Concerted action: what the state can do to combat inflation

Wif only it were that easy. On Monday the government is meeting with employers and unions to discuss ways to curb inflation. Politicians and experts fear a cycle: rising prices lead to rising wage demands, which means that companies have to sell their products at even higher prices – and so on.

Therefore, according to the original idea, the collective bargaining partners should moderate their agreements. However, those affected have already made it clear in advance that they will only allow the Chancellor to interfere to a limited extent – even if he beckons with tax exemption for one-off payments.

Very specific causes

In any case, the situation is very different from fifty years ago, when there was a “concerted action”. At that time, the end of the post-war boom led to a widespread mood of crisis. Today there are three very specific causes that are fueling price increases: high energy costs, labor shortages, supply chain problems.

Instead of fighting the symptoms, the state should, in principle, start here. What’s the use of wage restraint if afterwards there is a shortage of service staff and the meager supply in many sectors is even more scarce?

Unfortunately, this takes time and there are significant trade-offs. Before energy costs fall due to the expansion of renewables and other sources of supply, they will first rise – not least due to the financial difficulties of gas suppliers such as Uniper, who now have to procure much more expensive substitutes for the missing Russian gas.

Gas is systemically important

In the end, consumers will have to pay for companies’ less farsighted procurement policies. In other sectors, such companies would probably go bankrupt, but gas is systemically important – like the banking system in the financial crisis of 2008.

The expansion of renewable energies, which is intended to save costs in the long term, is also threatening to become a driver of inflation in the short term. Suddenly many households want to install a heat pump or insulate the walls, wind farms are to be built and railway lines are to be renewed.

The craftsmen who are supposed to do that don’t even exist yet. The skilled workers offensive of the politicians will only show their effect in a few years – if at all. Extensive subsidy programs therefore primarily cause rising prices in the short term.

Cash contributions are an additional burden

That’s why Finance Minister Christian Lindner is right in principle when he praises the falling spending in his budget draft for the coming year that he has just presented as a contribution to combating inflation. The only question is how targeted he saves. This is because the inflation risks are particularly high precisely where investments would actually make the most sense at the moment.

And in order to reduce the tax subsidy for the health insurance companies, he accepts higher contributions. But that puts a strain on small and middle-income people in particular, from the very first euro they earn – and thus thwarts the goal that the state should rip off less of the income of low-income earners, so that they can make ends meet even with moderate wage settlements. Lindner is planning a reduction in income tax for the fall, but this only partially compensates for this.

The formula of “concerted action” gives the impression that everyone only needs to get together sensibly and some of the problems will be resolved with pleasure. However, this did not work in the 1970s. Today, when the inflation risks are coming much more from outside, it will work out even less.

What economics and finance ministers have been saying for weeks and months remains true: the state can compensate for social hardship, but not for everything that causes the energy crisis and partial deglobalization in additional costs. That would also be counterproductive. Frozen energy prices or stagnant wages for airport staff will certainly not ensure that supply and demand match. Politicians should focus on tackling the root causes. Even if it takes time.