If there is anything that trained economists are taught to understand and value, it is the concept of economic equilibrium, more specifically, the maintenance of general equilibrium in an economy and the avoidance of disequlibrium. The more I read the pronouncements of the high officials of the Department of Finance regarding the impact of TRAIN (the Tax Reform and Inclusion law) on the economy, the more I am reminded of what my professors drummed into me, during my days in economics school, on the subject of economic equilibrium.
Disequilibrium comes into being in an economy when the general pattern of costs and prices is seriously disturbed, in continuing fashion, by economic events of either domestic or external origin. The key word here is trigger: a domestic event (a government action or ruling or a major private-sector debacle) or a foreign occurrence (a diplomatic row or an injurious foreign-government act) triggers a series of changes in costs that translate, sequentially, into changes in prices across the broad spectrum of an economy. As the process gets underway, cost increases give rise to price increases, which in turn occasions further cost increases and price increases. Before you—or, more specifically, the policymakers— know it, disequilibrium has become the order of the day.
A state of disequilibrium is what the Philippine economy is now in, despite all the DoF and the National Economic and Development Authority arguments to the contrary.
Anyone who doubts that disequilibrium is the state the Philippine economy is in need only consider the across-the-spectrum increases in costs and prices, the increasingly shrill demands of labor, manufacturing and consumer groups for wage and price adjustments and the intellectual somersaults being undertaken by the Executive department and the politicians in trying to explain the economic turn of events.
Things were not always like that. Until 2017 the Philippine economy was in a state of relative equilibrium, with costs and prices generally stable and the inflation rate staying within the range set by the Bangko Sentral ng Pilipinas at the beginning of that year. Indeed, price stability was one of the “solid macro-economic fundamentals” cited, mantra-style, by the policymakers to support the government’s claim of national economic stability.
Then TRAIN came charging into the picture on Jan. 1, 2018, and the dreaded D word—disequilibrium, began to infect the economy. Workers and consumers soon started to protest the price upsurges—of fares, electricity, food and services especially—that were bound to reduce the purchasing power of their incomes. Inevitably workers pressed for higher wages, which producers, already facing higher non-wage operating costs, were quick to resist. It goes without saying that any compensatory concessions granted to workers—P320 is the figure for minimum-wage increase that is most widely mentioned—is bound to result in increases in production and consumer items, which are bound to lead to further increases in costs and prices.
Rises in costs and prices following upon one another, in round-after-round fashion, is what the economy is facing these days. To say that the economy is in a state of ferment is to describe the situation accurately.
What leaves me aghast and flabbergasted about the entire present scenario is the bland assertion by the top DoF officials that goes like this: “Don’t worry about a surge of inflation. The rounds of cost and price increases will soon come to an end.” I say that I am aghast and flabbergasted for three reasons. The first is that the current state of disrupted equilibrium has disturbed the hitherto-relatively-smooth functioning of the economy giving rise to all sorts of distortive and speculative actions among workers, producers and consumers. The second reason is that an economy that has recently been growing annually at close to 7 percent has lost some steam. And the third reason is that workers and consumers with weak bargaining positions will have suffered a loss of real income and a consequent lowering of their living standards. True, the current inflationary surge will work itself out sooner or later, but costs and prices will then be at higher levels. They are not going to return to their former levels when the inflationary surge subsides.
Guess what now-higher wages and operating costs will do to the competitiveness of the dwindling band of competitive Philippine exports.
Back to economics school. Students were told that economic stability should be sought at all costs and that if governments are unable to make their countries’ economies grow, they should strive to keep them stable at least.
In choosing the excise-taxation route to incremental revenue-raising and by dumping excise taxes simultaneously on a number of highly cost-sensitive items, the DoF totally disregarded the precepts of the theory of economic equilibrium. TRAIN has proven to be what its critics feared it would be: a formula for disequilibrium.
