Inflation and a bad microphone

After 4-percent-plus inflation in July, officials’ obstinate 27% target for this year now seems ridiculous not only through the certainty of missing it, but through the very attempt to indicate so precise a figure early in the year.

The story seems to resemble a folk tale, so that the premier will need many months of inflation that “checks” before his estimates become credible again.

As in any other problem that never gets fixed, the answer to the question why inflation cannot be defeated can only come from answering another question: Who can use inflation in Romania?

Let’s take them one by one: unions, yes. The most powerful unions work in major national companies, which dictate market prices. The Government, yes, again. Budget revenues are artificially inflated over the year, expenses stay the same, and the fiscal deficit can be juggled easily.

The banks, yes, certainly yes. As long as there is money in merely moving people’s money around into and out of treasury bills, where interest is the better the higher the inflation, it’s O.K.

National companies and large loss-making state companies, according to the above mechanism, are having the best of times.

Therefore, inflation can only be dumped when those enabled to cut it short will have some advantages stemming out of this. Until then, it may simply be impossible!

“Inflation is like… alcoholism. When you take up, you first feel the good side, then the bad side, and when you quit, it’s first the bad side, then the good one. This is why treatment is so hard to withstand,” believes Milton Friedman, one of the great economists of this century.

Provided, of course, these is a treatment. The Romanian economy seems to have got to the situation of a the desperate patient who has no other option than a conjurer or sorcerer.

Current experience shows that even with complete synchronisation between monetary and fiscal policy, under the leadership of a premier-governor, for the first time in Romania after 1990, inflation cannot be limited.

Two months ago, the National Bank organised a seminar on inflation and ways to control it. The participants, the governor, one of the deputy governors, explained how consumer prices grow each year beyond forecasts.

But the governor’s whole speech was accompanied by a terribly malfunctioning microphone that caused many grins on his face. Perhaps this is the secret of inflation, the incompetence of your subordinates!

And not in the NBR in particular. but in any state enterprise or national company where the state, that is, nobody, has the control, and where results and competence matter little in an employee’s pay or job safety. And the cost of competence must appear somewhere.

Inflation in Romania has long ceased to be about the management of macroeconomic parameters. It is an issue of cost. Better yet, it is a problem of cutting costs.

Which is a political problem. Perhaps this is why the two former premiers entered the presidential race. They felt it was the only way to deal with inflation.