Because of the interview that appeared in today’s Népszabadság György Matolcsy’s name resurfaced in the Hungarian media. Recall that it was Matolcsy’s economic ideas that eventually led the Hungarian economy into near bankruptcy. In 2000 Matolcsy became minister of the economy in Viktor Orbán’s government, replacing Attila Chikán who was obviously not willing to change economic policy from a prudent and careful course to the reckless government spending that Orbán believed was necessary to win the 2002 elections. Matolcsy convinced Orbán that government spending and the growing deficit would not slow the country’s economic growth because increased internal consumption would take care of things. The only problem was that Hungary, heavily dependent on exports for its economic well being, could not generate the increase in internal consumption necessary to compensate for the growing deficit. The deficit was close to 10% by the time the MSZP-SZDSZ coalition won the elections, and because of Péter Medgyessy’s misdirected economic policies the problems continued until the convergence program was initiated by the Gyurcsány government in the summer-fall of 2006. Upshot: if I were Fidesz’s leader I would be leery of Matolcsy’s advice.
It is difficult to gauge how much influence Matolcsy has. Viktor Orbán claimed fairly recently that Mihály Varga, his former minister of finance, is in charge of short-term economic planning and that Zsigmond Járai, Varga’s predecessor and later president of the National Bank, of long-term planning. Matolcsy claims that his main concern is “national strategy,” whatever this means. He claims that Fidesz has a “long distance picture of the future” on which the “national strategy, social and political conceptions as well as economic policy are built.”
What makes Matolcsy such an economic visionary is hard to fathom. He received his degree from the Faculty of Industry at the Karl Marx University in Budapest. One can only imagine what its curriculum was in the 1970s. His first job was in the Ministry of Finance (Industrial Department). Between 1985 and 1990 he was employed by the Pénzügykutató Intézet (Financial Research Institute), by that time a gathering place of political and economic reformers. Beside his ill-fated spending spree as minister of economics he was the creator of the oft-mentioned Széchenyi Plan, a vehicle for providing subsidies to small businesses, especially those whose owners were politically close to Fidesz. Relatively little money was spent, but government propaganda made a lot of it. As if the Széchenyi Plan were the salvation of the country.
Matolcsy again is looking for a new economic model. He now argues that Hungary’s model should be an amalgam of the continental social market economy and the Anglo-Saxon liberal economy. First, he would like to change the tax system. Instead of putting the emphasis on personal income tax, most of the taxes should come from consumption. He would introduce a flat tax and five different kinds of VAT. (The only problem, and that is a big one, is that within the European Union there cannot be five different levels of VAT.) Matolcsy has an answer: at the moment this is the case but later it will be changed. (It’s difficult to imagine how Hungary will convince all the other members to change the EU VAT system, but I guess this is Matolcsy’s problem.)
Matolcsy of course is not telling us anything new when he talks about the low Hungarian rate of employment. It has been stuck for a long time at only 56%. According to him it should be 70%. (I think this is actually higher than the European average). To achieve the magic figure of 70% the country must add one million people to the work force. (This is where Orbán must have gotten the idea of one million new jobs in ten years.) At present only 20% of those employed have college degrees, and Matolcsy confidently announced that this number must double. In this way the income of individuals and families would grow enormously and there would be no need for the current strong social net. And if the country spends less on social welfare the government would need less income.
Matolcsy optimistically predicted that in two years’ time one thousand billion forints could be saved. How? Simple: once Hungary has a government that the international financial world trusts, the country would be able to exchange its current debt for debt at a lower interest rate that would save at least 400-500 billion. (Sure thing, especially now that the world is experiencing a huge credit crunch!) Second, because of lowered taxes the economy would immediately move into high gear and an additional 200 billion forints would reach the government’s coffers. Third, if they create 200,000 new jobs in two years this would reduce the numbers of the unemployed and those receiving welfare checks by at least a quarter. That means an extra 200 billion forints! Simple, isn’t it?
I’m no economist but this strikes me as daydreaming, woolgathering, wishful thinking that has nothing to do with reality. Although it is hard to imagine that anyone with any intelligence could take this nonsense seriously, it seems to me that at least certain parts of this nonsense have found acceptance by Viktor Orbán. For example, refinancing current debts at a lower interest rate. Orbán also copied verbatim the 100,000 new jobs every year and in ten years one million. Surely this is Matolcsy speaking. How is it possible that Orbán heeds such advice? Does he really know so little about economics that he believes this fairy tale about the Hungarian model? I don’t know. He has an abundance of street smarts, but that’s not enough to run a country successfully.