They don't listen because we are the opposition, but at least listen this time

ON INFLATION AND THE MINIMUM WAGE

If they do not manipulate the figures, it is understood that the year-end TUIK (Turkish Statistical Institute) inflation will be in the 42-45 percent range. (ENAG could be between 85-90 percent). The Central Bank, the IMF, and a significant part of the business world are suggesting a 25 percent minimum wage hike in the name of fighting inflation. Forget 25 percent; even if you don't raise it at all, you cannot lower inflation with these policies. Let us open some proposals for discussion, both for a minimum wage hike that will provide some breathing room and to truly break inflation expectations. Whether the government wing and the Central Bank implement them or not is their own business...

The findings and proposals we will make in this article are not intended to eliminate the problems in the economy. They are proposals that take into account what the government will never do, but aim to break inflation expectations to some extent with a few small measures. If you ask what is needed to get the economy back on track and achieve prosperity, it requires serious planning work. It does not fit into a column. For those curious about this, I recommend my book, "Turkey's Factory Settings for the Twenty-First Century." (Available from Naviga Publishing and the Amazon website).

We have written it many times. The diagnosis made by Mehmet Şimşek and the Central Bank regarding the causes of inflation is wrong and incomplete. When the diagnosis is wrong and incomplete, the implementation is also flawed and unsuccessful. Low-income earners pay the price.

They think that to fight inflation, the real incomes of workers, retirees, and farmers must be reduced and demand must be curtailed, and for this, they raised interest rates from 8.5 percent to 50 percent. Raising interest rates was correct, but it should have been done at once, and we have stated many times that monetary policies alone are insufficient.

Our most important problem in fighting inflation is faulty measurement. The basic management principle is: "If you cannot measure it, you cannot manage it."

We are not in agreement on the level of inflation. According to TUIK, annual inflation was 49 percent in September 2024, while according to ENAG, it is at the 89 percent level... Since I think that the 25 percent raise proposed for the minimum wage will show how cruel and exploitative a raise it is even according to TUIK inflation, I will make calculations based on TUIK inflation in this article, even if it does not sit well with me... You can add the difference yourself.

LET'S AGREE ON THIS DIAGNOSIS AND FINDING

First of all, we must agree on the program being implemented and the findings at the point we have reached. If Şimşek and the Central Bank have any objections or additions, I expect them to state them.

Let's start with a study by the Central Bank. Every 1-point increase in the minimum wage has a 0.07 (7 percent) effect on inflation. The effect of the 49 percent raise given to the minimum wage at the beginning of 2024 on inflation is only 3.43 points. (49x0.07=3.43)

According to TUIK data, the share of wage payments in companies' production costs fell from 16 percent in 2016 to 9 percent in 2022, and was 12 percent in 2023. Considering that the number of employed workers has increased by 3 million, we can say that the decline in labor income is actually more dramatic. We should also note that since interest expenses increased in 2024, there will be an increase in the share going from profit to interest.

At the beginning of the year, oil prices were 75 dollars. At one point, it briefly went up to 90 dollars. But it has been hovering around the 75-dollar level for a long time. Energy prices are not rising. The cost of energy imports has fallen.

The dollar price has increased by 15 percent since the beginning of the year. The exchange rate does not have pressure on inflation.

Wages have not increased at all since the beginning of the year.

But 9-month inflation was 36 percent, and annual inflation was 49 percent. The 36 percent we experienced in January-September is currently within the 44-48 percent year-end inflation you predicted, and the effect of the minimum wage is only 3.43 points. The question is: Where did the inflation of around 40 points come from?

As a result of the high-interest policy you implemented, the real purchasing power of the low-income segment, which was already declining, has declined even further, but that is not the problem. 20 percent of the population receives 49 percent of the national income in the country. The 80 percent spends 51 percent. Their demand has fallen. However, the top 20 percent continues to spend wildly.

Import data supports this claim. Our imports are falling. But our consumer goods imports have increased by 15 percent since the beginning of the year. You should deal with the demand of the upper-income group in both consumer goods and services items, not the demand of the low-income and retirees.

Our consumer goods imports are increasing, our intermediate goods imports are falling. Consequently, industrial production is declining. In the last three months, on an annual basis, manufacturing industry production declined by 7.2 percent in June, 5 percent in July, and 5.4 percent in August. Stagnation, stagflation, and unemployment are coming loudly.

One of the legs of fighting inflation is to curb demand with tight monetary policy. Okay. But that alone is not enough. Another side is to increase production... While curbing demand on one side, it is necessary to increase supply on the other and ensure a balance... Industrial production is declining. Supply is falling. On the other hand, the agricultural producer has been devastated. It is unclear whether many producers will plant next year. On the horizon, there is also a supply shortage problem in agriculture.

Another side of fighting inflation is fiscal policy... It is necessary to prevent tax loss and evasion. I am aware that there is no will of the 22-year government to prevent this. In an economy of 44 trillion liras (GDP), the corporate and income tax you collect based on declaration is not even 1.5 trillion. However, the amount of corporate and income tax to be collected with such capacity (if you consider EU or OECD countries) is between 13 and 14 trillion liras. I also know that you cannot do this, and I do not even offer it as a suggestion.

Let's come to monetary and exchange rate policy... When you held the foreign currency and brought the interest rate to 50 percent, our country became a paradise for hot money. We are the only country in the world that gives a real interest rate of 30 percent and above on the dollar on an annual basis. The incoming hot money has now eased the reserves. However, which economy can withstand a real 30 percent interest rate in dollar terms? There will be a massive transfer of resources from Turkey to abroad. Especially since the incoming hot money is likely to cause a very serious exchange rate shock and a new wave of inflation when it leaves. I think you see this danger too.

