On Tuesday, Tonio Fenech, the Finance Minister, had a breakfast meeting with the social partners. Mr Fenech stated that the fundamentals for employment, wages and exports were better than the GDP numbers indicated.
... economies do not work according to the same logic of households or business firms- Ranier Fsadni
Today, I don’t want to discuss whether he’s right or wrong. It’s an important question but that would be getting ahead of ourselves. The economy is an important electoral theme, numbers are already flying about. We’re going to have to get used to them if we want to hold those who spout them to account.
We don’t need to be Nobel laureates or even economists. Three basic rules of engagement should be enough.
The first rule is that, whatever anyone else tells you, economies do not work according to the same logic of households or business firms.
A household, of course, cannot spend more than what it earns; an economy can, at least for a while, and sometimes it is actually the best thing to do.
By firing workers, a business can get them off its books and forget about them; an economy cannot get workers off its books by firing them because they will simply turn up in the unemployment books.
This rule comes with a question: Is the advice you’re giving, or policy you’re advocating, based on what you consider common sense? Sometimes that’s enough but not always.
Is your advice based on professional economic opinion?
That’s the question I would have wanted to ask the General Workers’ Union’s secretary-general, Tony Zarb, and the Malta Union of Midwives and Nurses’ Paul Pace. They were reported as telling the minister on Tuesday that if the economic fundamentals were better than they looked then he should take the necessary measures to increase people’s purchasing power.
The non-sequitur may be a result of the reporting rather than their reasoning.
If the fundamentals give reasons for optimism – in an environment where economies are teetering on the edge of catastrophe – that is not enough reason to start splashing out. For one thing, if the economies around us do sink further, we will need any extra funds to protect jobs, not subsidise consumption. So we need to prepare for that eventuality.
However, on the basis of previous reported speeches, I believe that the two union leaders actually believe that increasing purchasing power should stimulate the economy and that it’s the best way to protect jobs.
Is their suggestion based on professional economic advice? We should be told.
All the professional economic opinion I’m aware of – for Malta and for other countries – is that measures, like tax breaks, to increase purchasing power are the wrong measure for this economic crisis.
They may not generate any appreciable growth at all. In Malta’s case, given that consumption spending goes largely on imports, it would mean that we would be subsidising other economies more than our own. In any case, government spending on infrastructure projects generates more growth. In the US, it is calculated that infrastructure projects generate $1.50 for every dollar spent, far more than tax breaks.
It is not even clear that increasing purchasing power with tax breaks is common sense. A recent opinion survey indicated that a plurality of Maltese expect the economic climate to get worse. Given such an expectation, common sense suggests that if their purchasing power is increased they’ll just save for the rainy day they expect soon.
The second rule is this: Advice is credible when it’s based on what’s tried and tested. People offering policy advice should be asked if the policy has been implemented elsewhere. If a country is held up to us as a mirror, then we should ask the obvious: But what did they do to get there? And, some time later, we should ask the follow-up: And where did it take them?
For example, Germany isn’t doing too badly now, although a eurozone collapse would obviously be catastrophic for it, too. But how did it get here? Part of the story is a moral as well as an economic tale: Between 2002 and 2011, Germany became more competitive by restraining wage increases; the first substantial increase over a 10-year period occurred last year.
This has implications for the way we discuss the Maltese case. Anyone discussing whether salaries should rise, more than they are doing, will also need to make a case for why our economy is different from Germany’s.
Such a case may be possible to make, according to the third rule, which is: Keep tabs on the particularity of each economy. But the case would need to be made.
For example, former Cabinet minister Michael Falzon has argued that technological changes in the construction industry mean that certain projects no longer have the economic spillover effect they used to. That’s an interesting contribution to the debate.
Similarly, Barack Obama’s stimulus package included measures to increase unemployment benefits (apart from useless tax breaks made for political purposes). In a context where people risked defaulting on mortgage payments because of sudden unemployment, that made sense. Does it make sense for us?
The three proposed rules won’t make us economists. But they should help us keep better watch over our interests. We will always get the leaders we deserve. Following these three rules, however, would make us more deserving.
ranierfsadni@europe.com