Thursday, September 25, 2014

German Exceptionalism

Americans have traditionally believed in its exceptionalism.  In terms of economic performance, however, Germany is exceptional.  Germans are happy with the performance of their economy and Americans are not.  In fact, Germans are happier than citizens from most countries in Europe as well.  What makes Germany exceptional?

One of the differences between the German economy and that of most Western nations is that it is still an "old fashioned" manufacturing economy.  It makes quality products and it sells them to the rest of the world.  It runs a current account surplus and it does not need to run large budget deficits to offset current account deficits.  It also trains, and employs, large numbers of highly skilled workers that are needed to produce quality products.  These workers are also well paid.  That makes many Germans happy

America is much more sophisticated than Germany.  It has exported the high skilled manufacturing jobs to low wage countries.  It has replaced those jobs with low skilled jobs in fast food chains and other sectors of the services economy.  Those jobs don't pay very well.  America still produces exportable products that require cognitive skills.  They are produced on Wall Street.  Advances in computer technology have enabled a relatively small number of highly paid technicians to produce and sell a wide variety of products and services across the globe.  This has enabled traders on Wall Street to earn a good living trading the sophisticated derivatives that they produce.  In a sense, Wall Street is a more sophisticated version of Las Vegas.  Its customers are pension funds, university endowments and wealthy individuals.  They hope that the traders they hire to manage their financial assets perform better than the traders with whom they compete.

US corporations are also in the asset management business.  They manage the the value of their stock price.  They tell Wall Street analysts how they will perform every quarter.  Management's job is to meet or exceed the expectations that they have set.  There is a dedicated TV network in America that is a lot like the sports networks in America. Instead of examining the performance of football teams, they get all excited about what is happening in corporate America that might affect stock prices.  They have a big advantage over sports networks.  The game is played every minute of every day; it is hard to contain the excitement that is generated by insignificant changes in factors that might affect stock prices. 

Corporate executives have a powerful incentive to manage their stock price.  They are awarded stock options by corporate directors as compensation for successful management of the stock price.  The easiest way to increase earnings is to reduce costs.  Employees are a variable cost.  The best way to manage the cost of labor is to have a very flexible workforce that can be adapted to the needs of the firm.  Temporary workers are better than career employees for that purpose.  The wage bill can also be managed by exporting jobs to low wage countries.  That has the advantage of opening up new markets for consumer products.  It also helps to cut taxes.  Corporations have been very innovation in developing tax avoidance strategies.  They have also found ways to use retained earnings to elevate share prices.  Instead of making risky investments, that may lead to earnings growth in the long term (after the CEO has retired),  many corporations have used retained earnings to buy back their own stock.  Some have even borrowed money in order to increase dividend payouts.  In many corporations financial engineering has surpassed product engineering in value.  It is not surprising that many corporations are identified by their stock symbol.  In a very real sense they have become financial assets that are actively managed as financial assets.

Perhaps the major difference between Germany and the US is that Germany is less advanced than the US.  It remains stuck in the old fashioned business of producing real products for the global market.  German corporations also operate under a different governance structure.  They have not moved to the more advanced mission that motivates American firms.  Instead of focusing on shareholder value they are stuck in the stakeholder value scheme that American firms abandoned years ago.

No comments:

Post a Comment