What Inflation?

28^th August 2008
The Malta Independent - Friday Wisdom

If you are confused about what the real level of inflation is, I don’t blame you. This for three reasons. Firstly because there are four different measures of inflation published every month. Secondly because these measures attempt to calculate the general level of inflation which are different from the individual’s own experience. Thirdly because the tools used to measure inflation are imperfect and they tend to go out of date rather quickly.

Let me try to unravel this complex issue. Every month we get four different inflation readings. The inflation results published for July 2008 can be seen in the table above.

The main difference between the RPI and the HICP is that the latter captures also hotel accommodation prices normally consumed by tourists. This element is not included in the RPI. There are also some minor differences in classification and weighting adjustments, which however leave very negligible impact on the overall result.

So the fact the HICP measure is higher than the RPI measure for the 12 months to July 2008 is positive in the sense that it shows that the economy is enjoying a buoyant tourist season permitting our hotels to increase their room rates.

The 12 months moving average measure smoothens out changes as rather than measuring the increase of the Index from a point 12 months ago to the same point this year, it measures the average of the last 12 months this time last year to the same average of the last 12 months. Accordingly price movements are more instantly reflected in the 12 months measure and will take time to get reflected in the 12 months moving average method.

Probably the RPI 12-month inflation measure is closer to readers’ personal experience but I still do not blame anyone who feels that in their case the real inflation is higher than the 4.80 per cent declared by the statistics. This is because the RPI averages out consumption patterns as they result from a nationwide household budgetary survey and one’s personal consumption pattern could vary substantially from the average.

Let’s take food as an example. This has a weighting of 23.82 per cent in the measurement of the RPI. Now this percentage could be too much for high income persons and could be too little for low income earners. People have to eat every day and there is a limit to how much they can eat even if they are rich. So food consumption as a percentage of total expenditure tends to vary inversely with the level of income. The higher the income the less one spends on food in percentage terms and vice-versa.

Given that food showed a 7.80 per cent increase in the year to July 2008 it is quite understandable that low income earners probably feel that their cost of living has gone up more than reflected in the RPI. On the contrary “water electricity gas and fuels” which increased by 31.29 per cent in the 12 months to July 2008 have a much higher impact on richer consumers than the 2.25 per cent weighting given in the index.

This brings me to the third point. The RPI is based on a Household Budgetary Survey which was collected seven or eight years ago. The HICP on the other hand has a base year 2005 but the weightings are reviewed annually for changes in consumption pattern as resulting from the National Accounts and such consumption includes not only private households (as is the case of the RPI) but also institutional households (corporate and businesses) and foreign visitors.

So for example the weighting of just 2.25 per cent for the “water, electricity gas and fuels” is clearly unrepresentative of our current spending pattern in 2008. Yet we continue to publish a faulty RPI which eventually sets the basis for COLA adjustments as if we are still in the year 2000.

On the contrary “transport and communications” has a weighting of 23.13 per cent. In all honesty do private households in 2008 spend 11 more times each year on transport and communication expenses (private car including maintenance and fuel and telecommunication bills) than they spend on their utility (water and electricity) bills and gas / kerosene consumption for cooking and heating?

It is evident why government, irrespective of social considerations, finds it much more convenient to recover higher energy cost by raising the surcharge on utility bills rather than the price of fuel at the pump. Due to the skewed weightings in the Household Budgetary Survey on which the RPI is calculated, increases in the price of fuel at the pump will have 11 times more impact on the RPI than increases in utility bills.

Beyond interpretation of the published figures there is often controversy on what is causing inflation. Is it imported higher prices of energy, commodities and food over which government has little control and which hopefully would be one-off in nature, or is it more to do with internal dynamics in price movements that are more within government’s sphere of influence, at least theoretically?

The correct answer is that it is both. Clearly 7.8 per cent in prices of food and 31.29 per cent in the prices of energy are imported stuff which government cannot do much about, unless we start forking out expensive subsidies which delays demand adjustments and break the public coffers. However there is some evidence that this first impact of imported inflation is partially seeping through second round price rises in other sectors. How can one explain a 7.02 per cent in clothing and footwear and 5.6 per cent increase in the price of educational services?

Nobody is suggesting that we return to across-the-board price controls to contain inflation. Furthermore in a monetary union we have pretty little tools left to use, as monetary policy is decided by the ECB for the whole union and fiscal policy has a fixed aim to balance the budget by 2010. What we are left with, is consumer education and effective consumer protection through price checks on regulated activities and dissemination of information so that consumers know with as little hassle as possible that they have a choice.

