The economics of Berlin

by on June 28, 2010 at 1:53 am in Economics | Permalink

The city continues to deindustrialize:

Most of the problems date back to the end of World War II when most large companies moved their headquarters to West Germany — for example, Siemens moved to Munich and the banking industry fled to Frankfurt.

After German reunification in 1990, East German industry collapsed when state subsidies were cut. Also, Berlin failed to stop spending at a rate it was used to, especially when federal payments were slashed in 1995 from almost 8 million euros to 2 million euros.

As a result, since 1991, Berlin's debt has risen nearly six-fold, from 10 billion to 61 billion euros, giving it the highest per capita debt level of any state in Germany. The city has lost about 100,000 industrial jobs since 1990.

Here is the full story.  Here is a related article.  This also explains why Berlin finds it so hard to privatize its arts support; the private sponsors simply are not there.

As I've noted before, neither land nor labor are remarkably scarce here, and so most items and apartments are very cheap, especially by European standards but even by south German standards.  Could it be that marginal cost pricing reigns at the retail level?

The cheapness makes Berlin a magnet.  I am told that large numbers of people — especially foreigners — live here part of the year but earn most of their money elsewhere.  Think of a twenty-something writing a novel or a dancer or singer in training.

Did you know that only about forty percent of the German population is employed?  I would be surprised if it were that much in Berlin.  You can view that figure as a realization of (temporary) utopia, the result of screwy anti-work economic policies, or a bit of both.

I thank Sebastian T. for the pointer and also Ines for a useful discussion.

GW June 28, 2010 at 2:31 am

“After German reunification in 1990, East German industry collapsed when state subsidies were cut.”

Well, no. East German industry collapsed after the currency union with the FRG. The currency union was entered into without any economic convergence (as well as before a political union) and this meant that, in one moment, East Germany’s order books, in Ostmark, with East Block countries were wiped clean as the trading partners were unable to pay in DM. The work of the Treuhand, which organized the sell-off of East German state enterprises, should have been done before the currency union, as a gradual convergence rather than none at all. The argument in favor of the action that was taken was that East Germans would “vote with their feet” if the union was delayed, thus depriving East German of its labor. Instead, we ended up with an East Germany with plenty of employable labor but almost no industrial workplaces except for the relatively small number established by western firms. If East Germans had been offered the option of a delayed currency union (not a bad idea – the US had a delayed currency union, too, assisting with the devleopment of the country’s westward expansion) in return for more stable employment, things might have developed much differently.

Ed June 28, 2010 at 5:40 am

The U.S. has about 185 million employed -including 17 million holding part time jobs only- out of a population of 300 million. Whatever the cause or implications, lower percentages of the population employed are no longer unusual. Welcome to Player Piano.

E. Barandiaran June 28, 2010 at 7:18 am

Tyler, do you know any good research work comparing the experiences of Berlin and other EU cities (for example, Bilbao or Edinburgh) in the past 20 years?

Sebastian June 28, 2010 at 9:10 am

@Bob

I think in a state as Germany that affords a rather big social state, looking at the actual percentage of people who actively support this state, is pretty interesting.

For comparison: The corresponding number is ~45 % in the US, assuming 307 Mio US citizens (according to Google) and 140 Mio employed Americans (http://www.bls.gov/news.release/empsit.t01.htm). That’s also surprisingly low.

Joe Teicher June 28, 2010 at 9:52 am

Sebastian,

And its even worse if you take out the 21 million people who work for the state (in the US). That leaves about 119M, or about 39% of the population that actually support the state. Its not so surprising that it is hard to restrain the growth of government.

spencer June 28, 2010 at 1:57 pm

Are there actually any developed world cities that are not industrializing?

MC June 28, 2010 at 3:40 pm

Does Mr. Cowen laugh to himself when he links to articles written in foreign languages without telling us?

anon June 28, 2010 at 9:30 pm

The reason the East German economy failed with the Reunification was twofold – the sudden currency conversion wiping out the customer and supply chains East Germany had and with what was called “Return before Reimbursement” (Rueckgabe vor Entschaedigung), a system which meant that enormous uncertainty impacted business and private property in the East (it was an attempt to unroll ownership back into the pre-WWII times).

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