Good Ideas Require Good Policy
When we were kids, my brother’s best friend practically lived with us while the two of them pursued their Eagle Scout merit badges. Gunther’s parents both worked “in aerospace” and kept irregular hours. Our busy household was well-stocked with after-school snack foods, and the field out back provided a perfect cover for the boys’ homebuilt “fort” and their covert botany projects. It was a match made in heaven for two pre-teenaged boys, and over the years our two families became warm friends.
I’d always wondered about the glass vial of dirty sand Mrs. Kroesner kept on her mantelpiece—it seemed so out of place with the elegant furnishings in the rest of her house. “I brought it from home.” She told me one day when I had finally worked up the courage to ask her about it. “I didn’t expect I’d ever see it or my family again.” Heavily pregnant with her son, she’d scooped it up and stuffed it into the pocket of her overcoat just before she snuck into the makeshift tunnel under the barricades of the Berlin Wall. It was the last act—and the last reminder—of her old existence as she headed off to make a new life in the west.
Twenty years ago yesterday, the most symbolic vestige of the Eastern Communist bloc fell to sledgehammers and pickaxes as the city of Berlin was reunified. The year before, Mikael Gorbachev, prodded, no doubt by the recent success of Lech Walesa’s “Solidarity” movement in Poland and the similar transitions in Hungary and other eastern European nations, had announced what came to be known as the “Sinatra Doctrine,” essentially the decision to disband the Soviet Union and allow its member states to go their “Own Way” without State intervention– Ronald Reagan’s last minute photo-op grandstanding notwithstanding.
Like many people, I cheered at the news footage, and wept as Leonard Bernstein led the Berlin Philharmonic in an emotional performance of Beethoven’s 9th symphony at the foot of the Brandenburg Gate. For those of us who grew up and came of age amidst the ideological battles of the Cold War, the tearing down of the Berlin wall was a seminal event; a victory for the forces of democracy and free trade, and a decisive repudiation of the totalitarian communist State. One hoped it heralded a new beginning and the promise of world prosperity and international cooperation. Nikita Khrushchev’s infamous “We will bury you” had turned out to be bluster after all! As the concrete fell, and the ebullient crowds surged and melded into each other, we felt a long-looming heaviness lifted from our hearts.
But much like the jubilation that accompanied the recent election of Barack Obama (and our elation then was real, too—as were our hopes,) it turned out, as it generally does, that our expectations were not quite so seamlessly meshed with the reality that came to pass.
Ironically, there are striking parallels between post-reunification Berlin and the current American transition (key word, here, transition,) from corporate oligarchy (the socialized losses and privatized profit system we have today,) to a more democratic redistributive market economy. Paradoxically, it’s obvious to most everyone that both our bureaucratic socialism as well as our ultra-liberal capitalism also require some fundamental democratic reform if our republic is to prosper.
Although it seems counter-intuitive, if we look at the Berlin wall as a metaphor for our national prejudice against collective stewardship (Democratic Socialism) separating the populist democratic West, (the current elected administration,) from the socialized corporatized East, (our failed corporate oligarchy,) the analogy gets interesting, even instructional.
Simply put, reunification has been a messy affair.
When the wall came down, a flood of East Germans threatened to overwhelm the social services of the West. Imagine that the United States were to one day announce it would no longer recognize its southern borders with Mexico, and you get some idea of the social upheaval Germany faced.
The first enormous aid package of DM115B was just the beginning of a long and expensive process. Well over DM 350B was spent in just the first three years following unification, four-fifths of which was in the form of direct government funding. Ten years later, the total amount had climbed to well over DM 1T.
Even before official unification, the West German government had decided to privatize the East German economy. The Treuhand Trust Agency (the German TARP, if you will,) was charged with taking over East German industries, stabilizing them, and turning firms over to new private management. Altogether nearly 14,000 firms were privatized between 1988 and 1994. But some problems emerged.
First, was the massive confusion about property rights. So much had been re-appropriated and reassigned first under Nazi, then Soviet, then GDR administration, that just who actually owned what was utterly obfuscated. As claimants began winning in the courts, and contracts were voided because no clear title could be established, investors shied away in droves. Foreign investment in the new enterprise zone dried up. Even Japan, which at the time was buying up everything in sight, demurred.
Secondly, East German production costs were enormous, with wages kept artificially high and far above what productivity levels could sustain in a competitive market economy. It was, after all an entrenched socialist society, long used to heavy subsidies and government protections for its workers. Western firms found it easier to serve their new Eastern markets by concentrating the expansion of existing facilities in the West, rather than investing in a entitled eastern culture long used to now-unsustainable government price supports. Consequently, new infusions of foreign money to the East were minimal.
Third, reunification was hindered by a woefully neglected eastern infrastructure, necessitating huge expenditures to bring the East up to competitive par with the rest of Germany. The railroads, for example, had been so badly maintained that they essentially required rebuilding from the ground up.
And these practical problems were dwarfed by the policy issues that confronted West German leadership. As we are seeing here in the US with “quantitative easing,” the policies that were intended to ease the transition into a new economic system forced compromises that would lead to long term structural burdens. Our current health care reform debate is a good example:
Although the huge disparity between what Medicare can handle now and what it will be able to handle when the boomer population retires will necessarily force a restructuring of our tax system—and require both a huge increase in public funding as well as a huge decrease in mandated services—this fact is conveniently ignored in the face of more immediate and politically expedient concerns; (Will I be re-elected? Will some illegal alien get an abortion on the public dime?) Similarly, the administration has chosen to prop up housing prices (and the banking industry, et al) rather than allow a catastrophic but more efficient resetting of the market. Given America’s historic propensity for armed insurrection, and its high levels of gun ownership, this is probably the wisest course of action—if not the most financially considered in the long run.
As explained in germanculture.com, Eastern Germany went into a deep economic slump immediately after unification. Within a year, the number of unemployed rose precipitously, (people go where the jobs are,) industrial production fell to less than half the previous rate, and it was estimated that the entire production of East Germany amounted to less than 8 percent of that of western Germany.
Because the reunification process was managed by western firms, the new eastern ones took on similar management and ownership styles. As large western banks assumed the assets (and liabilities,) of the former East German State Bank, they installed their representatives in its management. Those same banks, of course, administered the Treuhand funds, much as Goldman Sachs has assumed de facto management of once-privately held American industry– if not our entire economy.
Today, twenty years after reunification, the former GDR is still hugely dependent upon state funding, still significantly behind that of its western counterparts, (and most of its eastern European ones,) and the country as a whole has accumulated a massive state debt. As Polya Lesova reports:
“…The outlook for East Germany isn’t as rosy as in the early days. Despite enormous government spending, East Germany is still plagued by high unemployment, low incomes and population decline.
Germany’s national unemployment rate is 8.1%, with a rate of 7.0% in the west and 12.7% in the east. GDP per capita …(is only) 71% of that of a western German in 2008….”
Hmmmm. Massive unemployment, dwindling social safety nets, huge tax increases on the horizon, crumbling infrastructure, a thriving underground economy, morally suspect bailouts for “too big to fail” institutions, and foreign investment at a standstill as America’s democratic socialist government attempts to bail out its failed “free-market” capitalists. One wonders if Mrs. Kroesner might be having second thoughts these days….
As America seeks to reunify its public and private sectors in the coming months and years, let us remember that good ideas require good policy to implement. And that the best laid plans can be readily undone by our own good, if divided, intentions.
by ahansen
