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.

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.

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.

The New Europe

The list of (probable) European commissaries was reveaeled today and it gave opportunity for some reflections here in ECE, as usual. Some surprise is justified, after even the Romanian press reporteda month ago that the country won't get the agricultural portfolio they dreamed of and at the end Dacian Ciolos landed there. But the perception of the position of commissar and the respectove positions accorded to the candidates are quite typical in a sense.
The common elemet is the scizophrenic acceptance of the assumption that the EU commissary is not a representative of his or her country but the Union and its people. However, it is hard to miss that the reactions almways convey - at least implicitly - that this will be "our" portfolio with our representative there. But it is probably quite common everywhere. It is more interesting to see the differences, for example between Hungary and Romany. The Hungarian press approaches the position - sociall affairs and labour - primarily as a question of money and influence. The sum allocated to the portfolio, the importance of the field in terms of euro billions and share from the EU budget are the main concerns. In Romania - although the agriculture is clearly an important field in terms of finances - the focus lies on national pride. Romania came out of irrelevance, achieved a diplomatic victory and will have an important position. (Although not, as it is also mentioned in these articles and discourses.) It is a recognition of the country and the success of Romanian knowledge and expertise. So, Hungarians see a great bag of money where Romanians see an examination committee - in Europe.

Prudent politician vs. Hungarian madness

One of the most typical accusation to the adress of the Hungarian politicains from the business elite that the political elite simply bargains long term advantages fro short term political ones. (The most recent one comes from the prime minister, Gordon Bajnai, who is not really a politician, but one of the experts - with current finance mininster, Péter Oszkó, who arrived with great plans into politics and administration and clearly had to realize that in the public administration best practices from business can be even outright failure...) This statment is usually supported by an argumentation, pointing out that other ECE political elites could have managed their countries better and were more focused on the long term. Well, after a deputy whip of the largest Polish government party told in an interview to Bloomber that his party is not ready to commit political suicide and make budget cuts until the elections in 2011 I think this refine construct could be forgotten. Ukraine is a complet mess, because politicians are not willing to committ the same suicie, Romania similarly, in Serbia - another recent candidate for overtaking Hungary in the self-flagellant and nationalist discourse - the number of pensioners is estimated to be higher at the end of the year as those working (a fact advertised by the largest and most professional Hungarian economic website, www.portfolio.hu as the only case in the region, even though it was already the case in Romania two or three years ago, although to admit it would have meant an abandonment of the idea of the Romanian miracle due to flat tax), and this series could be much longer. It is again a small but clear sign how self-focusing and how detached from realities can this supposedly expert thinking be...

(Oh, and it is not excluded that at the end Germany will experience something similar to Hungary's fate in the 2000s. The liberals in the new coalition are very insistent on their promised tax cuts - the justification is the same: lower taxes mean more employees and more income - while their partner(s) in this "natural" alliance are fighting against their ideas - not only against their proposed tax cuts and the realization of it, but privatization in the health insurance system etc. The conflict is clear and at least superficially not dissimilar to the internal conflict of the Gyurcsány-government in Hungary. Moreover, the tax cuts are a textbook example of redistribution from down to the middle and upper income categories. In the lower segment of income it will be offset by growing costs of public services - litter transportation, contribution to the costs of health care etc. That makes it an illusion or at least a dubious attempt - especially in ECE with relatively low income levels - that tax cuts will bring more purchase power, more demand for local services, consumption goods etc. As long as it had to be offset by spending cuts it will automatically lead to higher cost of public services and in case of low income levels this raise of expenditures will suck up the additional income. While those with a really high income won't really spend more on hair cuts as their hair won't grow faster due to more money....)

