are way out there and see which employees are payiing attention or NOT. Then employers choose to find a reason to terminate said employee or not because of their reactions to mission statements, etc.,. Our quality shot downhill as soon as we began using cheap labor in poor countries to produce our so called American Products (that really aren't any longer and this needs to come back to us here in the States). Tim

      November 9, 2011 at 1:41 pm |
  7. williamb293

    WOW, after reading this article i should tell my comrades in China that Germany should be the target of their Of hacking and technology thieft.

    November 8, 2011 at 4:53 pm |
  8. James A. Lehman

    My website: inventive-internet.com will create jobs through innovation via the only interactive inventive metbods
    in the world. The site will be fully functional in about 10 days.

    November 25, 2011 at 8:39 pm |
  9. Eddie Fonseca

    Aynur Aydın a German Turkish singer had a song called Isporta which talks about the struggles of being from different backgrounds and this truly applies to America, because as Americans we like to steal the best ideas from around the world either from Germany or from England and infuse into our culture from the cars we drive to the products we use in our homes. During World War 2 as Nazi Germany and Hitler was crushing freedom across Europe, our great nation learned lot's from Germany from building better car engines and learning different military techniques to apply to our AirForce personal as well. As times changed lot's of corporations in our great nation started to take notice how the Germans did business, and let's take an example from GM which uses lot's of German engines in their cars so does Ford which uses lot's of German ideas in their vehicles as well. Nothing is rarely made in America its a mix of different things from Germany to other parts of the world, and let's be honest it works for us because our society has accepted that route from major corporations in America. Without more ideas and a better partnership from Germany can our great nation learn to be the world's leader in producing products, that the average Americans and other countries would like to buy for years to come.

    September 10, 2015 at 12:46 am |

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