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Growth in the end?

Germany's corona-stricken economy is likely to contract by 5.5 percent this year, according to the Institute for the World Economy. This would put the gross domestic product at approximately the same levels as in 2015 or 2016. So what's so bad about that?

Corona models on coins
© nopparit

"Not a lot, at first sight; after all, we weren't exactly living in trees a few years ago," admits Dr Stefan Kooths. The head of the Forecasting Center at the Institute for the World Economy (IfW) can certainly understand how strange some people might find our society's dependence on growth.

Grow or decay seems to be the question here. But in theory, at least, perhaps not quite so black or white. "If the whole economy were to shrink evenly by a few percent, it would be less stark," said Stefan Kooths, who in reality believes the unevenness to be the problem. Whereas some industries collapsed dramatically, others survived the crisis with relative ease. Which is the very thing that could lead to setbacks extending far beyond the duration of the actual corona pandemic. "Travel agencies, event agencies or restaurants will simply cease to exist," the chief economic forecaster of the IfW said to describe the dilemma. The fact that things are going a little better on the other hand with regard to postal or online services doesn't really save the situation.

All in all, the Kiel institute finds that the country is in a crisis of massive proportions. The corona-related loss in economic output in 2020 and 2021 could eventually add up to significantly more than €300 billion. Moreover, €110 billion of purchasing power are likely to be withheld this year simply because people have not had or do not have the chance to spend their money because of lockdown. And that's not all. According to Dr Kooths, nearly half of the sums by which the gross domestic product is shrinking would have been taxes or other public charges, with the result that federal, state and municipal debt will soar and social security reserves melt away.

Stefan Kooths
© Geist

Stefan Kooths ist Leiter des Prognosezentrums am Institut für Weltwirtschaft.

But is it not possible that the economy in Germany and elsewhere could take an entirely different course? Stefan Kooths has his doubts. "It's a fact that man is a striving being. We rejoice in what we achieve, but that feeling doesn't last long." This may sound like kitchen sink psychology, but the science of economics knows it has history on its side. Whether long-distance travel, food from all over the world, cultural pleasures or consumer goods that – like the smartphone – were not available at all only a few years ago but are now regarded as a basic necessity, in Europe and many other regions the mass of humanity is now living like the upper classes. And there's more. Stefan Kooths sometimes does a little experiment and asks his students if they would swap their standard of living today with that of the Rockefellers 100 years ago.

"Most of them say no," reported the scientist, ascribing it to the fact that travelling back through time to fabulous wealth would fail to include many of today's everyday amenities. No Internet, no chance of crossing the Atlantic in just six hours, medical care at the level of 1900? Better to stay "poor".

Aside from the psychological factors, the economy as such also seems to have a kind of inherent more-and-more spiral. But it's not a more-and-more of the same, but a qualitative growth that manifests itself in new goods. “Growth creates growth" is how Dr Kooths puts it, citing a drug for dementia as an example. "If it had been invented 150 years ago, it would have been a flop. Today it would be a tremendous success." Increased economic performance, according to the story behind the story, has in the meantime brought tremendous progress in living conditions, in hygiene and also in medicine. This is the only way people can grow old enough to even have a problem with dementia that then requires a drug against it.

It also seems to be another reason why the prophecy once expressed by Karl Marx of the imminent fulfilment of all material needs still remains just that today. Nevertheless, the possibly more frequently occurring mega crises that were last triggered by a financial crash and just a decade later by corona lead to the question of how an economy can deal with all these shocks and still make sure that the entire system isn't about to collapse. "We don't have to reinvent the instruments for that," believes Stefan Kooths, making a plea for decentralised units. What he means by this is ideas and initiatives that germinate in the social basis and spontaneously spring up out of the ground to reveal solutions for the greater good in a small way. According to Dr Kooths, just as the federalist system of the German Republic coped very well with corona because the acting levels were able to learn from each other, economy and politics also generally work better when things are decentralised. "We should become pioneers in 'small is beautiful' – centralisation makes systems vulnerable to wrong decisions and false incentives."

Author: Martin Geist