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The state should stop capping prices

After the Federal Government's first and second relief packages were inadequate, expectations of the third "heavy" relief package were rather low.

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The state should stop capping prices

After the Federal Government's first and second relief packages were inadequate, expectations of the third "heavy" relief package were rather low. Because the first two packages turned out to be more than a potpourri of small voter gifts than effective policy measures. In this respect, some sensible proposals in the new package come as a surprise.

Nevertheless, this package will neither specifically alleviate the hardship of the households hardest hit by the massive energy price increases, nor will it send the signals needed to get through the winter. And investments in renewable energies, which would help the country in the medium term, will continue to refrain.

There is no doubt that the energy price increases are presenting many households and, by the way, also many companies with unprecedented challenges. Nevertheless, a thought experiment: What would happen if the state did not intervene in energy pricing? Prices have a steering function, especially when there are abrupt shortages, as is currently the case with various energy sources.

If the federal government were to leave energy prices to market forces, i.e. also allow gas suppliers to pass on the costs, the extremely high market prices would then provide a considerable incentive to save energy. According to initial estimates by the DIW, there is a savings potential of up to 25 percent for gas, for example. This is pretty much the amount of gas that needs to be saved to get through the winter.

Of course, this would also have other consequences: Households for which energy savings are not possible and who cannot absorb the additional expenditure through their income would have to finance this by dissolving their savings.

This is often not possible for the low earners and the lower middle class, i.e. households whose income is below the median, because they not only have low earnings but also hardly any assets at their disposal.

For low-income households, this can mean insolvency and decoupling from the energy supply if they cannot make the corresponding back payments from their energy suppliers. A large number of personal bankruptcies are on the horizon.

Such social upheavals are not wanted in a social market economy and justify the targeted support of these households by the state. The granting of lump sum payments to the relevant target groups, i.e. to all households whose per capita income is below the median, enables such targeted support. Households would then continue to be able to heat their homes.

The incentive to save energy, and this is the second important advantage in addition to the accuracy of the instrument, would be retained at the same time. This is exactly where part of the third package comes in. Payments to students, the increase in citizen's income, the increase in housing allowance and child allowance enable households in need to bear the additional heating costs without losing the incentive to save energy. Only the flat-rate aid for pensioners is quite imprecise.

But these measures (beyond pensioner households) only target the lowest incomes and neglect the lower middle class. The Federal Government leaves this up to the employers in the case of dependent employees. They can make tax-free one-off payments of up to EUR 3,000 as an inflation premium to their employees. But you don't have to. It remains unclear to what extent households in the lower middle class will benefit from this. The self-employed in the lower middle class are currently getting nothing.

Instead, the federal government has announced various price caps in parallel. A commission should think about a gas price cap, the electricity prices for basic needs should also be capped and the whole thing should also be financed by skimming off “accidental profits”. Nobody knows exactly how this is supposed to work.

What is clear: Such price caps suspend market-oriented pricing that reflects current shortages. This proposal has only one advantage over lump sum payments. Low-income households, which also live in poorly insulated apartments and for whom a supportive lump sum payment is therefore too low, would be better supported by a price cap. However, this only applies if they use the energy source whose price is capped.

Compared to a lump sum payment to certain target groups, price caps have a number of disadvantages. First, a price cap lowers costs for all households. If the price cap were set for a relatively high quantity, this subsidy would result in a redistribution from bottom to top, similar to the tank discount. Second, such a price cap would lose the incentive to save energy.

On the other hand, the frequently cited alternative of urging households to save energy by means of appeals is likely to be much weaker. In any case, less energy would be saved than if energy prices were liberalized.

Third, a price cap that is limited to certain energy sources leads to further distortions, since this would make the prices for energy sources without a price cap relatively more expensive. Low-income households that depend on other energy sources should continue to receive other financial support.

While the third relief package contains some important reliefs, it is ultimately just symptom-docking. 65 billion euros will only be the beginning to get through the winter. This stately sum does not include funds for investments in the future of the country. The government continues to ignore the rapid expansion of renewable energies. It is precisely these energy sources that make Germany independent of other suppliers.

But it's not too late to let go of the price caps and provide targeted aid via lump sums to those who really need government support to get through the winter.

Apparently, such targeted payments are currently not possible for the public sector. In this respect, it would be a sensible state investment, namely to quickly develop the infrastructure in order to realize such payments as "negative income tax" via the tax authorities.

Prof. Dr. Alexander Kritikos is research director and member of the board of directors at the German Institute for Economics (DIW) Berlin, as well as professor for industrial and institutional economics at the University of Potsdam.

Prof. Dr. Alexander Kriwoluzky is head of the Macroeconomics department at the German Institute for Economic Research (DIW Berlin) and Professor of Macroeconomics at the Freie Universität Berlin.

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