This is why I find the stiff increase in price of clothing and footwear, one of the most competitive sectors, hard to understand unless we have become all so choosy to have switched from generics to branded products.

Who is Bullying Whom

24^th August 2008

The Malta Independent on Sunday

The western media would have us believe that the Russian invasion of Georgia following the South Ossetia ordeal is a reversion to the Cold War era, with Russia planning a gradual process of annexation back into the Soviet Union of former soviet republics that are now sovereign States

Russia has been served with several high level warnings that unless it reverts to the status quo ante, it will be considered as untrustworthy partner. The West has practically threatened to freeze all political co-operations like the Nato – Russian Council, to exclude Russia from future G8 meetings, or even block Russia’s aspirations to join the WTO.

Many could easily justify such a hard-line stance by citing Chamberlain’s misjudgement in appeasing Hitler through the 1938 “peace in our time” Munich agreement, which opened the way for the annexation of Czechoslovakia without a single shot being fired.

But comparisons are odious and there is nothing to suggest that Russia is in fact pursuing a policy of annexing any territories. If Russia argues that South Ossetians have a right to determine their own sovereignty it would open a can of worms, encouraging Asian and Caucasus regions like Chechnya to demand separation from Moscow.

The West’s handling of Russia following the disintegration of the Soviet Union was offensive, even if unintentional. Rather than treating a nuclear power with respect during its post trauma disorders, the West heaped on it additional servings of humiliation. When Russia was on its knees, the West continued to kick it. It is therefore little wonder if the Russians tend to go to the other extreme in an endeavour to re-assert their world status now that they have recovered. The pendulum never stops in the middle when released from the side.

The West has served Russia with a fait accompli over and over again. Here is the unilateral abrogation of the Anti Ballistic Missile Treaty for you. Here is our decision to extend Nato right to your doorstep. Here is our decision to place missile defences in Poland and Czech Republic, and you have to take our word that we will only use them to defend ourselves from Iranian missiles even though this is still very much unproven technology. Here is the independence of Kosovo ready for you to accept.

How can the West be in favour of giving Kosovars full sovereignty, thus allowing the will of the people to prevail over territorial sovereign integrity, but argue that in South Ossetia territorial integrity should prevail over the will of the people? One of them must be wrong.

Rather than paint Putin as the Russian bear ready to swallow up minions around him, it is worth getting at least a glimpse of how the Georgian debacle is viewed by the Russian side. And I do not suggest listening to the official pronouncements of the Russian government, as these are obviously partial and self-serving. I propose the opinion of someone who is very much respected in the West, someone no less than Mikhail Gorbachev, former President of the Soviet Union. Here is an excerpt of his op-ed published in the New York Times of 19 August:

“The acute phase of the crisis provoked by the Georgian forces’ assault on Tskhinvali, the capital of South Ossetia, is now behind us. But how can one erase from memory the horrifying scenes of the night-time rocket attack on a peaceful town, the razing of entire city blocks, the deaths of people taking cover in basements, the destruction of ancient monuments and ancestral graves?

“Russia did not want this crisis. The Russian leadership is in a strong enough position domestically; it did not need a little victorious war. Russia was dragged into the fray by the recklessness of the Georgian President, Mikheil Saakashvili. He would not have dared to attack without outside support. Once he did, Russia could not afford inaction.

The news coverage has been far from fair and balanced, especially during the first days of the crisis. Tskhinvali was in smoking ruins and thousands of people were fleeing – before any Russian troops arrived. Yet Russia was already being accused of aggression; news reports were often an embarrassing recitation of the Georgian leader’s deceptive statements.

It is still not quite clear whether the West was aware of Mr Saakashvili’s plans to invade South Ossetia, and this is a serious matter. What is clear is that Western assistance in training Georgian troops and shipping large supplies of arms had been pushing the region toward war rather than peace.”

Former German Chancellor Gerhard Schroeder expressed similar views. Here is an excerpt from his interview with Der Spiegel:

“The hostilities undoubtedly have their historic causes as well, and the conflict has had several historic precursors. But the moment that triggered the current armed hostilities was the Georgian invasion of South Ossetia. This should not be glossed over.

“There is a perception of Russia in the West that has very little to do with reality.

