East Germany: Sick from too much Government
Europeans and Americans are celebrating the 10th anniversary of the fall of the Berlin Wall. The Wall, built by the government of East Germany, officially known as the DDR - Deutsche Demokratische Republik, or German Democratic Republic, was built as a dam to keep the population from flowing out to the West.
by Fred E. Foldvary, Senior Editor
The trumpet of freedom blew, and the Berlin Wall came tumbling down. The totalitarian government of the DDR soon fell too, and the DDR was united with the Federal Republic of Germany, or West Germany. West and East Berlin became one united city.
East Germans had high hopes for freedom and prosperity. The government of West Germany has spent many billions in aid to its eastern part. But the collapse of the old East German industry has left the region with high unemployment, smashed dreams, and bitterness. New industry did not swiftly replace the old.
While Germany imposed heavy taxes to rebuild the misdeveloped east, it also stifled industry with restrictive labor laws and minimum wages. Wages for some factory workers are higher than they are in the US, even though labor is less productive. German investment shifted to the newly liberated economies of central Europe - Poland, the Czech Republic, and Hungary. Labor there was inexpensive, as it should have been in the former DDR.
The foolish attempt to equalize wages in western and eastern Germany shows that Germans have not learned from their own history. The "miracle" of the West German economy, which rebuilt from the ashes of World War II to become one of the world's mightiest economies, came from simple economic freedom. But then as the economy of the federal republic grew, so too did its welfare state and restrictive labor laws. Not only are workers overly costly, they are difficult to fire and lay off.
It was old socialist ideas emerging and then failing again, leading to an unemployment rate in West Germany of over ten percent, after the full-employment days of the 1950s and 1960s. Germans have not only not learned from their own economic miracle, but also from the economic disaster of the 1920s and 1930s. There is a great little booklet called "Why the German Republic Fell" available from the Robert Schalkenbach Foundation (800/269-9555). It shows how the great rise in real-estate prices choked off investment and plunged Germany into the depression that brought the rise of the Nazis.
During the past ten years, instead of building new factories and offices, in many cases western Germans bought the old companies cheaply just for the real estate - the land. They made money buying and selling land rather than building the industry that would provide employment and real wage gains for the eastern Germans. The tragedy is not just the lost economic opportunity, but a spiritual crisis in the former DDR. East Germans no longer have their old DDR identity, but they don't identify with West Germany either.
It is this kind of economic environment that breeds neo-Nazis and ethnic and religious hatred. Germans have the absurd situation where West Germans are heavily taxed to finance unemployment and pension payments to East Germans while artificially keeping wages so high that workers don't get employed.
This shows once again the futility and high social as well as economic cost of trying to help workers by artificially propping up their wages. There is no economic magic. We cannot wave a wand and create high wages from nothing. The real economic wage comes from the productivity of labor.
There is only one way that the German economy will prosper with both high wages and full employment. The German government must eliminate restrictions and minimum wages for all German workers. The German government should also reduce, and even better, eliminate all taxes that fall on wages. That includes the value- added tax and any sales taxes. Taxation should be shifted to the collection of land rents and to the very effective pollution charges that the Germans already have.
Germans did learn one history lesson. The wild inflation of the early 1920s was never repeated, and the German currency after World War II was even more stable than the US dollar. Now they need to learn why the old German Republic fell. Germans need to learn why a tax shift from wages to land rent is not just good for prosperity but also to preserve their democracy and civil society.
A free economy could bring the dream of freedom and prosperity to the long-suffering eastern Germans. Germans need to learn why economic freedom made their economy great, and why economic freedom could revitalize it again.
But who will teach them?
-- Fred Foldvary
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Copyright 1999 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.