Spending spree

There’s no such thing as a free lunch, stated economist Milton Friedman. As it turns out, for slightly over a year and a half at least, there will be free holidays in Poland. From August 1, the Polish government ensured the extension of the 500+ child benefit program – under which families receive PLN 500 per month for each child until the age of 18 – by tourism, creating the Polish Tourist Voucher (PBT). The program grants a one-off payment of PLN 500 for each child up to the age of 18 (additionally, another PLN 500 benefit for disabled children), to be used by March 2022. It is a new form of support, worth PLN 4 billion, in a situation where the economy is weakened by the Covid-19 pandemic. The question is: is rewarding people for leisure instead of work, even if it helps the tourism sector, a step in the right direction?

TOURISM JOBS ON THE LINE

While much attention has focused on international tourism, domestic tourism has also been severely impacted by Covid-19. Before the crisis, domestic tourism accounted typically for 75 percent of tourism expenditures on average in OECD countries. This figure varies highly among the member nations, but in Poland, it’s 40 percent. Typically, tourism contributes 6.9 percent of employment in OECD countries. However, many jobs are now on the line. Throughout 2020, the world economy will shrink by an estimated 4.9 percent, but in the eurozone, along with the UK, this decline is expected to amount to 10.2 percent and in the US by 8 percent. The first stage of the crisis was triggered by government-imposed lockdowns, while in the coming months, importance will be attached to consumer concerns and restrictions on industries such as tourism, travel, entertainment and hospitality.

The idea is nothing new. This is a variation on the idea popularized by British economist John Maynard Keynes and his students – to stimulate demand. But first, it could mean playing with fire, because more demand, given the same supply, could translate into higher prices. Secondly, according to official data, 60 percent of Poles prefer holidays abroad, e.g. in Greece, Italy, Egypt, because of the guaranteed good weather, remarkable views, at comparable or even lower prices.

BUMPY RIDE

The implementation of the PBT program has not been smooth. It turned out next to impossible to develop an IT system in a short time. The technical solution was therefore transferred to Poland’s social security institution responsible for the payment of pensions – ZUS. Therefore, PBT is distributed via the IT platform of an institution, whose official role is different than providing Poles with holidays. Since the beginning of the program, ZUS staff have recorded a gigantic number of complaints – several tens of thousands, from people who are entitled to get the tourist voucher and have not received it yet. Similarly, the website that allows you to review the registered places where you can redeem the received travel voucher looks raw – it does not resemble a catalog from a tourist office. Rather a sorrowful phone book with company details. The technical problems are a consequence of the fact that politicians were in a hurry to put pressure, not giving enough time to technically refine the solution. After all, free holidays are a reward for the result of the presidential election (the runoff in July 2020) expected by the current government.

Another observed bunch of problems is contained in questionable legal solutions. Pursuant to the Act on PBT, it must be redeemed for the child for whom the voucher has been granted, and the person entitled to do so must pay with the voucher. Therefore, both buying and selling the voucher as well as using someone else’s voucher is illegal and the penalty for breaking the law may be as high as PLN 1 million. Only that the possibilities of control are limited – officials will not have the time or the capacity to check whether the reality is the same as guaranteed by the Act. It is true that the voucher cannot be sold, but you can use it to pay for specific tourist service and then apply for a refund (assuming it is possible under the tourist service regulations). This way all the cash from the travel voucher goes back to the payer – it works a bit like a cashback payment. It is also possible to assign a tourist event.

Therefore, there may be attempts of taking up unofficial negotiations between the voucher beneficiaries and people who would like to redeem it. A black, underground market created by tourist voucher institutions is slowly emerging. It also encourages the creation of “laundries,” i.e. the cash will go to companies that will run fictitious tourist resorts, which in fact will be in agreement with the voucher beneficiaries. In the worst-case scenario, ill-managed institutions, creating poorly-thought out incentives, will be accompanied by people receiving social benefits, although they do not need them. It will be a bit like patients, about whom the popular House, MD series says: “everybody lies.” Of course, when it is convenient for them or they have an interest in it.