“I do not believe that Russia is pursuing a policy of annexation. And I also do not believe that there can be a return to the status quo ante in South Ossetia or Abkhazia. It’s out of the question. In my opinion, this has less to do with supposed Russian expansionist interests than with the wishes of the civilian population.”

There is always another view, which must be considered before rushing to conclusions. Rather than resort to escalating levels of mutual bullying, the West and Russia should realise than they have much to gain from continued co-operation. Russia has a shrinking population and a vast territory on its Asian side that is very sparsely populated. China’s rise and international assertion means that Russia needs to befriend Europe in order to avoid being squeezed by the USA on one side and China on the other. The US would do well to start taking into account Russia’s concerns for its own security before rushing to escalate the consequences of a regional turmoil, which Russia did not start,

Setting the Record Straight

22^nd August 2008
The Malta Independent - Friday Wisdom

My recent contributions regarding the planned privatisation of the shipyards and the disagreement between the government and the General Workers’ Union regarding the fate of employees seem to have irritated a few in the GWU quarters who expected of me a more supportive posture.

I have been accused as bearing prejudices against shipyards’ employees and that I am showing inconsistencies compared to how I had expressed myself regarding past similar exercises involving early retirement schemes.

Let me set the record straight. Firstly I have no prejudices against shipyards employees. Why should I? Secondly when I write I don’t do it to please this or displease that, but to express deeply held opinions hoping that my readers find them interesting enough to adopt them or criticise them.

If I have a regret about the shipyards it is that in 2008 they are still suffering the same problems that I had identified when in 1985 I had conducted a discreet internal exercise for the then Prime Minister Karmenu Mifsud Bonnici. Nearly a quarter of a century later and after sinking in some one billion euro in subsidies and investment, we are still trying to resolve the same problems. What hurts is that our shipyards, if properly managed and if employees adopt a can do positive attitude and start believing that efficiency in operations increases employment opportunities rather than reduce them, can offer employment to many thousands earning money and self respect in multiples of current experience.

In no way have I ever inferred that current problems are all the responsibility of employees and their union. Beyond single events like the Fairmount affair, which scandalously government is failing to take initiative to have it properly investigated through a public and independent enquiry, ultimately when an enterprise fails it is the responsibility of the highest corporate authority i.e. the board of directors or its equivalent.

If workers and their union make demands which management cannot justify on the basis of efficiency and productivity, it is management’s responsibility to hold firm rather than make concessions that compromise the enterprise’s viability. If management shuns its responsibility the board should sack it and replace it by someone more competent.

In a recent article in this series Death by a thousand cuts – 27 June 2008, I criticised the government for its handling of the whole shipyards issue in no vague terms: “Politicians work differently. As their primary objective is to obtain and retain power they prefer a tactic of making gradual changes over time so that nobody notices and those who notice do not raise much of a protest. It does not matter to them how much resources and time get wasted to arrive at their objective provided they get there without compromising their position in authority”.

So anybody who argues that I am laying all blame on the workers is absolutely incorrect. But I have no qualms in re-stating my position on this whole saga:

Firstly, I do not agree with the issue of early retirement schemes. Paying workers not to work has no place in my economic dictionary. Any available funds should be used to retrain workers to place them into other productive jobs.

Secondly, bidders should not be obliged to take workers they do not need as this would in any case be discounted in the privatisation price. Obviously the level of employment offered by the bidders will be an important criterion, among others, in the selection process.

Thirdly, employees not absorbed into productive work at the shipyards following the privatisation process are to be attached to a government/EU funded retraining scheme with their full pay maintained for the re-training period, say one year, possibly more.

Fourthly, same facilities are to be offered to employees made redundant by the private sector. The discrimination against private sector employees is a social heresy which unions should be fighting against.

Lastly, it is counter-productive for Labour’s aspiration to break out of permanent opposition mould at the next calling, to be associated with irresponsible calls to take to the streets or to break into Castille as a show of force. Labour’s only sustainable method of making it to Castille is by winning the general elections, which needs not only the traditional voter base but the majority of floating voters. The latter are distanced rather than endeared by irresponsible talk.

Thankfully, albeit with delay, the Labour leader found the courage to disassociate the party from such damaging irresponsible talk and that goes to his credit. Hopefully my criticism prodded him to do what needed to be done no matter how unpleasant it is to disassociate from old friends who behave irresponsibly.

