Against a Backward-Looking Economic Policy: Professor Christoph Schmidt Speaks at ZEW

Professor Christoph Schmidt, Chair of the German Council of Economic Experts, presented the 2013-14 Annual Economic Report at ZEW in Mannheim in early December. Some 200 participants attended the Council member’s speech, which formed part of the lecture series "First-Hand Information on Economic Policy."

"Against a backward-looking economic policy", the title of the current report, was chosen to clarify the Council’s critical stance towards the debate on economic policy in the election year 2013, Schmidt said in his introduction. According to Prof. Schmidt, economic policy debates were largely restricted to a limited range of topics, thereby sending wrong signals. Schmidt gave the examples of the poverty risks of specific population groups and growing income inequalities, which were disputed at length in election campaigns, while Germany’s good overall economic shape was taken for granted by almost all political parties. Neglecting the impact of effective reforms in the past, above all of the "Agenda 2010" reform programme which has contributed heavily to Germany’s economic performance, harbours the danger of reversing reforms and omitting necessary steps in the present.

In his lecture, Schmidt highlighted the allegedly increasing disparity of income distribution in Germany as a topic which is being addressed in the wrong way. "The rich are growing richer and the poor are growing poorer" is a catchphrase frequently used in political debates which creates the impression that income inequalities are continually increasing in Germany. This assumption, Schmidt added, is often linked with the assertion that growing inequality is largely due to the "Agenda 2010" reform programme. "In public debates, we frequently encounter the belief that the Agenda 2010 has been a success when it comes to reducing unemployment in Germany, but that the reform programme is also responsible for increasing social inequality", said Schmidt. However, empirical data have proven this assertion wrong. Studies based on data taken from the Socio-Economic Panel (SOEP) for the period between 1991 and 2011, for instance, reveal no dramatic development. The Gini-coefficient confirms that income inequality has increased only moderately since the early 1990s. The middle class of society has remained largely stable during this period. "The Agenda 2010 has not increased inequality in Germany. Middle-class fears of social decline are exaggerated", said Schmidt.

Demographic change as well as the high level of government debt, by contrast, truly challenge Germany. The demographic development will likely have its full effect on public budgets after 2020, said Professor Schmidt. He also emphasised that Germany’s present access to cheap money from the capital market will not last over the long term. Instead, the continually rising interest level burdens public budgets. According to Schmidt, economic policy measures with the objective of making Germany fit for the future have to avoid steps that put further pressure on public budgets. Unfortunately, measures like a mothers' pension (Mütterrente) and the allowance of broad exemptions to the new retirement age of 67, which are currently under discussion, would result inexactly this kind of additional pressure.

At the end of his speech, Schmidt touched on the topic of a national a minimum wage in Germany. "The Council rejects the idea of introducing a minimum wage because it is very likely to result in a loss of jobs for low-wage earners." Schmidt explained that studies analysing the effects of minimum wages for different institutional contexts do not form a consistent picture. However, the majority of studies conducted in various countries suggest negative labour market effects. It is in particular a cause for concern that those groups that actually need labour market support, namely young people and low-skilled workers, are affected most, said Schmidt.

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Kathrin Böhmer, Phone +49(0)621/1235-103, E-mail boehmer@zew.de