‘LEAKY BUCKET’

If we consider that the tourist voucher is not a form of supporting the tourism industry but a “porkbarrel” social program – just like the 500+ program is not a demographic program, contrary to what the government declared, only a social one – then the tourist voucher is a rather wasteful move, a massive burden on the country’s budget. Expensive and ineffective. Why ineffective? Well, it is enough to quote the famous anecdote featuring “Okun’s bucket.” Arthur Okun, an American economist, in his 1975 publication “Equality and efficiency, the big tradeoff,” noted that the loss of efficiency goes along with the redistribution process. He visualized tax collection as a “leaky bucket” in which the government takes water from a well. Okun wrote that we transfer money from the rich to the poor in a leaky bucket. Some of it just leaks along the way, so the poor won’t get all the money taken from the rich. The loss results from the administrative costs of taxation, but also from the very transfer of the “bucket,” and from the loss of incentives for the poor and the rich.

There is no quick panacea for the pandemic because the coronavirus will remain a burden for the economy for a long time – companies will close, people will lose their jobs and banks will be left with bad loans. It cannot be denied that a great experiment is taking place all over the world, as a result of which governments give away money in the form of programs similar to PBT, or give financial support to companies, and central banks “print money.” This phenomenon has reached Poland as well. The new paradigm, the crisis economics, seems to be saying that debts can go infinite. For example, Poland’s central bank (NBP) can buy any number of assets and thus finance government debt. Such activities lead us to pay a price that is invisible at first glance. The creation of money leads to the fact that the government may incur debt and the costs of servicing this debt are small. Unfortunately, it also hits savers, making it more difficult for them. A crisis is a time to spend money – governments can generate demand and stimulate development through large infrastructure projects or projects such as tourist vouchers.

SHORT-TERM RELIEF

Many are glad to receive the help that will only be a short-term relief. Unfortunately, the sad news is that in the long run debt will, just like a virus, infect entire sectors of the economy. Zombie jobs and even zombie companies – kept alive and fed with government subsidies – have been created. They look great on the paper but they are worse off in real life. It is enough to disconnect the drip keeping them alive and they will die. Low interest rates and government subsidies for years to come can lead to sustaining this condition. Added to all this is the pressure to blur the problem of proper risk assessment, which is a natural part of entrepreneurship, which, as a consequence, leads to ineffective allocation of resources in the market. Globally, when large zombie companies employing zombie employees are waiting for the mandatory state feed, it translates to harder times for startups and small businesses. Indebted and under-productive sectors will therefore endure rather than collapse, creating an incentive to commit investment errors and misallocate capital. Productive sectors will suffer from the increasing tax burden. Recession is clearly visible when we compare data not year on year, but quarter on quarter. In Q2 2020, the economy in the euro area shrank by 14.7 percent compared to the same period of last year. We are witnessing a gigantic increase in public spending and a decline in production that will lead, according to IMF calculations, to a global increase in government debt to over 100 percent of GDP. The balance sheets of major central banks including the US Federal Reserve, Bank of Japan, European Central Bank, Bank of England and People’s Bank of China have grown by a total of USD 20 trillion and the fiscal easing programs announced by major governments exceed 7 percent of global GDP according to Fitch Ratings. Together, these plans create the largest stimulus package ever. If we sum up government and private debts together, it will be over USD 200 trillion of debt, a global increase of over 35 percent of GDP, much more than the 20 percent seen after the 2008 crisis, and all in a single year.

Additionally, the gap between what is happening in the economy and the behavior of investors is presented in the chart showing the real GDP growth and the capitalization of the main US index – S&P 500. US GDP fell by around USD 2 trillion in the second quarter and, at the same time, the capitalization of the top 500companies on Wall Street increased by USD 4 trillion. Price scissors have diverged to historic levels. Where has this gap come from? Stock exchanges are flooded with cheap money from central banks and this currently determines the level of investors’ appetite in the world. There is also a gift for a common consumer – a free tourist voucher helps sweeten the difficult crisis period. Perhaps some of the beneficiaries will go on vacation this year, forgetting that another social program of this type exacerbates the harmful claimant attitude. People are told that they “deserve something” by virtue of their very existence. This is a very dangerous tendency to encourage living at the expense of others. Meanwhile, vouchers will contribute to creating a debt that will be paid for by future generations.