On each of these five points I hold deep conviction and can expound my thoughts in greater length through more appropriate channels than a weekly newspaper column. And I am absolutely at peace that my views are perfectly in harmony with fundamental social democratic left-leaning political teachings.

What in my opinion offends socialist doctrine is paying workers for not working and in the process depriving funds needed in other deserving sectors in health and educational services or loading debts on future generations; or offering redundancy protection to some workers whilst leaving others totally exposed to the unpleasant effects of globalisation; or obstructing the proper re-organisation of business to achieve competitive efficiency levels compromising the jobs of those who remain in employment.

I don’t think there was any personality more socialist than Mintoff in post-war Maltese politics. Under Mintoff’s administration no subsidies were offered to the shipyards except a one off Lm12 million loan write-off as part of the 1973 re-organisation. Yet from 1974 to 1981 the shipyards operated above or near breakeven levels without state support. It was when the Mintoff 1973 show-me-you-have-balls re-organisation started to wear off that losses started to accumulate without address.

During this period it was the workers council of administration under the chairmanship of Sammy Meilaq who had final responsibility for the shipyards. This until Alfred Sant had the courage to change things in 1996 saying the government had to have final say in the shipyards’ direction if it is to continue writing subsidy cheques.

Pity that following PN administration made a mess of subsequent re-organisations with downsizing and all, which never seems to be enough. You cannot continue to downsize the firm out of existence and rather than downsizing, what the shipyards need is strong management that can inspire union cooperation to install a new works culture. Giving job guarantees irrespective of performance, which is denied to most of us, does not help to bring about the needed culture change.

Finally it is heretic to blame EU membership for the shipyards problems. If anything EU membership is constraining us to address the real problems and not just persist in past irresponsible policy of postponing real solutions and financing the shortfall by writing a taxpayers’ cheque.

 

   

Marching on Castille

15^th August 2008

The Malta Independent - Friday Wisdom

What’s the difference between the French and the Maltese?

The French marched on the Bastille when the oppressed majority had had enough from the monarchy and its court of nobles. The Maltese tend to march on Castille whenever a privileged minority feels threatened by the government who in the name of the majority tries to remove some of their privileges.

Recently we had the transport operators defending their monopolies, where they make more money from sale or transfer of restricted licences and from state subsidies rather than normal down to earth operations, marching on Castille when government declared its policy to liberalise the public transport sector.

We now have the GWU threatening a march on Castille by shipyards workers demanding job guarantees for those among them who do not opt for early retirement schemes. The government is offering these schemes on a voluntary basis to all shipyards’ workers on the pretext that it needs to slim down the workforce even further in order to bring the organisation into shape for a successful privatisation.

I cannot manage to count how many times in the past any sector that felt threatened by the government’s action, chose to express determination to defend its position by marching on Castille. It has become a national trait.

There is in the country a much larger majority who busy as they are with their life, never find time to march on anywhere even though in the end they are the ones who have to foot the bill for the success or otherwise of whoever decides to march on Castille. It is the majority of Maltese taxpayers who through their fiscal contributions put the democratically elected government in funds to administer in the best economic manner whilst striving to maintain social cohesion in full respect of law and order.

It must be remembered that the government has no funds of its own. The government is the representative of the people and the funds it administers belong to the people. So when protesting minorities make claims on the government to protect their narrow segment interests by demanding anything which costs public funds, varying from continued subsidies to job guarantees, they are effectively asking neighbours next door who pay taxes on their hard earned money, to continue to channel those taxes to maintain the protestors’ inefficiencies.

In the case of the GWU demands for shipyards workers, they are effectively asking honest hard working taxpayers whose only job guarantee is their own hard work and efficient output, to provide guarantees, which the general taxpayers do not even enjoy, to certain sections of society who have not found a way to migrate to operational efficiency in spite of a horrendous flow of past state subsidies.

With a left leaning conscience I am all for social transfers in society in order to protect deserving causing who because of their health, age or particular situation, cannot help themselves to participate in the general economic growth created by taxpayers. This is necessary to maintain social cohesion among society which cohesion itself provides an inviting background for stimulation of economic growth.

Nobody among us argues these days, thanks mostly to the Mintoff revolution, the need for society to pay pensions to its retired employees, for providing social payments to those who cannot work due to sickness, destitution or temporary unemployment, and for providing basic free services in education and health services. However we must not fall into the trap of considering long-term subsidies as deserving social payments.

