Tag: Inflation

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Adaptive Expectations

In economics it is important to understand the concept of adaptive expectations. We all form expectations about prices and inflation, but there is more than just simple expectations. These expectations guide our behaviors in many domains. If we expect a drastic price change for goods and/or services we shall most likely modify our behavior in response. We might want to advance a purchase to take advantage of currently lower prices in the expectation of higher costs later on. Most people would follow the price changes on a regular basis and adapt their expectations according to the updated information. It is an important process as there are millions of people who do this and this process drives price levels in many countries. In Europe we would like to see not only inflation, but also expectations about inflation to be around the target level of 2% per year. After the high price rises of energy and food (Putin’s war) as well as the disrupted supply chains (Covid-19 crisis) we were unsure, whether we would have to adapt our expectations for the coming years. The credit crunch in the last few years forced people to adapt spending plans and expenditures. We seem to have overcome these major crises due to rapid adaptive expectations. The crucial mechanism to achieve this is a timely and open communication of changes. Media have a role to play to not only spread the information, but to explain underlying reasons. This contributes to a widespread understanding of basic economic principles that helps countries to navigate stormy weather. It is like players of chess who adapt their strategy after the other player has acted or not according to their expectations. It’s simple, isn‘t it?

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May 1st

More people take to the streets on the 1st of May in Germany. The costs-of-living crisis with high inflation has increased the claims for pay rises for workers and adjusted wages for employees. We all have observed “greedflation”, i.e. excessive company profits in several sectors. Additionally, “shrinkflation” has affected consumers in their daily shopping experience. Political efforts to curb inflation have taken a long time to come about and most initiatives have ended already (Energy sector). This spurred a new drive for trade unions to come out in huge numbers to protest and claim adequate wage increases to cover the increased costs of living. In Germany the DGB informed on the annual 1st of May demonstrations across the country about a strong new entry movement of members of 400.000 persons. It is higher than the loss of members of the large baby boomer cohorts who retire.
Through a broad and engaged membership the pressure on higher wage settlements will persist. Companies have used the crises to generate extra profits. It is only fair that those employees who largely contribute to the success of a company will claim their share as well.
For society as a whole it is important to consider that the discrepancy between managerial pay and shop floor wages do not increase further. The social fabric of societies is in danger if perceived injustices grow. More radical forces can all to easily exploit this causing a severe danger for democracies. Meeting people on the 1st of May and joining forces across sectors and trades ensures that a society continues to build and rely on solidarity. High inflation times are a great reminder of the economic basics of societies in history as well as today.

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Greedflation

The teaching of economics and socioeconomic policies has to deal with the topics around inflation and economic inequality for centuries. Greedflation has become a newly coined term for the rise of inflation due to greedy firms who use a window of opportunity to achieve extra profit margins or windfall profits. At a time of perceived price rises in many sectors, sectors that have no cost increases might still try to push prices higher simply because almost everybody else does so. Higher profits then show up in the reporting season of enterprises quoted at the stock exchange and the increase in inequality between wage earners and shareholders will rise. Greedflation is a summary term for it. The ECB European Central Bank has mentioned this and Reuters has reported on it as well end of June 2023. Since then a wait and see strategy has been adopted. Now in February 2024 we witness the wider spread of extraordinary profits of big firms not only in the fossil energy sector but also bog banks. The economies and societies suffer huge losses and a massive redistribution of capital. Subsidies introduced to lower the shock of the coronavirus crisis and the Russian aggression are unpopular to be scaled back. Employees and their trade unions have a hard time negotiating adequate wage increases whereas most companies use the momentum of seemingly general price rises to push profit margins. The translation of this mechanism to the political economy risks to jeopardize the support for capitalism and market forces in general. Another wave of increasing inequality endangers the survival of democratic societies. Countries with only a short experience of the functioning of market economies are at a particular risk. Germany’s decline into dictatorship in the 1930s after the severe economic crisis should be remembered as a major threat. Greedflation is a very serious and very real threat which we have to address with economic and social policies rather than waiting until the European elections have passed. Time to act, the thinking has been done. Evidence accumulates to make the political case.

Adolf von Menzel, The Petition, Alte Nationalgalerie Berlin
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Political theory and inflation

