The 2nd German miracle

The first occurred in 1948, when the Germans refused to listen to advice from progressive American and British economists.  Here’s Donald Luskin and Lorcan Roche Kelly on the 2nd miracle:

Since bottoming in 2009’s first quarter, German output has grown at an annual rate of 2.8%, compared with 2.4% for the U.S. since its bottom in 2009’s second quarter. Germany’s unemployment rate is an astonishingly low 5.5%. German youth unemployment is lower than U.S. overall unemployment. . . .

A mere decade ago Germany was called “the sick man of Europe.” It was still painfully digesting the unification of the former West Germany’s relatively free and modern economy with the former Soviet-enslaved East. Ten years ago German unemployment was 8.2%””the same as Europe’s overall””while U.S. unemployment was 5.7%. What did Germany do that allowed it to charge ahead and trade unemployment rates with the U.S.?

Starting in 2003, Germany under then-Chancellor Gerhard Schroeder began to implement a program of long-term structural reform called “Agenda 2010.” The idea was to transform Germany into an economy where business has an incentive to invest, and where labor has an incentive””and an opportunity””to work. This was pro-growth reform that would be very familiar to Ronald Reagan and Margaret Thatcher.

The centerpiece were labor-market reforms designed by a former human-resources executive at Volkswagen AG. The power of unions and craft guilds was curtailed, making it easier for unskilled youth to enter the job market and easier for employers to hire and fire at will. Germany’s lavish unemployment benefits were sharply cut back. An unemployed person in social-democratic Germany today can draw benefits for only about half as long as his counterpart in capitalist America.

The immediate reaction was a brief rise in unemployment, as German business was allowed for the first time to optimize its labor force. And there was a backlash by powerful union and guild interests, costing Mr. Schroeder his bid for re-election. But Germany was transformed.

The recent payroll tax cut included a reduction in the maximum UI benefits from 99 weeks to 73 weeks, which seems appropriate to me.  We need to gradually move back to 26 weeks as the unemployment rate comes down.

I’m not a big fan of the payroll tax cut.  On supply-side grounds it should have been an employer-side tax cut, not employee-side.  That would have created far more jobs, given the Fed’s 2% inflation target.  If they insist on “helping people,” they should have just given everyone an $X rebate.  As it is, my wife and I are getting a large tax cut, even though we don’t need it.  So it’s not optimal on either equity or efficiency grounds.

HT:  Morgan.



30 Responses to “The 2nd German miracle”

  1. Gravatar of ChacoKevy ChacoKevy
    17. February 2012 at 14:37

    Question: How is it determined that Germany’s labor performance is attributed to this “labor optimization” instead of Kurzarbeit, which was running concurrently?

  2. Gravatar of DonG DonG
    17. February 2012 at 14:51

    If you don’t want your tax cut, send it to me 😉

  3. Gravatar of genauer genauer
    17. February 2012 at 15:51

    as as German, living for many years in the US, and familiar with details on both sides:

    the labor market reforms mentioned here, were just about 15 – 20 % of the whole Agenda 2010 package.

    work time accounts (Arbeitszeitkonten), inflation decoupling and reducing retirement payments (by relative 20 %), high environmental taxes, massive reduction of marginal tax rates, personal bankruptcy proceeding, ruthless cutting of public salaries at all levels, to the point that a professor won this week a constitutional court case

    Systematic Austerity everywhere. But people are happier now.

  4. Gravatar of ninive ninive
    17. February 2012 at 15:51

    Germany’s unemployment rate is actually 6.7% not 5.5% 😉

  5. Gravatar of genauer genauer
    17. February 2012 at 15:55

    please do not just cherry pick the little piece you like

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. February 2012 at 18:39

    I’m also not much of a fan of the supposed second German miracle. When one looks at the data it’s not as miraculous as suggested. Labor productivity is down since 2007, five years ago. It’s mostly about worksharing.

    If that’s the “supply side solution” I’ll take a waiver.

