Time for supply-side policy: Thatcher versus Schumpeter

[Celerity]

Peter Bofinger explains what lies behind the conflict within Germany’s Ampelkoalition on economic policy.

https://www.socialeurope.eu/time-for-supply-side-policy-thatcher-versus-schumpeter

Not bosom buddies: Christian Lindner (left) and Robert Habeck in the Bundestag (Heide Pinkall / shutterstock.com)

Germany’s economic weakness threatens to become chronic. According to the European Commission’s latest forecast, its economy will grow by just 0.1 per cent this year. The spring forecast of the German Council of Economic Experts comes to a similarly unfavourable prognosis of 0.2 per cent. As unemployment in Germany remains low, however, while many companies complain about a shortage of skilled labour, Keynesian demand management is not the policy prescription.

‘Time for supply-side policy’ was therefore the title of a recent commentary by Gerald Braunberger, one of the editors of the Frankfurter Allgemeine Zeitung. Talk of ‘supply-side policy’ immediately conjures up Margaret Thatcher, the British prime minister primarily concerned with breaking the power of the trade unions, and Ronald Reagan, the tax-cutting United States president who was her ideological soulmate. In Germany, the supply-side policy propagated by the Council of Economic Experts in the 1970s primarily stood for the idea that the then high unemployment called for wage restraint by the unions.

Market-liberal

In Germany today, a 1970s-style supply-side policy is being urged by Christian Lindner, federal minister of finance and leader of the market-liberal Free Democratic Party (FDP). Robert Habeck, the minister for economic affairs and climate action from the Greens, favours by contrast a modern version, labelled ‘transformative supply policy’. Traditional supply-side policy is characterised by the idea that the state is ultimately the cause of all problems and the solution must therefore be to reduce its influence on the economy. The programme of the FDP is paradigmatic in this regard. It was recently advanced in two papers, ‘12 points to accelerate the economic turnaround’ and ‘Five-point plan for an intergenerationally fair budgetary policy’, published last month and this.

Both are characterised by the demand for strict adherence to the Schuldenbremse (debt brake) enshrined in the Basic Law, the German constitution. In principle, this fiscal rule requires a balanced national budget, with the exception of a permissible deficit for the federal government of 0.35 per cent of gross domestic product. At the same time, the FDP is in favour of extensive tax cuts and depreciation relief for companies, as well as tax relief for households with higher incomes. This would be made compatible with the Schuldenbremse via cuts in social expenditures: the social-insurance-based statutory pension and the Bürgergeld (citizen’s income) for the long-term unemployed and individuals unable to work. There would also be reductions in ‘bureaucracy’—although it is unclear which specific regulations would be abolished or restricted—and subsidisation of renewable energies would be ended ‘as quickly as possible’.

Little in common................

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