neljapäev, aprill 30, 2009

gospel of liberalism

I watched Finance Minister Ivari Padar last night on ETV and I was surprised by how bad he looked. Maybe it's the hellish job of being a social democrat in a center-right government, or just the fact that rumors are circulating that Prime Minister Andrus Ansip would like to dismiss him.

Padar's sin was making the argument that, rather than cut anymore at Estonia's already bare public sector, perhaps Estonians themselves could sustain a tax increase to pay for some of the services they enjoy.

This of course was not music to SDE's coalition partners' ears. Taxes, from the standpoint of liberals, always go down. They never go up. Given the choice between paying your teachers and nurses and sanitation workers a decent wage and lowering taxes, the choice is obvious: you lower taxes.

This is the philosophy of those who see the state as inefficient and intrinsically evil, though they don't mind running it themselves when given the opportunity. And if you really need money, the Swedes are always there to bail you out.

Except why is Sweden so sturdy and its satellite Estonia in such shit shape? Both nations should share the blame. The Swedes offered free money to the Estonians, and the Estonians took it, even though they couldn't pay it back. Now the relationship between the two countries has become even closer. Russia may own Estonia's past, but Sweden owns its future.

Estonian reliance on Sweden and Finland has created a narrowly structured economy heavily reliant on investments in financial intermediation, real estate, and the domestic consumption fed by both. Now that the money has dried up, Estonia has few places to turn. It keeps waiting for its shiny Nokia to appear, but it doesn't spend the same amount on R&D that Finland or Sweden do to produce those Nokias and Volvos and Ikeas.

Besides, investing the same amount of money in R&D to get to that point would necessitate capital, and perhaps even some tax increases. But such a scenario should never come to pass, because tax increases are not what Estonia is about. Here taxes are only supposed to go down, they never go up. If you need money, go ask the socialists in Brussels for it.

The problem with this philosophy is that, up until last September, the private sector was considered to be far more sophisticated than the public sector. Liberals could make their arguments based on the assumption that the financial managers knew best. Maybe they still do. Maybe Padar is wrong and Ansip is right. But how would we ever know. We are all tied to the theory of how things are supposed to work. But just a few years ago, these same characters were forecasting eternal growth and lighter tax burdens. Now, that appears to have been a fantasy.

So, on these days, I am happy I am not the social democrat Padar. But I am really glad that I'm not the liberal Ansip either.

12 kommentaari:

stockholm slender ütles ...

Well, I define myself as a social liberal - I don't think there is much question about which societies provide the most level playing field for individual social competition. It is the societies that provide the widest access to high quality education and health care, which are not possible without a certain level of income redistribution and relatively high taxation. That is why social mobility is way higher in the Nordic countries than in the USA. In other words in the US you are far more likely to inherit your parents' position in life. Of course Estonia did not have the luxury of wide choice after the return to independence but it would be plain silly to desribe the present system as just or efficient.

Jim Hass ütles ...

Didn't I read last spring about a very big rise in public sector pay in the last two or three budgets to try to keep up with rising wages in the private sector? The last budget boasted "What will Estonia be like 4 years from now" with a bunch of expensive possibilities like "doubling pensions over the next four or five years" etc. When all that capital flowed in it seemed like a future without many limits. The capital flowed around raising wages, real estate prices and tax revenue. Now that flow has reversed. It is not in Estonia anymore. It cannot be recovered by taxing. Estonians invested on margin, and now the call has come. Maybe not you, or your family, but maybe your company, or your clients or friends, relatives, customers-- etc. Good luck getting through this without pain. Domestic demand has fallen by huge numbers, but so has foreign demand. Cutting domestic demand by raising taxes to spend on a future payoff on projects doesn't solve the problem of this economic crisis.

The Estonian government is not small or cheap, except by comparison to their nordic neighbors. It seems to function, and many seem to think life was getting better rather quickly over the last 15 years. If folks wanted to save on taxes, they could move to the USA (excluding NY or CAlifornia) or Russia, yet few non-Russians seem to want to do that.