  7. Gravatar of Rien Huizer Rien Huizer
    18. February 2012 at 01:45


    Precision should be your hallmark.. Anyway, given the shortage of science and engineering graduates in Germany, this “professor” (in Holland he would be a “HBO docent”, not a “professor”: professorships should not be available to people under 70 and even that would be very audacious) could probably have found more remunerative work elsewhere. Why bother teaching when work pays better? But very good to see a familiar pseudonym willing to bring a few nuances to (maybe) too superficial international comparison. Though, overall the Hartz reforms may have made a very strong contribution.

    Look here:

  8. Gravatar of Rien Huizer Rien Huizer
    18. February 2012 at 01:55


    As a large net exporter of manufactutres with a low import content (and not only within the EU!) Germany ‘s GDP now benefits from EUR weakness, in contrast to Japan, a country with a similar industrial profile.We would hardly call Germany’s relative performance under those circumstances a miracle, although Germans may like it.

    The Hartz reforms truly kicked in only in 2006/7, intro EU demand was still high and exports to fast growing/investing China rose very rapidly (also because many German firms had been breaking up their supply chains and distributing them over Eastern Europe, China and even the US (to a much greater extent than for instance, France or Italy) thus benefiting from trade/productivity gains that the US had a decade earlier.

    It is clearly a mix of structural reforms, managerial competence/culture and incidental factors. All in all the outcome looks impressive. But how much of this will last?

  9. Gravatar of Mike Sax Mike Sax
    18. February 2012 at 02:27

    Well I’m glad you said you don’t need the payroll tax. When Democrats argued that the rich don’t need the Bush tax cuts the Right goes apocalyptic.

    Do you have a problem with the Bush tax cuts for the rich being allowed to expire?

  10. Gravatar of genauer genauer
    18. February 2012 at 02:27

    Hi Rien, nice to see you, long time no see !
    What I didn’t want to say, is that this specific “professor” deserves more, or that in fact it is up to a court to decide this.

    I did in fact make this decision for myself for more remunerative work outside academia, also based on the age statistics of German professors, which were horrible for the chances for late baby boomers.

    What I wanted to say, because I think it is relevant for other countries, is that it did hit ALL levels of society (doctors, engineers, “professors”) and now I also want to emphasize, that this did not start just with the Hartz laws in 2003 and was over quickly in a few years, but that this started already in the early 90ties. Privatizing, streamlining public services. Support of entrepreneurship. Pension cuts since 1998.

    Soo, if people believe, they just come over for a short trip, carbon copy whatever they see as the convenient half of what we did, and in 3 years everything is peachy, …., forget it ! Most of the things have to be adapted to the local circumstances, and it takes a long time. Sorry.

    On the age of professors I actually have to oppose you.
    I think most of them should have a stable job mid-30ties, in order to be able to start a family, even buy a house.

  11. Gravatar of genauer genauer
    18. February 2012 at 02:45

    @ ninive, the 5.5 % are for “Western” Germany, which for the purpose here is actually the appropriate comparison, but they should have spelt that out correctly. More important, youth unemployment is just 3 % in the South!

    And continuing with the nit picking:
    The Unemployment did not really go up, we just got closer to real numbers, also more comparable internationally.

    On the low import content, Hans Werner Sinn was arguing the opposite, lamenting the “Basar Economy”. And I say its good business, if people pay 20 % more for just putting a “Made in Germany” sticker on it : – )

  12. Gravatar of ssumner ssumner
    18. February 2012 at 07:12

    ChacoKevy, I thought that policy didn’t begin until 2009, but Germany’s turnaround began much earlier.

    DonG, I said I didn’t need it, not that I didn’t want it. 🙂

    genauer, Thanks for that info, I do recall many of those policies.

    I didn’t cherry pick, I also like most of the policies you mentioned.

    ninivo, Thanks for that info.

    Mark, Isn’t work sharing better than unemployment?

    I seem to recall Germany had roughly 10% unemployment for decades, how’s the current situation not better?

    Rien, I agree that there were other factors.

    Mike Sax, I oppose higher MTRs on the rich, but my reasons have nothing to do with whether the rich “need” their money. No one richer than a peasant farmer in South Asia actually “needs” their income.

    Everyone who reads this blog is filthy rich.

