Dickens, Merkel and Franco

______________________________________________ Article published on 12 February 2012 in The Malta Independent on Sunday This week we celebrated the 200th anniversary of the birth of Charles Dickens. Dickens never thought of himself as an economist, but through his writings he has certainly delivered forceful lessons about the need to move away from total laissez faire to systems based on social justice, equal opportunities and a market economy that is regulated to protect the least able-bodied from extreme poverty. In what is probably his most famous book, A Christmas Carol, Dickens gives a masterful lesson on how the complete absence of social protection will inevitably leave the greater part of the population in extreme poverty (a theme reinforced in his other books such as Oliver Twist and David Copperfield), whilst the few wallow in extreme wealth that causes them the problem of how to spend it. Through the contrasts of the ghosts of Christmas present, past and future, Dickens delivered forceful lessons about how much better it is for the super rich to live in a just society without extreme poverty rather than having to rub shoulders, day in day out, with extreme cases of human suffering and deprivation. A Christmas Carol delivers messages which are still being toyed with by economists today, such as whether the GDP – on its own – measures accurately the state of development of a country or if it would better to include in such measurements other non-monetary factors (like access to health care, quality of life for the non-economically active, longevity, etc.) to create a happiness or quality of life index. When discussing this with foreign colleagues, I always maintain that whilst our GDP may be inferior to theirs, our quality of life index would probably be superior, as we do not spend some three hours each day commuting to work, we live in houses that are bigger and better than those found in city centres, and we can be on the beach having a summer lunch half-an-hour after we leave work. We can live history over dinner in Mdina and 30 minutes later we can be at a club in Paceville. Such luxuries are hard to come by in a major city. The economic argument subtly depicted by Dickens in his books is still going on, and vibrantly so, to this very day. The US still looks down on the European model of social protection and considers the government’s share of the GDP at 18 per cent as too high, when in Europe a ratio double that would be the norm. The result is that in the US the super rich still live alongside the poor, who are comparatively not much better off than in the days of Dickens. The US consider it absolutely normal for the fruits of labour (wages, salaries and pensions) to be taxed at a rate double that applicable to the fruits of capital (capital gains and dividends) which are either untaxed until realised or taxed at a very low rate. This has led to the Buffett doctrine, which is now being taken on board by President Obama. Warren Buffet, as the second richest man in the US, says that his tax rate should not be less than the tax rate of his secretary who earns a normal salary. His tax rate is low because most of his taxable income comes through capital gains, which are taxed at a much lower rate than normal earned income. Even in Malta we have such anomalies which sooner or later have to be addressed. While normal income could be taxed at a marginal rate of 35 per cent, income from investments is either untaxed (capital gains on MSE-listed equities) or taxed at 15 per cent (final withholding tax on bank interest and investment income). At some point in time, equity demands that such rates will have to converge at a common rate, which I would estimate to be around 23 per cent and then the VAT rate will have to be adjusted accordingly to protect government’s revenues. But what has Chancellor Merkel of Germany got to do with all this as my title implies? A lot, I would say, if you have eyes wide open about what is happening in Greece. Greece is a financial basket case. The primary responsibility for this lies with Greek politicians who have irresponsibly driven the country into a financial cul-de-sac. The second responsibility, however, belongs to Germany and other founder members of the euro project who allowed Greece to join the euro when it was clearly unfit for such membership as it closed off the only safety valve that could help keep the Greek economy competitive, i.e. the occasional devaluation of the Greek drachma. These European politicians bear added responsibility for turning a blind eye when it was clear to anyone who wanted to see that Greece was not playing by the euro rules and that it was reporting figures that were clearly inaccurate if not downright false. But the European leaders pretended not to see that Greece was storing problems for its future generations, because Greece’s fiscal largesse resulted in export orders for German and French factories which were oiling the economic growth of the core European countries. Now that the chickens have come home to roost, negotiations are going on between the two main culprits of this economic disaster, i.e. Greek politicians and European leaders. Together they are prescribing austerity, which will be a huge burden on the ordinary man in Greece, whose life will be thrown back to the days of Charles Dickens. And they expect the Greek man in the street to accept this austerity simply because the alternative of default and probable expulsion from the euro and possibly from the EU itself would be worse. I agree that probably it would be worse – but at least the country would retain its dignity. At least the Italians and their political leaders had the decency to make way for a technical government lead by Mario Monti, whose entire cabinet consists of technocrat ministers. Red-faced Italian politicians have retreated back to parliament, where they approve budgets and laws proposed by the technocrat government knowing full well that these are in the country’s best interests and that it is much better for these reforms to be made by a technocrat government. In fact, there is no pressure in Italy for an early election to shorten the life of Monti’s government. In Greece, on the other hand, the Cabinet is made up of charlatans from the whole political spectrum that are eager to conclude the negotiations and hold fresh elections in the hope of going back to their old political games while their people suffer Dickensian poverty. Why is Merkel not forcing, as part of the bailout package, a Greek government consisting entirely of technocrats that will hopefully last long enough to ensure that the execution of the required reforms can be relied upon before the masters of the gang go back to their old games? Why is it that, in spite of the many claims of fraud by the old political spinners who are now crying their hearts out for the pain of the Greek population, not one of them has faced criminal proceedings? Greece cannot be redeemed by the same politicians that brought it to this disaster. This is clear to most Greeks, and additional doses of austerity – which may be accepted by their politicians eager to regain their seat in power – will not be accepted by the people. Rather than austerity, Greece needs a Marshall Plan which must include a technical government with a long mandate and a redesign of the Greek political landscape. And this has to be approved by the people in a referendum and not by politicians locked in all-night discussions jockeying for the best position and a quick return to the old system. And where does Franco fit into all this? I smiled this week when The Times invited the Prime Minister and The Leader of the Opposition to discuss at a public breakfast meeting whether the political crisis is really over. I did not attend, as a matter of principle. Neither the Prime Minister nor the Leader of the Opposition can answer such question. The Times should have invited the only person who can provide the answer – i.e. Dr Franco Debono. It is time for Dr Debono to stop beating around the bush and state his position in a concrete manner. His answer this week that the crisis will be over when the oligarchy around the Prime Minister is dismantled is neither here nor there. The PN has been in government since 1987, excluding a short break of two years between the first nine years and the remaining 13. Long tenure renders its holders blind to their own defects and presumably blind to the oligarchies around them. Only an election defeat will bring catharsis. That’s how democracy works. The PN has not had a proper election defeat leading to a long enough period in opposition since 1976 – and that is 35 years ago. When a week is a long time in politics, 35 years is an eternity. So Dr. Debono must decide whether he lets this oligarchy collapse when the next election comes in its due time or – in the true interests of the country, and ultimately of the PN itself – he brings an early end to it. This is a decision which should have been publicly communicated, had he been invited to be the main speaker at The Times breakfast meeting. Certainly, Franco does not wish the uncertainty he created to persist for another 17 months. This could crack our economy and change its directions towards the times of Dickens.