Tag: Hungary

Good News from Hungary

In a recent article for the Weekly Standard, I noted that freedom in Hungary was under attack. In the past several years, the Prime Minister Viktor Orban has tightened its control over media, harassed civil society organizations, politicized the judiciary, nationalized $14 billion worth of assets from private pension funds, and populated the board of Hungary’s central bank by appointees of the ruling party, Fidesz. Mr Orban – who was once seen as a pro-market, liberal reformer – has also become Vladimir Putin’s most reliable partner in the EU, having hosted him for a working visit just last week.

But not all Hungarians are applauding as the country descends deeper into what could be called ‘goulash authoritarianism’. In fact, the parliamentary by-election in the county of Veszprem on Sunday has brought a very encouraging piece of news. A Fidesz candidate was defeated by an independent candidate, Zoltan Kesz, endorsed by a coalition of left-of-center parties.

“The left-right divide has been turned on its head in Hungary; the relevant distinction here is between the pro-Western and pro-Eastern political parties,” says Mr Kesz, referring to Mr Orban’s geopolitical allegiances. It should also be said that Mr Kesz is no ordinary politician. An activist and English teacher, he is the founder of Hungary’s premier libertarian think-tank, the Free Market Foundation. Interestingly, given the toxic political and ideological environment in Hungary, the organization has become known as the leading voice against racism in the country, and much of its efforts have been aimed to counter the rise of political forces such as the xenophobic Jobbik party, which is currently the third largest political force in the country.

Mr Kesz’ election is significant because it brings an end to the narrow supermajority, which Fidesz enjoyed in the Hungarian parliament since the election last year. In 2013, the parliament passed a number of controversial constitutional amendments, and many feared that the unchecked dominance of Fidesz could herald the demise of Hungarian democracy. While Mr Kesz’ electoral victory assuages those fears somewhat, he will be fighting an uphill battle to get his country back on track.

Hungary’s Slide Towards Authoritarianism

Yesterday’s general election in Hungary has given Viktor Orbán’s party, Fidesz, a very comfortable majority in the Hungarian Parliament, while strengthening the openly racist Jobbik party, which earned over 21 percent of the popular vote. Neither of this is good news for Hungarians or for Central Europe as a whole.

In the 1990s, Hungary was among the most successful of transitional economies of Central and Eastern Europe. With a significant exposure to markets in the final years of the Cold War and a political establishment committed to reforms, it was often singled out as an example of how a successful, sustained transition towards market and democracy should look like.

In 2014, the situation could not be more different. Hungary’s economic policies have become increasingly populist and haphazard, as the government has confiscated the assets of private pension funds, undermined the independence of the central bank, and botched the consolidation of the country’s public finances (p. 77). Worse yet, Hungary has seen a growth of nationalist and anti-Semitic sentiments which have not been adequately countered by the country’s political elites. In a recent column, I wrote about Mr. Orbán’s personal responsibility for the disconcerting political and economic developments in Hungary:

Mr. Orbán’s catering to petty nationalism often borders on selective amnesia about certain parts of Hungarian history. Recently the Federation of Hungarian Jewish Communities, the Mazsihisz, announced it would not take part in the Orbán government’s Holocaust commemorations. According to the Mazsihisz, the framing of the ceremonies whitewashes the role that the Hungarian government played and focuses exclusively on the crimes perpetrated by the Germans—despite the fact that Hungary adopted its first anti-Jewish laws as early as 1938.

Mr. Orbán’s tone-deafness when it comes to historical symbols goes hand in hand with a concerted effort to undermine the foundations of liberal democracy and rule of law in Hungary. Since Mr. Orbán came to office four years ago, Fidesz has consolidated its political power and used it to pass controversial legislation tightening media oversight, as well as constitutional changes that curb judicial power and restrict political advertising, among other measures.

Slumping Money Supply (Not Austerity) Plunges Hungary Into Recession

Hungary is in a recession, again. According to the chattering classes, as well as many analysts and financial reporters, fiscal austerity is the cause of Hungary’s slump.

Nonsense. Hungary’s recession results from its slumping money supply.

When monetary and fiscal policies move in opposite directions, the economy will follow the direction taken by monetary (not fiscal) policy – money dominates. For doubters, just consider Japan and the United States in the 1990s. The Japanese government engaged in a massive fiscal stimulus program, while the Bank of Japan embraced a super-tight monetary policy. In consequence, Japan suffered under deflationary pressures and experienced a lost decade of economic growth.

In the U.S., the 1990s were marked by a strong boom. The Fed was accommodative and President Clinton was super-austere – the most tight-fisted president in the post-World War II era. President Clinton chopped 3.9 percentage points off federal government expenditures as a percent of GDP. No other modern U.S. President has even come close to Clinton’s record.

The money supply picture for Hungary seemed to be looking up until late 2011 (see the accompanying chart). Indeed, Hungary’s money supply had nearly returned to its trend-rate level, when it peaked in November 2011. Then, in the course of just over a month, things took a turn for the worse.

First, Moody’s downgraded Hungary’s debt to junk status, and soon thereafter, S&P and Fitch followed suit. Then, the EU and IMF walked out on debt restructuring talks, citing concerns over proposed constitutional changes, which threatened the Hungarian central bank’s independence. Just days later, their fears were confirmed, as the Hungarian Parliament passed the controversial law, merging the central bank with the Financial Supervisory Authority. And, to top it off, Hungary unexpectedly cancelled part of its December debt auction.