  13. Gravatar of Becky Hargrove Becky Hargrove
    18. February 2012 at 08:27

    “Everyone who reads this blog is filthy rich.”
    Looks like I’m not doing a very good job trying to represent myself as a poor person! (I get what you mean, just couldn’t resist)

  14. Gravatar of genauer genauer
    18. February 2012 at 11:36


    numbers for kurzarbeit can be seen here:
    if you need exact numbers, just tell me

    It is actually very easy to separate short term kurzarbeit from long term labor conditions. Mid term “arbeitszeitkonten” are a little more difficult, but certainly not impossible. I could help you with that, if you need this for understanding or paper or so.

    the cherry picking was not directed at you, just some general appeal.

    I am with you. This “german miracle” contains very little German “secret sauce”, but lots of ordinary “blood, sweat, and tears”.
    When the fatherland needed (a lot) more money after Reunification, it just took it. Why cant the US just go back to Clinton times tax levels, FOR EVERYBODY, as a first step ? It simply baffles people here.

    One thing, I want to mention as important, it was the “right” who raised taxes up to effective 75% marginal, and it was left/green, who did most of the benefit cuts.
    In hard times, good people tend to come together, as France / Germany Merkozy morph ever closer, and our other mainland friends understand that for the moment.

    You had this in the US as well, “united we stand, divided we fall”, not so long ago. I was christianed after JFK “Pay any price, bear any burden”, “Do not ask what your country can do for you ….”

    This was the post war generation, taught and used to deliver on sacrifice. When I started military service, I was told, if the Russians attack, my life expectation would be 2 – 4 days.
    When I started studying physics, in the very first lecture the professor said , look to the left, look to the right, after the 2nd year, only one of you 3 will be still here. Who is it gonna be ?

    And both were very realistic.

    Then look at this pampered, pathetic “Survivor” Noah Smith

    and I looked up the list of 25 peer reviewed publications in my PhD thesis.

    Where I live, population density is higher than 12000 per square kilometer, and some 10 – 15 % live on less
    than Greeks consider as an unbearable minimum wage, so much for “filthy rich” : – )

  15. Gravatar of genauer genauer
    19. February 2012 at 02:19

    @Scott and all

    just read this:

    1. The Economist is claiming that German service “productivity” was dropping in the last 15 years, not only relatively, but even in absolute terms. Something
    a) most commenters (including me) familiar with personal comparsions do object to, and is
    b) mostly the usual rant to deregulate everything, and to find just something to pick on with Germany

    I think this “falling productivity” is mostly just falling real wages in the service area, which nobody disputes, and a subsequent accounting head fake.

    What has this to do with the topic here ?

    Well, with “services” being 68 % of the labor force, and, lets take a guess, about half of that productivity acounted with wages, dropping this by relative 25 %, over 10 years, you end up with a 0.8% /a relative loss in NGDP growth, pretty much what was “observed” for the sick man of Europe,
    Germany at that time : – )

    Turning this through the low point in 2002, with a typical little time lag / overshoot of 2 -3 years, we now get a little overshooting in just getting back to normal wage growth.

    I have even a little personal example here. When I came here to Dresden in 2003, my cleaning lady got paid 6 €/hr, and in productivity acounting this would then drop with inflation accounting 2 % per year, but of course not in real. Well, I had to fire 2 of them, because they were billing me 4 hours, but working only 2 hours. The one afterwards writes only 2.5 hours, but started in 2009 to demand and get pay raises to 9.5 Euro. Soo, I still pay the same 24 Euro for the same work, but my present cleaning lady has as productvity gain of 50 %

    2. demographic factors and unemployment
    Something I think most economist are not really fully aware of, especially in the US, is the strong drop of fertility rates after 1965 here, to 1.4 vs the stability required 2.07, This means that for everyone leaving the workforce now, we have only 0.6 – 0.65 joining. This explains a lot of the drop in unemployment. This also explains why future Total GDP growth rates in Europe will be pretty close to nil.

