YOU DECIDE: What can we learn from foreign economics?

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

Economics is about understanding decision making when limited resources — time and money — are involved. Whenever I travel, I enjoy observing how economic behavior, at both the individual and national levels, differs from what I see in our country.

Recently, my wife and I made a personal trip to Germany, home to my maternal great grandparents. While the trip was a vacation from work, I couldn’t help but maintain my eye for “economic investigation,”

Visiting Berlin, once again the capital of Germany, one is immediately struck by a physical observation: the scores of construction cranes in the eastern part of the city. Of course, eastern Berlin was under Russian control for 45 years, ending only with the collapse of the Berlin Wall in 1989. Until then, development was limited, particularly in the so-called no-man’s land near the wall.

My wife, who visited eastern Berlin as a student in the 1970s, was amazed at the transformation she now saw. Modern condominium projects have popped up everywhere. The historic area near the Brandenburg Gate has been completely remodeled. Plus, one of the largest commercial projects in the last quarter-century — the Sony Center at Potsdamer Platz — has been built on former no-man’s land near where the Wall once stood.

The economic lesson here is that land will ultimately be put to its “highest and best” use; that is, the use that will give the highest economic return. Importantly, these uses can change over time. When Berlin was divided, and its economic and political future uncertain, real estate investors were understandably reluctant to put money into the city. Now, with the Wall down, the city reunified, and the Cold War over, eastern Berlin has become attractive to residents and businesses alike.

Changing land uses is certainly something North Carolina has witnessed in recent decades. Tobacco fields have become livestock farms, textile mills have been turned into research and commercial centers, and inner cities have sprouted high rises and office towers. As an economy changes, so does the use of the land.

Two individual German behaviors caught my eye: riding the subways and crossing streets. Tickets must be purchased to use Berlin subways, but there are no turnstiles or ticket-takers to prevent cheating. At street intersections, people dutifully wait for the go signal, even if there is no traffic in sight.

Some might say both behaviors are a result of German obedience to rules and regulations. I’ll let cultural experts debate that theory. But there may be an alternative economic explanation in the form of fines. Although anyone, with or without a ticket, can board a subway, inspectors roam the cars and randomly check riders for tickets. Those caught without a ticket are subject to large fines; 10 to 20 times the price of a ticket! There are also substantial fines for ignoring the crosswalk signs.

Apparently, German administrators have concluded these methods of enforcing subway and street crossing rules are cost-effective. While they may not work in every country, they do suggest the benefit of periodically rethinking how we handle even the most mundane of rules.

Let me conclude my travel commentary by moving to the national level and the condition of the German economy. During the recession, Germany did suffer its largest decline in economic production in 50 years. But today its economy has fully rebounded and unemployment is under pre-recessionary levels. Exports are booming, and the country’s relative budget deficit (deficit as a percentage of income) is half that of other European countries and the U.S.

What’s behind this enviable economic performance? Germany has learned to live with and even thrive in globalization. The country realized that what matters in international trade is not low cost or high quality individually but the relative relationship between the two. That is, a high-cost country can compete with a low-cost region if the product quality of the high-cost country is sufficiently better to counteract the added costs.

Germany applied this lesson by refocusing on the quality of its manufactured products and coordinating wage increases to quality gains. The country has also not tried to compete everywhere but instead has emphasized complex tools and luxury vehicles. Exports of both to developing countries have led Germany’s recovery.

It’s often helpful to look outside our locality to other regions and areas and compare actions and results. Germany offers some important comparisons for the U.S. and North Carolina. “Sie entscheiden” (you decide) what lessons we should learn.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/