Devaluation would make everyone work for much cheaper rates, spurring exports and employment, eventually, for a while, yet would be a major breach of trust with all those with who borrowed in Euros or other foreign currency, creating instant bankrupts, and raising inflation over the medium term.

Name your poison, set your priorities and don't forget that some people wont be able to cope, and need help.

Giustino ütles ...

Of course Estonia did not have the luxury of wide choice after the return to independence but it would be plain silly to desribe the present system as just or efficient.One could describe it as temporary.

Name your poison, set your priorities and don't forget that some people wont be able to cope, and need help.One issue is that the main political party is based on an economic ideology. They are not conservatives nor are they social democrats (who are more like British Labour, anyway). Defending their political position means defending an economic ideology. And that is my central critique. Poisons should be evaluated rationally, not on the basis of whether or not they stick to the script. Don't forget, 2009 is an election year here.

Vello ütles ...

I watched Padar as well and what I noticed was his extra long belt dangling out in front of his pants like a Kansas farm boy's belt (with a rodeo-prize, bullet-deflector-shield belt buckle to complete the ensemble). I wondered why he didn't just lose the briefcase and carry his papers in a plastic sack.

But that's what I like about Padar. He's unpretentious. Lets his guard down and tells it like it is. I'll miss him if he gets the axe. There are too many dandies in parliament.

Giustino ütles ...

I know people who are voting for Padar in the European Parliamentary elections just because they feel bad that he has to deal with Ansip.

Eppppp ütles ...

I know these people, too :).

Justin ütles ...

I am not in favor of raising the income tax, and I think that public sector spending should be reduced.

The government has chosen the path of deflation (over devaluation) and many companies have responded by lowering salaries and prices. Yet in the government, many salaries continue to increase (one needs to look at overall employee income since some managers have gotten around salary increase restrictions by paying bonuses).

The budget numbers in 2008/2009 were around 95bn EEK until they started cutting (with negative budgets).

So the question is: will services experience a sudden decline if the budget is cut, as you alluded to? (Police and teachers, for example)

I would argue that for the most part, no. Let's look at the government budget in previous years:
http://www.eestipank.info/dynamic/itp2/itp_report_2a.jsp?reference=503&className=EPSTAT2&lang=en (line 8.1, directly from Eesti Pank. If you cannot access the link, go to eestipank.info and click on Statistical Indicators then Annual Indicators of Estonian Economy)

If you go back even to 2004, the budget was much smaller (55bn). I was also living in Estonia then, and I found no huge problems with the quality of services the government provided. Public sector salaries have simply gone out of control since then (and productivity is still dismally low).

We could even just take the 2004 budget and then make some adjustments and add some spending to get to this year's budget target (after cuts).

I realize I am oversimplifying things, as inflation exists and some costs are difficult to adjust (entitlements like pension payouts), but I do believe the general idea holds.

I will support higher taxes only when it can be shown the government is efficient and salaries are reasonable. I don't think we are at that point yet.

Giustino ütles ...

Public sector salaries have simply gone out of control since then (and productivity is still dismally low).My impression is that all salaries have gone out of control. But why is productivity still so low? Do they need better training? Better management?

I will support higher taxes only when it can be shown the government is efficient and salaries are reasonable. I don't think we are at that point yet.It depends on how the taxes are raised. But, still, I wonder about where exactly the economy is headed. This past boom was fueled by huge investments in financial intermediation and real estate, which spurred further rounds of consumption.

Are Swedbank and SEB really going to let the taps run again once Estonia makes it to the Holy Euro? Probably not in the way that they did before.

So where is this new, post-crisis round of investment going to come from, and how can Estonia be best postioned to catch it?

(I know I am being general here, but let's consider this the 'economy' post.)

Justin ütles ...

My impression is that all salaries have gone out of control. But why is productivity still so low? Do they need better training? Better management?I don't have time to look up the references, but I can do so later if necessary.

Let's take EMTA (tax board). They were the only gov't institution able to reduce headcount substantially, and the head of EMTA said they did it through productivity gains and that the work output would remain the same.

Meanwhile, another amet (I forget which one.. I think siseministeerium) did a few layoffs, and followed that up with giving raises to all remaining employees. The logic? That those employess now had more work tasks, so they should be paid more. Gee, I wonder how they plan to cut their budget.

