compulsory reading, German Politics

The Real Problem Of The German Social Democracy: Brackets

In an interview with Gerhard Schroeder, printed in this week’s issue of “Der Spiegel” (in German), the journalists interviewing the chancellor rightly alleged that people like them – those who hold a lot of human capital, who represent the backbone of our knowledge based economy but are unable to pick a regulatory regime like those predominantly owning financial capital – would be the ones to have to pick up the tap for continued non-growth in this country. The chancellor answered sarcastically that the thought of their deprived economic situation really shook to him to his core, that he was close to tears. I was just a joke, but I fear there was a little bit more to it. It was also an unconscious expression of the fundamental conflict within the German Social Democracy – brackets, more precisely, income brackets.

A few weeks ago, I had a discussion with my friend American friend Sonya about the difference between perceived and actual relative income positions. Our conversation was based on a CNN poll, according to which 20% of US citizens believe they belong to the top one percent income bracket. Another 19% think they will be there at some point in their life. In Europe, things are bit different. Over here, many people tend to believe they belong to a lower relative income bracket than they actually do.

In both cases, the consequences for the economic policies implemented are severe. In the US, economists like Princeton professor Paul Krugman have begun to talk about the construction of a Plutocracy. In Europe, overregulation and suffocating marginal tax rates strangle more and more economic activity – or drive it into illegality. While some in the US deplore the lack a European style welfare system, welfare systems have evidently contributed significantly to the distortion of incentive structures on this side of the pond. It was this simple observation that prompted former LSE director Tony Giddens to write his now largely discredited book about “The Third Way”, which helped the other Tony to rebrand the British Labour party back in the mid 1990s.

While there may not be just one Third Way, it seems almost self evident to me that any economy/society must get both elements, individual motivation as well as redistribution of income, at least roughly right. “New Labour” seems to have understood this, but a large number of German Social Democrats still seems to have a hard time grasping the point. While the chancellor spent the rest of the interview explaining just how he wants to get the incentives right, and while his little sarcastic remark may not even tell us about his personal attitude, it certainly captures the mood of a significant part of his party. All reform rethoric aside, it appears many Social Democrats still do not really regard the professional middle class (the group they called “Neue Mitte” in their 1998 election campaign), working in human capital intensive jobs as those who add the most value to our economy. Many economists as well as political scientists have written extensively about the societal consequences of changing patterns of economic activity, and most of arguments are necessarily a lot more complex than the simple one I am making here [ the following link leads to a particularly good paper by Fritz Scharpf, concerned with sectoral changes and welfare regimes in competition ]. Nonetheless, I believe this is the core of the SPD’s internal conflict – those within the party who have not already done so need to realign their perceived structure of income brackets.

In the US, when political Robin Hoods demand to take from the rich and give to the poor, they probably do not plan to take it predominantly from working professionals earning, say, 60,000 Dollars. When some German Social Democrats talk about taxing the rich, those earning 60,000 Euros should beware. Don’t get me wrong – I am by no means saying that there should be no significant tax progression up to 60,000 Euros – of course there should be. Someone earning this amount is evidently able to bear a much larger part of common good than a struggling single mother earning a mere 15,000. No doubt about that.

But I seriously believe that people in this country need to realize that the most important problem of our economy is not lack of capital or demand (well, there is a cyclical lack of demand on top of the structural problems) but a lack of both powerful intrinsic (like the American Dream as a social institution) and extrinsic (monetary compensation) incentive structures. Isn’t it telling that the largest group among German university graduates wants to join the public service where they expect job security and predictable income increases for their entire working life? An economy that is devoting more than 50% of its time and money to administrating itself is probably not a particularly creative or productive one. And creativity is just what is needed to pull ourselves out of the self-designed slump we’re in.

Isn’t it time to realize that supporting those who actually deliver this creativity with some extrinsic motivation will be great for the common good? Isn’t it time for still traditionalist Social Democrats to finally leave the remains of cherished working-class-struggle rhetoric and policies where they belong – in history books?

I think it is. And I really hope Schroeder does, too.