Alberto Mingardi  

Germany: trading political stability with economic stupidity

The Relative Unimportance of S... Pick Your Poison...

Angela Merkel has won the German elections by a landslide, but as she did not reach an absolute majority, she is still struggling to form a government. It is a bit paradoxical, but Merkel's electoral triumph, which resulted also in the liberals of the FDP and in the eurocritics of AFD remaining out of the Parliament, is forcing her to bargain with far less amicable political groups. Exploratory talks between Merkel and the Greens broke down last week - which means Merkel shall now knock at the door of the Social Democrats of the SPD.

Christian Democrats and Social Democrats have already governed together in a grand coalition government under Mrs Merkel in 2005. The Social Democrats may not have a happy memory of that experience, which ultimately resulted in Merkel winning elections in 2009.

This time, the SPD is presenting ten non-negotiable demands to the CDU. Though Mrs Merkel basically vanquished them electorally, a coalition government allows for the junior but indispensable partner to exert its bargaining power. The crucial request of the SPD is thus the introduction of "a federal minimum wage of 8.50 euros ($ 11.50) per hour". 7 million Germans, the Christian Science Monitor reports, earn less than 8.50 euros per hour.

Until recently, Mrs Merkel opposed the introduction of a minimum wage by the central government. I suppose the circle between her and the SPD may be squared with the introduction of a minimum wage set low enough as not to matter much.

Would that be a wise move? After all, once the federal minimum wage is there, it would be far less problematic for a future left government to raise it - compared with introducing it anew.

In a classic page in "Interventionism: An Economic Analysis", Ludwig von Mises rather elegantly explained why a minimum wage is likely to produce results far less agreeable than the intended ones:

Economists were always fully aware that wages, too, were a market phenomenon and that there were forces operative in the market which, should wages depart from market wages, tend to bring wages back to the point conforming to market conditions. If wages fall below the point prescribed by the market, then the competition of entrepreneurs who seek workers will raise them again. If wages rise above the market level, part of the demand for labor will be eliminated and the pressure of those who become unemployed will make wages fall again.

The fact that, in the year 2013, the debate in Germany (arguably one of the most successful economies in the West) revolves around the introduction of a minimum wage may be seen by many as a proof of the deafness of the political class to this argument by Mises, and more generally to the idea that to work properly the market needs the government to abstain from arbitrary interventions in matter of prices and remunerations of the factors of production. But it could also be taken as a signal of an even more troublesome phenomenon: that is, the idea that political groups invest in and cultivate "symbols" (for example, a federal minimum wage) irrespective of their unintended consequences, even when these latter are relatively uncontroversial. It may well be that the political class is still convinced that the economy should be "managed", to produce proper rewards to the deserving. But it may also be that they continue to talk a minimum wage because, irrespective of whether it produces the desired outcomes, they simply lack the imagination or the courage to propose something different to their voters. Political symbols are extremely resilient, and after all, their purpose lies exclusively in the need to maintain a grip on key political constituencies.

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CATEGORIES: Eurozone crisis

COMMENTS (7 to date)
Shane L writes:

Interesting and insightful post. I tend to agree about your idea of political symbolism or gesturing. Responding to pressure from lobby groups the government probably feels it has to "do something" about various social concerns, so it acts in the expectation of praise and further support, regardless of whether it believes in the act or not. (Or they may sincerely believe in the policy, as you point out too.)

If SDP do become junior partners in a coalition with the CDU then I will be interested to see if the SPD's popularity soon nose-dives. I mentioned in the comments on another post that junior partners in coalitions in several countries have quickly lost popularity:

My guess was that their supporters tend to have strong ideological principles (which is why they are minority parties to start with) and they become appalled at the compromises the party has to make while in coalition with a larger, less ideological party. So SPD could be wrecked for a while after a coalition with CDU. We'll see.

Philo writes:

" . . . political groups invest in and cultivate 'symbols' . . . . ". Political groups? EVERYONE does this. Man does not live by practicalities alone. Symbolism rules!

Brian writes:

"But it could also be taken as a signal of an even more troublesome phenomenon: that is, the idea that political groups invest in and cultivate "symbols" (for example, a federal minimum wage) irrespective of their unintended consequences, even when these latter are relatively uncontroversial."

Truer words have never been spoken. In all likelihood the single-most important cause of dysfunction in government is the mistake of confusing policy with values. That is, political groups invest their self-identity in particular policy choices irrespective of how effective they are at advancing the groups' valued outcomes. So a party might value wealth equality and reducing the gap between rich and poor, but identify with the policy prescription of a high minimum wage. The group will then argue for the policy no matter what, even if it does nothing to close the rich-poor gap.

This is really the best explanation for ObamaCare. Despite the claimed value of affordable health care for all, the real motivation was the ideological identification with a specific policy approach, namely having the Federal government control the market. When Nancy Pelosi said we had to wait to see what's in it, what she really meant is that it doesn't MATTER what's in it. Good or bad, the legislation served its purpose of making certain people feel good about advancing their policy identity.

We see this repeated everywhere by both sides.

Keystone Pipeline--symbolism (protect environment)
Outlaw abortion--symbolism (protect human life)
Head Start--symbolism (help poor children)
Cut taxes--symbolism (let free market work)

Ultimately, each of the valued outcomes could be better served by other policy choices, but the advocates don't care because they already identify with the proposed policy.

Gorgasal writes:

@Shane L:

Good point. Merkel is already being compared to the Borg in Germany.

  • She led a coalition with the SPD in 2005-2009, resulting in the SPD going from 34.2% of the vote in 2005 to 23.0% in 2009.
  • She then formed a coalition with the FDP in 2009-2013, which led to the FDP going from 14.6% of the vote in 2009 to 4.8% in 2013.

These two data points already show that entering a coalition with Merkel will cost you 10.5 percentage points at the next election. In 2013, the SPD got 25.7% of the vote, so if they do agree to a coalition, I confidently expect them to get 15.2% at the next elections.

Incidentally, this also shows why the Greens couldn't agree to a coalition with Merkel. They only had 8.4% of the vote in 2013, so after a coalition, they would end up at -2.1% at the next election, which I believe is not allowed by the German Grundgesetz.


Max writes:

Really 7 million Germans earn less than 11 dollar per hour. How could anybody believe the us is the richest society?
I also believe the number to be false. If it's just 7 million I wonder who those are and why we need a law to amend the situation. Also would such a law also include interns and apprentices?
What about 1 Euro Jobs? So only 8 percent...

ThomasH writes:

I wonder about the importance that is given to minimum wage laws on this blog. Is it really the biggest distortion around? Or is it mainly symbolic for Libertarians? "Political symbols are extremely resilient, and after all, their purpose lies exclusively in the need to maintain a grip on key political constituencies."

Cyberike writes:

The statement by Ludwig von Mises is false because it does not take into account the barriers to entry the entrepreneurs face, which could be technological, regulatory, or economies of scale.

Mom and pops cannot compete with Walmart, period.

The entire concept of markets setting wages has been refuted again and again by history. Slave wages and miserable working conditions have been the norm, America since the 1950's notwithstanding.

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