On the way to summer vacation, I listened to a current episode of a well-known podcast. Topic: “Social unrest in the coming weeks and months. Scaremongering or justified concern?” The guest was Sebastian Dullien, who heads the Institute for Macroscience and Consumer Research (IMK). The Federal Government’s relief measures to cushion inflation were discussed. I was intrigued by the episode on several levels.
On the one hand, I was impressed by Dullien’s professionalism. After weeks of reading, at regular table level, from stakeholders that the measures were untargeted and that the wrong people would benefit, it was laid out in some detail that the government is amazingly accurate at reaching people with a mix of measures.
Low-income families receive the highest percentage of relief, while middle-class families receive higher relief in absolute terms but less compensation in relation to their additional burden.
What fascinated me even more, however, was that two economists – Mr. Dullien and I – took such a completely different view of the challenges associated with inflation. Mr. Dullien was primarily concerned with cushioning the consequences – i.e. distribution issues, in particular how much someone would be affected by price increases if he or she continued as before. A very static way of looking at the world.
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As a microeconomist, game theory and negotiation expert, I’m more interested in the incentives that price increases and relief measures distributed by politicians have on the population and its behavior. For this reason, I consider it – completely independent of the content – a disaster as we discuss the topic itself. The overall framing of the situation and the way the government is setting anchor points that it will have a hard time getting rid of is chilling.
I understand that politicians’ job is to pose as the people’s advocates. But when we talk about unacceptable burdens, giving people the feeling that they are living in terribly hard times and even blustering about insurrections, it is no wonder that – as in France – more than 50 percent of the population are crazy, extreme parties on the right and choose left wings. It would be the job of experts and the media to drive the politicians to the parade instead of heating up the debate.
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.
Even if employees did not get any salary increases or relief in 2022, with 7.9 percent inflation, prosperity in Germany would only fall back to about the level of 2014 (with the 6.5 percent increase in wages that IG Metall just pushed through, correspondingly less far return). I don’t remember that we were on the brink of impoverishment back then.
>> Read also: Inflation in Germany rises to 7.9 percent – and is likely to remain high longer than expected
If the significant wage and salary increases of the last 10 years were not quite as noticeable for the people, that was due to the progression in the tax system, especially the cold progression. But despite everything: the 10 percent of the lowest-income households in Germany are still among the 10 percent of the wealthiest people in the world population, including state health and education services. And we advocate for social unrest! For real?
Dodge inflation through behavioral and consumption changes
This federal government began under the motto “dare more progress”. That sounds like movement and not the status quo. I, too, am only interested in looking ahead and in the questions of how we can get out of the energy crisis and how we can prevent inflation from perpetuating.
One is that we could literally work our way out of inflation and its material consequences, as explained in my last guest article here in the Handelsblatt. The other thing is that we can massively avoid it by changing our behavior and consumption. People react very quickly to prices, which thus have an important steering effect – especially when high prices indicate that something is scarce.
>> Read here: Inflation, labor market, taxes: only strong incentives will lead to changes
We have decided in Germany and Europe that we will fight climate change with a kind of certificate trade – soon also for road traffic – i.e. with a pricing of CO2 emissions. Rising prices for petrol, oil and gas are therefore expressly desired and part of this strategy. These increases came earlier and stronger than planned due to Russia’s invasion of Ukraine. But therein also lies an opportunity.
Disappoint FDP and Greens
The price shock came from outside like a natural disaster. That’s much easier to sell to your own people. By the time the regulatory and CO2-related price increases had taken effect, the price pressure from the Ukraine crisis would probably have abated again. However, people have gotten used to the higher price level and the pressure to be more energy efficient.
Nobody in the government is saying: “Guys, save 50 percent of your energy consumption as quickly as possible.” Instead, we are discussing mitigating the effects, which means nothing other than the pressure to adapt that the government has declared it wants to build up in the context of the climate crisis reduce and undermine.
The SPD has always been a structurally conservative party, so I didn’t expect anything else. A disappointment, however, is the FDP, which wanted to combat climate change with market-based instruments and is now doing the opposite. And a near default are the Greens, who have long placed rapid reductions in fossil fuels at the heart of their policies.
Invest incentives in the labor market instead of in the social systems
In addition to mitigating the pressure to change, the policies of the federal government also have a second effect on people’s behavior, the so-called “endowment effect”. This causes people to take what they have for granted. Once people have gotten it, even if it’s advertised as limited in time, they don’t want to give it up.
After just three months, a kind of entitlement to the 9-euro ticket or a similar successor had arisen, although its steering effect away from private transport was extremely weak. Nothing against relief, on the contrary, but in a crisis like the current one I would always first invest in incentives in the labor market before expanding the social systems in the form currently planned.
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