When the dust settled, confidence in Hungary’s financial system had been shattered. Despite a 15.9% increase in the supply of state money, the total money supply had plummeted by 4.2% (from November 2011 to January 2012). As the accompanying table shows, this decline in the total money supply was driven by a 9% drop in the all-important bank-money component of the total.

Hungary’s money supply has yet to recover from this perfect monetary storm. And, as if that wasn’t enough, Hungary recently adopted a damaging financial transactions levy.

Money and monetary policy trump fiscal policy. Until Hungary gets its money and banking houses in order, its economy will continue to wallow in recession.

The New Hungarian Constitution

My colleagues and I talk a lot about the need for fidelity to our founding document, in part because any power the federal government exercises that’s not listed there is illegitimate and in part because our Constitution is an essentially libertarian (or classical liberal) document.  And part of having a proper, Madisonian view of the Constitution is not to use foreign law to interpret it (or other domestic law).

But it is absolutely appropriate — and good practice — to look to foreign example and experience when drafting a new constitution (or even crafting new legislation).  I find such occasions, when a country comes up with a new founding document — either because it’s a new nation (South Sudan), has undergone regime change (Iraq and Afghanistan recently, Eastern Europe in the 1990s, much of Latin America in the 1980s), or just because (France, periodically) — fascinating.  I wrote my college thesis on comparative constitutionalism and now occasionally peruse the Comparative Constitutions blog (apparently there’s a blog, facebook page, or twitter feed for just about anything).

Which is all a long preface to introducing the new Hungarian constitution (English version here) — intended to correct some lingering deficiencies from the immediate post-Communist one.  There are plenty of good things in this draft, which is due to be voted on by parliament on April 18 (and expected to be adopted due to the governing party’s majority).  It moves in the right direction in many respects on property rights, economic liberties, government transparency, and an independent judiciary, but also contains provisions that would empower the state beyond what is suitable for protecting individual rights (property and otherwise) and provides weak institutional guarantees.

Marion Smith, president of the Common Sense Society (a free-market think tank in Budapest) offered a critique last week in the Wall Street Journal Europe:

The drafters and Mr. Orbán [the prime minister] have committed themselves to Hungary’s future economic sustainability, having already adopted a flat personal income tax of 16% and included a government-spending cap at 50% of GDP in the proposed constitution. At a time when national economies in Europe are collapsing left and right due to years of runaway public spending, Budapest is moving in the right direction.

But the proposed constitution also includes a series of second-generation rights and state objectives that will commit future governments to providing “adequate housing,” “access to work,” “sports,” public education and a state-run pension system to all Hungarians. Whereas natural rights (such as life, liberty and property) are rights that governments protect from infringement by others, positive rights (such as housing and leisure) are things that governments are expected to provide. This redefinition of the nature of rights necessarily and fundamentally alters the relationship between individual and the state and increases the scope of state power. The wealth redistribution necessary to provide these rights undermines the protection of private property.

Moreover, Smith notes, the government seems to get a trump card over private enterprise and civil society:

Their proposed constitution also enables future state intervention into private economic activity on the basis of ill-defined “community objectives.” Specifically, the current draft mandates: “Employees and employers will cooperate in the interest of maintaining the national economy, ensuring jobs and implementing other community objectives.” By including such broad provisions that could justify significant intrusions into private-market exchanges, the draft risks solidifying the sluggish economic policies of Hungary’s past.

The draft compounds these potential problems by providing weak and ill-defined checks on Parliament’s legislative and executive power. The text grants the Constitutional Court final-review power over fiscal, economic and property matters “only if the petition refers exclusively to the right to life and human dignity, the right to the protection of personal data, the right to freedom of thought, conscience and religion or the right connected to the Hungarian citizenship.” That restriction not only weakens an important check on Parliament, it also undermines institutional guarantees of individual liberty—including the right to acquire, possess and use property, as well as the right to appeal to justice if those rights are violated by citizen or state.

While the current Hungarian government, a center-right coalition between Fidesz (a sort of nationalist party that has migrated from classical liberalism to conservatism) and the Christian Democrats, might be good on economic freedom (if not necessarily other kinds), imagine what a future center-left/socialist government could do with the powers the new constitution grants. 

Time to go back to the drawing board.  And for Americans — whether Republicans, Democrats, libertarians, or “independents” — this is, as they say, a teachable moment.

Dan Mitchell Gets Results

I gave a speech in Hungary about two weeks ago and now the government has announced a big step in the direction of better fiscal policy. My role was about as meaningful as the rooster crowing, followed by the sunrise, but this is still good news. According to Reuters, “Hungary’s new government plans to introduce a flat personal income tax of 16 percent from 2011, as well as a 15 percent cut in public sector wages.” Those are the headline initiatives, but the fiscal reform package includes other good policies. Here’s a blurb from The Economist.

After a three-day emergency cabinet meeting over the weekend, Viktor Orban, the prime minister, announced the government’s new economic programme this afternoon. The battered forint quickly jumped almost 2% in response. …The introduction of a 16% flat personal income tax is a daring move, and could have important repercussions beyond balancing the state’s books. Unemployment, or at least that element of it which is declared, is nudging 12%, and one reason is Hungary’s cumbersome bureacracy and heavy tax burden. Now Mr Orban has announced that corporation tax for companies with annual profits of less than 500m forints will be reduced from 19% to 10%. Ten more small and bothersome taxes are set to be abolished altogether.

A few years ago, when several nations each year were adopting the flat tax, I arbitrarily decided that this rock classic would be the theme song of the tax reform movement. Sadly, it doesn’t look like we’ll get to play it in America anytime soon.