Germany: 60 billion in green subsidies will only cause disasters.
Recently, there was a debate in Germany on the constitutionality of an additional € 60 billion public debt. The loan is debated because Germany has a debt brake in the constitution. The debt brake limits the government's ability to borrow and pushes it towards a balanced budget in normal times. In times of emergency, however, the debt brake has been eased and has made it possible to run larger deficits.
The German government plans to present a bill that transfers an unused loan authorization of 60 billion euros of covid funds from last fiscal year to a special fund called the " Energy and Climate Fund ", even though the spending for the climate itself it would not be excluded from the debt brake. The rationale for justifying the constitutionality of the plan is purely Keynesian. Advocates argue that the state must invest or provide corresponding subsidies to trigger private investment in the wake of the coronavirus crisis. Spending must stimulate the economy. In this way, earnings and jobs should be saved or insured. If there is to be a Keynesian stimulus plan to overcome the crown crisis, why not spend the tax money on "green projects"? So it's green spending to deal with an emergency.
Government investments to cope with the Corona crisis
We discuss the Keynesian justification for circumventing the German debt brake. In the case of this bill, the additional public spending is financed by a debt greater than € 60 billion. The European Central Bank and the European banking system will in all likelihood monetize this debt (i.e., the money supply will increase). The new purchasing power will allow the German government to benefit from production factors and use them for climate projects. These government-absorbed inputs will then no longer be available for alternative projects. In other words, a € 60 billion purchasing power will be withdrawn from civil society and will no longer be available for private sector projects.
The € 60 billion of additional spending drives up the prices of factors of production. Factors of production, i.e. labor, raw materials and semi-finished products, will become more expensive than they would have been without the additional public spending. This will increase costs for private companies, which will have to pay higher wages, energy prices and other costs. Projects that would have been profitable with lower costs for energy, wages and other input factors will no longer be, thanks to the 60 billion euros of additional public spending. In practice, the private sector will be displaced by inefficient public investment.
The problem is that inefficient green investments, subsidized by the state, will be clearly visible, while private ones, perhaps more efficient, will not show their capacity. Imagine an incredibly efficient traditional fuel engine: it will not have investments and it will not be realized.
More importantly, the additional government spending won't help companies struggling in the covid-19 crisis. Imagine a restaurant owner who lost sales due to covid passports and other restrictions. It does not benefit them at all that some green projects are subsidized. What it needs is the lifting of the restrictions on, not the solar panels in the field next door. Or imagine a company that has supply chain problems. The microchips do not arrive because they are not loaded on containers in Chinese ports. This troubled company does not even benefit from grants for green projects. It does not carry any of the necessary microchips. Conversely, when these new green projects take off, they are also likely to require the same inputs that the struggling business needs, such as microchips. The bottleneck increases, as does the price of the inputs that the ailing company needs.
From an economic point of view, there is no connection between the additional public spending and the overcoming of the economic consequences of the corona emergency. Far from activating sustainable private investment, public investment and subsidies discourage it, increasing costs for businesses. Instead of being used in private projects desired by consumers, resources are increasingly used in projects that are desired and protected by the state. To achieve the self-imposed goal of the bill and quickly put Germany on a sustainable growth path, it would be more appropriate to cut taxes, especially at this time, letting businesses, and people and consumers decide what to do. buy what not.
On the contrary, what would be needed is a lot of supply side economics, that is, canceling these constraints that stop growth and let the economy take its course. Obviously Red-green Germany, and Yellow only for austerity, cannot understand this.
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The article Germany: 60 billion green subsidies will only wreak havoc. comes from ScenariEconomici.it .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/germania-60-miliardi-di-sussidi-verdi-faranno-solo-dei-disastri/ on Thu, 20 Jan 2022 16:46:45 +0000.