America Must Learn from Germany - Before It’s Too Late

This blog is cross-posted from CNN’s Global Public Square.

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.