Saturday, December 26, 2009

What kind of state we need?

It is a popular question today, not only for those who try to figure out what kind of social system (or in case of conservatives state, authority, society etc.) would be the better from the different perspectives of diferent value systems, but for ordinary people. The state is easily seen as a burden, an unneccessary burocratic authority, not encouraging, but restraining the productive skills of its citizens. Too many people had too many disappointing experience with burocrats, seemingly irrational regulations and rules for not to accept also the broader approach to the problem: the state is ineffective, expensive, inefficent, a hindrance of building a better future rather than supporting it.
As this is the case with many generalizing statements, it is too often proved by individual experiences to contradict easily and this post never would claim to be in this position. However, the problem of the state and the burocracy is maybe a bit more complex then the otherwise quite justified everyday complaints and their conclusions would suggest. It is easy to percieve the elminination of "burocracy" (at this point it is only a common reference to state administration in the broadest sense) as something releiving not only burdensome activities from citizens but as a reasonable source of financial saving and that way a possibility to lower taxes. The reason for this assumption is simple and not easy to refute: if the "burocracy" carries out tasks that are unnecessary and applies rules that are only a hindrance to individual progress to get rid of them means less public servant to pay and more time for work and/or leisure.
However, the situation is maybe not so simple. Continental states and societies are usually different from Anglo-Saxon ones, they usually try to presume every possible situation and circumstances in advance, provide a law and/or regulative framework that can easily be applied by state administration, instead of bringing tha situations not covered by the law to the court in order to create a precedent. In this sense the state administration - I mean it at this point in a broad sense, including local authorities etc. - has the right and responsibility to apply the rules for almost every imaginable situation in a community. It is not simply an administrative machinery, but it takes the burden of acting pre-emptively in order to avoid conflicts or resolve them as first instance.
It can be argued that these roles could be attributed to the community itself, but this is a real historical tradition in Europe and beyond this fact the societies in ECE spent the 20th century in a constant state of exclusion (a signficinat, albeit changing part of the societies were sidelined and/or violently excluded from their rights), in which they hardly could have collected enough experience of cooperation instead of conflict. (Or expereinces to create their own, local regulative framework while taking into consideration every legitimate local interest.) Unfortunately this hole in the social experience was not filled after the change of regime, but sometimes even widened. Anyway, the logical conclusion would be to ask: if the state is eliminated as it is argued, who will take and with what means these tasks, that are integral parts of society? Even if local administration and its rules seems irreasonable, many of the regulations really avoid conflicts, for example the procedure of giving permissions for construction. If the state wouldn't have the right to decide these issues (for example whether one can build a house one-two-three-four etc. meters from the border if his estate or not) it is not impossible that in too many cases the issue would turn into a constant quarrel between neighbors, with equal or even higher costs, but this time without any hope for solving it. It does not necessarily mean that every prerogative and task of the state administration is useful from this perspective, but before deciding the elimination of any of those a thorough analysis from this aspect would be necessary as well. Without knowing what tasks can be easily taken over by the society and which one causes a danger of replacing regulated life with irresolvable conflict or simply anarchy is a real issue, not to be neglected.
Another aspect of the process of natural selection of unnecessary tasks. Guesses regarding the number of public servants to be laid off are usually based on the assumption that the state not only assumes a series of tasks, but in fact fulfills it. As a consequence it is presumed that if an unnecessary administrative task is identified and eliminated the personnel responsible for carrying it out can also be eliminated from the system. But there is a series of administrative fields where the "burocracy" nominally has rights to act and responsibility but due to a mutual adaptation process of the citizens and the authorities, nobody really excerises them. For example although modifying a small roof over the door of a house needs official permission and an approved plan, it is rarerly applied for and rarely required by the authorities himself. Not to speak of the possible general shortage of qualified public servants in a series of fields, where this state of affairs in itself could lead to neglectment of administrative duties. Anyway, it is possible that the state only nominally claims a series of roles and rights but the administration never really uses it and therefore the existence of these tasks in itself is not a sign of a surplus of burocratic personnel. It is also possible that after eliminating these tasks it would turn out that the existing personnel is barely capable to deal with the remaining ones and therefore it is not a source of saving, but simply an adjustment to the realities.
I have no idea to what extent these phenomena exist today in Hungary. But I'm sure that they are in fact realities and therefore without assessing their importance and extent it is hard to plan a meaningful restructuring of burocracy and burocratic responsibility.

