austerity, policy choices and demonstration

The announcement of a policy increasing the social security contribution of workers with a reduction in employers' contribution was the spark that lead to a strong street demonstration Saturday 15th. The demonstration was already called for but the announcement of the new measures did put people on the street.

The complain was obviously the perceived unfairness of shifting money from workers to employers, and more broadly the austerity imposed by the financial rescue plan. Still, this simple view may be misleading. The demonstration was shared by several cities in Portugal, people interviewed were basically expressing the concern about the road taken by the Government with this specific policy. In the end, despite some fear it was a peaceful demonstration, gathering people from different ages and political views. More tense images from the demonstration walking by the IMF delegation in Lisboa can be somewhat misleading about the general feeling of the population, at least for now.

We need and should discuss the direct economic implications of this policy (see the posts of Susana Peralta and Francesco Franco on this).  Still, there is another sort of impact and in a sense a deeper one that may have implications for economic activity.

The demonstration was a clear call for the government to review the latest measure on social security contributions. Whatever the end result, whether the policy measure will be carried out as proposed, or modified or even dropped, there is the risk of this week events having an impact on the ability to introduced further reforms in the public sector, in the labour market, in the housing market, etc...

The necessary goodwill among social partners has been damaged to some extent, and there will be need to rebuilt trust between the government and the social partners, and between government and the population at large.

Also the impact on effort and willingness of people to move forward may be affected. Long term solutions for the portuguese economy have to involve development of new products and services, provide services and goods with high quality, and so on. But the commitment of workers to make more effort to develop new products, to increase productivity in current tasks, and even to smile when providing a service to the tourist may be at risk. Thus, the discussion on productivity gains needs to regain a central role - how does a policy proposal contribute to increase productivity? how fast and how much?