    Add further in, that in the former Eastern Germany more women were used to work (better Kindergarten coverage), that a lot of people here started their own little stores (like 15 – 25 square meters), makes for service convenience, but those folks are certainly not getting rich. and the result is of course a drop in unemployment. Some hair dressers here worked for 3.5 Euro / hour (and getting some money on top from the government)

    The usual supply and demand plays out, economics at work, now employers have to compete for employees, with rising wages especially at the lower end.

    And there is nothing miraculously left to explain.

  16. Gravatar of Rien Huizer Rien Huizer
    19. February 2012 at 02:55


    What does that mean for comparative economics? And what would we do without the standard way of using the product of accounting according to internationally standardized conventions? Your observations are most probably correct and show that using numbers is risky. I have often wondered how US economists would infer from a handful of data that country X was better/worse at task x than country Y at task y, thus assuming that x and y were comparable. While a closer look at those tasks would show so much difference on context, demographics, technology that simple sums, regressions etc, however sophisticatedly executed would make someone with personal experience wonder why do this arithmetic at all. What could be learned in country X to become more like Y and why would X want to do that. Standard economics avoids casuistics for good academic reasons, but policymaker and politicicians should be careful. Useful for a rhetorical context (like in a mass periodical like the Economist that must compromize between readership preferences and prejudices and academic quality. But risky for people involved in figuring out what is the matter between X and Y, if that is knowable at all.

  17. Gravatar of Morgan Warstler Morgan Warstler
    19. February 2012 at 06:11

    genauer and Rien, I prefer to think about human time.

    It is in part why I got into auctioning the unemployed.

    The value of a man’s hour really has nothing to do with how much he needs to live.

    Our social agreement that Americans or Germans or Greeks need an income great enough to live is a social suggestion, and thus must be backed up by gvt.

    So you get a Debit card with an online acct. and every week the gvt. puts $x dollars x 40 hours into the acct. IF AND ONLY IF you have insisted you wish to work.

    Immediately your 40 hours are put into an online auction, every week your neighbors and entrepreneurs within some distance (say 20K) are able to bid on your following week.

    Basic algorithms help bidders unearth value, and reputation on both sides buyer and seller comes to matter quite a bit, so do before and after photographs.


    The point here is that when you want to focus on the value of work in hours, by comparing them to value of other people’s hours, things become easier.

    Note, it catches the lazy and rewards the hyper productive on both ends.

    genauer (and some of his neighbors) are combing the Ebay site looking for a shared cleaning lady who accomplishes the most in the least amount of time. As buyers they want to group their effort, so she doesn’t spend time travelling and they get the full 40 hours. Buyers to lazy to think get gutted.

    Mainly it reduces the costs of services particularly in poor areas.

    So suddenly it is far less expensive to keep the ghetto clean, and single mommies that also want to work, can more easily do do.

    Imagine what such a Euro policy would do for Greece. The ECB covers some lower (compared to Northern states) end weekly income, and suddenly the VERY GREED OF GREEKS has them all bidding on one another’s time, each trying to get a deal, and forcing each other to either compete and make more or get left behind… but ALL have to work to eat. gutting the unions, and driving down prices IN GREECE to where they should be compared to Northern states.

  18. Gravatar of ssumner ssumner
    19. February 2012 at 06:36

    Becky, If you have a computer you are rich. 🙂

    genauer, As I recall Italy also has very low fertility. And yet there’s been no employment miracle. Ditto for Spain.

    It’s hard to believe that the sudden fall in unemployment after 2005 was demographics. Economic theory doesn’t predict any correlation between demographics and the natural rate of unemployment.

  19. Gravatar of genauer genauer
    19. February 2012 at 07:12


    in international comparisons this is already known, it is called the “Balassa-Samuelson-Effect”, similar, not identical.

    In city aggregation many people claim that larger cities are making us “more effective”, which I dispute as well.
    And where Germany seems to be different from many other western countries. (Can I ever agree with Paul Krugman on just one thing?) I say significantly higher salaries in some sector are just dragging many others with them.

    For analytic paper purposes only, I think one could come up with some ad hoc rules to adjust the income accounting, along lines of an example of Tchibo shop girls in large and small towns, I have in mind. One could separate “real productivity” along the lines of some standard jobs, like hair dressing, nursing, house cleaning, if those data would be “official”, a little bit like the Case-Shiller index. But I agree that one can not incorporate this in official accounting standards without creating endless sophistery.

