Of Traffic Light Austerity and Economists Who Ignore Angry Citizens

When economists argue about the right or wrong budget policy, the focus is usually on the economic effects of cutting spending or increasing taxes and levies – whether and how restrictive the course is. And whether, for example, what the traffic light government has just decided to do to comply with the debt brake will lead to a deeper recession, as the expert Achim Truger and the German Economic Institute fear – or not.

That is important. What could be at least as important in these times is what is not even included as a dimension in the usual economic models: the extent to which such a policy affects people’s discontent and doubts about democracy – in other words, what has also contributed to the rise of the AfD (which not coincidentally began with the onset of record inflation in 2022). The fact that austerity can have severe consequences for the stability of democracies is well documented empirically – whether in studies by historian Christopher Meissner on the rise of the Nazis (particularly in regions that were affected by Brüning’s austerity) or in Thiemo Fetzer’s evaluations to explain Brexit (which was voted for particularly in areas where there was severe austerity in 2010).

You can guess why austerity has such an effect: every time it is about people having to make do with a lower standard of living – without them generally being responsible for the causes of the cuts, and in the worst cases others are the responsible ones. Few things have shaken the basic trust in the old market-liberal paradigm as much as the humanly absurd fact that after the financial crisis, there were suddenly billions to bail out the banks, whereas shortly before, social spending had been cut everywhere in Germany.

The fact that the latest traffic light coalitions’ decisions threaten to bring with them such unpleasant side effects is demonstrated by the fact that it took less than two hours after the announcement of the higher CO2 price for the “Bild” newspaper to headline that petrol and heating would now become more expensive (again). This should be a warning signal, and not just for those who want to save the climate by pricing CO2 as harshly as possible – especially as the increase will not be offset by climate money (Klimageld), because otherwise it would not save any money. This kind of austerity threatens to bring the AfD new voters.

At the latest then, it would be worthwhile not only to determine real economic multipliers for the subsequent assessment of fiscal policy, but also to conduct much more research into what such measures mean for the stability of the country in a broader sense. And what it means, so to speak, to make individuals pay for mistakes in budget management or excessive zeal to curb debt. This may work if the country as a whole has previously splurged and put on fat. It works less well if some of those who are then expected to pay are already struggling to make ends meet.

This is all terribly uneconomical, which economists don’t like at all and therefore prefer to abstain from – but in the end it will also have real economic consequences if Brexit happens, Trump is elected or the AfD continues to rise. Contrary to what was long postulated in the market-liberal era of the primacy of the economy, the world cannot be (sufficiently) explained – and saved – by economics alone.

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Speaking of reappraising old economics: Next Wednesday, Simon Johnson will be our guest at our New Economy Short Cut. Together with Daron Acemoglu, he has written a great book about how innovations have happened in history – much less as a result of market processes and much more as a result of political will. Another outdated assumption from the era of dominant market liberalism that needs to be addressed. On December 20 from 4 p.m. – via Zoom and in cooperation with the OECD. Register here.

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