Is Germany Really Poverty-Stricken?

Inequality has rapidly become the core theme for the 2017 election year in Germany. Martin Schulz, the social democratic challenger who aims to replace long-term German Chancellor Angela Merkel, is building his campaign on the issue of “social justice.”

According to Schulz, Germany is a country deeply divided between the rich and the poor. And, he says, it is high time to change this.

His policy prescriptions to remedy the situation include yet more social transfer payments, more benefits for the unemployed and higher taxes for the rich.

A little problem

There is just one problem with this alluring sounding case. It isn’t borne out by the actual numbers.

Worse for Schulz is the fact that Germans – generally a very fair and equitable minded bunch with a remarkable willingness to tolerate high taxes in order to live in an equitable society – do not seem to be convinced that there is a real problem.

Only Belgians have a higher load of taxes and social welfare contributions, according to the OECD.

Following the recent regional elections in Saarland, a small German state, which were nevertheless considered important in view of the upcoming federal elections in September, polls showed that 60% of German voters think that theirs is overall a “fair” country.

Tough road ahead?

With those numbers, it won’t be easy for Martin Schulz to win the election. To gain the upper hand, he needs to succeed in convincing Germans that they have a problem.

In order to change the current perception of the German public, unions, left-wing parties and their media accolytes have started a campaign. A flood of articles, interviews and studies tries to create the image of a country in urgent need of social rebalancing.

Academics to the rescue?

The leading figure in this campaign is Professor Marcel Fratzscher, director of the Berlin-based economic think tank DIW (Deutsches Institut der Wirtschaft).

The DIW has a mixed reputation, due to poor quality of some research, and is therefore not a member of the prestigious group of economic institutes advising the German government

Nevertheless. Mr. Fratzscher and his institute are regularly awarded special contracts by the German Ministry of Economics, which is under the leadership of the SPD.

Mr. Fratzscher has dutifully embarked on a campaign against inequality. There virtually is no TV network, no radio station, no magazine or newspaper in Germany without a comment by Fratzscher on the pressing issue of social injustice. Some newspaper editors even complain that he seems to send out a column a day.

Wrong data

To make it all work, Fratzscher not only gives the available data the required twists. He even comes up with wrong data.

Last year, one week after the leading German business magazine WirtschaftsWoche published a cover story based on data of the DIW, he had to admit that the data were wrong.

In contrast to his message of a massively shrinking middle class, he had to acknowledge that in Germany the middle class is more stable than in other countries, notably the United States.

This was no small fry or an accidental oversight. After all, Fratscher had made a lot of media hay with his book “Verteilungskampf. Warum Deutschland immer ungleicher wird” (Battle for Redistribution – Why Germany gets ever more unequal).

But this did not stop the campaign. In a regular column for the weekly Die Zeit, Fratzscher continues to paint the picture of a country falling apart. Specifically, he complains that:

• The share of working people being threatened by poverty has increased from 4.8% to 9.6% since 2005,
• This means that 1 out of 10 working people in Germany are in this group.
• Working women are particularly threatened by this trend.

At first glance, these data are dramatic. Who would want to argue that this does not need to be corrected? Obligingly, Mr. Fratzscher asks for more social transfers, better education and higher wages to overcome this.

Incorrect data

However, the data used by Fratzscher need to be challenged. According to the OECD, an institution of far more repute than the DIW, Germany has one of the lowest poverty rates in the world (around 4% of the population, compared to 6% in the UK, 7% in France, 12% in Italy, 13% in Japan – and 12% in the United States).

Also, Germany’s Gini coefficient, a statistical tool to measure inequality, has barely changed in the last years. Here, Germany, too, performs much better than France, Korea, Japan, Italy, UK or the United States (as well as the OECD average).

Finally, the real disposable income of the bottom 10% has grown in Germany faster than the median income since 2007. That would indicate less social injustice — and not more.

Faced with such criticism, Mr. Fratzscher acknowledges that the income of the bottom group has risen, but conveniently points to the standard definition of “poverty.” Poor is – according to this definition – who earns less than 60% of the median income.

Think about it for a moment: If everybody doubles his or her income, we would still have the same number of “poor” people. That is indeed a strange artifact of constructing statistics.

Who are the poor?

The German public might have a more correct understanding of who exactly are the poor in their country and to discern whether or not Messrs. Fratzscher and Schulz jump on the topic with good reason.

Poverty in Germany is often associated with the labor market reforms by Merkel’s predecessor Gerhard Schröder. According to this logic, lower wages have led to a new group of “working poor.”

That overlooks the inconvenient fact that many of those who now work for low wages were unemployed before. That represents progress, not a step backwards, I would say.