Economic notes on Turkey for Şimşek and the Central Bank team...

Price controls on the minimum wage, retirees, and goods!

“In order to raise pensions, Turkey would have had to borrow from abroad at an interest rate of more than 50 percent.” Signed: Mehmet Şimşek, Minister of Treasury and Finance…

Speaking of taking out foreign debt for current expenditures, and at a 50 percent interest rate at that, is a situation even worse than the Ottoman debts and the Ottoman Public Debt Administration, which were major factors in the collapse of the Ottoman Empire. However, it is certain that Mehmet Şimşek is an experienced figure in the loan-shark banking market in London. Could it be that Şimşek, due to the risks carried by the Turkish economy for which he is responsible, considers a 50 percent interest rate in dollar terms to be appropriate for the near future?

Turkey is currently able to find debt in the outside world at interest rates of 9-10 percent, which are loan-shark rates. We have a finance minister who rejoices every time he finds debt. We are like a colony... Imperialism used to go and invade countries in the first stage and seize their resources. In the second stage, it continued with foreign trade surpluses and foreign capital investments. The stage it reached 40 years ago is to exploit countries by lending to them, dragging them into a debt trap, and keeping their administrations under control.

Since Mehmet Şimşek made these remarks immediately after the election defeat, and the Central Bank warned in a letter, “Make the minimum wage increase only once a year. And do not make the increase higher than the inflation we are targeting,” let us once again recall the phenomenon of deteriorating income distribution and demand-pull inflation in Turkey. These friends see the increase in demand as the cause of inflation in Turkey, and the raises given to the minimum wage and pensions as the source of that demand increase. They are wrong. Let us explain the policies that distort income distribution and increase inflation. In the next article, let us look at the demand and inflation that have increased according to this distorted income distribution.

IT IS A SHAME TO PUT PRICE CONTROLS ON GOODS (!)

For example, if someone were to stand up and say, “In a market where inflationary expectations are widespread, price increases made by companies out of opportunism are one of the most important causes of inflation.”

Yes, this assessment is correct. Based on this assessment, if they were to make the following proposal:

“In that case, let us ban price increases, let us put price controls on goods.”

“There is a free market economy. Can you put price controls on goods? What century are we living in?” a strong objection would arise. Yes, there is a market economy. The market economy has rules. Within these rules, there is also intervention in monopolistic markets and opportunistic profits. A free market does not mean I can freely fleece everyone.

During periods of high inflation, a social consensus is required for a certain period. In these periods, it is expected that no one will increase prices (prices of goods and services, wages, interest rates). Sacrifice is expected not only from wage earners but from all segments of society. Fine, let it be as you say. For now, let us not put price controls on goods. As a government, you already lack the trust and political base to ensure such a social consensus. However, you, as the government and the Central Bank, are already putting price controls on things in a strange way. Why is no one speaking up?

IT IS FREE TO PUT PRICE CONTROLS ON THE PRICE OF LABOR (!)

When you say price, do not just think of the prices of goods and services sold in the market. Labor has a price, and so does money...

We call the price of labor “wages.” You collect the commissions, you give a raise once a year or every six months. And you keep that raise below the actual inflation. While you advocate for the prices of goods and services to be formed freely in the market, you do not allow prices (wages) in the labor market to be determined by bargaining. With pressure, laws, and the force of police and gendarmerie, you dynamite strikes, unionization, and collective bargaining. You are putting price controls on the price of labor.

There are hundreds of examples. Let me share two that have been reflected in the press. When workers at a poultry and egg producing firm (Lezita) go on strike, the firm can fire the workers, bring in workers from India to work, and you, as the state authority, give permission to that firm. Since the firm is publicly traded, it is free to access its balance sheets. It has increased prices, its turnover and profits have exploded. But it has benefited from a pile of exemptions, and when it comes to taxes, it is nowhere to be found...

Or the Cengiz İnşaat, which you love so much, finds the wages of local workers too high for the construction it will do in Bodrum Cennet Bay and brings in workers from Sri Lanka. You give them residence permits and work permits. You turn a blind eye to the informal employment of asylum seekers and try to destroy even the minimum wage level. By turning a blind eye to informal employment, you do not collect the Social Security Institution (SGK) premiums that should be collected, and you usurp the rights of retirees.

By putting price controls on the price of labor, you are transferring income from labor to capital.

DOUBLE INCOME TRANSFER BY PUTTING PRICE CONTROLS ON THE PRICE OF MONEY

Money also has a price. We call the time price of money interest, and the exchange price against foreign currencies the exchange rate.

Capital likes cheap credit for investment or operating expenses, and cheap foreign exchange rates for imports. You said Islamic rules, you said 'nas' (religious decree), and you put price controls on the interest rate, the price of money. When interest rates fell, the exchange rate started to rise. This time, by selling foreign exchange reserves and paying exchange rate differences for a debt you did not take, like the KKM (FX-Protected Deposit Scheme), you put price controls on the dollar's price, the exchange rate.

While inflation was hovering around 150 percent, you put price controls on interest rates and transferred income and wealth to capital with 20-30 percent loan interest. By selling 128 billion dollars first and then nearly 250 billion dollars in reserves over the next two years, you allowed the exchange rate to rise by only 45-50 percent while inflation was rising at the 120 percent level. You put price controls on the exchange rate. You transferred wealth to the importer. You took the exchange rate risks of the private sector, which has exchange rate credit risk, and loaded them onto the public and the citizens. The cost of KKM to the Central Bank in 2023 alone was 900 billion TL.

Mehmet Şimşek and the Central Bank say they are switching to rational policies, but they continue to apply price controls on the exchange rate by selling foreign currency through the back door, bringing reserves to minus 70 billion dollars. They still have not found a solution to KKM, the pinnacle of irrational policies, and they continue to borrow domestically in foreign currency-indexed debt. Irrationality has not ended. I am not even mentioning budget expenditures...

Because of these policies you are implementing, income distribution has deteriorated significantly. Add to that black money and the informal economy. As a result, what kind of consumption demand has formed in which income group in Turkey, and what kind of inflationary effect is it creating? What kind of disinflation policy should be implemented? Let us share these in the next article. Maybe it will be of some use.

Economies where the prices of goods and services are freely determined by opportunists, while price controls are applied to the price of labor and money, are not called free market economies. It would be more accurate to call it a free robbery economy. Today is Sunday. I have ruined your mood, but let us add a little humor to the mix. This type of economy is called the 'Haşşırrrt the Blackboard Economy' (*), in the words of our famous late artist Öztürk Serengil.

(*) Haşşırrrt the Blackboard: According to the account of our famous artist Zafer Algöz in a TV program, when the late Öztürk Serengil was describing the bill that came after a meal he ate at a restaurant by the sea in Çeşme; “The bill came in a binding like a volume of the Larousse Encyclopedia. I opened the cover...”

The person opposite asks, “Is it a rip-off?”

“What rip-off, my dear. A rip-off is a toothpick compared to this. It's like a Roman Spear. Haşşırrrt the Blackboard at the SeaSide...”