Guest article – Behavioral economists: With their relief package, the traffic light fell into several traps

Guest article: Behavioral economists: With their relief package, the traffic light fell into several traps

Due to the high inflation, the federal government has decided on extensive measures – for companies and private households. It is understandable that with such a quick reaction in a difficult situation not everything is going optimally, but it is worth taking a closer look at the measures, because it also shows how psychological factors, especially in Germany, often lead to poorly targeted policies.

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First Corona and now the war in Ukraine – the German economy and many citizens are groaning under the financial consequences of this double whammy. The prices for natural gas, heating oil and petrol are exploding, but so are wheat and other foodstuffs. As a result, inflation rises to unprecedented levels.

The federal government has decided on extensive measures – for companies and for private households. It is understandable that with such a quick reaction in a difficult situation not everything is going optimally, but it is worth taking a closer look at the measures, because it also shows how psychological factors, especially in Germany, often lead to poorly targeted policies.

“Too big to fail” plays a role in companies

Let’s first look at the relief package for companies. From an economic point of view, it can definitely make sense to help companies in emergency situations if it was not possible to protect against a crisis, for example because nobody could have expected one, or if companies essential to the economy could otherwise get into trouble (“too big to fail”).

About the experts

dr Mei Wang is Professor of Behavioral Economics at WHU – Otto Beisheim School of Management, one of the leading business schools in Germany.

dr Marc Oliver Rieger is a German mathematician and finance professor. He has been Professor of Banking and Finance at the University of Trier since 2010.

The “too big too fail” argument is being put forward by the government on KfW’s short-term credit lines for energy companies. You can understand this from an economic point of view. In the further measures, however, the argument of the unforeseeable crisis plays a role – but does it really stand the test?

Companies take advantage of state aid

The rapid increase in some commodity prices was by no means so unique that companies could not have been expected to hedge against such price fluctuations. In 2007/2008, for example, there were similar price jumps. If the state helps out in such situations, companies are encouraged to do even less risk management in the future and prefer to use the reserves saved in this way elsewhere, eg for higher profits. You don’t have to be a socialist to think that’s bad.

In addition, the corresponding relief measures are only intended for companies from energy- and trade-intensive sectors, and some of the measures are concentrated on very specific sectors, in particular chemicals, glass and steel. In concrete terms, this means that the state decides which areas are particularly affected. It is obvious that this will not always be the case.

However, it also means that some sectors protected by the state have less pressure to adapt than others: it will be less worthwhile for a company from these sectors to find ways to save gas, for example, than for companies from other sectors. This can mean that savings are not made where it is easiest, but where the state helps least.

One-off payments not effective – but we are partly to blame for that

More problematic than the support measures for companies, however, are the measures to relieve the burden on citizens: this is where the proverbial watering can comes into play. Employed people and children receive one-off fixed amounts to cope with the increase in heating costs. It is therefore clear that only a small part of it actually arrives where it makes sense – namely with those who would otherwise have to freeze.

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Let’s be honest: The vast majority of citizens will feel the pain of the increase in costs, but will not suffer as a result. A gift from the state of 300 euros (+100 euros per child) is gladly accepted, but it does not serve the purpose of preventing real hardship.

Politicians are of course not as stupid as people like to make them out to be. So why are they distributing the money in such a poorly targeted manner? This is where psychology comes in: Suppose the government only pays a flat rate heating premium to those in need. But who is “needy” cannot be defined so precisely. There’s always someone who doesn’t get the deal but needs it a little more than someone else who gets it.

On the basis of such individual examples, one could then describe the measure as “unfair”. In our society, where justice is mostly understood as individual justice and equality, this would be deadly for politicians. We, as citizens, are also partly to blame if politicians avoid this problem and prefer to distribute funds with the watering can.

Psychological traps of help

Another psychological trap awaits when the energy tax is reduced: a whopping 29.55 cents/liter tax reduction will largely offset the previous price increase for petrol of around 30 cents/liter caused by the Ukraine war. This largely eliminates the current incentive to save fuel. This is problematic, because of course it would be better for all of us if consumption were to go down.

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However, it will be even more difficult to withdraw from this measure: an increase in the energy tax, which will then lead to a jump in the price of petrol, will become extremely unpopular. We know from psychology that people perceive a loss much more strongly than a gain. It will therefore not be easy for politicians to end this measure again.

Overcrowded public transport: 9-euro ticket could be in vain

A discount on public transport as an alternative to the car seems to offer a way out, and isn’t the 9 euro ticket coming anyway? Unfortunately, the 9 euro ticket is also a typical example of a well-sounding government measure whose effects are rather questionable: Anyone who uses public transport anyway simply saves money, will travel more by train – and probably also more bus instead of cycling. If you don’t use public transport because there are no adequate connections for you, you won’t be able to change that even if the bus and train are suddenly almost free.

It will only lead to fewer car journeys for those who have previously avoided public transport for cost reasons. However, since the offer is not expanded at the same time, in the worst case the first experiences with buses and trains are negative: if they are completely overcrowded thanks to the low prices.

Finally, at the end of the three months, the price rises to the previous level, which is more clearly perceived as a loss. The bottom line is that a more moderate but permanent reduction in costs and more money for expanding the range of public transport would certainly be the better alternative. But it would be much more boring and less popular.

Conclusion: Not everything that sounds good at first glance is also well thought out

In short: Not everything that sounds good at first glance is also well thought out. A lot of the recent relief packages follow the watering can principle: money is spent, but does not necessarily go where it is actually needed.

Psychology often plays a decisive role here, because ultimately we voters are only human and do not evaluate every measure rationally. Politicians anticipate this. Only high-quality media can help to overcome this situation by pointing out the problematic aspects of attractive-sounding government measures.

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