Saturday, November 22, 2014

1.75 bn Euros vs. 7 bn, and Economic Make-Up Sex

Last week saw two economic headlines in Germany: the projected cost of Germany's new retirement scheme, and the cost of the Russia boycott for German firms.

The timing of the reports was very interesting because of their close proximity and of how the media framed the raw figures.

The new retirement scheme
The new scheme allows workers to retire at age 63 with full benefits if they can show 45 years of contributions to social security. In terms of the life lived by eligible workers, this means you start working at under 20 years of age and don't stop until 63.

New calculations project extra costs of the scheme of about 1.75 billion Euros combined for 2014 and 2015.

The extra cost to social security will either be covered by additional payroll contributions or from record tax revenues. This money "stays" in Germany.

Cost of Russia sanctions
The cost of the sanctions in place against Russia: Latest estimates project the loss to the German economy at around 7 bn Euros for 2014 alone.

While some economists hope for a boom once sanctions end - the economic equivalent of make-up sex - others are worried that Russia will permanently switch to Chinese suppliers for some products.

How these numbers were framed in the press
The sanction costs were neatly framed in one major paper as tiny compared to the overall German benchmark numbers. Lowering growth by 0.1 percent was the biggest of these impact statements, everything else became even smaller, such as 1/400th of <whatever benchmark>.

The additional expenses of the new retirement scheme, on the other hand, were not put in relation to GDP, or expressed in terms of negative impact on anticipated growth or any other macroeconomic benchmark. Not a single major German paper made any effort to provide context.




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