Random thoughts at the end of a long year

I have to admit I faced a much easier task at the beginning of the year, when the events of the crisis were dominant in the public sphere and easily bound to a coherent narrative. With the pressure - at least seemingly - lowering on a series of countries the picture became more distorted, while some states earlier seen as almost doomed now are considered as almost exempt from the consequences and new countries joined the group of economies in a concerning state. Most notably Greece and Spain. However, Hungary, Latvia, Romania are still considered as basket cases. And some surprises at the end of the year are worth to pay attention to.

The Constitutional Court in Latvia ruled that a core element of the austerity measures of the government trying to meet the demands of the EU and IMF, the cut in the existing pensions is void. Moreover, it has to be repaid until 2015. Although politicians reacted with disappointment, the prime minister even stating that the country would simply go bankrupt if the authorities obey every legal provision, the issues goes in a sense to the heart of every so-called economic and social reform from the last few years. The Western model of state is based - at least nominally - on the rule of law, providing the society with a stability of rights and obligations. The CC in Riga simply decided that pension expectations - anchored by law - are such obligations of the state that can reasonably be expected to be fulfilled by the state. The rule of law idea has been chosen as a pillar of democratic society with a good reason and historically its neglectment led to very severe consequences. This time the government will also try to comply, but there is an inherent contradiction between the preconditions of the agreed loan and the constitutionality of these measures. The economic policy implied by the agreement is thought to be the optimal way to deal with the crisis, but the legal provisions - and sometimes the lack of political support and will - are an objection on this road. However, after mass-scale experiences with a system in which every aspect of life was submitted to the perceived needs of the economy and at the same time economy was considered as the area of society that determines everything else it is hard not to feel reservations. And now, after the collapse of the above mentioned system, we are in an era where exactly the same is happening, this time invoking democracy. (OK, socialist systems also perceived themselves as democratic ones.) The earlier experiences didn't really confirm that submitting the society to economy is a good idea, without reservations.
It is clear that rule of law, especially in times of rapid changes not necessarily equals sustainability of a society and the rules sometimes have to be accomodated to the changing environment. But the ruling could remind everyone that so-called reforms, however bright those ideas seem, need democratic legitimacy and popular support, otherwise, only acting in the name of some kind of rationality they can led to surprising consequences. (Not to speak of how irritating can be the view of technocrats praising measures that diminish the standard of living of everyone but them.)
Otherwise the ruling could raise another important - and for the time being clearly neglected issue, the distribution of the burdens of the crisis and the coming period of adjustment. Especially as two quite contradictory views confront in this regard. The dominant perspective - at least in ECE - sees elderly, inactive people only as burden on the shoulders of the active members of the society and this way justifies the confinement of their social benefits to a minimal level. But the crisis was mainly caused by the excess borrowing and consumption of the active groups of the societies, they were the front runners of consuming beyond possibilities. (At least I presume that more active people got FX loans than pensioners.) And the cut in social benefits - especially with a determination to save those loans from effective default - is nothing else then putting a burden on those who were less responsible for what happened and who would have a chance to regain some of their losses during their remaining active life, while pensioners can not really hope for recovering their losses. One can argue that governments has a very limited room for maneuver and it is true as a general assumption. But especially in cases of low redistribution systems the pose - taken by governments - of the guardians of the (would-be) middle class interests is rather a defence of the interests of the very wealthy, whose income and property is untouchable, at least it taxation is an anathema with the reasoning that it would reduce entrepreneurial incentives. It is maybe the case, but even in this case some moral principles could be taken into consideration. But as long as we have very few data on the disposition of the wealth of those at the upper end of the income scale it is a mistake to presume unconditionally that they invest every additional cent and every piece of their existing property in productive enterprises. Why? Didn't they invested in real estate funds, hedge funds, specific financial products linked to exotic financial indices and derivatives etc.? Would it be more reasonable to think that instead the wealthy - who were always proud how sophisticatedly they manage their wealth compared to the ordinary (“kádárist) people- the pensioners fueled those financial enterprises?

