THE ATTRACTION EFFECT OF INVESTMENT
Economic activity, like human behaviour, is paradoxical and full of unwanted and unforeseen secondary and tertiary effects, which turn against whoever caused them. This produces a boomerang effect, leaving those who trusted blindly in easy solutions which make everyone happy, dumbfounded. One of these paradoxical effects, significantly widespread and highly damaging, is the expulsion effect of employment-generating productive investment. When, without throwing light on the deep causes of a bad economic situation, a few so-called experts in this or another country, dazzled by the political success of their ideas and sickened by power, believe they know how to take the ignorant lower orders to a new earthly economic paradise, it is possible to fall into confusion and enter a vicious circle difficult to escape from.
Since national production was hindered with respect to its ambitious pretensions and employment was at an all-time low, the saving State comes to our aid and urges public spending in goods and services. The number of civil servants is increased to ‘logically’ decrease employment and it is even as well to raise their salary agreeably because that will encourage consumption; but above all, great public investment projects full of selfish pomp are set into motion which will speed up growth of public GDP and decrease structural unemployment. The multiplier allied to the redeeming State will do the rest. Its informing benefactor will impel the GDP all over the national geography multiplying its value two or three times the value of P (P is the magic letter which represents Public Spending); and new workers contracts will follow with an excessive frenzy. Soon we shall catch up with the German engine, our domestic standard of living will be on a par with the seven big ones and we shall even be able to look down on them. A free rein is given to easy and ignorant bliss. That is what they thought.
However, sooner or later the day of reckoning comes. The human economy has its natural supranational and inter-temporal laws, which end up imposing themselves with unrivalled bigheadedness. All the cunning juggling games that were used to build a perfect economy were based on the transgression of one of these natural laws whose respect we have to recover; the basic maintenance of the budget equilibrium. When this equality of income and expenses is lost, on the deficit slope, the vicious circle, with its perverse effects, is set in motion. Forced spending causes inflation. Deficit increases debt and these continuous negative imbalances constantly increase this debt. It has to be financed and domestic saving cannot do so alone. There is a need to attract capital and in order to do so we have to raise interest rates, at the same time trying to avoid the gallop of inflation. Juan Velarde, publishing an account of a conference by José Barea in September 1993 which I attended, explained it like this: ‘High interest rates increase public spending on one hand, and on the other, render financial costs so expensive that the private sector is deterred from acting, inside the so-called ‘expulsion effect’. The entrepreneurial weave is mostly destroyed and unemployment increases. Recourse is made to public spending both as relief and in order to avoid a serious social conflict. More civil servants are contracted; the PER (pension for agricultural workers in Andalucia) rises in price; pensions increase and so on…. Relief from the Welfare State is expected, but as the crisis is serious, tax and treasury collection collapse. The Public Sector deficit increases again. As if it were made of knives and razors, the diabolical wheel continues its unflagging and destructive rotation of our economy’. The boomerang repeatedly hits those who hurled it with excessive presumption. The aim was to assist the weakest and they end up being the most harmed.
It may be a blessing in disguise and popular knowledge prophesies that the experts should be the ones to rectify. Humbly recognising without megalomania the cause of the blunders, the vicious circle can be converted into a virtuous circle, the perverse effect into beneficial effect and the expulsion effect of investment into the attraction effect. We can already see it in the Spanish economy. Suffice it to say that the markets common sense, that is to say, national and foreign citizens, suspect that the real intention and effective decisions of the Government are directed towards restoring natural economic laws. These consist of maintaining a healthy budget equilibrium and fighting against degradation of money (inflation) which perverts generalised economic behaviour so that domestic or international saving and the consequent investment, land permanently in our country. Investment and pension funds increase, the stock exchange reaches all-time highs, it is possible for interest rates to fall, risk premium with respect to the apparently all-powerful Germany is minimised …etc. What will happen if these intentions are not only observed, but furthermore, it is proved day by day that these good intentions and curative measures are put into practice without hypocritical thoughts? In spite of everything, in spite of the difficulties, we have to open a door to true hope. Although we are in the middle of winter, the economic spring is near.
JJ Franch Meneu