American risk, German heed

During the G20 economic summit in Toronto last June, Washington and Berlin came to an impasse about how to deal with the economic crisis.

German Chancellor Angela Merkel campaigned for savings and budget cuts according to the motto "spend what you have." Meanwhile, US President Barack Obama advocated more stimulus money to breath life into a stagnating economy.

Yet despite the billions of dollars in stimulus aid, the US economy shed 131,000 jobs during the month of July, double the number predicted by economists. These figures have raised concern that the US could experience a double-dip in which the economy worsens before it gets better.

But in Germany unemployment - seasonally adjusted - actually declined by 20,000, while the latest figures show growth and exports booming, driving Europe's largest economy forward.

The contradictory unemployment numbers across the Atlantic reflect deeply rooted historical differences in how the two countries believe a healthy economy should be structured.

American Dream, American Bubble

Since America's establishment, politicians and businessmen have preached a national gospel of social mobility. Anybody could achieve the American dream by diligently applying their life and liberty toward the pursuit of happiness.

But during the 90s, more and more Americans began taking short-cuts on their road to wealth. A post-cold war triumphalism, fuelled by the belief that history had ended in the free market's favor, inflated the American lifestyle beyond sustainable levels.

Homeownership became an economic panacea that guaranteed upward social mobility. People started buying homes in record numbers under the impression that prices could only rise. And there was plenty of cheap money circulating to ensure that anybody could stake their claim in the American bonanza.

In the whirlwind of economic expansion driven by the booming real estate market, speculators began turning a profit by buying and selling the debt used to finance the American dream. But Wall Street was making so much money that the investment bankers forgot a very important economic principle: Debts have to be repaid.

"Our banks, that's how they make their money - with consumer debt," Dr. Richard Freeman, a labor market economist who teaches at Harvard University and chairs the National Bureau of Economic Research, told Deutsche Welle. "Some people are making money off the debt, and they will fight to keep that debt."

The dream grew too big and when the housing bubble finally burst, it turned into a nightmare. As the debt-laden banking sector teetered on the verge of collapse in 2007, the easy money of the 90s and early 2000s became harder to acquire. Credit dried up. The crisis spread from Wall Street to Main Street. And the economy subsequently shed 8.5 million jobs in a little more than two years.

American industry went into crisis mode and began to look for a way to contain hemorrhaging profits. The solution came at the expense of workers.

"Our main response was to get rid of workers as fast as we can," Freeman said. "Companies want to get back to profit building as quick as humanly possibly even if it may hurt the company in the long run."

Risk-averse view from Berlin

The recession hit Germany differently. As an economy geared toward international as opposed to domestic trade, the crisis primarily impacted the export-industry. In Germany, there was no real estate time bomb waiting to explode in the domestic market.

"The real estate market [in America] had a psychological impact," Karl Brenke, an expert on labor markets and the business cycle at the German Institute for Economic Research, told Deutsche Welle. "The real estate will continue to increase in value. People will always become wealthier. We didn't have this development in Germany."

History had taught Germany important lessons. Two traumas in a single century left deep societal scars that remain today. During the 1920s, hyperinflation wiped out the middle class, allowing political extremists to feed disenchanted masses with populist rhetoric. That rhetoric brought a second - and this time total - destruction of the German economy.

"Germans may be risk averse because of past experience," said Dr. Jennifer Hunt, a labor market expert at McGill University in Montreal, Canada who is also a member of the Research Institute for the German Department of Labor. "There are people in Germany who still remember what it's like to go hungry."

The numbers reflect the difference in German and American perspectives on debt and risk-taking.

In Germany, 43 percent of private households are homeowners, compared to 68 percent in America. And in 2006, Germany's average private household debt was just over 100 percent of disposable income, whereas in America it hovered around 140 percent.

But the answer is not simply that Germany's economy did not see as much inflated growth. Companies also reacted differently when the recession finally hit. As one of the first nation's in the world to institute a broad social safety net, cutting jobs was not the knee-jerk reaction.

Instead of massive layoffs, industry and government utilized a system of short-time work. Workers kept their positions, but their hours were cut. The German government then subsidized a portion of their lost wages.

According to Brenke there was already a work shortage in Germany. Companies didn't want to lay people off. They kept their workers to increase productivity once the recession passed.

Chronic Problems

Although Germany's risk-averse economy may cushion it from the current recession, it has not proven to be an engine of stunning economic expansion in the past.

The German economy is indeed large. But it has chronic problems with long-term unemployment and sluggish growth. These idiosyncrasies are connected with the reintegration of former communist East Germany into the West German economy.

"Before recession struck unemployment in Germany was 7.1 percent and that's all it has gotten down to," Hunt said. "I would never consider 7.1 to be an acceptable unemployment rate."

America's profit-driven, consumer economy generated steady growth and low unemployment throughout much of the post-cold war era. The current recession, however, has revealed that much of the growth was debt-inflated hype.

Ultimately, the American economy will need a sweeping recalibration of economic behavior before it returns to good health.

"The state is in debt. The firms and banks are in debt. Private households are in debt," Brenke said. "Society needs to be recapitalized."

Author: Spencer Kimball
Editor: Rob Mudge