John McCain, Republican presidential nominee, took the view a few weeks ago that US taxes on gasoline products should be temporarily lowered for the summer driving season so that Americans could still have their usual holidays.

Not clever, John. When a resource price goes up, it signals scarcity, something to which people should adjust. Just lowering the tax would invite people to stay with unchanged behaviour.

Indeed, many emerging markets are today reducing their subsidies on petrol and diesel in order to have their populations experience the reality of rising oil prices and moderate their consumption accordingly, improving the allocation function of market prices.

In the event, the McCain idea wasn't adopted. Instead, a new concept was born (and apparently has already been copyrighted), namely "staycation". That is, having vacation in your own backyard this summer. Americans are already driving less, and one in ten is considering staycation this summer because of high traveling costs.

In contrast, in South Africa today we are encountering more McCain-type propositions. Let us lower VAT on food and reduce the fuel levy on petrol and diesel.

Whatever next? Pay a subsidy to gold mines because the gold price is sliding?

Regarding gold, we have traditionally had a system in place that could keep gold mines alive, namely the rand, which tended to fall when our export prices were under pressure. But then gold was a strategic export product.

The idea that we should compensate sections of the population because they are being impoverished by foreigners raising their prices on our consumption goods may sound appealing, but all it does is to interfere with the allocation function of the pricing system in a changing world.

By all means provide a safety net for the truly poor, but focus this well rather than benefiting all middle class and working class people, too.

Simply print more money

Besides such direct subsidization, there is the matter of indirect compensation. Simply print more money and allow wages and salary to rise as fast as the increased inflation.

This doesn't ultimately give us buying power over more oil and food, but it gives the illusion of doing so, which can be comforting in our impoverished state.

Unfortunately, it also constitutes a second-round lift in inflation, which will become the basis for the next round of inflation behaviour. This way one embeds higher inflation longer term, something that specifically penalizes the poor half of the population which has little market power to protect their real spending power.

Thus inflation amounts to a transfer tax from the poor to the rich, unless the state interferes and raises enough additional tax off the rich and transfers it back to the poor by way of higher spending.

This is getting complicated, not so, as the acceptance of higher inflation for a while would amount to traveling the road of least resistance, and something apparently not to be contemplated.

The SARB has been raising interest rates, and will be raising them further, in an attempt to contain second-round inflation (wage) demands.

Yet last week the government announced the expected public sector salary negotiations to be based on May's CPIX inflation, namely 10.4 percent.

In other words, the biggest sector in the economy with the lowest productivity gain, but politically well connected, can be expected to see its wage bill rise well in excess of 12 percent, when also allowing for notch increases, more benefits and employment gains.

This is the same government that instructs the SARB to keep inflation at three-to-six percent. If the SARB takes this instruction seriously (it does), it basically means it has to square this achievement over the backs of the remaining 80 percent of the economy.

Labour force need to be politically 'accommodated'

It means interest rates on the indebted have to rise to painful levels, because important sections of the labour force need to be politically 'accommodated' at the expense of others.

Double standards indeed. We should all stick to three-to-six percent standards, with the government leading by example, not only in terms of Eskom tariff increases, as loudly demanded of late, but also regarding public servant wage increases, as it is a key cheerleader in the broader labour market.

That could well make a few powerful unions very unhappy, for which reason it is unlikely to be attempted.

Meanwhile, politically fragmented indebted households have no market power of note to protest the interest rate treatment being meted out to them.

If this also sounds like the road of least resistance for macro policy, that could well be true.

Cees Bruggemans is Chief Economist of First National Bank.

AFP