Hungarians and economics

A few days ago there was a good suggestion: let's talk about economic and financial ignorance in Hungary. Of course, there are well known Hungarian economists. In fact, I remember as a first year grad student talking to an economics professor of mine who somehow expected me to excel in economics simply because "Hungarians are very good economists." Undoubtedly preserving the reputation of Hungarian economists, I didn't become one. I took a few courses, but mostly Soviet and East European economics which in those days had little to do with the real stuff.

I became suspicious about Hungarian ignorance of the most basic economic principles when a young relative came to visit me in the United States. That was in 1994-95. He was a college student: bright, energetic, with good language skills. He applied for everything he could, and among other things he received a scholarship for a work exchange program to the United States. He took a leave of absence and spent a year here. Came Christmas and my young cousin arrived. Gyula Horn had just sacked László Békesi, his minister of finance, because the prime minister didn't like what Békesi had to tell him: if the government doesn't do something the country will go bankrupt. I was outraged, and I tried to explain to Gyuri (we called him George the Third because he was the third George in the family) the financial facts of life. It was obvious that he didn't understand a thing. He complained bitterly about the high interest rate (I don't want to lie but I remember something like 25%). What kind of a country is it where the banks charge that much money on a loan, he asked. I brought up the obvious. But, Gyuri, what about the rate of inflation? Oh, inflation? It seemed to be a revelation to him that interest rates and inflation had anything to do with one another.

Not long ago I talked to a cousin of mine who manages my meager Hungarian assets. She reported that she had put X amount into long-term CDs. Which bank are you using, I asked. She mentioned a bank I had never heard of, but in the name was the word "nemzeti/national." Oh, I inquired, why this one? Because a national bank will not fail! Here I'm not talking about somebody with an eighth grade education but a former school principal.

The same cousin's latest is the following. Here is the BKV (Budapest Transit System) which is in constant trouble. A CEO comes, another goes, and nothing ever changes. No lending facilities are available to them, they run up huge yearly deficits, and the city (Budapest) that owns the company can no longer help because they don't have any money. So BKV appeals to the central government, and the government says: sorry, we gave you 30 billion not so long ago and there is no more. Admittedly, there's no easy fix. But I mentioned to my cousin that perhaps the best solution would be to privatize the transit system. The reply: "Well, I don't know, look what happened to MÁV Biztosító." To explain, in case you haven't heard of MÁV Biztosító, it is an insurance company that initially insured MÁV employees but quickly moved into the infinitely more profitable world of fraud, selling car and other insurance with no intention of ever paying any claims. It's easy for Hungarians to conflate privatization and fraud.

Another thing that people don't seem to understand is that it is indeed proper and perhaps even more just to tax property rather than to rely so heavily on income tax. Even responsible politicians (and I think Károly Herény, MDF, is responsible and reliable) can say really stupid things about the introduction of property tax. He, and many others, announce that "the real estate owned was purchased from already taxed income. This is double taxation." Yes, but then sales tax is also double taxation. After all, I am purchasing goods (including foodstuff and clothing) from monies I already paid taxes on. And this sales tax is not low: even on bread it is 20%. But while you eat the bread and it disappears into your stomach, the property you purchased, the house you built, is presumably an investment that will appreciate in value over time. (Even in the United States, with the horrific housing data, those people who bought before the housing bubble are okay.) And so isn't this a possible source of governmental revenue?

Middle-class pensioners whose income seems rather meager may actually own several pieces of real estate. Many middle-class people built or purchased weekend houses in the 70s and 80s, some people inherited another apartment after their parents died which they now rent, they may have purchased an apartment for their grown-up sons or daughters, and yet they pay no or very little tax on these properties. For someone who lives in the United States this is very strange. In this country, the main form of taxation, actually the only kind until the beginning of the nineteenth century, was tax on property. And to this day, this tax is the basis of the municipalities' budget. In Hungary the municipalities receive the bulk of their income from Budapest. I think it would be better for the towns to have an independent source of income that could be adjusted to local conditions. And more importantly, it would lighten the burden on those who right now carry the whole burden of the budget through income tax. However, when I mentioned my ideas concerning property tax, this same cousin announced that she hopes she will die before its introduction.

And finally, the politicians themselves are working furiously to lead the people down the garden path if it serves their purpose. The minister of finance had to announce an upward adjustment in the projected rate of inflation for the next few months. Obviously, the reason for this is not local conditions but the international commodities markets. The cost of energy and food. Both originating far away from Hungary. Yet, Péter Szijjártó, who majored in economics, blamed the Hungarian government's policies for the higher than projected rate of inflation. This kind of misleading statement serving only political purposes certainly doesn't help the cause of economic literacy.

Comments

[Adrian]

I think the first observation to make is that Economics doesn't form part of the elite education path in Hungary. Lawyers are seen as having the most prestigious careers in Hungary, and the path to Law is through History and Literature. Economics, I believe, is not even taught in the Gymnasiums, that responsibility falls to the second tier szakközépiskolas. That having said, the central bank has played a very good hand over the 15 years, so some of the Hungarian elite know something about Economics.

Secondly, even if Economics was more widely taught in Hungary, it doesn't follow that the quality of economic debate would be any better - look at the debates involving History we have seen on this blog. The bigger problem is the lack of 'essayist literacy' in Hungarian education. To quote one of my less enlightened colleagues "I don't care what their opinions are, this is what they need to know for the examination". Essayist literacy not only values students' opinions it insists that they are founded on the critical examination of evidence. Without this we get Laci, who would actually be one of my more engaged and open minded students if he were in one of my classes. Nor are my students thick, they are certainly as clever if not cleverer than me at the same age.

