Only strong incentives will lead to change

I am repeatedly asked by non-economists in my circle of friends what exactly I do with my time. Game theory or market design are relatively unwieldy terms, but at their core are incentives. Just as a civil engineer is better off following the laws of statics, business leaders should be aware of the incentives they are setting.

They must systematically ask themselves how the goals, rules and processes they establish affect the behavior of those who need them to achieve their goals, such as employees or suppliers. Paradoxically, there seems to be the opposite trend in politics, which is what we are witnessing in the current debate about rising prices.

What makes inflation so special at this point is its clear triggers. The big price drivers are energy, construction and logistics. In these areas, too much demand meets too little supply. If we want to avoid this perpetuating a wage-price spiral for years and possibly even ending in stagflation, then we should get to the root of the problem.

The energy crisis can only be ended if solar systems are quickly screwed onto roofs and LNG terminals are built. Disrupted supply chains can only be stabilized if people actually work at the bottlenecks – and all this with a shortage of workers, especially those who are willing to get their hands dirty.

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Prizes are usually great controls. They tell us very precisely what to do and what not to do. At the moment they are yelling: “Reduce energy consumption!” and “Come to work!” and “Only build if you absolutely have to.” This message of the prices is generally understood by everyone.

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Interestingly, it has never been so easy for consumers to avoid the really harsh consequences of inflation: above all, by consistently conserving energy. And what is the government doing? Instead of increasing the incentives to avoid high energy prices and to make staying in the status quo as unattractive as possible, she is trying to absorb “the harshest consequences of inflation” and appeals to people to take shorter showers, please. As a result, private households continue to consume gas, electricity and petrol as ever. But the opposite would be necessary.

When people work less or not at all

Wherever public demand contributes to the price explosion or even crowds out private activity, state-financed construction projects should be postponed, stretched out or put on hold. A short-term focus on public projects that contribute to energy provision and eliminate logistics bottlenecks not only protects public budgets, but also makes a significant contribution to price stability.

And on the job market? If there is one common denominator between modern conservatives, leftists and liberals, it must be the ideal of equal opportunities. The current job market is the epitome of equal opportunity. Regardless of whether they are highly qualified or have no qualifications at all – employees are desperately needed at every level.

Marcus Schreiber is a founding partner and chief executive officer at TWS Partners. He has many years of experience in strategic purchasing and broad industry know-how. His focus is on strategic purchasing, applied industrial economics and market design. He also supports companies in applying game theory knowledge in complex procurement decisions.

If you can count to at least three and show a rudimentary willingness to learn or commitment, you can easily find a well-paid job for the respective level of training, at least in southern Germany. So almost everyone has the chance to work their way out of inflation and – from a social point of view – to eliminate one of the causes of the price increases at the same time.

But no matter where you look, the economy is complaining about a shortage of workers. Construction sites stand still, craftsmen and gardeners postpone orders and raise prices. In the catering trade, at the airports and in the care sector, it is said that people left during the pandemic and are not coming back.

Yes, where have they gone? As a society, we have not aged so quickly that demographic change could have an impact on the labor market within a few months.

The fact that practically all sectors are complaining leads to the conclusion that many do not work any more or much less. Columnist Jan Fleischhauer tweeted a summary of his recent article in Focus this week: “There are two numbers that no one puts together. Or want to bring together. 1.7 million and 1.6 million. One is the number of positions for which people are urgently needed. The other is for people who are unemployed and on Hartz IV.” And the government is celebrating the final abolition of Hartz IV.

False incentives everywhere you look

In my physiotherapy practice, hardly any of the employees work full-time. My therapist tells me that with the current tax burden, it’s idiotic to work full-time. If so, then you can make home visits on a private prescription for 120 euros an hour. I’m the last to question personal preferences, and work-life balance is a great thing. But if the sum of our individual preferences leads us collectively into disaster, then it is not the job of the state to feed our private hedonism.

Since 2005, the top tax rate threshold has only risen 12 percent, but inflation has been over 30 percent. The broad middle class, which does not quite reach the top tax rate, is simultaneously hit by 20 percent social security contributions and marginal tax rates of over 30 percent – no wonder that working less is so attractive.

And why are pensioners not exempt from social security if they work fully or partly despite being entitled to a pension (employers are more than welcome to continue paying)? Why are there no additional allowances for working pensioners? Why are potential employees above the 520-euro job, if they want to enter the labor market, de facto taxed at 60 to 100 percent from an economic point of view due to the sudden elimination of social benefits?

The ZEIT newspaper recently reported that working more is a long-ago debate. I am convinced of the complete opposite. If we want better education and care, if we want to set up a climate-neutral energy system, none of this will fall out of the blue; we have to get down to work and make overtime and entrepreneurship more attractive. It would not be completely ironic if, of all things, a federal government dominated by the Red-Green Party had to make use of the incentive-oriented toolbox of classic supply-side politics in order to master this crisis.

More: Appeals instead of incentives: economists are growing dissatisfied with Habeck’s gas austerity policy

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