Economic Policy Public Finances and Financial Economics ZEIT ONLINE op-ed column

No envy, please!

This text was also published in German in  ZEIT ONLINE on February 3,  as part of the op-ed column “Fratzschers Verteilungsfragen“.

“Time for fairness“ is the motto of the new candidate for Chancellor of the German Social Democrats, Martin Schulz, in his campaign against Angela Merkel. The slogan is bound to strike a chord in a country where 70 percent of the people feel that inequality is too high. But the issue of fairness should not be the one at stake. Unlike inequality that that can be measured, fairness – at least concerning distributional issues – is purely subjective. A public debate about fairness is bound to aggravate rather than alleviate the polarization within German society.

Germany does not need a dispute over fairness, to which there can never be a definite answer. Instead, it needs a debate about how our society can grow together and function properly. The social contract between the people in this society and the way this contract will be shaped in the future have to be at the core of the discussions.

Political parties fundamentally differ in their answers to the issue of inequality. The political left and the political right see inequality in income and wealth as a lack of fairness that must be solved through more state intervention, more taxes, and the reigning in of market forces. The centre of the political spectrum does not consider inequality as intrinsically unfair. These political proponents reject a bigger welfare state, want lower taxes and a smaller state.

Both sides are in the wrong. Whether people feel that they are being treated fairly or not is not the issue. Fairness is an entirely subjective notion, and making it the core of the argument would only exacerbate the feeling of injustice many have.

“Fairness” for some voter groups  

When political parties talk of “fairness”, they are concerned mostly with the interests of their own electorate and not securing prosperity for all in the long term. My fear is that the campaign for the September general election in Germany will become a contest about social distribution, in which each party tries to mobilize potential voters through electoral gifts – with promises bound to be disappointed.

In light of the topics that have already emerged, a further polarization of society in the upcoming election campaign is already foreseeable. The controversy over tax cuts or tax increases is one between the rich and the poor. In the discussion about pension increases and obligations, old and young people oppose each other. The issue of how the tax system should treat families, and specifically those with children, creates a conflict between families and those with different ways of life. The debate about the integration of migrants pits some natives against immigrants. And the dispute over wages and the taxation of companies polarizes workers and entrepreneurs.

For sure, these issues have to be debated. But these discussions lead to a profound and harmful division of society. Germany actually has no fundamental problem with the size of its welfare state nor with the equity of its tax system. Hardly any other country in the world can boast such a strong and effective welfare state. The tax burden is spread rather evenly among income groups, so that no group of the company can credibly complain about a systematic disadvantage.

Nevertheless the inequality of opportunities, income and wealth has now reached an extent that is economically and socially detrimental. It harms productivity, growth, health and innovation, and ultimately to the prosperity of all, not just those directly affected. Thus the debate in the electoral campaign should not be about fairness, but rather about how more equality of opportunity and increased economic and social participation can improve prosperity for everyone.

We Germans are proud of our Soziale Marktwirtschaft, our social market economy – and rightly so. For decades it has been at the core of our social contract, it was the cornerstone of the German economic miracle in the aftermath of World War II. The success of the social market economy is rooted in a strong welfare state, a high degree of individual freedom and responsibility and a functioning market economy. For years, the interaction of these three elements has guaranteed social cohesion and prosperity.

Germany has drifted away dramatically from this ideal. Equal opportunity exists for fewer and fewer people and ever more are falling behind. Social mobility is low: whoever is born today into a socially weak family finds it much more difficult than in the past, or than in many other Western countries, to obtain a good education and adequate training and to climb the social and economic ladder.

More and more people are losing their economic autonomy and have become dependent on welfare services. One of three households in East Germany now receives half or more of their income through the state. People worry about keeping up their way of life when they grow old, parents fear that their children won’t be better off than (or even as well off as) they themselves have been. Many women still find it difficult to get the same opportunities, pay and recognition in the labor market as men. Many migrants despair faced with the huge task of adapting and obtaining the qualifications necessary to enter the labor market.

Prosperity for everyone

This is the German reality, and it stands in stark contrast to the ideal of the social market economy. The issue at the core of the political debate in Germany should therefore be how to design a new social contract, which reconciles the “social” with the “market economy” not only for a few but for as many as possible – eine Inklusive Soziale Marktwirtschaft, an inclusive social market economy. It requires improving equal opportunities and social mobility in Germany – not by fighting over redistribution, as the political parties are currently doing.

The objective has to be to create more opportunities for a good education, to enable more people to integrate into the job market, to let them participate in technological change and globalization, to provide them with a better safety net so that they seize opportunities and take responsibility.

Such an inclusive social market economy creates prosperity for everyone, it serves not only a few, but society as a whole. Citizens who enjoy a good education, who can develop their talents, use their skills, integrate into the job market, and feel socially secure, can participate in social and economic life for the benefit of all. Entrepreneurs benefit from qualified workers as much as these workers benefit themselves. When more people take their fate in their own hands and fewer citizens depend on social benefits, the state can lower taxes and concentrate on providing for those who need it. All this improves the economic and social performance and brings back what made Germany so successful in the first decades after the World War II: a high and shared prosperity.

For such an inclusive social market economy to work and succeed, at least five policy areas must be addressed. Germany needs an education initiative that improves the quality of early childhood education, but also reforms the school system and opens it up for more children; a family policy that creates better opportunities for women, single parents and socially vulnerable people; an inclusive labor policy focused on the needs of those who have been neglected by earlier reforms (the long-term jobless, people with health issues, migrants); an overhaul of the tax system that abolishes privileges and thus creates more competition; and a reform of the social security systems in order to provide better targeted support to those who need it most.

“Time for fairness” is a beautiful motto for an election campaign. But Germany does not need a beautiful motto, electoral handouts or an argument over the best definition of fairness. It needs a new social contract, an inclusive social market economy which is based on the strengths of the past seven decades of individual freedoms and responsibility, a strong social welfare state and a functioning market economy – and one that once again becomes more inclusive.


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