More and more regulations: Against Gulliver's syndrome

The German economy is suffering more and more from the state's mania for regulation.

In the meantime, the network of rules, regulations and documentation requirements is reminiscent of the giant Gulliver, who was tied to the ground by countless cords, warns the head of the Kiel Institute for the World Economy, Prof. Stefan Kooths, and calls for a quick change of course - despite high hurdles. 

Kiel – Industrial policy interventionism is on the rise again.

This neo-dirigism now sails under the flag of “economic sovereignty”, according to which the state has to make domestic economic activity more independent of what is happening in the rest of the world.

Such ambitions can be seen particularly at EU level.

In the process, protectionist ambitions are intertwined with industrial policy ambitions that existed long before the current stress in the supply chain – so there is also a lot of old wine in new bottles.

Diversification instead of isolation

The retreat behind one's own national borders fails to recognize two things: Firstly, independence from a single country always means independence from one's own country.

The consequences of the pandemic would have been much more difficult to deal with without integration into the global economy.

Diversification and not foreclosure is therefore the order of the day.

On the other hand, you don't have to carry companies to hunt.

They know best how to diversify their supply relationships.

They typically proceed more prudently than the current political debate shows.

This is dominated by the acute impression of a crisis and overlooks the fact that it does not make sense to eliminate all risks in the event of rare events (such as a pandemic or war-related disruptions).

It would be absurd to permanently maintain production capacities for face masks if they are only required in large numbers every 30 years (storage is therefore the more efficient strategy for pandemic preparedness).

The same applies to other rare events that disrupt economic activity.

On the other hand, a fully comprehensive mentality can become very expensive in the long run because it eliminates many productivity opportunities.

voice of economists

Climate change, supply bottlenecks, corona pandemic: Rarely before has interest in the economy been as great as it is now.

This applies to current news, but also to very fundamental questions: How do the billions in corona aid and the debt brake go together?

What can we do about the climate crisis without jeopardizing our competitiveness?

How do we secure our pension?

And how do we generate the prosperity of tomorrow?

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Economic policy is often subject to fundamental misunderstandings

With regard to technology control, exaggerated security and planning thinking in economic policy testifies to a gross misunderstanding of market-economy competitive processes.

By their very nature, these are open-ended.

This applies in particular to product and process innovations.

Nobody can know tomorrow's ideas today.

Here the state too often assumes knowledge that neither the authorities nor anyone else can have and thus massively curtails openness to technology (e.g. with a view to future energy supply).

As a result, valuable options are wasted unnecessarily.

The most recent example: a ban on internal combustion engines for cars. The opening clause for e-fuels does not indicate openness to technology, but rather a narrow end-of-pipe perspective.

Emission neutrality would also be achieved if conventional combustion engines continued to operate and the quantities of CO2 released were removed from the atmosphere elsewhere (negative emission technologies).

Whether this will be economically possible depends on technical progress, the results of which cannot yet be known today.

A policy that only ever aims at guaranteed results thus deprives the number one engine of prosperity of its basis by allowing technical progress only in narrow channels.

Network of individual regulations inhibits innovation and growth

The crux of the matter: it is not so much individual regulations that shackle the innovative and growth power of the economy.

Rather, it is the network of many individual regulations that tie up valuable resources through regulations and documentation requirements (e.g. minimum wage: Even companies that pay market wages far above the minimum wage now have to prove this through time recording).

The more interventionist the economic policy, the more the economy suffers from Gulliver's syndrome.

Much like Gulliver wasn't held down by a string, it's the regulatory web that's making life difficult for companies.

It is all the more difficult to change course in political economic terms, because no single regulation can be held responsible for the major damage.

EU Taxonomy Regulation: New bureaucracy monster with no economic benefit

However, a new area of ​​regulation is so far-reaching that it has to be named prominently: With the EU taxonomy regulation, a huge new bureaucratic monster threatens without any macroeconomic benefit.

