Tom O'Connor: The banking crisis is topical. Unemployment isn't and hasn't been in the last three years. This blindness towards unemployment and monopolisation of everybody's efforts solely on the banks, needs to stop. Human misery, suicide, emigration and economic recession should not be displaced from the top of the agenda by anything. Unemployment should and can be dealt with in advance of a banking solution. Last week's Quarterly National Income figures demonstrate that Unemployment cannot wait. It has been waiting since 2008 until the banking mess has resolved.
A plan and a concrete investment strategy funded from our own unborrowed resources within the NPRF and NTMA needs to happen mow. What is happening now and in the last two years is that governments, most economists and the media have all but ignored unemployment, given the urgent necessity to fix the banks. Can I suggest that unemployment is even more urgent? It should have been, and should now be, dealt with, even before this banking crisis is resolved.
Most people will not read last week's CSO figures on economic growth which are designed to tell us whether or not we are still in recession. However, people in pubs, shops, clubs and workplaces really do want to know whether we are or not. They are hanging on for dear life and their children are emigrating. Will there be an improvement? If not, they want to know why not, and what is the Government going to do about it?
Let’s look at the figures: Based on the whole of 2010, they tell us we are still in recession because both measures of economic growth fell. GDP fell by 1% and GNP by 2%. This is bad news. But, policy makers will say that we are either out of recession or coming out of recession. Why? Because they will say that GNP grew by somewhere between 0 and 2% in each of the last three quarters of 2010.
People will say, however, that they can still really feel the recession and it’s not getting any better. The truth is that we are not out of recession! This indeed is also borne out by the figures for GDP, which fell by 1.6% in the last quarter of 2010. Ah, but policy makers will say that GNP is a better measure for Ireland, so that doesn’t matter!
They would be very wrong. During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!
Nonetheless, much of the GNP increase has been fuelled by real exports which in gross terms rose by 13.6 billion from 2009-2010 and when imports are subtracted grew by 5.7 billion. This growth arose from the multinational sector in the main, which accounts for up to 90% of Irish exports. However, the jobs dividend from this growth will be very little. Why?
Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals' employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.
But hold on, there are 2 million people needing jobs! There are 444,000 people on the live register of unemployment. The figures tell us the continuingly depressing story of the demise of these people. We knew already that 150,000 have lost their jobs in construction or construction-related work.
The big drivers in creating Irish jobs have always been based on what people produce domestically. However, the figures tell us that all domestic output fell, apart from business output which rose, and which is strongly influenced by multinationals. For example: the value of building and construction to the Irish economy fell from 8.4 billion to 5.7 billion from 2009 to 2010; the value of agriculture and fishing has fallen by 227 million; the distribution, transport and communication sectors fell by 336 million; the value of other services fell by 2 billion. Incidentally, in 2007 the value of construction output stood at 13.6 billion compared to 5.7 billion at the end of 2010.
Taking all the above into consideration, the clear message is that the loss in jobs in the Irish economy, which is reflected in the fall of GDP in 2010 and particularly in the fourth quarter of 2010, is indicative of a deep recession. Apart from multinationals, Ireland is haemorrhaging jobs out of its economy and driving up emigration.
Examining the expenditure economic growth figures, the overall demand in the economy has fallen by 7.9 billion. The fact that multinational net exports grew by 5.7 billion makes little difference as it produces few extra jobs. It does nothing to improve the catastrophic effects of the loss of jobs in the sectors of the Irish economy mentioned above which actually do provide jobs, and which have all fallen.
The current GNP figures only statistically mask this huge problem which is obvious from the fall in GDP of almost one billion in the last quarter of 2010 alone. The masking of this by a statistical increase of over 2 billion in GNP terms, based on lower repatriation of multinational profits, shows that the GDP figures are giving the correct picture.
Last year I warned against trusting the predictions of a strong economic recovery at the end of last year and the dangers of growing unemployment and emigration. Unemployment has increased to 444,000 at present, and emigration is running at 80,000 a year. The reasons are obvious from the above. Unemployment and recession will not be solved by any government which lies to the population by quoting GNP figures. They mislead the people by promising that the economy is out of recession; that it has ‘turned the corner’; or that unemployment will drop significantly going forward.
As I have stated since June 2008, the government needs a sustained set of stimulus packages to provide job beneficial growth. It needs three stimulus packages worth 8 billion over two years and includes: A state development bank to lend money to viable businesses coming from the un-borrowed cash reserves of the government at the National Treasury Management Agency and at the National Pension Reserve Fund. This is crying out to happen as money invested by businesses fell by a staggering 27% in 2010 according to the current figures. This needs to prioritise indigenous business by investing 3 billion in social partner-vetted business growth and new ventures.
A further 2 billion needs to be invested in hundreds of new schools, primary care health centres and mental health facilities; finally, 100,000 houses need to be bought by the state at never-to-be-repeated bargain basement prices which would cost 3 billion in net terms. Through low cost affordable housing and social housing with reasonable rents, thousands can be taken out of unemployment traps and the black economy, and with economic stimulation, be brought in to taxpaying real jobs, also taking them off social welfare.
This piece is written from an ideological position that the economic consensus that operating up to now, called variously by terms such as total free market philosophy, has failed. In the words of a book by Paul Krugman, Nobel Prize Winner for Economics in 2008, “A Country is not a Company”. Each business leads its own business only; the government needs to lead overall. The current debacle will continue to fail as long as there is a failure by the state to lead economic development. The direction of change at this point should be firmly rooted in a new and lean Keynesian economic model.
