What the U.S. Can Learn from Germany’s Fate in the Covid-19 Crisis

Sebastian Dullien

Macroeconomic Policy Institute (IMK) and HTW Berlin – University of Applied Sciences

Sebastian Dullien is Research Director at the Macroeconomic Policy Institute (IMK) of the Hans-Böckler-Foundation in Düsseldorf, professor for International Economics at HTW Berlin – University of Applied Sciences and Non-Resident Senior Fellow at AGI. His research focuses on European integration, international macroeconomics, and financial market regulation.

He has worked as a consultant and expert for the different political foundations, different sub-organizations of the United Nations, and has testified in front of different committees of the German Bundestag and the European Parliament.

From 2000 to 2007, he has worked as a journalist for Financial Times Deutschland, the German language edition of the FT. He first worked as a leader writer and then moved to the Economics desk. From 2002 to 2007, he has been responsible for the paper’s coverage of the global, European and German business cycle as well as developments in German academic economics.

Today, he writes a monthly column in the German magazine “Capital”, regular contributions to Spiegel Online, and irregular op-eds for a number of other German media.

His book “Decent Capitalism” (joint with Hansjörg Herr and Christian Kellermann), which provides a blueprint for a better regulated are more stable capitalism after the crisis, has been published in 2011 by Pluto Press. An earlier German version (“Der gute Kapitalismus”) has been widely discussed in Germany.

For decades, many in Germany have envied the United States as a modern, efficiently governed democracy with a more flexible and more innovative economy than at home. This image has been badly damaged over the past couple of years and especially since the onset of the Covid-19 pandemic.

Even though the reaction of the German government to the pandemic has been far from perfect, it seems much more successful than in the United States. The U.S. government has given the impression of not acting decisively enough against the virus at the expense of human lives. Relative to its population, until the end of 2020, the US had more than twice the number of Covid-19 deaths as Germany. Pictures and reports from an overwhelmed health system in New York and especially poorer parts of the population receiving suboptimal care have shocked many Germans. Even though lockdowns in the United States were much softer than in Germany, the labor market impact there has been worse. From February to April, non-farm employment in the U.S. dropped by 22 million or 14 percent. In Germany, during the lockdown in spring, employment dropped by a mere 800,000 or only 1.8 percent.

Moreover, judged from the other side of the Atlantic, the U.S. political debate has reached a new low with a sitting president pushing repeated (and unsubstantiated) claims of the election having been rigged. While conspiracy theories are circulating in Germany as well, the overall trust in the integrity of the democratic system seems to be much higher than in the U.S. In fact, according to surveys among the working population in Germany conducted by the Hans Böckler Foundation, the share of the population believing in an elite conspiracy around the Covid-19 pandemic actually has declined from the first to the second infection wave last year.

While conspiracy theories are circulating in Germany as well, the overall trust in the integrity of the democratic system seems to be much higher than in the U.S.

Parts of the good performance of the German society and its economy during the Covid-19 crisis can be traced back to elements of the “Soziale Marktwirtschaft,” the social market economy, and some of its elements might actually provide a valuable role model for the U.S.

One lesson from the crisis has been the important role of the active welfare state in Germany. In particular, unemployment insurance has contributed strongly to the stabilization of jobs and income in Germany. One element of this insurance is the so-called “Kurzarbeitergeld” (short-time work allowance). Under this scheme, employers can put their workers on short working hours (including zero hours), while the employees are paid 60 to 67 percent of their prior wage through unemployment insurance. As already seen during the global financial and economic crisis, access to the scheme was simplified and financial incentives for firms using it were increased. The result has been a rather low drop in employment relative to the collapse of GDP and a quick economic recovery as early as the summer of 2020.

For those who lost their jobs despite this scheme, the German unemployment insurance provides replacement payments for up to one year, also about 60 or 67 percent (depending on family status) of a person’s last net earnings. The combination of short-time work allowance and unemployment benefits has stabilized expectations and has prevented the broad population from falling into panic about their future financial situations and has hence prevented a toxic downward spiral of falling consumption and economic activities.

The combination of short-time work allowance and unemployment benefits has stabilized expectations and has prevented the broad population from falling into panic about their future financial situations and has hence prevented a toxic downward spiral of falling consumption and economic activities.

Of course, the U.S. system of discretionary top-ups of unemployment benefits also seems to have stabilized aggregate demand. Yet, the labor market situation in the U.S. remains dire and the drop in employment means an increased level of uncertainty for those who have lost their jobs. The year-end haggle between Congress, the incoming Biden administration, and outgoing president Donald Trump has demonstrated the benefits of formalized and stable systems of sufficiently high replacement payments in times of crisis.

Moreover, the universal health insurance system in Germany with clear rules of continued wage payments in case of illness and covering the costs of Covid-19 tests for those with symptoms has created the right incentives for people to get tested and stay home, limiting the spread of the virus among the poorer population.

Another stabilizing role in the crisis in Germany has been the institution of co-determination at the firm level. While especially foreign managers are often skeptical about these legal rights of employees to elect their work council and the councils’ rights to have a say in many organizational questions in the company, this setup has helped the German economy and society again in the recent crisis. Already in the crisis of 2008-2009, this system was praised for its ability to find constructive solutions for stabilizing employment through internal flexibility, such as worktime accounts or reduced working hours during economically difficult times. In the current crisis, this system has also proved helpful in keeping conspiracy theories at bay. Many surveys have shown that blue-collar workers are more susceptible to conspiracy theories than workers with college degrees. Yet, at the same time, surveys show that those working at firms with work councils are less likely to believe in conspiracy theories and are more likely to trust in the government’s containment measures.

Over the past couple decades, the world seems to have become more volatile as evidenced by an abnormal number of major crises over a short period of time, such as the subprime mortgage crisis, the euro crisis, and now the Covid-19 pandemic. Moreover, digitalization and decarbonization will create new individual labor market risks for many people over the coming years. If ever, this is the time to rebalance the role of the state in providing a social safety net – not only for social reasons, but also for economic performance and for the coherence of our democratic systems.

Sebastian Dullien is Research Director at the Economic Policy Institute (Institut für Makroökonomie und Konjunkturforschung) and professor for economics at HTW Berlin – University of Applied Sciences. He is also non-resident senior fellow at AGI.