It is simply impossible to certify that a single project makes a contribution to sustainability.

Such a suggestion once again demonstrates a blatant misunderstanding of market economy mechanisms and starts in the wrong place by influencing financing conditions.

As a result, this only creates a very lucrative business field for the consulting and financial industry, which also powerfully beat the advertising drum for it.

Not only does this make life even more difficult for companies, it also binds highly qualified workers who are not matched by any added value, because only buzzword jobs are created on a large scale.

The growth momentum, which is already weakening, is thus being given a further brake on productivity.

The best thing would therefore be to cancel the entire project without replacement.

It would not harm the sustainability goals because there are better instruments for this that do not additionally damage economic growth.

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State dirigisme provokes implicit claims for compensation

Rescue programs for systemically important companies are also foreign bodies in a market economy.

With the Uniper rescue, this process has now also started in the energy sector.

However, it should be noted here that the orientation of the companies only reacted to the incentives that had been set by politicians for decades.

Something similar could be said about the financial crisis, which was preceded by a far too expansive monetary policy.

It has been shown again and again that if the chances of profit and the risk of losses (principle of liability) are overridden by the state, it will ultimately be expensive for the taxpayer.

This is due to the fact that implicit compensation claims against politicians arise as a result of state dirigisme.

This will also be the case with the energy transition, and all the more so the more technology specifications are made by politicians.

Should it turn out, for example, that the future lies in other forms of energy (e.g. in the operation of motor vehicles), the automotive industry will claim that it has been firmly committed to battery vehicles by politicians.

There is no such thing as an “entrepreneurial state” that has cutting-edge technological knowledge.

Even the term is economic nonsense.

He mixes spheres that must be clearly separated from each other.

The state is the only authority that can legitimately use instruments of coercion.

Each of these must be well justified.

Businesses operate in a competitive environment in which they should produce the goods that consumers want most.

Industry Policy: Successful projects are an illusion

It is therefore also nonsense when reference is made to the fact that certain industrial policy projects have been "successful".

In economic logic, "successful" would mean that the private actors would not have known what to do better with the funds (= tax money) used there.

However, this proof is never provided; instead, in a dirigiste manner, the sovereignty of the technocrats is placed above the sovereignty of the consumers.

Blatant example: The USSR was the first country to launch a human into space.

At the same time, there was a shortage of consumer goods everywhere in the same state.

If consumers had been asked, they would certainly have voted to stock the shelves on Earth first before venturing into space.

For good reasons, market economy systems are not designed to produce state-specified high-tech goods, but rather those goods that are most important to consumers.

Unfortunately, industrial politicians repeatedly fail to recognize that one thing has to come at the expense of the other.

There is a clear economic criterion for state intervention in the provision of goods: only if users cannot be asked to pay using private law (at reasonable transaction costs) is the state required to solve the free rider problem with public law coercive means.

The most prominent example of this is external security (national defence).

Significantly, the state has not done its homework in this field for decades.

The proof of a corresponding collective willingness to pay in the context of cost-benefit analyzes is anything but trivial and should therefore be handled restrictively.

Tax financing: hand in neighbor's pocket

Because that is exactly where the superiority of market systems lies: Markets can properly deal with the subjective evaluation of goods by people because they directly involve those who assert a high need in the costs of provision.

With tax financing (no nexus between payers and users) this does not happen, rather the illusion arises of being able to live at the expense of third parties (lobby interests on the expenditure side of the state budget are correspondingly high).

As a result, everyone has a hand in their neighbor's pocket.

That in itself can be considered indecent.

It is definitely a very unproductive work attitude.

That too is a facet of Gulliver's syndrome.

About the person: Prof. Stefan Kooths is Vice President of the Kiel Institute for the World Economy and Director of the Research Center for Business Cycles and Growth there.

He teaches economics at the BSP Business and Law School in Berlin/Hamburg and is chairman of the Friedrich A. von Hayek Society.