    Which brings us back to the recent critique of NGDP, Solows growth theory used by the CBO, by Bullard.

    Brings me to the last point that Germany is now since at least 15 years doing many things to promote “new business”, way beyond reasonable in short term fiscal GDP terms, but not too bad in secondary Quality of life terms.

  20. Gravatar of Kyle Kyle
    19. February 2012 at 11:22

    “The power of unions and craft guilds was curtailed, making it easier for unskilled youth to enter the job market and easier for employers to hire and fire at will.”

    Do labor unions really have much power in the US? This might help other European countries, but doesn’t seem to apply in a comparison between Germany and the US.

    “Germany’s lavish unemployment benefits were sharply cut back. An unemployed person in social-democratic Germany today can draw benefits for only about half as long as his counterpart in capitalist America.”

    As Mark pointed out, work sharing isn’t really a supply side idea, and is a large reason unemployment is so low in Germany. It certainly has great social benefits, but would the authors of this piece actually be supportive of a mandate that corporations sacrifice productivity for the greater good of the economy, or do they just want to cut unemployment benefits in the US without implementing any of the German policies that actually allow for reduced unemployment benefits?

  21. Gravatar of genauer genauer
    19. February 2012 at 15:06

    @ warstler
    Do I know you from some other place ? linkedin ?

    I agree with you, that at least short term wages have not much to do with some “objective, general” value. A lot more with momentary supply and demand.

    In general, your online auctioning is a good idea.

    This debit card thing didnt work here as expected. In fact still about 10 % of the people here in former Eastern Germany are close to bankruptcy, because they just didnt get the transformation from socialism to market. 10 years ago, private balance sheets in DE looked a lot more horrible than in most other places. I had some interesting discussions about this with Warren Brussee, who predicted “The second great Depression 2007 – …”

    On auctioning off my cleaning job, with neighbors (gulp), this is a really bad example. Have you ever experienced how fast the temperature in a room can drop by 30 degrees, when people realize, that I made ten times the hourly wage 20 years ago, as they have now ?

    During the day reading FT alphaville and bloomberg screens, talking with a VC CEO about based on what metrics I did value facebook how much, wondering about WTI / Brent spreads, CDS quotes, income distribution in the Roman empire, being a “capitalist pig” in the typical words of my neighbors (not directed at me personally, since they dont know)

    During the night, talking with people at the, lets say, lower end of the income distribution. Last night, getting a telephone call after midnight, getting my rucksack filled up with booze in one of those little shops, going to a guy, who is losing his custody fight, shredding some court verdict, inter-country, commie vs Nazi stuff mixed in, reading six pages of email filled with invectives, already sent, filled him up. Beating up a judge is rarely a good idea. This is not exactly a gated community here. When Obama came, I had 100 police men in my street, for good reason.

    Cleaning Job Requirements:
    not to be seen by somebody in my neighborhood,
    finding explanations for paying more, without sticking out of the typical payment spectra.

    The cleaning lady has a key to my place, and I know where she lives, just in case.

    Good point, the comparison to Italy and its seemingly eternal mezzogiorno problem. Taken. I do not have an explanation for everything, just from the top of my head, and I believe, I am humble. For Germany, I believe I understand the not so sudden drop of nominal unemployment numbers.

    Can somebody explain to me, where and how the Hartz laws did infringe on union rights here in Germany?
    “work sharing”, we raised working hours for public officers from 35 to 42 hours, without pay increase.

    This how long somebody can actually draw on unemployment benefits is a lot more complicated story.

    Our cutting on that was simply because “we dont have the money” was spelt out and acted upon at a 3 % GDP deficit, and
    not only at 10 % as some southern neighbors now.

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 19:01

    Kurzarbeit preserves work skllls no doubt but it does not increase efficiency. Even a lefty like me would not view it as a supply side strategy.

