RPT-A time of Modest Proposals: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

HUNTSVILLE, Ala, September 7 (Reuters) - Russia appears to have come up with a novel way to ease its pension woes and increase revenues at the same time: encourage its people to die sooner and pay more taxes until they do.

While I thought that encouraging Americans to buy or stick with overpriced houses was bad policy, Russian Finance Minister Alexei Kudrin plumbed a new low late last week, encouraging his already coughing and bibulous countrymen to drink and smoke more.

"If you smoke a pack of cigarettes, that means you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates," Kudrin was quoted by Russian news agency Interfax as saying.

"People should understand: Those who drink, those who smoke are doing more to help the state."

While I can't say for certain how Mr. Kudrin plans to spend the extra tax revenue after Russians light one up and tie one on - perhaps he plans on government funded first dates - the idea that this will help with demographics is particularly bizarre.

Russian is already in a kind of demographic retreat, caused at least in part by the effects of alcohol and tobacco consumption on life expectancies.

Despite having a per capita income which is 50 percent higher than global averages, male life expectancy is just 62, according to the World Health Organization, lower than it was at the end of the Soviet era. More than 60 percent of adult men use tobacco, and alcohol consumption, at 18 litres per capita a year, is both high and damaging.

So no demographic boost then, but seeing as how it takes about 20 years for smoking to translate into cancer, you could argue that Russia will have a better ratio of workers to retirees. That is one way to solve a pensions issue, I guess. The nicest thing you can say about it is that it is good news for bondholders, though it may make many investors distinctly queasy.

Kudrin's plea is not too far off "A Modest Proposal", published anonymously in 1729 by Jonathan Swift, in which he satirizes callous British policy towards Ireland by suggesting that the poor there sell their children to the rich as a "delicious, wholesome and nourishing food." Of course Swift was kidding, as it were, whereas Kudrin is, apparently, in deadly earnest.

BAD ADVICE FOR WHOM?

Tobacco company Philip Morris famously, and perhaps foolishly, paid for a study in the late 1990s into the effects of tobacco consumption on Czech public finances. The study found that because dead people don't use hospitals, live in nursing homes or collect their pensions, the net effect of tobacco was actually positive on Czech state finances. That study didn't endear Philip Morris to many people, but the research seems to stack up, at least if you don't assign a proper cost to human life and suffering.

This continues one of the darker themes of the economic crisis - there really is no end of policy priorities you can achieve if only you go and encourage your people to do things which are bad for them personally, but will benefit some one else or advance some other goal which you wish to favour.

Britain introduced a plan in August of 2008 to cut transactions taxes for first time house buyers and give them subsidized loans. That may have worked out reasonably well for people who already owned houses and for banks with housing loans on their books, but the first time buyers have seen the one or 1.5 percent savings they made more than eaten up by a five percent fall in house prices since then.

That is not to mention that the effect of the programme is to take a group of people who are patently not ready for home ownership and encumber them with an unstable, expensive and debt laden asset.

Or consider the Home Affordable Modification Program, also known as HAMP, a U.S. effort to cut repayments for struggling homeowners. While it may or may not support house prices and collateral values, the program is arguably not in the best interests of the poor saps being 'helped."

HAMP works by some combination of extending the repayment period, cutting the amount owed and lowering the interest rate. That may sound like a good deal, but the typical HAMP beneficiary still comes out of the program with way too much debt. Even after a modification these people owe 63.5 percent of their monthly gross income in housing costs plus other debts and obligations, an utterly unsustainable ratio. Walking away would be far wiser, at least for them.

Let us hope that desperate times do not call for increasingly despicable policies, but that seems to be the trend.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on [SAFT/])