Irene van Staveren (1963) is professor of Pluralistic Development Economics at Erasmus University’s Institute of Social Studies (ISS) in The Hague. Her areas of expertise cover feminist, social, institutional and post-Keynesian economics.

Why do you feel the measures are misguided?

“The problem is that most economists attribute inflation to a surplus of money. That’s usually due to the fact that money has become too cheap. However, that’s not what’s happening now. As Keynes explained, the real cause can be traced back to cost increases. I think that’s important to highlight. It’s a cause of inflation that has actually largely disappeared from the economics textbooks. That’s why raising interest rates actually won’t be all that effective in this case. It makes it more expensive to borrow money, but it doesn’t do anything to address higher cost prices.”

Isn’t the war in Ukraine the real cause here?

“It’s definitely an important cause, but it’s only a temporary one. There’s also a more permanent cause, in the form of our ageing population. That’s causing labour market shortages and won’t be fixed overnight. It’s just something we’ll have to learn to live with. The pandemic heightened that effect. People started leaving the industries that are currently facing severe shortages – such as the hospitality industry – during the pandemic.”

So if interest rate hikes are not the solution, what is?

 ‘You’ll need to respond to price increases. That could mean introducing price caps in the energy market or more measures to rein in house prices. We can achieve that by phasing out the mortgage interest tax allowance. In Germany, for example, you can borrow up to 80 per cent of the property value and have to contribute the rest of the money yourself. That also helps to reduce prices.”

Having to put in your own money obviously does not make things any easier for first-time home buyers. 

“That’s why you shouldn’t introduce the measure all at once. We’ve already reduced the maximum lending rate in the Netherlands from 110 to 100 per cent in recent years. I think we should keep moving towards the German standard. There are also other measures that could help, like anti-speculation clauses under which you have to live in the houses you buy rather than using them as investments. In other words, we need to introduce regulations for the housing and rental markets as well as for the energy market.”

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Image credit: Bas van der Schot

Shouldn’t we just raise wages?

“As we’re constantly reminded, that carries the risk of a wage-price spiral, which will only drive inflation. The recent collective labour agreement of the Dutch Railways (NS) at first glance seems to be a good example of that spiral. A 9.25 per cent pay rise. Still, I’m not that worried. People tend to argue against wage increases using the inflation-correction argument, but they actually represent an overdue correction. Wages have been lagging behind profits for many years.

“The NS CLA was actually quite clever in that employees got two 1000 Euro payments and minimum wages went up. Those two elements ensured that the lowest-paid NS staff enjoyed a comparatively greater advantage. After all, if you just negotiate a percentage-based pay rise, senior managers are likely to put the money in savings or invest it. That doesn’t stimulate the economy. At best, those managers will go on an extra skiing trip. The poorest households, on the other hand, need the money immediately. That means you can be sure it will be spent quickly, which helps the local supermarket, tailor or restaurant. One-off payments also don’t lead to any structural wage increases, so you avoid a spiral.”

Households are mainly struggling with sky-high energy bills. So what should the government do?

“There are currently plans to decouple electricity and gas prices. They’re currently linked, which doesn’t make much sense: green suppliers don’t use gas to generate electricity. They use wind and solar power, which is much cheaper. If we unlink the two, green energy will automatically become cheaper.”

The original idea was that energy suppliers would make extra profits off green energy, incentivising them to invest more in green technology. So wouldn’t decoupling the two remove that incentive?

“It would, but all the benefits are currently going to the suppliers. Meanwhile, households are struggling to pay high energy prices, so let’s make sure they enjoy the benefits. You’ll still get suppliers to change their behaviour, but the incentive will come from the demand side. Consumers will be able to choose green energy suppliers who can offer much cheaper electricity. I would also support a price cap on gas and electricity, but the government should act sooner rather than later.”

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If you cap the energy price, doesn’t that remove households’ incentive to be fuel efficient?

“It’s true those kinds of measures won’t help reduce gas consumption, especially if gas becomes much cheaper. Still, I don’t see that happening any time soon. The price cap will be set at the level of January 2022, which was already quite high. It’s obviously supposed to be a temporary measure. The EU is asking people to consume 10% less energy, and they’re definitely going to do that. This spring, it became clear that we had already conserved an average of 15 to 20 per cent. Most of that was attributable to businesses, but households also cut their energy consumption.”

Meanwhile, the government is also trying to shore up spending power. We can expect at least 14 billion in aid next year. How do you feel about the fact that most of those measures will be introduced next year?

‘It’s pretty dire that the government won’t be taking measures to compensate for lost spending power until next year.’ Apparently, our public services – such as the Tax and Customs Administration – have been hollowed out to the point where they can’t get it done this year. That’s definitely not good policy. People are already in trouble now, they’re getting into debt. There’s no way they’ll have recovered by next year. We can still take measures this year if we take a pragmatic approach. For example, you could achieve a lot through the healthcare allowance, which people with low incomes already receive now. Why not just multiply that amount.”

Are you confident the government will strike the right balance between supporting large companies and low-income households?

“I’m mainly worried about the big difference between the support for large companies and smaller businesses. For example, a large fertiliser plant is currently getting subsidies to stay afloat, even though we have a fertiliser surplus. That seems a bit strange to me. Smaller businesses play an important role in society. They haven’t really made themselves heard so far, but they also need energy. And what happens if contractors have to stop construction because they can’t afford to pay their energy bills? I thought the government was eager to build lots of houses.”

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