  23. Gravatar of Rien Huizer Rien Huizer
    20. February 2012 at 12:44


    Kurzarbeit allows firms to survive that would have perished otherwise. Some of these firms are worth keeping, others not. If one believes in efficient markets in a doctrinaire fashion (for instance when the market in question is seriously illiquid etc) that is a waste of public money. If you are part of a nation that believes your widgetmakers deserve an investment by workers (who do not look for work elsewhere) and gvt (who finance Kurzarbeit) and thinks it is worthwile to help the median widgetmaker/widgetmakerworker, this is the way to keep jobs from going to China..

    And you know what, in the case of Germany if it does not work for a particular firm, the jobs may go to Poland instead of China.

    Utterly irrational but good politics and good communautarian government.

    Would not work in the States though. The trough would be empty before the more deserving cases (the shy and sincere ones) would ask to be fed…

  24. Gravatar of ssumner ssumner
    20. February 2012 at 17:28

    genauer, I am certainly impressed by your knowledge of Germany, so I don’t discount anything you say.

    Mark, I agree, but I’d point to some of the other reforms as being somewhat supply-side oriented. I accept your point that “miracle” was too strong a term.

  25. Gravatar of genauer genauer
    21. February 2012 at 11:52

    @ ssumner,
    I wasn’t out to impress you. If I wouldn’t know the German details better, this would be a bad thing.
    I was just getting a little bit emotional. May be I have my nose a little bit to close to the local grindstone, with my neighbors. But little “miracle” to be seen here. The 99% didn’t have much of a choice in accepting the sacrifices.

    What I see more and more, that everybody is running his usual agenda on Germany now, “The Economist”, which I liked for quite a while, the usual deregulation rant.
    The union bashers celebrate the alleged beating, which I absolutely do not see.
    The lefties emphasizing the continued strong union position (half of the board seats, etc.).
    German communists, at UNCTAD, who got stonewalled by the unions, slandering the German unions for conspiring against the rest of the world.
    And all of that has very little to do with what is really happening here.

    Just imagine the Union sitting on the board of IBM.
    When I worked there, and they changed the pensions from defined benefit to defined contribution, a lot of people were very unhappy and talked about union. When I talked at lunch about how unions work in Germany, one IBM guy slipped away, and I had one hour later my 2 level higher boss sitting on my desk, telling me pretty clearly, just to shut up, or I would be on my way back to Germany pretty quickly.

    I agree with you, and want to add, that Kurzarbeit only helps with some short term event like the 2008 crash. It is not meant as a longer term fix for anything, and Germany has got out of those “industrial policy” phantasies in practice.

  26. Gravatar of ssumner ssumner
    21. February 2012 at 18:37

    geneaur, We have plenty of unions here, despite being a small share of the workforce. And they don’t work nearly as well as in Germany. I don’t know if that’s the unions’ fault, the companies’ fault, or both.

  27. Gravatar of genauer genauer
    21. February 2012 at 19:34

    I ll certainly hope that I didnt come across as a union lover.
    I was never a member, and probably wont.

    But, especially in international comparisons, I see their constructive role, at least here in Germany.

    And with “plenty of unions” we have actually some pretty interesting fights going on here, at Frankfurt Airport, 2 years ago at the railways, 4 years ago in the hospitals, breaking up the former de facto rule of “one place, one union”, and now the 99% union pretty openly running strike breaker against the minority.
    There is something significantly new happening.

    But you have to look at the details, and the long term implications.

    Well, a German favourite, long term reliability and stability, but our customers apparently continue to pay a significant premium for that, and our global neighbours honour it in the yearly BBC survey with “most liked/trusted nation”, at least until last year.

    One last thing, I ll do believe that we have less of the “not invented here” Syndrome here.

  28. Gravatar of TC TC
    22. February 2012 at 14:19

    This is the worst analysis I’ve read of what happened in Germany in the last 3 years. The absolute worst.

  29. Gravatar of TC TC
    22. February 2012 at 14:40

    I am sorry I wrote that, I should be nicer. :/

  30. Gravatar of ssumner ssumner
    24. February 2012 at 07:02

    genauer, Thanks for that perspective.

    TC, Glad you liked it.

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