It would be easy to think - and one must admit it is also quite popular - that this greed of some individuals was the structural reason behind the crisis, but scrutinizing the situation more closely one should conclude that unfortunately we are all behind this situation and not only because taking loans irresponsibly was a widespread phenomenon. Moreover, this issue is also connected to the problem that in this crisis companies are less ready to absorb losses with reduction of profit. In an ideal and traditional world of capitalism, characterized by family enterprises of many generations the company is the property of a few people who occasionally can decide to take losses for a certain period and reduce profit. It doesn't necessarily mean that they would do it, but they certainly has a choice, at least as far as they can fulfill their financial obligations to lenders and to the state. From a different angle it means that even though profit is still the main driver of enterprise it is easier to resist immediate action for preserving profitability in times of hardship. But this world of the Buddenbrocks or Morels is in principo less biased towards immediate layoffs than the present, where very an ever growing number of companies has more and more nominal proprietors as shareholders while in fact the management make decisions, the only expectation is to provide shareholders with higher and higher profit. Moreover, the personal income of managers is bound to profit rates, but profit is more and more the result of the rising price of the company's share instead of production. Anyway, it is a logical decision to concentrate on keeping profitability high even in times of crisis and the only means is to cut back production costs as much as they could be aiming at a relatively high profit ratio.
It would be easy to assume that this is still a game that is advantageous only for a small minority of a society, but as social security and services (most notably pension systems and health care) became gradually - and sometimes only partially - privatized the high profit rates are in the interest of everyone who has social insurance as well. As soon as company profitability collapse more people would be hit than one would initially assume, just because pension funds invest in financial products either directly into company shares, or indirectly. In this system social redistribution rate is lower, instead of taxation long term profit yields personal security and stable living environment. But it makes people increasingly dependent on the success of financial companies, maybe exactly because only high profit rates that can only be achieved on these markets can compete with effective redistribution - at least as long as demography do not intervene.
Beyond these considerations there is the problem of financing companies' production. Once again in the traditional and ideal world it is based on direct credit links to banks (many of them also private companies, properties of a limited number of individuals), while modern finance brought about a huge change. Direct financing from the market - issuance of shares, bonds etc. - became more popular. However, this reorientation not only meant an easier access to savings, but a profound change of the traditional way of financing the economy. (Once again in an ideal world.) Savings placed on accounts at banks, borrowed by companies thoroughly scrutinized by those financial institutions and re-payed with a modest return on capital, resulting an equally modest percentage of income on for the initial savers. The increasing importance of the direct financing from the market offered higher profit for individual investors, while production itself lagged behind returns of investment in financial assets. Savings were distracted towards financial markets in a growing proportion, quite logically.