Now about the private sector. 20%+ layoffs are common, as are salary cuts of at least 10% or more. For example, _every_ major newspaper in Estonia has either done layoffs or cut salaries by at least 9% in the past few months.

Now look at the public sector and their "big" budget cuts they had to do a few months ago. The actual reduction in headcount was minor, like typically only a few percent. Postimees had an article about this a few months ago. They also investigated the social tax paid by each ministry, since that's a good measure of compensation (it factors in bonuses and fringe benefits), and in many ministries the spending on social tax in 4Q09 actually went UP. The gov't was finding ways to cut salaries in some places, but increase it in others ways (bonuses, fringe benefits).

I'm only ready to support new taxes once I see the gov't reducing headcount by 20%+ and salaries as well. Private industry has reacted quickly, because they had to. Gov't should do the same.

For example, let's look at Padar's (financial minister) proposal to cut the budget just last week:

http://www.balticbusinessnews.com/Default2.aspx?ArticleID=05b48279-a4e2-4c99-a315-4b20dc8ca4e6

Notice how he has only cut gov't spending (operating costs) by 1bn, but is instead cutting benefits everywhere else and raising taxes.

So where is this new, post-crisis round of investment going to come from, and how can Estonia be best postioned to catch it?This is debated constantly on BBN (Baltic Business News) so I recommend you peruse the comments section on articles (yes there's a lot of vitriol on there, but also some intelligent chat interspersed). In my opinion, the "way out" is in knowledge economy areas, since Estonia lacks in both plentiful natural resources and also in people (the population continues its decline and immigration is not popular). Things like IT and biotech.

I'm not sure if you plan to live in Estonia all your life, but if so, I would indeed be concerned about the future in Estonia and opportunities for people of your children's generation. The choices the gov't needs to make to ensure a good long-term future are difficult and politically risky, and I (sadly) don't have much faith that these will happen.

Giustino ütles ...

BBN is pretty yellow, when its stories are understandable. The comments section always devolve into diatribes about Estonian inferiority and how Estonia should kiss Russia's ass more.

I agree that Estonia should invest more into biotech and IT. But where will that money come from?
The Swedes and Finns spend more than 3 percent of GDP per year on R&D. Estonia spends less than 2 percent. The markets that biotech aims to serve are huge, but it take a lot of investment before you see any return.

Justin ütles ...

I agree that Estonia should invest more into biotech and IT. But where will that money come from?Indeed you raise a good point, and I must admit I have not analyzed this problem closely enough to provide a reasoned response.

I am very closely involved in the IT sector here. I see a lot of good ideas/projects that aren't getting funded, and part of the blame lies with Enterprise Estonia and Eesti Arengufond, particularly the latter. Their mandate is to take risks and invest in Estonian companies, but they seem to be taking too conservative of an approach. Enterprise Estonia seems too focused on developing production (i.e. tangible goods produced in factories) and tourism.

The IT sector in Estonia still suffers from a lack of workforce. There are plenty of job opportunities out there for people with IT skills, and not enough people to fill them. Maybe something really drastic is needed, like eliminating all (or almost all) free (gov't paid) seats in university in areas where there is little job demand, like psychology and law, and directing that money to provide more free spaces in the IT/tech area. The results would be visible in 3-4 years' time as these students start to graduate.

Estonia has a culture of IT (not many other countries do you walk into cafes and see so many people on their laptops) so I think it's a natural direction to go in. The IT industry is one where starting a company does not require significant investment (i.e. factories/machinery), and results can be seen fairly quickly.

I agree BBN is not perfect, but it's probably the best forum out there for foreigners doing business in Estonia, and some of the commentators are actually fairly intelligent.

nipi ütles ...

Cutting down govt spending is two-sided. From one side, streamlinging the services and getting rid of nonproductive staff (mostly those who do not provide actual services) sounds good.
But comparing with other countries which are in difficult times spending more in infrastructure, we try to cut there also. So result is that government instead of protecting the country and supporting consumption is amplifying crisis. Same way also with tax increases.