I have a wild intuition about why this is the case. The American linguistic anthropologist Shirley Brice Heath has suggested that working class mothers emphasise the "labeling of items" and the "recalling of information directly from the text". Could it be that 40 years of socialism led to the proletarianisation of educational values in Hungary?

Eva, is there any history supporting this intuition?

[Pistefka]

Its interesting that you mention property ownership. Many Hungarians don't know how lucky they are to actually own their property outright (as many do) and even own second properties outright too. I sometimes point this out to Hungarians when they are complaining about how poor they are compared to western Europeans. For the vast majority of people in Britain who "own" a house or flat that "ownership" actually means they are tied to a mortgage for the next 20 years.
The reaction to this observation I tend to get from Hungarians is usually sceptical howver. One pointed out that she had taken out a loan to help pay for her property too. A three year loan. I had to smile.

[Odin's lost eye]

As a total economic illeterate (or perhaps a disbeleiver in the works of Adam Smith, Keyns, Marx, and others) I can perhaps understand this. I am a simpleton, I understand some of Freedman/Thatcher which to me makes sense. If money is difficult to get it is worth more. Interest rates must be higher than inflation, otherwise people will borrow, spend and wait for money to be worth less than they borrowed.
I understand the five laws of the market place. May be I should have spent less time on 'astro-navigation and spherical triganometry' and more on economics.

@Adrian
**** "The American linguistic anthropologist Shirley Brice Heath has suggested that working class mothers emphasise the "labeling of items" and the "recalling of information directly from the text"...." I have a distinct feeling that you are right. I have noticed that when I am talking about something which is outside a Hungarian's knowlage base, they 'switch off' and what is more they just do not wish to know. There is also a clear lack of use of any analytical ability in their mental tool-boxes. They do not lack the ability of mental gymnastics, they do not use them. It is, as if anything outside of their knowlage, is some form of heresy. I have a 'gazda' who lives opposite to me. Every year some of his fields arrive in my 'go-downs' and dooways. I have to shovel it out. I asked him why he did not undersow his crops with clover. Through my wife I tried to explain the benifits (soil binding, nitrogen fixation etc). He switched off and my wife argued with me that it was not possable.

@ Dr Balogh
I dislike the taxation of property to finance local government. My reasons are these
1. That those who have no property still have a vote. These people have no real care as to how the money is raised only how it is spent. The country where you now live fought a war against mine on this very principle "No taxation with out representation" and to my simple mind this also means "No representation without the liability for taxation". This was the essence of Mrs Thatcher's Community Charge. Why it failed is an object lesson in 'Bureaucracy out of control'.
2. Whilst property may have been increasing in value it may not always do so. A tax on possesions of any sort is a disaster waiting to happen as it distorts the market.
3. If a house is let -or any other possesion is making income- then you pay income tax on the profits derived from that income.
4. If a possesion falls in value would you get a rebate? (NO I think not.)
5. An object is only worth what someone will give you for it, every other valuation is subjective. You also add
***** In Hungary the municipalities receive the bulk of their income from Budapest ****
It is thus in many other countries because of the burdens and duties imposed on the local governments by central governments.

[Eva S. Balogh]

Pistefka: "ts interesting that you mention property ownership. Many Hungarians don't know how lucky they are to actually own their property outright (as many do) and even own second properties outright too."

Very high percentage of people (close to 90%) own their own houses or apartments. According to some economists that is not a good situation because it retards mobility.

"I sometimes point this out to Hungarians when they are complaining about how poor they are compared to western Europeans. For the vast majority of people in Britain who "own" a house or flat that "ownership" actually means they are tied to a mortgage for the next 20 years."

In the States thirty-year mortgages are common, however, in normal circumstances that doesn't mean that one is tied down for a lifetime. I think that every American family packs up and moves every seven years. The transaction is fairly simple. You bought the house for X and you sold it for X + Y = Z. You owe X - A to the bank. From Z you pay what you owe to the bank and the rest is yours.

"The reaction to this observation I tend to get from Hungarians is usually sceptical howver. One pointed out that she had taken out a loan to help pay for her property too. A three year loan. I had to smile."

Very many people purchased their apartments for peanuts from the local governments at the very end of the 1980s. Really ridiculous amounts of money. By now the value of these apartments is perhaps hundred folds. One infamous case is a downtown apartment purchased this way by the Orbán family and two years later sold something like twenty-five times of its original purchase price. However, this would have been quite legal but, if I recall properly, there was something wrong with the original purchase. They didn't have a large enough family at that time and his political connections came to the rescue. At that time District V was in SZDSZ hands. Fidesz at this point was junior partner of SZDSZ.

[Pistefka]

Yes, of course people aren't really tied down to 20-30 year mortgages - they can always move house, and doing so every 7 years is the average in the States. However, your next property will also invariably have a mortgage attached. The point is that few people own their house outright, and everyone with a mortgage has a "sword of damocles" over their head - if they lose their job things can get sticky rather quickly. It also means lots of people are interested in what happens with the interest rates - otherwise these would be of interest only to a small minority who are interested in and understand economics.
All this debt probably does mean people work harder and worry about balancing the books. The problem in Briatin is that property is now so expensive that well-off young professionals, the kind who would be the most productive careerists, are now unable to afford to "buy" (i.e. pay the deposit on a mortgage for a) house. In the US the problem is that for the last few years the banks thought that it would be very cool and unconventional to give mortgages to people without any deposit at all!