On the contrary, if society is constrained to provide long-term subsidies to segments who refuse to re-organise themselves to commercial success or, where this proves not possible, to move to new self sustaining economic activity, it would in fact be misallocation of resources, meaning that the truly deserving causes for social support will not receive the level of assistance they deserve. It is socially regressive to continue subsidising able bodied who should be contributing to society rather than draining resources away from it.

Nobody had explained this more clearly than Mintoff himself who in 1973 went to speak at the famous meeting for dockyard workers where he actually challenged them to show they have balls to operate the dockyards without reliance on state subsidies. And they did at least for a period as the Dockyard operated profitably until 1981. Then the Mintoff effect withered away gradually and under a 21-year PN administration we have been hopping from one restructuring scheme to another, costing the taxpayer some one billion euro cumulatively, and yet leading to nowhere but threats of marches on Castille.

The only march that the taxpayer will gladly make is that to the ballot box every five years and it would be indeed a pity if the new Labour administration does not position itself as a better defender of taxpayers’ interests so as to give them a real choice when next asked to choose their national leaders.

What the GWU should be insisting upon is that any employees who do not opt for early retirement and who are not offered re-employment in the privatised outfit, will be offered extensive re-training to facilitate transition into new productive sections of the economy. And for this there should be no need to have workers march on Castille. On the contrary, GWU executives should walk head high to Castille for proper negotiations in this sense while respecting the interest of the general taxpayers.

Workers marching on Castille with the evident approval of Labour will distance rather than endear the growing floating voter segment from Labour, making the dream of making it to Castille recede further deep into the future. Going to Castille for serious negotiations which respect to the interest of the taxpayers will bring Castille much closer to Labour.

If Labour truly wants to be elected that is.

 

   

It Hurts

8^th August 2008

The Malta Independent on Sunday

Is it the summer heat or has everyone gone crazy? How dare the government squander taxpayers’ money, offering shipyards employees yet another early retiring scheme possibly costing the nation some e49 million after having already thrown down the drain some e1 billion, equivalent to one third of the national debt, in useless restructurings that led nowhere?

And how can the GWU advise shipyards’ employees to refuse this bonanza once the government has gone crazy with our money? How can workers be expected to altruistically refuse to be paid for doing nothing while still having the possibility to be re-employed at the shipyards when they are privatised?

I am against early retirement schemes, period. And I am not alone. The EU we all love so much now is against early retirement schemes too. Such schemes pay people for doing nothing and add strain to our social security systems at a time when we are extending the retirement age to keep them from going bankrupt.

We should not pay any able-bodied person for doing nothing. If we have money to spare, we should invest it in retraining schemes to re-skill employees for alternative productive employment as quickly as possible.

Such schemes should be available to all workers who suffer redundancy. The practice whereby employees in the public sector continue to be privileged with voluntary schemes to accept redundancy while private sector employees remain totally unprotected, should be unacceptable to anyone with a social conscience. Unions should be insisting on more equity in the labour market rather than asking for privileged job guarantees the non-privileged can never have. Don’t we all pay our taxes, or are some more equal than others?

The suggestion that employees should be offered an alternative to move to some other public sector job is offensive to taxpayers. If we do that, we may just as well keep the shipyards open and continue subsidising them, which thankfully we cannot do because the EU rules will be invoked to save us from ourselves.

Arguments whether early retirement schemes should be offered before or after privatisation are irrelevant. They should not be offered at all.

Once there seems to be consensus that the only alternative to closure is privatisation, it means that the shipyards’ employees will all become redundant very soon once no major works contract are being entered into until privatisation is concluded. Redundant employees should be re-trained and re-skilled until they find alternative employment. The government, as their indirect ex-employer, should pay for such retraining (which could be funded through special access to EU programmes) and keep them on full salary for the training period (say one year).

The privatisation process should in the meantime proceed in full swing and, to ensure that the nation obtains the best value from it, no obligation should be imposed on the bidder regarding employment obligations. Obviously, the employment aspect will be an important criterion, among others, in evaluating and adjudicating the bidding process. But no employer should be made to keep employees it does not need on its books, as otherwise this will be discounted in the bidding price. If this happens it means that, essentially, the bill for such excess labour would still be on the taxpayer.

