Crybabies

Budget Secretary Ben Diokno was in a moment of frankness when he described those complaining about the elevated inflation rate as “crybabies.” A hard-nosed economist, he knew that rapidly expanding economies do create inflationary pressures as a matter of course.

The presidential spokesman tried to walk back that description. He was wary about rising public discontent over the movement of prices. But he failed to provide a more apt word for those using the inflation rate to bludgeon the administration.

Perhaps “crybabies” is not the precise word. It adds a tinge of innocence to critics banging populist pans by demanding the tax reforms be rolled back, the minimum wage raised and subsidies rolled out. I preferred to describe them cynical rabble-rousers. The sum of all their demands is hyperinflation.

To be sure, governments need to at least appear to be doing something to douse an inflationary surge. But it cannot overplay so that it appears to be a King Canute ordering the waves to be still.

In order to appear to be doing something, government price checkers have been deployed to see if the suggested retail prices for commodities are being observed. That is more theater than anything else. Suggested retail prices are, well, suggested.

The President made a show of ordering the Energy Department to check if Russian oil may be procured on a government-to-government basis. That holds little promise.

The Russians are unlikely to undercut themselves and sell us oil at prices lower than they might get selling to the open market. That will be an obscene act of charity if they do that and other nations will be demanding the same bargain rates for themselves. This will politicize the price of oil and blow away the normal channels for openly trading the commodity.

Besides, even if government manages to procure some amount of crude oil on what might seem to be bargain rates, we will be politically indebted by that deal. Then we have to go find refineries to convert crude to usable oil products. After that, government will have to devise a way to distribute the commodity, sidestepping the developed and efficient distribution systems the existing oil players have.

In the end, because of the public sector’s legendary inefficiency, we might be selling politicized oil at a much higher price than what could be sold by private sector players with efficient refineries and distribution systems.

Buying oil on the basis of some political arrangement with oil exporting countries has never been an efficient way of doing things. This option is pure political gimmickry. It is as much an insult to public intelligence as those cynical leftists demanding the oil industry be “nationalized” – which can only mean that end-products are heavily subsidized using taxpayer money.

Those demanding the “nationalization” of the oil industry are the same ones demanding that government subsidize rice so that they can be sold without reflecting true value. They want prices to defy the laws of the market. In the end, this is futile.

The best thing I learned from that brilliant economist Phillip Medalla is this: the solution to high prices is high prices.

If prices are too high, producers will enter the market to exploit that situation.  At some point, a workable equilibrium is reached.

Indeed, the oil exporters have learned to moderate their greed in the past few days. The international price for crude oil has begun to soften.

If global prices hover at around $80 per barrel, global economic growth will slow. Demand for the commodity will slacken. The traditional oil exporters will lose market share to shale oil producers who are profitable at $60.

Right now we are looking forward to a series of oil price rollbacks, reflecting the softening of crude oil prices in the global marketplace. Even before we actually negotiate with the Russians for a piece of their oil bounty, prices in the open market have dropped below what they might offer us.

The point is this: before hyperventilating, allow some space for prices to self-correct.

The inflation rate for May is expected to hit five percent. But that should be its peak, as oil prices, a major inflation driver, begin to correct.

As mentioned above, an economy expanding as fast as ours generates inflationary pressure as a matter of course. In our case, the rapid expansion could account for two percent or even three percent of the total inflation rate.

A combination of other factors magnify that: the spike in crude oil prices that is now beginning to relax, the depreciation of the peso, the new excise taxes imposed to account for social costs and, lest we forget, the increased purchasing power given consumers through adjustments in the income tax rates.

TRAIN might have been vilified for the wrong reasons. The excise taxes imposed on a highly polluting commodity like oil, on tobacco and alcohol and on sugary beverages are all below levels imposed by other countries on the same commodities. Consumption of these products imposes health costs on society that excise taxes will help defray.

It is estimated that the reduced personal income tax rates add P32 billion to the disposable income of our wage workers. Free tuition fees at the tertiary level for public educational institutions add about the same amount to the total disposable income. Together, they boost demand that pushes prices upwards.

Add to this the fact that we created twice more jobs in 2017 that we did in the previous years. That further magnifies demand pressure on prices.

Should we roll all of that back?