Redistribution Must Become More Focused and Growth-Friendly

Germany’s next federal government must take a more focused approach to resolving distribution problems in its redistribution policy, without risking growth targets. This is the proposal put forward by ifo President Clemens Fuest, Andreas Peichl, Director of the ifo Center for Macroeconomics and Surveys, and Florian Neumeier, Head of the ifo Research Group Taxation and Fiscal Policy, in an article for ifo Schnelldienst. Market interventions are often unsuitable for this purpose. “One example of a misguided redistribution policy is price regulation, such as rent caps or the minimum wage,” Peichl says.

Such measures are not suitable for addressing distribution problems and lead to losses in prosperity. “One example of this is the Berlin rent cap. This has severely tightened the supply of rental housing and reduced the opportunities for low-income earners to find affordable housing. Residents of large apartments, on the other hand, have benefited,” Neumeier says. This is exactly the opposite of what the law originally sought to achieve, Neumeier points out: “The rent cap prevents housing from being built and provided where it is needed.”

However, there are also distribution policies that exhibit little if any conflict with efficiency and growth objectives, the economists write. One example is education policy. In Germany, there is considerable scope to achieve greater inclusion, equal opportunities, and higher productivity through education policy reforms. Additional policy goals should include employment incentives in the low-wage sector and the promotion of home ownership.