Wednesday, March 16, 2016

Small numbers do a number on economists: German basic means tested HARTZ IV is "good income" in other EU countries

Just leave it at the headline, grumbled the famously cynical K-Landnews TheEditor. It says all you need to say about people who have no idea of suffering from poverty and exclusion.

We did not want to do that.

It would be unfair to macro economists to dismiss them in this manner. Their work is like every other job, and they do try to put numbers together and make sense of the world in this manner.

Have you ever actually seen the complex formulas one my CEOs proudly proclaimed to have managed to write on the palm of his hands before his finals?

So, give economists some credit.

But not too much.

Because, as they are the first to tell you, too much easy credit takes away some of the hamster wheel motivation and might make you slack off, thus dragging the whole economy down with you.

We do want to thank the economists of German KfW for honest work in their new study that shows that a huge proportion of income growth in Germany between 2000 and 2014 went to the upper incomes.

They also point out that 40% of German households saw their incomes rise less than the rate of inflation during that period, reducing their purchasing power, making them effectively poorer.

The inequality coefficient Gini was at an all time low for Germany in 2000, at 0.25, and has increased to 0.31, according to the study. The study authors point out that government transfers have softened the rise and that it would be much higher without redistribution of wealth.

But then they manage to spoil a good impression by adding this:
German basic means tested HARTZ IV is considered a good income in many other EU countries. The median income in Romania, for example, is less than half that.

Without context, these two sentences are next to meaningless, but they do seem to tell readers, hey, you are doing pretty good compared to others, even if you go hungry every now and then.

How high is the cost of living in Romania? According to this website, the cost of living in Bucharest, Romania, is about half of that of Munich or Frankfurt, Germany.

HARTZ IV doesn't look at great anymore, right?

Even so, the fact of the matter is that you cannot receive HARTZ IV while living in Romania. You have to be present in Germany, willing to work (if able to), and willing to spend time and money on job hunting.

In the words of TheEditor: A good part of the benefits should really be considered work income, for job hunting.

But that is only the superficial easy dig, there is another issue with the whole "social transfers" business.

The study, or maybe just the article, uses "social benefits" (Sozialleistungen) to encompass both government benefits and employer benefits, and states that the proportion of those has remained unchanged at 29% of GDP between 2000 and 2014.

The study's author then goes and says that "monetary social benefits like unemployment benefits, pensions, and child allowance" are the primary means to reduce income inequality.
Which is true but fails to account for the fact that unemployment benefits as well as pensions are insurance type benefits, paid for - at least to a substantial degree - from premiums.

The child allowance - no premiums here - comes in two distinct forms, a monthly cash payout and a tax exemption. The tax exemption becomes advantageous if the family income is over 60 000 Euros a year and effectively means wealthy earners get more for their children than average and low income families.

Of course, this does not negate the fact that even the low monthly allowance increases income, but it does point at the heart of Germany's "social benefits" debate.

The "social benefits" debate in Germany is bound to remain skewed because conservatives tend to focus on "free" social services/benefits when they talk about immigrants coming to Germany to supposedly enjoy the lavish benefits, i.e. those funded out of government tax revenue, meaning the basic means tested HARTZ IV, disability as well as benefits for pensioners having pensions less than the HARTZ IV threshold.

These benefits are meant to stave off poverty, and they ran at less than 30 billion Euros  in 2014 (28.5 billion if you must know).

German GDP in 2014 was 2 974.8 billion Euros. If we use the "social benefits" definition of the study (which appears to be "all transfers") of 29% of GDP, we get a - rounded - figure of about 900 billion.


That's why you should never mention HARTZ IV in terms of social benefits in relation to GDP.

Given that HARTZ IV comes out of tax revenues, we should look at those. The 2014 revenues (excluding local government tax revenues) stood at about 600 billion Euros. While no longer peanuts, the 30 billion for HARTZ IV are still only 1/20th of tax revenues.

Compare these expenditures to other tax revenue spending, for example, 23 billion for child daycare (in 2013, the latest free stats we found). In states with free day care, these funds go to different income families without regard to needs, in others, lower income families receive subsidies.

My favorite comparison, though, is the revenue generated by the "broadcast fee" (radio and TV) for German "public' broadcasters, which stands at about 8 billion Euros per year.

Keeping over 4 million residents out of abject poverty costs just three times the money spent on Germany's most expensive sedative, broadcasting. 

[Update] Typos.

[Update 3/19/2016] The chief of the German Institute for Economic Research (DIW) was interviewed by zeitonline for his new book, and had a few very interesting things to say about German society.

The blogster likes what he had to say for one specific reason: He is able to accept what data tell him and to be surprised by data.

Here is a supporting snippet from the interview:

Zeit: What surprised you most during the research for your book?

Fratzscher: The very marked lack of equality of opportunity.

Zeit: Why?

Fratzscher: I had always believed we lived in a socially responsible free market economy. If you exert yourself, you will be rewarded. But, if you look closely at the data, that is an illusion. We have been living in a class society for some time, maybe even a caste society.

The blogster has used the argument "caste society" in several posts for two specific phenomena: the fact that the often vaunted and envied vocational training system had very much the effect of keeping people in their place in society, and for the small group of civil servants who enjoy the status of "Beamte".

[Update 3/21/2016] Right on the heels of all of this, the German federal reserve bank Bundesbank comes out with its 2015 report on the wealth of the country. Here are the numbers:

Top 10% own 59.8% of net wealth
Folks between 50% and 90%: collectively own 37.7%
Bottom 50% own 2.5%

Not included in this are the super rich worth more than 100 million Euros. Their wealth is estimated because they don't like participating in surveys.

Also not included are future pensions.

Neither the "conservative" nor the "liberal" media outlets dispute the figures themselves but conservatives like FAZ try to lessen the impact by pointing out that excluding future retirement income makes the figures for the bottom 50% look worse than they really are.

That's an interesting distortion:
a) The report measures currently available wealth (not past wealth, not projected future wealth)."Future wealth" is not relevant, be it in the form or real estate, stocks, or pensions.
b) Once you hit retirement age, the pension becomes part of the surveyed data set.
c) Poor folks tend to die younger, so, if anything, you'd need to adjust downwards because many of the poor will lose 100% of payroll social security deductions as a result of early demise.

[Update 3/24/2016] German daily Frankfurter Allgemeine has been pushing a generic "equality is dangerous" type of argument pretty consistently after inequality has been highlighted in the past few weeks.
The really interesting line of argument in these articles is centered around the unverified claim that equality means everybody earns the same amount of money. This simple definition does not appear anywhere near the intro of these articles for reasons the blogster can only guess. Is it because providing that conceptual base at the outset would render these articles moot?
Not a single economist who criticizes real or perceived inequality makes that claim. No one who advocates a universal basic income (UBI) makes it either.

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