The Hungarian budget debate: Politically motivated economists and others

Twenty-nine people, no friends of the current government, published an open letter in Magyar Nemzet and Magyar Hírlap addressed to members of the Hungarian parliament. The men and women who penned their names to the document were even ready to pay for the publication of the letter. MTI claimed that the letter was the work of "well-known economists, among them high-level government employees of the Orbán government." Yes, it is true that there are some "well-known economists" among the signatories, but most of them are neither well known nor economists. Some come from the business world and not all of them occupy high positions. For example, I found one woman who was described on Linkedin as a "marketing assistant." I was also somewhat baffled when I saw the name of Gábor Náray-Szabó, a member of the Academy, who is not an economist but a chemist. (If anyone would like to have a good laugh he/she should visit one of my earlier blogs in which I translated a conversation between Gábor Náray-Szabó and József Orosz in Kontra. The comments to this post are also hilarious.) Perhaps most startling was the name of Ferenc L. Gazsó, the editor-in-chief of the far-right Magyar Hírlap.

Admittedly, there are some well-known economists on the list, but I would say that they are in the great minority. The most prominent are two former chairmen of the Hungarian National Bank: Péter Ákos Bod and Zsigmond Járai. Bod filled the position during the Antall government only to resign under pressure by Prime Minister Gyula Horn (MSZP) while Járai, after serving as minister of finance in the Orbán government, occupied the post between 2000 and 2005. Járai's relations with the Medgyessy and Gyurcsány governments were singularly bad. Some people blame him for keeping the forint artificially strong and thus doing great damage to the Hungarian economy. In addition to these two men another big name is György Szapáry who left Hungary in 1956 and, after receiving his degree in economics at the Catholic University at Louvain, worked for the IMF until 1990. In that year he returned to Hungary as the representative of the IMF. Later he became one of the vice-chairmen of the Hungarian National Bank.

When asked why he decided to sign this letter Zsigmond Járai said that it was out of desperation. He and his fellow signatories are convinced that this budget will only deepen the economic crisis. The letter claims that the budget before parliament is bogus, that it cannot be implemented and therefore will further discredit the country in the eyes of the international financial community. The minister of finance, they write, overestimated the size of certain revenues while underestimating expenses. In addition, the signatories blame the government for postponing necessary reforms and not helping Hungarian entrepreneurs' competitiveness. The letter concludes with: PLEASE DON'T PLUNGE THE COUNTRY INTO NEW DANGER.

Finance Minister Péter Oszkó's reaction was brief but to the point. He accused the signers of the document of partiality and stated that anyone who has a sense of duty and responsibility for the future of the country should vote for next year's budget. As for the bogus budget he brought up the fact that this is the first Hungarian budget to undergo the scrutiny of the European Committee, the International Monetary Fund, the Hungarian National Bank, the State Accounting Office, and the newly founded Budgetary Council. Not one of them thought that the budget used false data.

Today an opinion piece appeared in Népszabadság by Tamás Bauer, himself a well-known economist, publicist, and former member of parliament. The article is entitled "I can't believe that Bod, Járai and Szapáry actually signed this!" And later: "This must be a forgery! Not the text, the signatures." Of course, Bauer knows only too well that the signatures are for real, but he wants to emphasize the absurdity that these people could possibly lend their names to opinions expressed in the open letter. Take Szapáry, for instance. After all, for about thirty years he was employed by the IMF and originally came to Hungary as its representative. He then represented those very principles he now finds unacceptable.

Bauer also expresses surprise that Járai signed this document. Járai who until now time and time again demanded the radical reduction of government expenses. And this budget cuts expenses by 1,000 billion forints. Járai while he was minister of finance wanted to introduce a flat tax but was unable to implement it due to Viktor Orbán's opposition. This budget's tax structure is as close to a flat tax as possible without calling it a flat tax. Bod, a cautious man who believes in gradual change, should really know how deeply and bravely this government reduced government expenses.

How can these three men say, continues Bauer, that "this budget takes the country in the wrong direction just as the bogus budgets of the Gyurcsány government," when they know full well that it was the 2002 Medgyessy budget that moved the country's economy in the wrong direction. As for lack of reform, surely they couldn't mean what they say because this budget contains serious reform steps as far as pensions and family assistance are concerned. The reason that no more could be included is due to the Fidesz initiated referendum that put an end to certain reforms. But then "responsible economists" didn't raise their voices, says Bauer sarcastically.

As far as "plunging the country toward new danger, they could have said that about the 2000 or 2002 budget but then they said nothing." Oh, yes, all that talk about independent experts! Let's face it, they don't exist.

Comments

[Mark]

That the signatories of this letter are motivated by their own political interests (interests to which I'm not sympathetic, as I am by nature a left, and not a right-winger), doesn't make them wrong on the economics. It is noticeable that neither Bauer nor Oszkó are prepared to say why they believe this letter is wrong; they only assert that it is, or go around trying to bash the signatories.

