Friday, July 3, 2009

The Markets, oh the Markets!

Last week the Hungarian governemnt achieved a great "victory", the parliament passed a bill on the taxes and tax system in next year, modifying the structure of taxes, with cuts in the personal income taxes and the social security contributions and hikes in VAT, introducing a new property tax etc. It laid the foundations of the next budget and it made the ministers quite proud of their production. Moreover, the government was 75 days old and it gave an opportunity for the prime minister and the finance minister to give interviews on the progress made by this new, brave body fighting the crisis so effectively. (One should ask, why is a prime minister, who is admittedly not seeking political career after his term will expire, so keen on making pr, but I really don't know. Maybe he is afraid of the possibility that his parliamentary majority will collapse, but I would doubt that it is the proper way to fight it. And PR-interviews - especially in the Hungarian case, where the "questions", due to the tragic quality of journalists and journalism, seem as if they would have been prepared by the Prime Minister's press secretary - are not only boring, but unconvincing, without any originality.)

Anyway, the finance minister and his boss pointed out that their success is signalled by the markets as well. The strengthening of the forint is a sign of the returning trust. I understand, that sometimes those who are in political positions, feel the necessity (and sometimes they are even compelled) to make stupid statements, in order to gain popularity, portray themselves as capable individuals etc. But this government is supposedly an expert one, the finance minister arrived from Deloitte. I don't really think that he has no idea of the current situation: there is no credible sign of an individual assessing of the forint and its movements against the dollar and euro were and are driven by fears regarding the state of affairs in other countries (most notably in the USA and in the eurozone) and by mere speculation, the so-called carry-trade. Or, with other words: the current movements are the result of a very high interest rate of the Hungarian National Bank and the willingnes of the so-called investors to see green shoots everywhere. Nothing specifically Hungarian, as everyone can see, who compares the movements of the currencies from Poland, Hungary, the Czech Republic, the first one and the latter being considered as more stable economies than Hungary.

But the really frightening probability is, that the minister can be convinced of his truth. Not necessarily because in this case he and his government tries to please actors, who do not really care about its activity, but because sometimes it shows a quite simplistic obsession with the idea of the efficient markets. Well, it is a viable econimic theory, that was capable to make tolerable predictions for decades, but in the light of the recent events even those, who were not aware of its problems are ready to admit that at least some refining would be needed. And as a perspective of the human society, it is rather frightening, as it tries to reduce its complexity in one single indicator: market price.

Moreover, as in the last few weeks I had an opportunity to glance at many products (analyses etc.) from market actors (due to some kind people dealing with economics or the economy, with quite different views) and as a result I'm increasingly convinced that those are less complex than it would be necessary in times of economic turbulances. Not that they would be useless, but they use only a limited range of indicators and data and sometimes too obsessed with the mathematical models, instead of leaving some room for the good old intutition. Although predictions based on the mathematics and market conventions turned out be very risky nowadays.

But this is not the only problem with the Hungarian government's actions. As they are keen to please "markets" and consider as the sign of the success of this efforts the strengtheing of the forint, they are slowly giving up the advantages brought by the rapid depreciation of the national currency and its relative stability in the last two months. The competivity (what they are seeking with tax cuts in a dire budgetary situation, therefore compensating it with budget cuts, equally hurting consumption as the tax cuts are inspiring it) gained suddenly and unintentionally (the eternal comparison, Slovakia was behind Hungary in terms of labor costs at the beginning of the year, although the "experts", among them the minister himself, always complained that Hungary lost its competivity regarding cheap labor to Slovakia, and it was a reason behind tax cuts and social spending cut proposals) are now trickling away. Even though there is some reason behind it - reducing the debt burden of those, who are indebted in foreign currency -, it is at the same time simply the mirror image of the much despised politics of pleasing inactive voters with financial transfers through the social security system. It is very much an attempt to satisfy middle-class rent-seeking, placing the complete burden of adjustment on the shoulders of those, who are living from sthe social security systems. and even though there are many inactive people, who would be capable to work, the lion's share of this group is composed by pensioners and by those, whoe are really living on a subsistance level, without any hope for a decent work. This politics is not seeking the just distribution of the burdens of the crisis, it tries to privilege a group, that bear some responsibility for the situation of the country, as they were ready to take a huge debt burden, many times with repayment rates higher than the half of their otherwise not too large income. And as it is clearly hurting the long term perspectives of the country (Hungary abandoned even the moderate room it acquired through this strengthening of the forint in terms of monetary policy, as the HNB is focusing on the debt level and not on the exchange rate yielding advantages, therefore it is not ready to lower interest rates), either as an economy, or as a society, it is equally problematic, as the rent-seeking of the inactive groups.

The other privileged group will be the entrepreneurs. The tax cuts are aimed to ensure they lasting competivity through making labor cheaper. Although personally I don't think that eternally lowering labor costs through abandoning every public service is a viable strategy of growing welfare and standards of living, this time I would only point out that - as I argued some posts earlier - without a growth of the capital in the economy it is clearly a hidden state subsidy for non-competitive companies (the state subsidizing even negative marginal products of the newly employed labor with renouncing some state incomes), and as usual in those cases it will probably bring only more private profit from public money. It is possible, that in the long run it will really bring some raise in employment rates, but I'm doubtful regarding its effectivity, at least its effectivity imagined by the minister. But it is another story...

(Oh, and meanhwile flagellant exceptionalism surfaced in Romania. A well known blogger counted 13 factors of Romania being affacted worst by the crisis. :) Maybe my next post will cover this funny topic.)

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