Wednesday 8 December 2010

Time (in)consistency once again?

   One of the more recurring features of Portuguese politics is the time inconsistency of decision makers. Probably the same happens everywhere.
   I would like to know the contribution of time inconsistency of policies to the slowdown in economic growth. Basically, if you cannot believe in agreements signed with the Government, this should have a cost in terms of economic activity.
   This was brought again to my mind by the agreement on minimum wage - It was signed 4 years ago an agreement involving the Government, the unions and the industry associations (I think the industry associations signed it, not sure, but it is not essential). It stated that minimum wage should go to 500€/month in phased way.
   Now, industry associations want the Government to refrain from it, based on the bad economic conditions. Unions (and left wing parties) argue the Government should stick to the agreement.
   For once, I agree with the later on the grounds of consistency of policies (they use other arguments, of course). Actually, it is in the interest of the industry associations that
the Government does it. Otherwise, any agreement with the Government becomes only valid until the next convenient moment to change it? and if instead of minimum wage would be a VAT tax? or an exceptional tax on sales with "frozen" prices? A bit demagogic, I know, but once you enter the uncertainty that agreements do not bind the parties, everything goes.
   Moreover, I was puzzled by a news report stating that some computations made by the Government showed little impact associated with the minimum wage increase.
   Overall, without entering the discussion of whether a minimum wage has negative effects upon employment and growth of economic activity, I feel that not respecting agreements must also be damaging, in a hardly visible way.

1 comment:

  1. It became evident over the past couple of years that our productivity gap with Germany has increased to around 30%. This is supposed to be one of the main reasons for Portugal's present crisis.

    So which type of credibility is more important: one related to an agreement that is now completely out of touch with reality or the one related to governing taking into account the latest data in a pragmatic way?

    IMHO, the role of governments is to govern. That implies adapting policies along the way. This is specially true in tumultuous periods as the one we are living. Not accounting for that equals not living up to the role. Ideally that should be achieved by negotiation. When that is not possible a good government should accept the responsibility of making decisions, no matter how hard those should be.
    Respecting agreements should be the rule, but sometimes higher values are at stake. When those moments come a good government should accept a sunk cost.
    Pedro Sousa