Ich bin ein Midwesterner

Dusseldorf, Germany, principal center of Germany’s Rhine-Ruhr metropolitan area.  Dusseldorf’s population peaked in 1960 and the city’s lost 100,000 residents since, but it has a strong economy.  Source: hellomagazine.com

For some time, I’ve been searching for historical parallels and analogies to Midwest economic decline. As a region, the Midwest is certainly not the first to suffer economic collapse and seek rebirth.  So far, I’m finding that post World War II Germany is most relevant for today’s Midwest, particularly the Midwest’s major metro areas.  There’s a lesson to be learned in their economic approach, and I think Germany’s recent past could well be the Midwest’s future.

Throughout history there surely have been nations, regions or places that rebounded from collapse and found rebirth.  London and Rome are two examples of cities that rebounded from collapse.  London was effectively abandoned for almost 500 years after the collapse of the Roman Empire.  Rome itself fell from a population of one million in the 2nd century to an estimated 35,000 by the Early Middle Ages.  Both came back.  But Germany’s status as an industrial and manufacturing power that lost its luster in the middle of the 20th century, only to return to elite global status, is worth examining.

By 1950 Germany was reeling from defeat in World War II.  In 1940 Germany had an estimated population of 71 million; just six years later, the toll of war (casualties, refugees) reduced it to 64 million.  By 1950 that figure grew to 68 million as refugees returned.  But Germany was a shell of its former self.  Lands seized by the Nazis were returned to their previous independent status.  Standards of living were at levels not seen in a century.  Food shortages were rampant.  And before the establishment of recovery aid to Germany through the Marshall Plan, the Allies had done much work to strip Germany of its industrial capacity to prevent it from arming again for war.  Germany’s largest cities — the Rhine-Ruhr cities of Cologne, Dusseldorf, and the rest; Frankfurt; Munich; Hamburg; Stuttgart; Leipzig and Dresden in the East; and of course, Berlin — suffered incredibly.  One could argue that today’s Midwest metropolises witnessed a similar, if not as complete, collapse.

Between 1950 and 1970 Germany underwent an amazingly strong economic recovery that was boosted by Marshall Plan aid and a worldwide void in economic output following the war.  I don’t see this era as applicable to the Midwest’s current experience, although the Midwest saw considerable economic growth during the same period for the same reasons.  Since 1970, however, Germany has continued to grow its economy, while the Midwest has largely stagnated (in the absence of time to quantify this at the Midwest state level, I’ll make this assumption).

It’s important to note that Germany has been a slow-growth nation since the start of the 20th century, and has not been dependent on population growth for economic growth for some time.  Low birth rates, restrictive immigration policies, and near-constant warring for the first half of the 20th century meant that Germany’s population (East and West included) has remained relatively constant for decades.  This is in contrast to the United States, which historically has been and continues to be a high-growth nation for a developed nation.  This clouds our perceptions of the drivers of economic growth, and here you can see how.

Between 1970 and 2010, the U.S. population grew by 51 percent, from 203 million to 307 million.  The gross domestic product (GDP), in constant 2000 dollars, grew 210 percent, from $4.7 trillion to $14.6 trillion.  Not bad.  During that same time, Germany’s economy grew just 124 percent, from $929 billion to $2.1 trillion.  But Germany’s population, much smaller than the U.S., grew only five percent over the same period, from 78 million to 82 million.

Here’s another way of looking at it.  The U.S. economy is reliant on population growth for economic growth, while German economy is not.  Witness this table of ratio of GDP to population growth for both nations:

GDP to Population Ratio, 1970-2010
Germany 24.151
USA 4.096

Yes, Germany’s economy grew 24 times faster than its population, while the U.S. economy grew only 4 times faster than its population.

You can see this in charts also:
How was Germany able to do this?  By my reckoning Germany accomplished this through its continued adherence to its concept of the social market economy.  Here’s how Germany’s Federal Ministry of Economic Affairs and Energy describes it:

As a complement to the principle of free markets, the concept of the social market economy includes a second principle: the principle of social equity. This means providing an effective level of social security for people unable to earn market incomes due to age, disease, or unemployment. However, because the emphasis on social equity should not constrain market freedom, the key task is to strike the proper balance between both principles. Social benefits and government programmes are financed through tax revenues. But taxes are a burden on those people whose incomes generate prosperity. Therefore, the aim is to achieve a solid level of social security while ensuring the highest possible level of prosperity. 

The social market economy sounds a lot like the type of U.S. economy that existed immediately after World War II, before shifting to a less regulated and more laissez-faire economy in the ’70s.  The Midwest performed well in that context, but not so much since then.  Conversely, the Sun Belt, and later the Northeast, have done well in the new economy, propelled by population growth or globalization.

What does this mean for the Midwest?  Well, I’m no economist but I think economic measures will figure more prominently in our evaluation of Midwest metros.  It it means that we need to look at metrics besides population growth to determine the health of metro areas.  As I wrote in my most recent post, some Midwest metros are performing very well in attracting young adults, despite losing population overall.  Midwest metros, having dealt with demographic decline, may have found a way to grow their economies in demographically challenging environments.  Sun Belt metros, driven by the constant influx of new residents, may soon find themselves dealing with the totally unfamiliar dynamic of economic decline due in part to demographic decline — and Midwest metros will have a 50-year head start on how to deal with the challenge.  
If that’s the case, ich bin ein Midwesterner.

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