Saturday, February 12, 2011

Playing Cassandra, resolving cognitive dissonance and on the importance of not investing too much emotional and intellectual capital in expectations

As I try to take a distance from politics in a stricter sense it could mean that in less troubled times I remain silent. My intention is not to comment on everything happening in Hungary or in ECE, especially not when someone else is perofrming it with more expertise and in line with my opinion, rather to give my ideas when I feel I can express thoughts and ideas less prevalent in the public discussion. (Even if this blog is clearly not part of any kind of public discussion, just a variety of a diary or a notebook.) Furtherome, many occurences in the politics are connected to the crisis only indirectly. Although the electoral success of Fidesz in Hungary, their two-thirds majority enabling them to pass a new constitution and change the basic laws of Hungary according to their will, was not independent from the economic crisis and the populations distaste for and discontent with the Socialists and asuterity, the concept according to they are acting is their very own, rooted in their nationalist ideology what is not a reaction to the crisis. Therefore, although I can offer some thoughts on this problem it is only tangentially part of this blog. Nonetheless, the "war of economic independence" or "economic war of independence" as Fidesz labelled its economic policy in the summer that is part of this broder effort of reshaping the country, reached its next phase this Feburary, after the quasi-nationalization the compulsory private pension funds. The Fidesz now has its own budget, not one they can pretend to have no responsibility for and they acquired enough room for manoeuvre with the partial default and forced natioinalization to come up with their own and original ideas.

Some of the important constraints remained, from the EU with the deficit target under 3%, and from the broader environment as the crisis still looms over Europe. (During the Irish crisis Hungary was significantly affected.) But the government now tries to pre-empt negative reaction and contributed to the growing expecatations regarding a fresh refrom package due in February, at aboput 600-660 billion HUF. The story offers an interesting experience of human behavior and psychology, its failings in a supposedly rational and competitive environment. Especially as it is not the first occasion we can observe an almost identical chain of action and reaction. The sequence is always built on communication according to the taste, expectations and desire of the so-called analysts (or in its impersonal form the markets), a sudden eruption of enthusiatsic love for the government, even more communication and more active emanations of this strengthening love and... Well, in the earlier cases the end was always disappointment but it is clearly not a hindrance of the renewed passionate realtionship. Anyway, and this is where I dare to take Cassandra's role and robes, I would be surprised to see a different outcome this time, as the facts and the stark inner contradictions of what the government suggests and the analysts accept as a new, profound reform agenda are pointing to the opposite what the markets are expecting and waiting for. But this revived love-story is telling in itself.

It began already in December, when - even before the budget was passed - the government announced they will prepare and introduce a reform package in Februay. Common sense would have warned everyone as the least normal course of events is to make a budget with huge efforts, bring it to the parliament, proceed with it with energy and determination only to abandon it after one and a half month. Is this the way governments work? - could have asked everyone. But, instead, it caused jubilation and was taken as a sign that the Fidesz was brought back to its senses and at last they admitted the necessity to come up with structural changes bringing budget spending under control in the mid- and long term. Soon the opening moves of this subtle chess play were made, firstly György Matolcsy and later Viktor Orbán himself - in an interview with Wall Street Journal - told that his government will ensure the state pension fund will not spend more than it recives in the form of social contributions (although the ministry made it clear already in November that it means transfering disability pensions to a separate fund financed from the budget), and announce cuts concerning subvention of medicines, the social services for unemployed and the public transportation system. They even mentioned the sum of 100-100 billion HUF in case of the former two and 50 billion in the case of the latter. As these are the pet targets of every analyst who are reluctant to admit that the structural problems in Hungary can not be solved by simply cutting budget spending in some sectors it was well received and generated a wide-spread belief in the coming of a substantial reform package in mid-February. Neither an easy reality check - asking whether it is possible to cut 100 billion from these funds, both not higher than 340 billion per year while unemployment is well over 10% - nor Fidesz politician's instistence on not doing harm to the population and tampering with their benefits could have deterred analysts from their firm conviction that soon something important will happen. Optimism prevailed even after the first reports on the process of the preparation surfaced, showing that the government is still in the phase of brainstoriming in early Februray. (At that moment the different ministries still collected their ideas independently from each other and they had to put them forward to Matolcsy and Orbán, who are entitled to the final choice.) Optimism was not shaken by the emergence of other details - later admitted by Matolcsy - , suggesting that the plan is not to cut 600 billion in 2011 - an earlier assumption of the markets - but making a cosmetic surgery in this year and delivering some more substantial budget correction in 2012 and 2013. (A few days later the plan turned out to be to begin savings in 2013!) Furthermore, as the process of the planning was in delay the announcement was postponed. Originally the promise was a package published in mid-February. In January it was modified, mid-February became the date when the government could discuss it in first readingand the date of the announcement was established at 28 Februray. In early February the new informations suggested even more delay.