This issue also leads to the problem of sovereign debt and sovereign default, because the privatized systems - although with certain restrictions - channels the savings from the state bonds to other financial products in order to gain more profit, compared to the low return on government bonds. Nowadays sovereign default is considered as a horrific perspective - one of the bigest issues of 2010 - although there were more complete or partial one in the histroy than one would except and the consequences - if it happened in a regulated way - were not always catastrophic. Just to mention a recent example from ECE: Poland defaulted on its external debt and it lasted fro years to achieve an agreement with its creditors but at the end it didn't hampered its development after the change of regime, Romania instead payed back almost literally every cent in the '80s with serious social consequences, Hungary tried to manage its debt for almost three decades with more or less success, but today one of the most important limitations on its economy is the sovereign debt. (And yes, even the US defaulted in fact on some of its debt during the Great Crisis, but as it was well managed it was not a very spectacular event.) However, sovereign default, if it is not well prepared and managed, a very unpleasant event, therefore governments were moe inclined to use inflation for effectively reduce outstanding debt in the past. It also gave a chance o place some of the burdens on the lenders, as inflation hurted them as well. However, with the strengthened independence of central banks and the limitations on direct issuance of money it is more complicated today, even if a country is capable to borrow in its own currency. Markets are too alert to inflation risks and as soon as they suspect it the price of issuing government bonds can easily rise.
But one of the causes of the crisis is the existence of excess liquidity in the world and up to this moment central banks, financial authorities and governments were only successful in replacing it but not effectively reducing it. As long as this excess liquidity remains it is hard to imagine a really stable and sustainable financial system. One way to reduce it is nothing else then write off even in the form of sovereign default. Or more precisely regulated write-off is the alternative of sudden and unexpected sovereign default.

But not only reduction of liquidity would be necessary to really stabilize - and not only repeat the earlier cycle - the world economy, we need stable state finances as well. Sovereign default s looming over our head because state finances proved to be very fragile and facing the crisis almost none of the important economies had reserves to spend. Instead government debt amount and ratio to GDP soared. The usual recipe for this state of affairs is cuts in budget spendings and tax cuts in order to reignite growth. However, exactly the story of the last one or two decades shows that the usual mixture of tax cuts - spending cuts and reforms were not capable to ensure fiscal stability, they even became a factor in the instability after the unheard fiscal stimuli. Just look at Germany, where politicians try to keep electoral promises in forms of huge tax cuts, but sovereign debt is predicted to skyrocket in the next few years. The usual mixture is never really aimed to build up reserves, but to keep the state finances on the edge of managebility, due to popular and business pressure for more and more tax cuts. Maybe it would be more reasonable to modify this approach, as the last few years, with a series of significant tax cuts in Europe riding with the tide of the credit bubble created growth hardly can prove that lower taxes will necessarily result in an upswing of revenues later. Especially as consumption is far from recovering and the environment is hardly promising for investing in production.

The ideas and reasoning above is clearly not all-encompassing and it is only designed to deal with such aspects of the problems that are usually not in the forefront of the discussions. It is not claiming to be universal and sole solution, it's aim is only to highlight that these problems are interconnected with other issues, equally significant for a society. However, one conclusion is clear: democratic societies shall take into consideration these aspects as well and democratic decisions, upkeeping individual and collective freedom can only be made with regards to these besides the sole economic factors. Nevertheless, in a crisis it is hardly the task to distribute surpluses and gains, it is all about distributing the pain. In a righteous way.

Wednesday, December 9, 2009

Shameful self-promotion

Just a link for those who can read French. The topic is quite fitting, although the story of this piece is still a bit strange for me.
Lost in Transition?
Here is the pdf version.

Sunday, December 6, 2009

Lost in Space and Time

Decisive second round of presidential elections in Romania. Some TV stations has an all-day program covering the events - funny and sad, comical and tragic - with the indispensable talking heads, intellectuals analyzing. An economist - former minister of finance -, a historian - former minister of foreign affairs, - and a political scientist - not a former minister at all - shares their views on Romania. The country is seriously and dangerously divided, as the unexpectedly succesful mobilization shows. The political debate in the capmpaign was on superficial issues instead of programs. The Romanians are dependent on the state. Romania is situated as the last country in the EU in every respect. The governments of the last few years were irresponsible. The country is seen as similar to the Ukrain. (!) As if I would be in Hungary. Maybe some of the Hungarian intellectuals has lrearned Romanian and asked to participate in Romanian TV programs? I don't think so, it would be ruinous to they conviction that Hungary is alone as the only divided country with a population hoping for help from the state, with superficial debates, irresponsible governments and at the bottom of the EU.