In the private sector there are no job guarantees. If we work hard and do well we have a job; if we don’t we get the brown envelope and Bob’s your uncle. Occasionally it gets worse. Private sector employees get the brown envelope even if they work hard and conscientiously. Technological innovation, threats of globalisation and normal life cycle processes make even the best among us redundant.

If employees in the private sector organisation hit by redundancies are unionised, their union will try to negotiate a severance package that goes beyond the tokens provided by law. But if the employer happens to run into financial problems, then not even the legally due redundancy tokens remain assured.

Have you heard any union making claims for voluntary redundancy and job guarantees for such private sector employees? Clearly, the unions have pretty few levers to pull in the private sector and somehow only flex their muscles where the government is involved as a direct or indirect employer. No wonder everyone prefers a government job!

Have you heard any union suggest to the government that before considering adding on industrial relations the burdens of second pillar pensions, the government should bring equity in the labour markets by making it obligatory for all employers to contribute to a redundancy fund, which would keep the salary of redundant employee intact while attending State/EU funded training programmes?

The government has become too cavalier with our money. The argument that early retirement schemes will be funded from the privatisation proceeds, has been used as if it doe not matter if privatisation proceeds are squandered. Privatisation proceeds will be a mere trickle of the one billion euro we have poured down the shipyards these last 20 years. Most of these funds are accumulated in our national debt on which we have been paying hefty interest bills each year. Any privatisation proceeds we get should be used to reduce the national debt. They should not be frittered away on some crazy early retirement schemes where we pay people to go away of their own accord and then come back and do the same work for a new owner, probably earning more than before if the outfit is managed as efficiently as private organisations usually are.

And once at it, how can the government keep mum on claims being made by the unions that management have caused the shipyards to incur huge losses on some contracts, which were improperly negotiated, wrongly costed and badly executed? Awesome figures of tens of millions of euros have been mentioned. This is the taxpayers’ money. The shipyards are no ordinary commercial organisation. If someone fouled up then the taxpayer has to be given due account. Not that the shipyards’ fate could have been avoided without such foul-ups. But at least we would have lost a few millions less. A proper explanation, confirmation or denial is needed and if the government has no answers then it should get them by setting up an independent investigation. This in no way should be allowed to delay or interfere with the privatisation process. Both can run in parallel.

Time is tight and the margin for error is zero. The taxpayer should not be made to suffer more. It hurts!

 

   

Poker

8^th August 2008
The Malta Independent - Friday Wisdom

With the decisions taken over the last two months for the formation of the leadership and administration line-up, Labour will have many an opportunity to celebrate triumphs at local and MEP elections. However they made it unlikely to win the general elections when they come by 2013 even though the PN will be suffering from accumulating voter fatigue and the electorate’s inclination to try something new after long tenure by the same party.

When this will happen eventually, Labour should spare itself further self-flagellation through publishing post mortem reports of analysis and just accept that as the seeds of the 2008 election defeat were sown in the internal leadership elections in 2003, so the outcome of the next general elections has been prejudiced by the choices made in 2008. The delegates who made the choices in 2003 and 2008 need look no further than their reflection in the nearest mirror to understand why the floating voters will again not be attracted to Labour when it matters.

Ultimately in the general elections a party can close on success if apart from holding on to its voters’ base, it wins the majority of the floating voters. And floating voters will sway to Labour only if rather than radical changes it presents credible alternatives for better execution in continuity.

The public opinion of the floating voter segment was already challenged by the choice of Joseph Muscat as leader over George Abela. However as Dr Muscat is still an unknown quantity nothing was seriously prejudiced and indeed the initial soundings and positions taken by the new leader kept the floating voter segment warm towards Labour and willing to give its new leader the benefit of the doubt.

However events over the last two months are making floating voters ever more doubtful about whether Labour can deliver what its new leader has promised. And you can’t blame them! The choice of the two deputy leaders was already out of sync with moderate line of the new leader. Of course the party needs hard-liners as they form a crucial part of the base. But it hardly needs two of them as deputy leaders if it means to deliver a refreshed image of moderation and continuity.

Still the situation, while unhappy, remained acceptable on the basis that the new leader, who had no time to influence the choice of his deputies would somehow manage to keep them on the right side while undergoing a thorough polishing up of their character and image.