Nevertheless, analysts were very excited at the beginning of this month and expected Viktor Orbán to share important elements of the package with the public in his so-called "state of the country" speech, due on 7 February. As Orbán held a very banal speech, composed of proverbs and self-styled popular sayings analysts, the markets did not show dispair or at least some surprise, they predicted that Orbán will make the whole package public on 14 February, in the parliament, and expetced the Fidesz caucus to discuss it between 9 and 11 February. The latter obviously did not happen, but expectations remained.

However, as there seem to exist no coherent package in the moment, the ideas during the long barainstorming more and more turned towards raising new revenues instead of planning the reforms eagerly awaited it would be astonishing to hear something really significant, different from Orbáns 29 points and the economic plan implemented in October - with the quasi-nationalization of the pension funds. Something certainly will be announced, probably pointing out some directions vaguely, packed in the banal terms of the renwal of the country and it is also probable that cutting unemplyment benefits will be one of the few explicit measures. But it will fall short of any kind of reform and will be very far from the expectations driving the markets to extasy in the last few weeks. There are at least three reasons to expect this outcome. Firstly, Fidesz is aiming at a renewal and reorganization of the nation in its own, nationalist terms. What they try to realize is not some cost-effective restructuring of sub-systems based on thorough consideration of existing models and good practices, but the only model that would express the substance and spirit of the Hungarian nation. It is quite different in the sense that the plans are based on a set of speculative assumptions, but they assume that no constraints of costs may impede its realization. (Exemplified by Orbán, who told the Fidesz caucus, that even if people are right that the governments plans for the public instruction system will cost more than at present, it is the responsibility of the economic minister to find the necessary resources, and not the secretary of state for education to adjust plans to budget constraints as the plans are pointing to the right direction.) Such approach also means that fields analysts consider important in the reforms could be of secondary importance for the government, leading to their neglectment, while other sub-systems - like education - won't be restructured according to the criteria analysts are expecting to direct the changes. Secondly, Fidesz clearly wants to avoid confronting any significant electoral group and as long as they can implement measures that at least seemingly do not affect the people - like the so-called crisis-taxes - they will opt for thes. It is hard to expect major changes in the funding of the public transportation system if it would mean rising costs for the population - for example elimination or curtailing of existing benefits for students, children under 6 or people over 65. The whole brainstorming approach and the continous delay of the announcment is exactly because of this reluctance. According to the information leaked, the apparatus was always very effective in bringing new ideas of new revenues and not quite successful in outlining cost-cutting measures. Thirdly, the present structure of the government and its personal composition with a lot of inexperienced and not quite bright party hacks occupying key positions in ministries consisting concurring departments without a minimum of internal coordination and with a minister responsible for economics ad budget who only trusts in a very limited number of people is an obstacle in the way of preparing a coherent plan, assessing every proposed measure in the context of the state as a public institution and an instrument to deliver public good the most effective way - apart from its assessment in the light of Fidesz's nationalist ideology.

I do not realy want to contemplate the question why analysts again swallowed the bait. Probably they invested too much emotional and intellectual capital in their belief of Fidesz's rationality and willingness to go down the way they expected and at the end they could not disengage. However, it is of some use, at least at a personal level. For a while I had to feel guilt as I was crying with the pack of analysts whom I had criticized earlier. Now it is a chance to detach myself and again point out their failings. Vanity and arrogance as it may be, but reassuring because it restores a part of my identity. :) It resolves this particular form of cognitive dissonance.

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