A political theory in the area political economy is prone to be labelled as classical, neo-classical, Keynesian, Neo- or Post-Keynesian or heterodox economics. This is a university level course in the history of economic ideas, if you like this. Let’s try something creative here. We have unprecedented levels of inflation currently in Europe and many other parts of the world. Reasons for this are higher prices for energy, transportation and food. Anything else you need for life? You must be an artist or a priest, a bit off the normal, it seems to many economists. Add to this that, we want to foster strategic autonomy in Europe rather than anything from China that is cheaper and more polluting. In 2023 we have inflation stay with us for some years. Central banks give out warnings in this direction now as well, having negated the problem for far too long (their own statistics ECB on long-term forecasts of inflation).
Besides the ample economic advice (IMF), depending on which theory of money and the economy you adhere to, political theory allows a refreshing perspective on these economic facts and trajectories. (1) From an international strategic perspective, countries that have to renegotiate a lot of their debt or take new credits to finance imported food, energy or transport will run into insolvency rather quickly. Self-sufficiency becomes an economic asset not only a geo-strategic one. Turn around globalisation is a side-effect.
(2) Countries eager to build new public infrastructure, irrespective of concerns for bio-diversity, might reschedule or abandon huge projects, thereby reducing their CO2 footprint. This reduces the official counting of GDP, but has beneficial effects to save the planet in the medium term.
(3) Individuals and households will have to reconsider their consumption patterns: more expenditure for food, less for energy and/or transport. Behavioural changes might be induced by inflation. Less of some form of consumption, guided by inflation, will induce reductions in CO2 most likely as well.
So far this is only applied economic theory as in any textbook. A more challenging political economy question is to ask: can we come to like inflation? Can we change our preference set (ECB growth dogma) for economic variables? Southern countries in Europe seem to like inflation more than the North. Does this depend on historical experiences or is it cultural or personality trait? There is again a huge money transfer due to inflation within the Eurozone. The less indebted countries pay with loss of their purchasing power of their savings and indirectly pay for the highly indebted countries mainly in the South. European and international solidarity will be put to a tough test.
As governments fear of being voted out of power they tend to soften the price signals from markets. Again, it is cultural more than economic to what extent people are willing to accept state interference in economic affairs even of households need for food. From an ecological point of view inflation could be our friend due to the potential to induce behavioural changes. However, more expensive bio-products seem to get crowded out due to further price rises and many even middle-income households seem to return to cheaper non-bio food in many countries. The distributive effects of inflation are a major issue here. Same rationale seems to apply to transport. If you can no longer afford CO2 saving transport by train, since it has become overly expensive more people are likely to take a heavily polluting low-cost flight to your holiday location.
Hence, from a political economy perspective liking inflation might well turn out to be a rich, white man’s perspective on the economy as the global South is likely to suffer most having no resources left to invest in energy and CO2 -saving in general. Price signals may induce behavioural changes for the better of us all. However, the story it is not only about allocation of resources, but also about distribution. There we should embrace a renewal of trade union strength to correct imbalances in the distribution of earnings as the basis for consumption and investment of households as well. (Image: Tapta, at Wiels Gallery in Brussels, 2023-6, mostly untitled work, one with title: on the edge of time).

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Recht auf Wohnen

Das Recht auf Wohnen ist ein Grundrecht.
Grundrechte sind nicht verhandelbar, so wie die unveräußerlichen Menschenrechte. Selbst unsere Wohlstandsgesellschaften tun sich recht schwer damit, ein einfaches Wohnrecht für alle zu verwirklichen. Ganz besonders in Städten, die eine hohe und stetig steigende Nachfrage nach Wohnungen verzeichnen. Da will viel geplant und gebaut werden. Dennoch läuft das Angebot an Wohnungen der Nachfrage ständig hinterher.
Nicht überall (nur ein kleines Dorf in Gallien). Weite Landstriche leiden am beständigen Fortzug von Jungen, die eine noch stärker alternde Einwohnerschaft auf dem Lande zurücklassen.
Das atemberaubende Großstadtleben hat viele Vorzüge. Bildung, Wissenschaft, Kultur, internationale Unternehmen und höhere Toleranzschwellen. Nach solchen Erfahrungen fällt die beengte Dorfgemeinschaft schwer, selbst wenn viel Platz, Luft,Wasser und Wohnraum preiswert zur Verfügung stehen. Gute Verkehrsanbindung des ländlichen Raumes an die Innenstädte mit ihrem vielfältigen Angebot ist ein zentraler Lösungsbaustein. Das Häusle in der Vorstadt, abends in die Oper, morgens im See nackt baden und mittags nach Smoothie im Himalaya Restaurant vegetarisch speisen. Die neue Bohème gleich in vielen Aspekten den Eliten der 20er Jahre. Schön und gut.
Die Kehrseite der Medaille (Avers – Revers) waren die großen Wohnungsbaugesellschaften der 10er und 20er Jahre, beispielsweise in Berlin, die für wachsenden und erschwinglichen Wohnraum sorgten. Die großen Firmen der Epoche haben bei den neuen Siedlungen kräftig mitgeholfen. Es gab Zeiten, da haben Arbeitervereine und Gewerkschaften gemeinsam in die Hände gespuckt und sich staatlich unterstützt, preiswerten Wohnraum selbst geschaffen. Eine Gefahr von Korruption besteht, kann aber kontrolliert werden.
Die Herausforderung durch die hohe Inflation steht im Untertitel des Zeitungsartikels der Berliner Zeitung: „Die sinkende Reallohnentwicklung“ führt zu zusätzlichen Ängsten und realer Bedrohung für die vielen Geringverdiener, Arbeitslosen und Integrationsbedürftigen. Das braucht rasche Antworten, nicht nur von den Parteien, die „sozial“ in ihrem parteipolitischen Namen führen. Obwohl, schnell geht im Bauwesen selten etwas. Großspurige Ankündigungen werden nur selten eingehalten, besonders bei Wohnungsbauprojekten. Das Recht auf Wohnen bleibt ein Beispiel für die Notwendigkeit und für die Herausforderungen einer sozialen Marktwirtschaft.