D.he rise in the German inflation rate to 3.8 percent in July is less unexpected for many experts than for the general public. And since debates about inflation in Germany tend to be more hysterical than in other countries, it is worth investigating the question of whether inflation is only a temporary cause for concern. Because it is undisputed that the inflation rate is currently being driven by temporary influences such as last year’s VAT cut, which has now expired. But the question is justified as to whether other, longer-term forces might also have an impact on inflation.
In any case, economic policy – monetary policy and financial policy as well as other branches of economic policy – is currently in danger of setting its priorities incorrectly because it underestimates the dynamics of change. Before the pandemic, the old industrialized nations were in an environment characterized by low economic growth, low inflation rates and low interest rates. It does not need to remain this way. Instead, there are good reasons for an improvement in the economic environment, even without monetary and financial stimulus, with moderately stronger inflationary pressure. The task of good economic policy would be to create suitable conditions in order to utilize the growth potential while at the same time keeping inflation under control.
The main causes of the triad of low growth, low inflation and low interest rates were mainly secular influences such as demographic development and the transformation of capital-intensive industrial societies into service-oriented knowledge societies, which until now has been accompanied by low productivity growth. The low inflation was favored by a global division of labor, which allowed the industrialized nations to obtain cheap consumer goods from emerging and developing countries that produced low wages.
Many processes in the state system work poorly
However, in the face of a digital revolution that encompasses all areas of life, wage pressure that is also increasing in the long term for demographic reasons, growing doubts about globalization and a rethinking of previous lifestyles and economic models caused by the pandemic and climate change, important parameters are changing. The pandemic is causing private companies to review their business models. There is a great temptation to advance the digitization of companies as quickly and as comprehensively as possible. This should result in noticeable increases in productivity in the coming years.
The strong demand for their products and services in turn gives technology companies incentives to develop further innovative solutions. Companies will not be able to refuse this push of modernization: Those who do not participate are more likely to be thrown out of the market sooner rather than later.
The pandemic has also shown considerable deficits in the administration, the extent of which has caused a surprise in Germany in particular. The equipment in schools and health authorities, for example, is extremely deplorable; in addition, many processes in the state system work poorly. The chronic under-equipping of the police, the administration of justice and the military was an issue even before Corona. In the past, many politicians had little reason to remedy obvious grievances because they preferred to use the money for socio-political transfers. In view of the prominence that government misconduct has received in public, politicians should now also have the incentive to do the most urgent tasks first.
An ambitious climate policy will put the economy under considerable pressure on the one hand, but it will also initiate extensive – private and public – investment projects. This, together with noticeable productivity gains, may well result in somewhat higher economic growth in connection with a slight rise in interest rates. This scenario is threatened by a questioning of the global economic division of labor, which would not only be detrimental to economic growth, but could also lead to higher inflation. A future-oriented economic policy would have to face these challenges instead of thinking that low interest rates and high government spending are a timelessly correct strategy.