Slashing budgets may or may not desirable, when all other things are equal - but saying that doing it is good in all economic circumstances is a bit like saying it is a good idea driving at 100 km p/h all the time and in all conditions, because that is the speed limit on a high speed highway where this good weather and perfect visibility! To cut spending in circumstances when growth in the private sector is contracting will exacerbate the extent of the recession. This is something economists (except most Hungarian economists, whose knowledge of the operation of actually existing capitalist economies bears more relation to crude theories about correctly functioning markets than reality) learned seventy years ago. In the Hungarian case probably as much as a quarter of this year's contraction is due restrictive budgetary and monetary policies for which the two governments in office since October 2008 can be responsible for directly, and the current budget will delay the stabilization of Hungary's economy, possibly by as much as a year. This will add to unemployment, which will feed low participation in the labour market (everything we know about unemployment suggests many will never return), which will damage long-term growth prospects.

In so far as expenditure and revenue are concerned the real issue isn't the accuracy of the data (anyone who knows anything about the data will know that it is provisional for a variety of very good reasons). It is that if one tries to slash budgets in circumstances of economic contraction then final expenditure will not fall, it will rise. If one increases taxes and depresses economic activity, it is not necessarily the case that this will bring in any more revenue. If a state's budgetary planning assumptions do not recognize this fact, then they are going to be wrong. If their estimate as to what happens to GDP is out - even by what seems like a small ammount - then their budgetary projections will be wrong.

[Gábor]

Actually as much as can be known about the signatory's - I mean the "economists" here - opinion they advocate even harsher spending cuts and lower taxes in a way that raises inequalities. Járai's main dream (rather nightmare) is to fire an additional hundred or twohundred thousand from the public sector, for example. Moreover, the word "reforms" at least as these "economists" use it, is usually understood as cut first in the publc sector and wait if there is something positive as a result. (Ok, I'm not entirely correct, but their reforms used to be market-oriented ones.) Szapáry was in the IMF during its heyday and represented the Fund in Hungary until 1993, the classic era of IMF recipes. He still didn't show any sign publicly (I have to admit that I don't follow his academic career) that he would have reconsidered his ideas and opted for a more balanced economic approach.

Anyway, Oszkó clearly has some reason to be insulted, as he is coming from the same environment has the same ideas and as a representative of the Reform Alliance - I fear even in the government - he could have hoped for support from like-minded people. But maybe it is time for him to learn about the hardships of life. :)

And I especially love the sentence - betraying a thorough knowledge of our neighboring countries' situation - stating that the crisis hit Hungary harder than the surrounding states. Apart from the problems of differentiating between the dead body of a cow and an ox the hard data is far from supporting such practical nationalist statements.

[Mark]

Gábor: "Actually as much as can be known about the signatory's - I mean the "economists" here - opinion they advocate even harsher spending cuts and lower taxes in a way that raises inequalities."

Someone - I forget who - once defined hypocrisy as the homage paid by vice to virtue. I'm reminded of that definition when I think about the past positions of some of the signatories of this letter. I suspect that all of them have realized that over the next year they will become responsible for Hungary's economic disaster and the resulting political crisis. There will (and probably literally) be no MSZP left to blame, and will have Jobbik breathing down their necks on the right, and the MDF to their centre. If they produce no speedy turnaround in Hungary's economic fortunes (a tall order with even a change of policy) they will be faced with political meltdown on a scale greater than has afflicted the current government. And I have a strange feeling it won't be forces to FIDESZ's left - any of them - that will profit the most from this meltdown. For those who have waited eight years for power, there is nothing that concentrates the mind more than losing quickly and in spetacular fashion.

[Gábor]

Today's strange text form Péter Heim at index.hu was not corroborating the idea of "economists" sobering from their earlier irresponsible stance. He just repeated his ideas, this time even more vaguely and was sticking to the concept that lower redistribution rate means automatically higher potential GDP growth. Let's hope that he - besides Járai - also won't be a minister from that equipage. (I must admit he is my personal favourite. He was always a unshaken critique of Gyurcsány's convergence programs, always boldly predicting a worse budgetary outcome for next year as it was in the budget - since 2007 it meant very bad predictions, but his mastery was revealed by the fact, that some days after Lehman's collapse he announced that the worst of the crisis is over, stock exchanges can not fall more because every loss was already anticipated etc. Not exactly two months later he was a whip of the government hat - contrary to his magnificent pesronality - was not capable to predict the real economic consequences, proposed a budget that was clearly impossible from the begining etc. Oh, and I especially love his distinctions, signalling his outstanding economic knowledge: most sophisticated trader of government bonds. :) I fear this is the essence of Hungary's current meltdown, everyoe claims to be something else as in reality they are. Péter Heim, "economist".)

[Odin's lost eye]

I have a nasty feeling that this letter was actually written at the behest of the leadership of FIDESZ and was ‘signed b those who wish to ingratiate themselves with the party. They are looking to get their snouts into the ‘gravy train’ which they see on the near horizon. Orban Victor has in the past resolutely set his hand to the total destruction of all political other parties as part of his wish to be the absolute power in the land (the All Highest). Since it is expected that all the other parties (except Jobbik) will be destroyed, when FIDESZ takes power the Europeans will do everything it can to keep them in power. They will do this they will subsidise Hungary to the hilt even though they know that the lion’s share of these subsidies will go straight into the pockets of the top brass. They will do this because the alternative (Jobbik) is totally un-acceptable to the peoples of rest of Europe.
In the realm of economics, I gave up trying to understand them when the U.K. economic models used by the national economic development in the early 1970s lead to total economic ‘stagflation’. A few years ago I read a book on Chaos theory. One chapter suggests that economic activity is by its very nature chaotic and involves weird things called ‘strange attractors’.