But the re-election of Jason Micallef as secretary general of the party, essentially in the role of chief executive, is much more serious stuff with grave consequences for the perception of Muscat as an effective leader. There is no doubt that anybody who has true Labour’s interest at heart, coupled with an intelligence level up to 20 per cent lower than the average, should have known that the party’s interest would have been served better by putting a new person in the chief executive role. The analysis report of the 2008 election defeat puts grave responsibility for such failure on the very sub-standard performance of Mr Micallef who consistently has shown that he does not have what it takes to fulfil effectively the functions of a chief executive of such a huge organisation.

It is therefore completely beyond comprehension how the general conference delegates chose to put stumbling blocks in the way of the leader they elected just two months earlier by re-electing the incumbent chief executive that has a vested interest to resist the promised earthquake of changes.

Many influential Labour exponents, even those who like Leo Brincat are normally very reserved about expressing critical opinions about the party’s internal matters, this time tried admirably to avoid disaster by speaking out clearly about the risks of re-electing the incumbent. Michael Falzon did the same. Now they have to respect the decision of the delegates and suffer in silence while professing willingness to bury the hatchet.

But Labourites on the outside have no obligation to accept the delegates’ decision as part of the democratic process. We have suffered enough through their misjudgements.

Personally I had to leave the party purely because in 2003 I could not remain faithful to the delegates’ decision to re-elect the incumbent leader when it was clear to whoever wanted to reason objectively that this decision was effectively prejudicing Labour’s chances for winning in 2008. I was right and they were wrong. I was also right in the run-up to the 2003 election when internally I voiced my view against all odds that unless we accept the referendum decision on EU membership as final we would lose the election. Why should I therefore respect the delegates’ decision this time given their awful record of getting it wrong?

And what does all this say about Joseph Muscat’s leadership qualities? If he thinks that Jason Micallef is a good choice than he has no business being leader. If he thinks that he has to accept a democratic decision taken by the conference then again his credentials for leadership get dubious as effective leaders have to do what it takes to ensure they get the team that can effectively execute their vision and policies. Effective leaders make things happen not just accept them. The best vision and policies could still fail if they are inadequately executed without good judgement, teamwork, devotion, control and enthusiasm.

The only other explanation for Joseph Muscat’s stand offish approach in the re-election of Jason Micallef (while on a personal basis sending positive signals about his re-election by being seen regularly in public socialising together) is the one I referred to in the contribution Living Contradictions of 13 June 2008, immediately after Muscat’s election. A reminder is useful at this stage:

The contradictions that new Labour leader Dr Joseph Muscat has to resolve would take much more than a smiling solution. The analysis report about Labour 2008 defeat had counselled the new leader ‘to be tough with those who think that they own the party, or even worse, those who think that the party is indebted to them. The party has to cleanse itself from such infantile cliques before its professions of inclusiveness can be taken seriously.

It is more than an impression that those who need to be cut to size before achieving the much aspired unity in Labour’s house are among those to whom the new leader is most grateful for having smoothened his way to success. Those who forced the other contestants to row upstream during the election contest while Muscat was permitted to row downstream.

Muscat’s leadership qualities will be put to test fairly soon. There are many true Labourites both inside and outside the party who feel that the leadership contest was unduly influenced by the incumbent administration. These people fear that change will be merely superficial and that in essence the more changes are made on the surface (hymn, logo, positive talk, smiles etc) the more things stay the same at their core where it really matters.

The new leader must prove their suspicions misplaced. He must show he has the emotional intelligence to eliminate all obstacles that stand between him and election victory by 2013, without fear or favour, without undue submissiveness to those who helped him make it to his post. Above all he must not surround himself with yes men who tell him only what he wants to hear and shield him from the reality that must never fall outside his purview.”

If this is the case then Muscat has failed badly his first major test and it is the worst possible scenario for Labour. A scenario which would give credence to certain suspicions I harbour that the PN don’t just manage their own party but through reverse psychology also manages Labour’s. A scenario explains why the PN, unlike genuine and hurt Labourites, have good reason to be happy with Labour’s choices as they scored a poker in the four top positions that will lead Labour’s assault on the PN’s apparent unassailability by 2013.

Please pray I am wrong.

Credibility - The Currency for Success

1^st August 2008
The Malta Independent - Friday Wisdom

I have grown to be highly suspicious of strong assertions made by politicians. The stronger the assertion, the finer the sieve I use to filter it through a credibility test. When Jason Micallef says he is re-contesting because he still has a lot to give to Labour I question whether what he really means is that he still has a lot to take by keeping his well-paid job rather than join the ranks of the unemployed.

