Michael Eriksson's Blog

A Swede in Germany

COVID-19 and state support

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As the COVID-19 crisis and restrictions are slowly ending in Germany, the calls for support from the state are increasing—everyone and his uncle wants to receive (or already does receive) support, be it unemployed workers, businesses on the verge of bankruptcy, an opportunistic automotive industry, or cities/municipalities/whatnot.

On the one hand, the damage done to the economy is mostly to blame on the government imposed counter-measures (rather than COVID-19, per se), which makes it hard to deny these requests from an ethical point of view. (Not that I expect e.g. the typical politician to understand this, however.)

On the other, who is actually eventually supposed to pay for this? When the demands for support are this large and wide-spread, the state cannot just fiddle a little with the budget and create space for handouts—and it certainly does not have an immense surplus to spread on the needy. Where will the money come from? Printing money ups inflation and, indirectly, destroys wealth. Borrowing money only postpones the problem. Increasing taxes just pushes money back and forth, while incurring waste. (Someone receives a support check from the state’s left hand and a new tax demand from the right.) Cutting in the existing expenses will be both hard to justify politically and take a long time, even when it comes to bureaucracy and waste.* Considering the strong Leftist tendencies in Germany, I fear that the “solution” will ultimately be that the “rich” must “show solidarity” with the “poor”, which is implemented e.g. by the government simply confiscating large portions of wealth (hypothetically, 20 % of all bank assets above 100.000 Euro). A perpetuation of the highly unethical and abused “Solidaritätszuschlag” seems likely—a “temporary” tax of the past thirty years, which, before COVID-19, finally seemed to approach the end of its life.

*And even here, the cuts will do damage somewhere, which might require additional intervention and/or reduce the beneficial effects of the handouts. (But, to avoid misunderstandings, apart from the political obstacles, I would consider this the best way to go, as those damaged will often lose an unfair benefit, e.g. that of being employed for life as a civil servant while being incompetent and lazy, and as the long-term societal effects are likely to be positive.)

The most that can be hoped for is some degree of redistribution of damage, but this hardly ever ends up fair either, and often implies that the smart, hard-working, economically prudent, whatnot pay for the dumb, lazy, wasteful, and/or you-name-it. The COVID-19 countermeasures have hit more randomly than, say, regular career or business success, but it has not resulted in a “negative lottery”. For instance, a business with a sounder original economy, greater buffers, less debt,* fewer unnecessary costs, …, will be less endangered than a less sound business—but which will receive more governmental support and which will tendentially be at risk for an additional tax payment? Similarly, the individual who has saved as little as 100 Euro a month during his working life will be more likely to come out of this without needing help than the one who has consistently spent the same 100 Euro in a bar or on a bigger apartment.

*In a bigger picture, this is a strong indication that running businesses in debt and deficit, even be it to achieve growth and in the hope of future profits, is a dangerous strategy. (Often for the individual business, even more often for society as a whole.) Here very considerable rethinking might be beneficial. Generally, everyone, individuals, businesses, municipalities, …, should strive to build buffers instead of living on credit.

Indeed, just like COVID-19 kills far more among the elderly and those already in poor health than among the young and healthy, the counter-measures will kill struggling business first. (But also, unfortunately and unfairly, small businesses, which could have very negative effects on the “demographics” of businesses.) Compensation then risks saving businesses that would have failed anyway comparatively soon and might well still fail despite the compensation within a year or two—and if they grab onto COVID-19 as an excuse, we might see a larger scale repetition of e.g. the decades long German coal-industry subventions. This amounts to a great waste of money and could additional skew competition in a manner that is harmful for society.

Then there are those who might fake or grossly exaggerate a crisis in order to get compensation that they do not at all deserve …

It would have been better, had there been fewer and/or less drastic countermeasures, with (a) less damage* and (b) a greater justification for letting business developments run their course without support. As is, the situation is extremely poor with no good answers. I do suspect, however, that erring on the side of too little compensation will be the better way to go.

*And note that even a comparatively small change in damage can have a large effect on the businesses (and more generally, persons, entities, whatnot) that are close to the border of failure, e.g. in that being closed one week less or one week more can be a make-or-break criterion, as can having a tenth of the normal revenue vs. being closed entirely.

Excursion on Barmen:
I live in Barmen, a part of the German city of Wuppertal. Just a few hundred meters from my house is the local city center, once flowering. Even during my few years here, I have noticed a continual drop in stores, presumably driven by a mixture of the general brick-and-mortar crisis and the establishment of a major new mall in Elberfeld (another part of Wuppertal). This possibly aided by a drift towards shopping in nearby Düsseldorf. Of course, such decline leads to a vicious circle, where every store that closes makes it less attractive to shop in Barmen than in Elberfeld, shifting even more of the commerce away, which risks more store deaths, … Add in the negative consequences of the COVID-19 countermeasures and this could end badly.

Written by michaeleriksson

May 7, 2020 at 7:53 am

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  1. […] As a follow-up to an excursion in an earlier text ([1]): […]

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