Angst und drang: germany's productive sector has a limited capability to subsidize the non-productive

National Review, Dec 22, 1997 by Deroy Murdock

Mr. Murdock is an MSNBC columnist and an Adjunct Fellow with the Atlas Economic Research Foundation in Fairfax, Va.

PANKER, Germany

An eighteenth-century swing set graces the lawn of the estate where Prince Moritz of Hesse lives with his family and a stately pair of black Labradors. Across a nearby grass-covered bridge, pebbles in a small Japanese rock garden are arrayed like ripples beside a calmly reflective lake. Seen from here, German life couldn't look better.

But soon, at a conference on Germany's economy, the woes of the country's less pastoral precincts begin to echo within the prince's 537-year-old mansion.

"In Germany, it's easier to divorce your husband or wife than it is to dismiss an employee," says Dr. Arend Oetker, a prosperous industrialist with holdings in oil, computers, and shipping. Standing halfway up a sweeping staircase, he guides a delegation of young Germans and Americans through his country's economic doldrums.

"The German labor market is swamped with countless legal regulations: a jungle of paragraphs, tariff contracts, internal agreements," Oetker continues. "These are supplemented on a daily basis by a plethora of new verdicts from the labor courts." The federal government, for instance, still sets restrictive shop-closing hours, though it has eased them slightly.

Germany's labor costs are higher than the Bavarian Alps. "For every Deutsche Mark in wage payment, the employer has to pay 80 pfennigs in ancillary costs," Oetker says. He estimates that German employers pay an average worker $27 per hour in wages, pension, and benefits -- compare that to about $17 for American employers. With employees who enjoy 36-hour work weeks, six weeks of paid vacation annually, up to 21 days every three years (with a physician's approval) of visits to state-subsidized spas, and Christmas bonuses of a month's pay, German businesses get paltry returns on their payrolls. Furthermore, whatever profits they manage to make are taxed at a rate of 45 per cent.

Not that the employees get to keep all their generous earnings. Germans face income-tax rates of 25.9 to 53 per cent; the top rate kicks in at $53,000. A 7.5 per cent surcharge -- the so-called solidarity tax -- subsidizes eastern Germany's reunification with the west. Consumers also pay a 15 per cent value-added tax, one of ten taxes Chancellor Helmut Kohl has hiked or invented.

The root cause of this crushing tax burden, Oetker says, is the state's "policy of taking on all imaginable duties on behalf of its people." Propping up eastern Germany and moving the capital to Berlin are two mega-projects that keep the public checkbook wide open.

The results are frightening. As of this October, 4.3 million Germans, 11.2 per cent of the labor force, were officially unemployed -- near the postwar record of 11.4 per cent, set in August. GDP growth languished at 1.4 per cent in 1996, although it rose to a 2.4 per cent annualized rate for the first half of 1997 (German exports have benefited from the Deutsche Mark's losing a fifth of its value this year). Meanwhile, entrepreneurs rarely launch new companies. And rather than suffer new state-sponsored headaches, BMW and Mercedes-Benz have opened U.S. factories that export cars to Germany.

And yet, despite this blizzard of bad news, daily German life looks like a ride in Prince Moritz's swing. In late August, Berlin's wide boulevards are as lively as ever. On a Wednesday at 4 P.M., Lubeck's ancient squares are full of people taking shelter from the warm sun beneath the colorful umbrellas of outdoor cafes. Residents of Hamburg spend a Friday evening at a street fair surrounding the Binnenalster, a small lake downtown. After enjoying salmon pasta, paprika steak, and draft beer, the Hamburgers stand in crowds five deep to see a half-hour fireworks show set to the music of Handel and Prokofiev.

What's going on here?

The chief explanation is that generous social benefits pay the unemployed 67 per cent of their net wages for 30 months, then 57 per cent thereafter. Pensioners, meanwhile, live on 70 per cent of pre-retirement income, compared to 42 per cent in the United States. But this cannot continue forever. Germany's productive sector has a limited capability to subsidize the non-productive. At some point, this ber-Ponzi scheme will grind to a halt. Yet Germans seem ready to party till they drop.

They will get some help, thanks to a cut in the solidarity tax: this 7.5 per cent income-tax surcharge is set to drop to 5.5 per cent in January. But as soon as Germans cheered this news, the Bundesbank snatched away their steins. On October 9, the central bank hiked from 3 to 3.3 per cent the so-called security repurchase rate that German banks use to manage liquidity. The interest-rate hike was designed at least partially to stem inflation, which is creeping along at just 1.8 per cent. Traders were not amused. The DAX stock index fell 104 points, or 2.4 per cent, that day.

Squabbling within and among Germany's political parties has delayed broader tax relief and other structural reforms. Despite rumbles within his own cabinet, Kohl and his Christian Democrats (CDU) reveled in the poor showing by the Social Democrats (SPD) in Hamburg's parliamentary elections. Led by Hamburg's swaggering, theatrical mayor, Henning Voscherau, the SPD delivered its worst performance in the city-state since World War II. After seeing his party's vote share slide from 40.4 per cent in 1993 to 36.2 this September 21, Mayor Voscherau announced that he was "very bitterly disappointed," and then resigned.