When the US Treasury Secretary says that America supports a strong dollar policy, in spite of seeing the dollar lose half its value against the euro over five years, I question whether he means that only a weak dollar can avoid a deep recession in the US by making imports more expensive and exports more competitive.

When the government assured us last autumn that it is keeping the surcharge steady at 50 per cent until June 2008 in spite of actual costs indicating a surcharge of 95 per cent I question (as I in fact did in an article in this series titled Surcharge and Surprise published on 7 December 2007) whether this is mere political convenience for which we will have to pay a posteriori lest public finances will reverse their positive trend. As it happened we have suffered both unpleasant consequences. The surcharge shot up to 95 per cent after June 2008 and our public finances are bleeding as the cost of energy continued to increase making the higher surcharge still inadequate to cover the escalating cost.

There is one breed of professionals in the commercial world who depend crucially on strong credibility credentials for performing effectively. Rather than elected, central bankers are irrevocably appointed for a long term, and this to ensure that they perform independently and do what is needed rather than what is popular. Their mandate is to protect the value of money from fast erosion caused by inflation beyond a small acceptable threshold needed to lubricate economic growth. The former Labour leader once parried criticism about something I had written stating that I tend to view things from a banker’s point of view rather than from a political purview. I felt flattered even though it was not intended.

And of all central banks of the major economies, the European Central Bank (ECB) is clearly winning the prize for the most credible monetary authority in keeping a consistent monetary policy in spite of economic turmoil caused external shocks like exploding energy prices and collapsing real estate values in the US, UK, Ireland and Spain.

While the central banks of the US and UK have dented their inflation fighting credentials by lowering interest rates in the face of rising inflation, the ECB has kept a steady hand and did not succumb to political pressure, mostly from France, to soften their inflation fighting stance in order to safeguard the economy from approaching near recession territory.

The need for a steady hand at the wheel of monetary policy stems from the simple fact that there is no greater evil than when high inflation gets embedded into the economy beyond an acceptable threshold, which in case of the euro area is 2 per cent p.a. Inflation is a spoiler that forces us to fight how to share the misery rather than co-operate on how to grow the economy.

Central Bankers get scared to death when unions make wage demands based on experienced inflation rather than productivity gains. Purely raising wages because of a general increase in prices is the surest mechanism to start an inflation spiral with prices and wage claims chasing each other higher. In the end this benefits no one as wages are always lagging behind inflation and employers withhold the necessary investment for growth as they cannot see profitability through the fog of inflation.

The ECB acknowledges that it can do little to control headline inflation when this is caused by external shocks like rising energy prices. But consistent monetary policy to protect the value of savings can do a lot to ensure that headline inflation does not get transmitted to the rest of the economy resulting in general across the board price increases through accommodative policies to safeguard overall demand and economic growth even in the short term.

Unlike politicians whose fortunes depend on short term objectives, central bankers have to be prepared to sacrifice short term growth for long term price stability. Yet there is ample room for monetary policy to evolve. Central banks cannot be happy with a mandate for controlling inflation at the retail price level and having no obligation for asset price inflation in the property and financial markets. Lax monetary policy inflates asset bubbles which eventually burst to dampen economic growth. This inevitably attracts pressure to protect economic growth by abandoning inflation discipline.

The US Federal Reserve is presently having to go soft on inflation control in order to protect from asset price deflation. This is the consequence of laxity in past evolution of monetary policy which it neglected asset price inflation purely because temporarily retail price inflation was behaving within targets. The problem is that the tools that are needed to control retail price inflation are unsuitable to address asset price inflation.

When the German economy was soft and the ECB reduced rates to 2 per cent it was automatically permitting real asset bubbles to be blown in Spain and Ireland who actually needed a much higher interest rate to avoid inflating a dangerous real estate bubble. But in a monetary union the ECB cannot have different rates for the same currency in different places. It can however co-ordinate different reserve ratios needed for bank lending to areas where asset prices are being inflated.

Inevitable asset price bubbles depend on strong credit growth stimulated by cheap credit which however can be addressed by different tools like reserve ratios. The Chinese are aggressively experimenting with these tools in a bid to avoid having to push their interest rates too high to calm down an overheating economy. If the ECB mandate has to be revisited it is to widen its mandate to control not just retail inflation but also asset price inflation and certainly not to soften its inflation fighting objectives as the French seem to prefer.