Despite all the tight monetary and interest rate policies, you cannot break inflation expectations. For the end of 2025, the Central Bank first said 14 percent. Then it was announced as 17.5 percent in the Medium-Term Program. The IMF's expectation is 25 percent.

According to the Central Bank market participants survey, the annual inflation expectation is 24 percent... This segment mainly consists of representatives of the financial sector.

According to real sector representatives, the inflation expectation for one year later is 40-45 percent... This is the segment that raises prices. A significant part of it is also a segment defined as having distorted pricing behavior due to inflation expectations.

Again, according to the Central Bank survey, the household's inflation expectation for one year later is 75 percent. A significant part of this segment is low-income. Some of them do not curb their demand because they do not believe that inflation will fall. Even if they do not need it, they continue to consume because prices will rise anyway. According to the research conducted by Koç University and Konda, the household's one-year inflation expectation is at the 90 percent level.

The Central Bank underlines that to lower inflation, it is necessary to break inflation expectations in the real sector and households due to the deterioration in pricing behavior (immoral opportunistic price hikes), but they do not have clear ideas about how this will be broken.

This is where my suggestions begin,

SUGGESTIONS....

Stop breaking the backs of minimum wage earners, retirees, and farmers, and break the backs of inflation expectations.

We said that one leg of fighting inflation is fiscal policy, and we also guessed that you cannot collect taxes from those who do not pay taxes. In this case, play a little with expenditures.

For example, we pay very serious money to Public-Private Partnership Projects, which are one of the biggest black holes of the budget, such as airports, bridges, highways, and city hospitals. Moreover, these companies built these projects at prices three to 10 times world prices. They already earned money while building the construction. The normal thing is the urgent expropriation of these without compensation, but I know you will not do this.

Breaking inflation expectations, in the words of the Central Bank, "until a clear and permanent decline in the main trend of monthly inflation is achieved and inflation expectations converge to the projected forecast range," that is, until monthly inflation falls to the 0.75-1 percent level, stop the Treasury Guarantee payments to be made to these companies right now. You already raised bridge and highway tolls by 284 percent this year for these companies.

I know that suggestions such as cutting vehicle rental, purchasing, and pompous expenditures in the public sector are futile. I will not repeat them. At least announce that you will send at least half of the asylum seekers within a three-month plan, and announce that you will save on transfer and health expenditures in the budget for asylum seekers. Believe me, the Syrians you send from here will be more effective than using military force in the fight against the terrorist organization PYD/YPG stationed on our Syrian border.

There is 2.8 trillion liras of tax that you have given up on collecting for the 2025 budget. (Tax Expenditure) Take a break from distributing it to friends and acquaintances in the name of fighting inflation this year. Let them make a sacrifice too. Use only 1 trillion liras of this for the minimum wage, and announce that you will collect the remaining 1.8 trillion liras.

For the opportunists you call deterioration in pricing behavior, make the Competition Authority and Finance inspectors work effectively. Start with public companies. For example, mobile phone companies and internet companies... Two of the three mobile phone companies are under state control... The raise they made this year is between 98-120 percent. Make the Competition Authority work. Dismiss their managers. They continue their operations by making profits for a long time with fixed prices with the exorbitant raises they made. We are among the countries that use the slowest and most expensive internet and mobile phones in the world. Announce that there will be no raises for these services for one year. If the only remaining private operator cannot keep up, it will leave. This example would be a serious warning against the deterioration in pricing behavior (opportunists).

Since you are demanding a raise as much as the expected inflation, not past inflation, for wages, then make a decision for the 2025 Revaluation Rate. The 2025 Revaluation rate will most likely be at the 40-45 percent level. You will raise all fees, fines, and some taxes according to this rate. Again, you will stand up here and say, "Until a clear and permanent decline in the main trend of monthly inflation is achieved and inflation expectations converge to the projected forecast range, we will not raise public services, fees, and fines for 2025. However, after three or six months, we can do it as much as the expected inflation rate of 17.5 percent."

Work on additional customs duties or SCT (Special Consumption Tax) increases for imported goods that are included in the consumption expenditures of the 20 percent income group.

Immediately lift the EPDK's (Energy Market Regulatory Authority) annual 5000 Kilowatt decision, which means at least a 100 percent raise in electricity.

If you announce these measures today, you can lower interest rates by one or two points in November, and three-five points in December, and five points in January, with the claim that it will break inflation expectations, and you can stop the decline in the manufacturing industry. If you manage the broken inflation expectation and interest rate expectation well, you can direct some of the hot money for which we pay the world's highest interest rates to the stock market in a more permanent way without scaring it, without experiencing a possible exchange rate shock, and you can reduce the burden of brutal interest transfers.

If you say, "No, we are not taking these suggestions into account. We will not do any of them, we will give a 25 percent raise to the minimum wage according to the expected inflation," then I invite you to be fair to everyone. Lower the 50 percent policy interest rate to the expected inflation rate of 25 percent or the minimum wage raise rate in January. But I am not responsible for the noise that will break out afterwards.

We started with the minimum wage. Let's finish with the minimum wage. How much should the minimum wage increase? Where 25 percent is mentioned, it could be 30 percent. If the constitution and elections are on the agenda, 40 percent would not be surprising. But since I based it on the inflation (ENAG) experienced since 2020, I said 45 thousand liras last year. Even if a 100 percent raise is given to 17 thousand liras right now, the erosion of the last 4-5 years will not be corrected.

Temporary proposals, even if not permanent, regarding breaking inflation expectations are from us, and taking them into account is from the economic management... Calculating and writing the real losses in minimum wage, retiree pensions, and farmer incomes is from us, and the struggle is from unions, retirees, farmers, and voters....