What the United States Can Learn from Germany: Workforce Training and Public Investment
Political tensions between Germany and the U.S. promptly resurfaced not long after the new administration took possession of the White House. Many will argue at length about who is right about what. Yet now that Chancellor Merkel has returned to Berlin from her inaugural meeting with the U.S. president, a few lessons about what the hosts can learn from the guests may help to alleviate some of the tensions. Three examples will do.
The first is about the success of vocational training in Germany. The topic is not new; in fact, it was the focus of a U.S.-German CEO meeting at the White House the day of the Merkel-Trump tête-à-tête. Many studies have linked its impact to the country’s manufacturing prowess. As the Trump administration is keen to bring back manufacturing jobs, the relevance is obvious.
Manufacturing accounts for about 11 percent of GDP in the U.S. (about half of Germany’s share). One would suspect then that armies of jobless industrial laborers loiter in the land. This is not quite the case. Only 4 percent of American manufacturing workers remain unemployed, a share below that for all employees. Circumstantial evidence points to an opposite problem: many industrial companies in rural areas complain of shortages of qualified staff. People are there, many seek jobs, but they do not possess the requisite skills.
Enter Germany’s experience. The success of the country’s vocational training lies at the intersection of private sector demand, a dense network of vocational schools, and state subsidies. The U.S. delivers in the first two categories but lacks in the third. Without state-level funding, vocational training will founder. If it is in the public interest to subsidize tertiary education through federal, state, and private purses, then surely it ought to be socially desirable to support traineeships and skills-based education.
Private companies alone, whether German or American, have little incentive to spend on public goods, that is, on education. U.S. states, in particular—which compete to attract investment through tax incentives and bear the burden of unemployment—should have every reason to support vocational training. Local chambers of commerce and similar stakeholders might serve as bridges between business and local communities.
The second policy area that U.S. policymakers would be wise to study is road congestion in urban areas. Everyone agrees that such congestion incurs large private and public costs (in addition to annoying those stuck in traffic jams). Economists consider such costs “external” because they originate from some but are imposed on others. Externalities are not only unjust but are also hard to eliminate because market forces by themselves cannot do the trick. Public policy is required.
Investment in public transportation is the obvious way to fight congestion. Again, Germany can teach the U.S. a lesson. Berlin and Washington boast virtually the same population density (3,927 vs. 3,976 persons/km2, respectively) yet Berliners spend considerably less time in traffic jams than do the denizens of DC. What is the reason?
Daily ridership on the public rail system in Berlin is twice the number in Washington, while almost three times as many passengers use buses in Berlin as in Washington. Little wonder then that Washington ranks as the 15th most congested city in the world compared to Berlin’s rank of 78th. More broadly, 11 of the top 30 most congested cities worldwide are in the United States while none are in Germany.
Behind the high density of public transportation in Germany lies solid backing of the federal government and diverse sources of funding. In addition to the usual mix of municipal, local, and state governments, a substantial share of very capital-intensive projects comes from the federal government (up to 60 percent in some cases). At the same time, cities routinely tap cross-subsidization, compensation, and EU funds as well as road and fuel taxes. If there is one lesson that U.S. cities would be wise to learn, it is that local commitment is critical but heavy external funding is necessary for sustained investments in public infrastructure.
And here is the third—and related—lesson. For some time now, consumers and policymakers in advanced countries have agreed that it is in the public interest to cut car exhaust emissions and generally curb oil consumption. The way to reduce emissions is to motivate people to drive less and buy fuel-efficient cars. Germany and the U.S. have dutifully put in place policies aimed at achieving both objectives.
The German government has been going after these objectives through the cost of fuel. The American approach is focusing on mandating fuel economy standards for new vehicles. After decades of implementation in both countries, the verdict is in: the German approach has proven not just more cost-effective but consistently delivered superior outcomes.
Taxing fuel at a high rate—as is the case in Germany and elsewhere in Europe—has been estimated to be six to fourteen times more cost-effective in reducing demand for gas than fuel-economy standards. The added advantage of taxes is that they do not distort consumer choice. By contrast, fuel standards tend to push manufacturers into tweaking supplies of vehicle models to meet a mandated average standard.
Raising taxes is hard in the United States. Perhaps. But so is breathing dirty air or sweltering in heat due to climate change. It is the job of policymakers to explain the benefits and costs of public choices to constituencies and their elected representatives.
German public policy long ago delivered on what was clearly in the public interest. The U.S. federal and state governments should study these policies and learn from their successful implementation.