are we falling into the same trap? An economic change of course is necessary

High inflation, slower economic growth and a changing international energy policy. It seems as if the 1970s are back with the oil crisis. As then, a misdiagnosis of the problem threatens to lead to counterproductive economic policies that will pay the bill for many years to come. In the autumn, a change of course will be necessary for the governments.

Although comparisons are always flawed, the similarities are too great not to draw lessons from the past. Herman Van Rompuy described this period as the ‘malgoverno’. The period from the mid-1970s to the early 1980s, when politics became entangled with itself and sought refuge in an economic policy of increased government spending. The sad high point is 1981, with an inflation rate of 8 percent and a budget deficit of no less than 16 percent of GDP. Budget Minister? Guy Mathot of the PS, with the well-known one-liner ‘that shortages come naturally and therefore go away on their own’.

The great similarity between this period and today is that we are not so much dealing with a demand shock as with a supply shock. Supply and demand are the two sides of the same economic coin. In every economic crisis, policy must therefore ask itself whether it is related to a demand or a supply shock. For both ailments require a completely different remedy.

banking crisis

The typical example of a demand shock is the financial and economic crisis of 2008-2009: a decline in demand for services and goods due to a loss of confidence, in this case the collapse of the banking sector, causing consumers and businesses to postpone spending and investments. . In such a demand shock, it may be wise to boost government demand through increased government spending, as suggested by British economist John Maynard Keynes.

At higher commodity prices, such as today or in the 1970s, it is a different story. As a result of Russian military aggression, gas and oil have become scarcer. And therefore more expensive. Which makes it more expensive for our industry or food sector to produce and provide services. Boosting purchasing power does not solve that problem. If a baker has only eight loaves of bread for ten people, it is of no use to give those ten more money. They will simply bid higher for the same eight loaves of bread. And so the price of bread will continue to rise. Will there be more inflation? The same applies to our energy market today.

Applying Keynesian policies on top of automatic wage indexation, for example by granting a fuel oil check, will only push prices up. Without addressing the underlying problem, our dependence on increasingly scarce fossil fuels. The result is what the American economist Milton Friedman described as stagflation: high inflation combined with low economic growth. The government finances are part of the bill. They derail, without helping the economy.

New reality

In the event of a supply shock, you have to tap into a different vessel. Addressing the root causes. Conduct a structural policy. Adjusting, reforming and preparing the economy for the new reality. This will give you a stronger starting position for the future economically. You can ensure that the baker can bake more bread. Or encourage consumers to eat oatmeal. In the case of higher commodity prices, the lesson is clear: reform your economy and society so that you become less dependent on commodities such as gas or oil.

How does that translate to today? Over the past period, more than 4 billion euros in generic purchasing power measures have been taken in Belgium. Extra measures are certainly justifiable for groups that are disproportionately hit. But general tax cuts or checks for everyone on top of the index are not only financially costly, but even counterproductive. They push prices up further, reducing our economic competitiveness and removing the incentive to reduce our dependence on foreign raw materials. It is as if one wants to put out the fire with extra wind.

At a time when we have the eurozone’s largest structural budget deficit, our governments must therefore change course in the autumn. Pleas for additional generic purchasing power measures, as advocated by Paul Magnette of the same PS, are therefore no longer under discussion. On the contrary, in the autumn it is time to once again outline a credible budgetary trajectory. The PS should finally learn that you can only spend a euro once. There are limits to what a government can do.

Instead of counterproductive purchasing power stimulation, governments should work on structural investment and reform policies. Whether it concerns the renovation of our homes, our approach to the water and drought problem or heat pumps: we are lagging behind in all these areas and tens of billions will be needed in the coming decades. Investments in these domains are necessary in any case and can even reduce our gas and oil dependence in the relatively short term. Accelerate it, raise investment budgets for this and use this crisis as leverage to be stronger in the future. This will benefit our economy, our public finances and the purchasing power of households. To put it in Friedman’s words instead of Keynes: never waste a good crisis!

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