Economists argue about stimulus programs

Berlin Scrappage bonus? VAT cut? Negative tax for companies? When the coalition committee draws up an interim assessment of the consequences of the economic standstill on Wednesday evening and provides advice on possible new aid for small and medium-sized businesses, the leaders of the Union and the SPD also want to include advice from economists. However, almost all of the proposals for an economic stimulus package to boost consumption are controversial among economists.

It starts with the question whether, in addition to the rescue aid that has already come into force, the economy needs a medium-term economic stimulus program to get it back on its feet. Yes, say Clemens Fuest, President of the Ifo Institute, and Marcel Fratzscher, President of the German Institute for Economic Research (DIW). “It is not enough just to avoid bankruptcies and unemployment,” said Fratzscher.

No, says Gabriel Felbermayr, President of the Kiel Institute for Economic Research (IfW). “Economic stimulus programs are pointless as long as economic activity is paralyzed by preventing social contacts,” he says. The government must now provide a credible, resilient plan to exit the lockdown. Veronika Grimm is more cautious about saying no to promoting consumption. It requires targeted modernization investments in digitization and climate protection.

Employees of Fratzschers DIW and Felbermayrs IfW even had a day-long Twitter exchange of blows about the need for economic support. After the leading economic research institutes, which included the DIW, the IfW and the Ifo, delivered their joint forecast to Economics Minister Peter Altmaier (CDU) last week, the DIW complained that his recommendations for an economic stimulus program had been kept outside by the other institutes .

More short-time work allowance? Broad tax cuts? “We don’t need all of that,” says Felbermayr. He is convinced: “If the companies’ equity base remains successful, then after the crisis they can continue where they had to stop because of the crisis.”

DIW

Marcel Fratzscher is President of the German Institute for Economic Research.

(Photo: imago / IPON)

He does not consider it necessary to strengthen purchasing power. “We save more than usual because we can consume less. The money is available for consumption as soon as the lockdown ends, ”he says.

In contrast, Fratzscher and Fuest are convinced that the crisis is so deep that the state must support the economy. Short-time work, for example, is associated with a loss of income. However, Fuest warns: “The state should use the money very specifically for additional measures”, after all, the national debt is already increasing rapidly.

With the short-time work allowance, for example, which Federal Labor Minister Hubertus Heil (SPD) wants to increase for everyone, Fuest suggests increasing it only for those who would otherwise fall under the social assistance limit. As with the solo self-employed, this could be done without a wealth check, says Fuest.

In the Union too, it was said, an increase can only be imagined for lower income groups. There are also voices from the CDU and CSU that have not yet decided on new aid programs, but want to monitor developments for two to three weeks.

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Fratzscher, in turn, wants to strengthen purchasing power through temporarily lower social contributions. That would also help employers. “Broad income tax cuts would now be of little use because they are more likely to help people with higher incomes,” said Fratzscher.

It is undisputed that the economy is suffering enormously from the contact bans imposed in mid-March. The figures that the Ministry of Economic Affairs had prepared for the coalition committee and which are available to the Handelsblatt describe a catastrophic situation.

By April 13, 725,000 companies had registered with the Federal Employment Agency for short-time work. The applications already examined concerned over one million employees. 13,000 companies have applied for liquidity aid from KfW amounting to 26 billion euros.

And 1.1 million small businesses were granted grants of nine billion euros. According to data from the HDE retail association, 70,000 hotels and restaurants are facing bankruptcy. In a lightning survey by KfW on the start-up platform, 90 percent of the self-employed indicated a drop in sales. “We are currently experiencing a massive economic downturn,” says Fuest.

Purchase premium in the criticism

The purchase premium demanded by the auto industry is particularly bad for the economists surveyed by the Handelsblatt. Fuest advises the government to consider what the 2009 scrappage bonus actually did before making a decision.

In no case does he want to see the bonus linked to the scrapping of old cars. Fratzscher thinks that a scrappage bonus could be an incentive to buy a car; but it must promote new drives. “If you can’t do this, the state should invest in charging stations instead of subsidizing the status quo,” he said.

The Veronika Grimm economy considers “a scrapping premium to be the wrong instrument”. It would “potentially bring hundreds of thousands of new petrol engines to the fleet and delay the transformation towards climate-friendly mobility,” she said.

The population is also against the premium, as a representative survey by the polling institute Civey shows, which is available to the Handelsblatt: 62 percent answer the question “Should the federal government support the purchase of new cars with a scrapping premium for old vehicles as a result of the corona pandemic?” “No, definitely not” and “rather no”.

It is better, says Grimm, that the state should invest money in the expansion of IT networks and in schools. This is all the more important since children from educationally disadvantaged classes would now suffer new disadvantages due to the school closings.

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Fuest also relies on targeted investments: “IT specialists are now available, so it would be the right time to reduce the IT backlog in administration,” he said. The digital skills of workers should also be trained. There was time for this during short-time work. “We now have free construction capacities that did not exist before Corona,” said Fuest, who therefore advises that public construction investments be preferred.

Fratzscher also demands the promotion of the domestic economy. “It will not work for Germany to export itself out of the crisis,” he said. Economic growth in key customer countries, such as China and the USA, is too weak for this.

Even the proposal to lower VAT is not well received by economists. On the one hand, with loss of revenue of twelve billion euros per percentage point, this is particularly expensive for the state treasury. Fratzscher also doubts that the relief would be passed on to customers. “It would therefore be a subsidy to companies that would not increase demand,” he said.

Fuest is also skeptical about a VAT cut that several prime ministers want for restaurants. “If you choose to do it, it would only be temporary,” he said. “But then later you would have the problem of getting out of this exception,” he fears.

Compensation for lost profits?

There is, however, one way that economists would go together: relief for companies that profit taxes do not have to be paid this year, but are postponed to other years through generous tax advances and tax returns. The companies would then come out of the corona crisis with significantly less debt.

IfW

Gabriel Felbermayr has been President of the Institute for the World Economy since March 2019.

(Photo: ifw-kiel)

This was suggested by the former economist Peter Bofinger. Immediate depreciation for investments is also widely supported. Felbermayr also thinks this makes sense. He also advocates a “negative tax”, where companies would be reimbursed for profits based on profit taxes for 2019 for 2020 – repayable from 2021.

Michael Hüther, head of the employers’ institute of the German economy (IW), had also asked for a negative tax. Fuest can also envisage government grants that would have to be repaid if profits flow again.

Bofinger even thinks that the companies could demand compensation from the state for their lockdown-related loss of profits. “You shouldn’t treat them like supplicants,” he said. “Hotels, for example, cannot help that they cannot do business.” The corona crisis is completely different from the financial crisis that bank managers caused.

“If the regulatory principle applies that responsibility and liability go hand in hand, then companies should get money from the state,” he says. Like the farmers after the tsunami: “The state did not take part in the farms in return,” said Bofinger.

More: Different sectors are affected to different degrees by the corona crisis. The state should therefore rely on industry-specific solutions to boost the economy again, says Handelsblatt editor-in-chief Sven Afhüppe.

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