Why we need an active state, (especially) right now

FEPS Vice-President
Karl-Renner-Institute Director

After a very long period of low inflation, the current cost-of-living crisis seems to have caught us just overnight. But has it really? Haven’t there been any early signs? How can we avoid having many people unable to heat their homes this winter, or even to pay their rent? And how is it possible to prevent a wave of deindustrialisation due to the skyrocketing energy prices?

The good news is: Social Democrats are indeed best suited to cope with a cost-of-living crisis. First, they are the first to notice that intervention is needed. In Austria, the leader of the Social Democratic Party (SPÖ), Pamela Rendi-Wagner held her first press conference demanding broad action against the rising inflation more than a year ago, on 1 October 2021. At this time, rents and energy costs already started to rise. People with lower income and tenants noticed it at first, and thus the SPÖ was alerted immediately. 

Second, Social Democrats have the best answers to tackle this crisis. It is clear, that market-oriented solutions are not at all what people need right now. As the current inflation results from supply shocks and not from an overheated economy, raising interest rates can, at best, help lowering import prices. And only if the United States would not press further in raising their interest rates (which they do). Compared to the US dollar, for months already the Euro is at a historic low, even though the European Central Bank (ECB) has raised key interest rates. This shows that the ECB’s ability to interfere is very limited, it might even harm the economy, raise unemployment, and burden borrowers with even higher costs. 

So, what are potential Social Democratic answers to the current situation? The crucial point is to find ways to actively lower the prices instead of just paying transfers to people and businesses which contribute nothing to tackling the problem substantially. Therefore, we need a fundamental understanding of how markets work, and under which circumstances they simply don’t. 

The best example of a market that is currently failing is the liberalised energy market and its infamous merit order. 75 per cent of the electricity consumed in Austria is covered by renewables. Nonetheless, the Austrian electricity price index rose by 340 per cent over the last year. This is not a matter of supply and demand, but mostly of the logic of the current pricing mechanism: as the electricity production with the highest marginal costs sets the price for all other suppliers, electricity made of water, wind or sun gets equally expensive as electricity produced with gas. The higher prices, paid by consumers, remain as profits for the energy suppliers. Therefore, the Austrian Social Democrats suggested an immediate direct market intervention on the EU level for a common procurement of gas, which should be given to gas power plants for a reduced price. Where should the money for such an intervention come from? From taxing the windfall profits! This would lead to a rapid decline in electricity prices, and would give the EU a necessary pause to reform the structure of the electricity market and expand renewables. 

Other fields that are touched by today’s high inflation demand legal regulation. Take rents: in Austria, landlords are legally permitted to raise rents according to inflation. This might be a sensible framework for moments when inflation is at 2 per cent. But when inflation comes close to double digits due to the rise of energy and food prices, higher rents are not justified (the burden of high energy costs still lies on the tenant). In addition, such increases drive inflation even further up very rapidly. Therefore, in March 2022, the SPÖ has suggested legally freezing rents immediately: one more measure to structurally keep costs low(er), instead of transfers to cover the skyrocketing costs. 
On wages: a few weeks ago, the annual cycle of wage negotiations in Austria started. The coverage of collective bargaining agreements is over 95 per cent. This means that almost all employees are affected by the outcome of the negotiations. After years of fairly quick settlements, where trade unions showed much understanding for the businesses’ struggles caused by the health crisis, and which, at the same time, delivered fair pay rises for the employees, this years’ conditions are much more difficult. The business representatives, together with their affiliated think tanks started to warn of a wage-price spiral months ago, despite the obvious fact that the current inflation cannot be linked to pay rises. People suffer from high costs. Like businesses, they have to pass them on, and the trade unions deserve every possible support to successfully settle the negotiations. The employers won’t have much choice but to agree on a fair wage rise. Even if it is overshadowed by the immediate crises, sooner or later they will have to deal with a declining labour supply and competition for workers. But this is another story.

Photo credits: Shutterstock/ Popova Veleriya

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