U.S. War on the Middle Class: What the German Example Can Teach Us

Joe Nocera’s article in the 6/8/11 New York Times print edition (B1) about the German economic model was illuminating and vital. I hope some policy makers will stop navel-gazing and institute the sort of changes that’s kept German unemployment at 6.1% versus the U.S. 9.1%. The German economy has grown faster than ours since the middle of the last decade and the growth hasn’t been confined to a tiny slice of the most affluent as it has in the U.S.

The top 1% of German households earn about 11% of all income, virtually unchanged relative to 1970, according to recent estimates. In the U.S., the top 1% makes more than 20% of all income, up from 9% in 1970.

In Germany, the public and private sector worked in tandem to keep the country strong. Instead of regulators who collaborated with the banks to fleece the American homeowner, German regulators refused to allow underwriting loan standards to deteriorate. Many subprime mortgages didn’t require a downpayment during the go-go years of the 00s. “German banks often required a down payment of 40%”.

In any case, the U.S. unemployment rate of 9.1% is woefully inaccurate in painting the picture of what’s going on in the lower 99%. It does not include the long-term unemployed such those who have given up looking for work because of lack of opportunities and the underemployed, those who are working part-time who need full-time work. According to Market Oracle, U.S. underemployment is closer to 19.9%.

The German government focused two-fold on the serious dilemmas of the long-term unemployed and the idea that unemployment benefits discourage work by matching their skills with open positions:

The able and healthy were matched with potential employers. If they took a low-paying job, they would still receive a small portion of their benefits for a time. If they refused to work, their benefits were reduced anyway.

“The incentives to take up work were strengthened,” says Felix Hufner of the Organization for Economic Co-operation and Development, “and also the sanctions were strengthened.” Sure enough, the reforms have nudged more people back into the labor force—and work tends to beget more work, as people develop skills and have more money to spend.

The German public sector works with the German private sector to stave off the decimation of the middle class. A huge difference is that German labor unions are still powerful. Their notion of austerity is not to cut all spending for domestic programs targeted for the poor, working and middle class; they cut spending but also increased taxes 40%. This is anathema to the Republicans who seem to run things in Washington despite the fact that Democrats outnumber them in the Senate and there is a Democrat in the White House:

Most Republicans refuse to consider returning tax rates even to their 1990s levels. Republican leaders also want to make deep cuts in the sort of anti-poverty programs that have helped Germany withstand the recession even in the absence of big new stimulus legislation.

The lower 99% are suffering through increasing prices, high unemployment rates across the board and the crushing burden of underwater mortgages. Foreclosure rates are increasing rather than decreasing. Talk of cutting the deficit without mitigating the pain inflicted on the middle class will only destroy us further. There aren’t any policy makers in Washington carrying our water. Make no mistake about it: this is a War on The Middle Class.