Relief and self-congratulation

Hungary is certainly not a peaceful country nowadays, but the growing tensions – albeit connected to the crisis and social poverty – are never directly associated with the financial and economic crisis. Regarding this issue a cautious stance prevails, emphasizing more and more positive effects of the governments measures. The parties behind it seem to accept their fate with resignation, and some of their politicians are ready to think that the cure prescribed by the „experts”, the business elite and the IMF – this at last showed some muscle recently in Romania and in the Ukraine (although only after prolonged period of a total lack of compliance in the former and a skillful tactics of „promise-and-non-fulfillment” in the other) is bringing its first fruits. (Even if it would be the case why are the same fruits sweet for supposedly leftist politicians as for not just supposedly rightist businessmen?) Anyway, the prime minister and the finance minister gave a series of interviews recently confirming that the budget deficit will remain as agreed with the IMF-EU couple and the fiscal restriction has its first effects: Hungary will emerge from this Maelstroem as the most competitive country in ECE.
Faithful readers can be already familiar with my views on this very simplistic and deadly perception of the world – I rarely felt myself better as an underpaid academic knowing that meanwhile I'm living in a very competitive county. The whole idea of competition instead of cooperation in ECE is one of the reasons of the mess we are experiencing. The clear demands and preferences of the society – usually expressed by vote – were always neglected in the name of competivity, as disadvantageous for business etc. and of course as remnants of some dangerous post-socialist, post-communist mindset, incompatible with democracy and capitalism. This stance even reached such heights as to accept lying to the electorate if it serves the aims of the business elite (and middle-class) but despising it if it turned out that the lies veiled a somewhat different, socially more balanced politics.
(One must admit that nowadays a different approach is gaining strength, the one arguing that the failure of transformation – that is in a sense an exaggeration – was caused by social pschychological factors and the mentality. This would be the real hindrance before the implementation of reforms. However, the proposed solution is not to develop ideas fitting to the social realities, rather somehow transform the mentality in order to implement the reforms, that are perceived as having no alternatives.)
Returning to the topic of this post, the government certainly can cite analysts predicting that Hungary will be the most competitive, most fabulous country. (On the one hand it is really comforting, at least no country will be at the end spared of the pains. :) ) But I fear analysts once again won't register success with their predictions, as they didn't before the crisis and since then. (A series of important data appeared in the last two weeks, for example GDP growth rates, and analyst's consensus was usually far from the real data. In case of Hungary they were disappointed but once again nobody asked whether their profession has any relevance, whether they deserve the attention paid to them. If analysts has something wrong, it is always the government's, the politics' the kádárist's fault and not theirs.) The real problem is that these forecasts are based on the usual simplistic model, somehow calculating a potential GDP growth (that is a very slippery issue, the oracle from Delphoi could be almost as successful as analysts, as the future is not known for anybody...). In this case they rely on the assumption – at least as I understand – that lower taxes are an incentive to hire workers, because cheaper labour makes producer prices more competitive and it will lead automatically to a higher employment rate. (What they will produce and first of all who will buy it, it is not a question. As in case of some economists, who – arguing that the lasting problems of labour market participation in Hungary needs a systemic approach instead of the present fragmented one, based on different education programs and state subsidies – came up with the all-encompassing and very systemic solution: in crisis regions a lower minimal wage have to be agreed upon.)
Nevertheless, this issue – what to produce and for whom – would be crucial as export based industry in Hungary was quite competitive even in the recent years (although the effects of the crisis are not clear at the moment), but for example a 5 point cut of the social contributions from July didn't had significant effects on employment, business was not capable to hire workers just for the sake of paying lower labour cost, the unemployment rate was kept at bay only by state-financed public work programs. Maybe next years similar cuts will have a different effect, maybe growing export markets will contribute to the easing of the situation. However, it has its clear limits as well.
Unfortunately the core of the problem lies in the SME-s, oriented towards domestic consumers in services, retail sales, construction. Although lower taxes would seemingly be good for them as well, not only due to lower labor costs (although paying less for some employees not necessarily enough to hire a new one, especially if there is no demand for the products), but through higher net income of the population. But the competivity issue in the export oriented sectors is a hindrance of wage raises as well, making the effects of tax cuts limited. Another possible solution would be redistribution to those whose “marginal propensity to consume” is higher – i.e. who are poor and can not afford even the basic needs on a daily basis – but it is also despised, as not business friendly. For a while credit substituted for real growth of income, but the result is too painfully clear. Without significantly higher wages there won't be really higher demand for services and construction. Moreover, lower taxes usually mean fewer public services or more expensive ones. Effects of tax cuts on personal incomes – especially in a country with lower wages – can be almost entirely offset by higher costs of public services. But not much SME-s will be content, when people will spend their excess money on train tickets instead of a hair cut. It would again flow to the state and not to the companies.
But the simplistic “lower taxes bring higher employment” assumption's validity is doubtful because of other reasons. The immobility, low education, low skills of the workforce reserve (the employment rate was 58% at its best now it is around 55%, the reserve is guessed sometimes at about 1 million people) would make investment necessary. Investment in mobility – affordable housing, not rents as high as a monthly wage, reasonably priced or state supported traffic costs etc., (the company's contribution to public traffic costs of their employees will become a taxable income from 1 January) – and in education would be much needed, but for this aim also redistribution would be much needed. At least as long as offering chances for everyone is perceived as necessary social solidarity and means of cohesion. If not ..., yes, it is another country.
(Moreover, there is a fair chance that at the end, with a rapidly ageing population and dependency ratio, without a European social system, Hungary will end up as having only one chance, to export more and more, making this whole speculation on possible ways out pointless. But even in this case the state would have to invest in children.)
Therefore the self-congratulating manner, the dreams of being once again a forerunner country seem not too well-founded. The result could easily be disappointment of the middle-class seeing that the price of tax cuts is higher payment for public services and freezed gross wages for a long period, therefore lower taxes bring not more money to spend on consumption, the disappointment of the SME-s because of the continuing lack of purchasing power, and even stronger disappointment of the poor, for whom it easily could mean more poverty and less chances to get out from their situation. The already very serious tensions can easily explode at that moment...