16 comments:
It never ceases to amaze me - this determination to avoid naming the problem - though I think I understand why. The cause of the continuing financial and economic crisis isn't 'toally free markets'; it is totally unfettered capitalism. The challenge is to shackle capitalism to generate economically and socially useful outcomes. But, of course this won't do for those on the left; the object is to totally suppress or supercede capitalism.
And the desire for a new Keynesian model totally fails to recognise that Keynes's three principal objectives were (1) to save capitalism from its damaging excesses, (2) to ensure the continuation of civilisation and (3) to establish a liberal, progressive plurality that would keep at bay the bandidtry of right-wing capitalism, on one side, and the ideological muppetry of the extreme left, on the other.
@ Paul Hunt
Could you please enlighten us with the difference between totally free markets and totally unfettered capitalism.
Sounds a lot like a facile attempt at rebranding to me.
@disguntled,
I'm glad you asked that question; though, unfortunately like so many on this board, you seem to have your mind made up about the answer.
It matters not; I have frequently answered this question here without securing any effective engagement. In any event, I quite enjoy seeking to open the closed minds of the unpersuadable. And, who knows, there may be some mutual benefit in the engagement.
So here we go again. A market is simply a mechanism for arranging the exchange of a good or a service. The nature of the good or service may be defined in contractual terms, but even if it isn't there there is an shared understanding of what is being exchanged. There have to be a number of buyers and sellers with freedom of entry to, and exit from the market. Irrespective of the extent to which what is being exchanged is defined in contractual terms there will be a requirement for agreed rules governing the exchange, payment and subsequent performance.
These 'market rules' may be agreed by the market participants (self-regulation), but, in general, they are underpinned by the civil law governing contracts and the commercial behaviour of individuals and firms. And, because certain market behaviour can damage the interests of citizens (who might lack the sophistication or knowledge to participate or struggle to secure remedy or restitution) and can damage the public interests, this behaviour is subject to the sanctions of criminal law.
So markets are never 'totally free'. Most capitalists are content to accept these restraints as it ensures a degree of confidence, trust and of a guarantee of performance without which business could not be conducted. However, many capitalists rail against policy or regulatory oversight of certain markets. This has been the case for all sorts of markets in derivatives whose trading, rather than being conducted with transparent price discovery at exchanges, has been conducted in bilateral (or over-the-counter (OTC)) trading. These markets were 'free' from policy governance or regulatory oversight and the abuse of these markets by sophisticated players (and the gulling of unspohisticated participants) leading to spectacular market failures was the principal caaue of the 'credit crunch'.
(In Ireland, in contrast, the problem was a bog-standard banking and property bubble accompanied by an unsustainable fiscal policy. All the necessary processses for policy governance and regulatory enforcement were in place; it was simply found by the elites to be politically and commercially convenient not to apply these processes - and to evade their application. It wasn't 'totally free markets' that caused the problem in Ireland; it was markets subverted by crony capitalism and soft corruption aided and abetted by a total failure of policy governance and regulatory oversight. The problem arose when totally unregulated global derivative markets failed and the international short-term money market (on which Irish banks had come to rely excessively) froze.)
Because capitalists will always seek to 'free' markets from effective policy governance and regulatory oversight, many people find it convenient to blame 'totally free markets'. But the problem was, is and always will be capitalists seeking to evade any constraint on markets. Don't blame the impersonal mechanism that is the market; place the blame on the agents - capitalists.
@disgruntled,
I submitted an answer to your question, but it appears to have been rejected - perhaps the same will happen to this.
The gist was: please don't condemn impersonal mechanisms such as markets; target those (capitalists) who abuse them in pursuit of their own narrow sectional interests and to the detriment of the public interest; and focus on the effective policy governance and regulation of markets to ensure capitalism generates economically and socially useful outcomes.
Paul,
I'm rather constrained for time at the moment, so forgive me if I'm brief and not exhaustive. In fact, I'll try to get down to the nub of the issue (for me at least). And that is contained in your last paragraph.
"The gist was: please don't condemn impersonal mechanisms such as markets; target those (capitalists) who abuse them in pursuit of their own narrow sectional interests and to the detriment of the public interest; and focus on the effective policy governance and regulation of markets to ensure capitalism generates economically and socially useful outcomes."
I would contend that the market is not an impersonal mechanism being abused by sectional interests, but nothing other than those sectional interests interacting in a totally self-interested manner. The market itself, as it is nothing more than the sum of it's parts, is by it's nature malign. It is hegemonic. It is also itself a rebranding of what is essentially class interest.
Also, it's ironic that you should talk about ideological muppets on the left. The only people engaged in class warfare over the past number of decades has been the rich, and in the words of Warren Buffett "we're winning".
As for Tom O'Connors post. He surely deserves a better response than condescension. He doesn't believe the market will do anything much to help almost half a million unemployed. And for that matter, nor do I.
Tom,
Yes emigration is rising, but there's a risk of a moral panic here. The media continually reports that '1,000 people are leaving the country every week'. If this is based on anything, it's from the CSO Population and Migration Estimates (21 September 2010). This gave a preliminary estimate for year 2010 emigration of 65,300 people, of whom precisely 27,700 were Irish citizens. The cry that 'our children are emigrating' ignores the new ease of movement within the EU, such that people immigrated here in the boom years some of whom are leaving, it ignores that emigration today is very different to the 1980s let alone to the 1950s.
There seems to be something strange with the commenting function here. Yesterday I submitted a comment. It never appeared. Then I submitted a summarised version. It appeared and, lo and behold, my previous comment also surfaced.
I could have sworn that I saw a comment by 'disgruntled observer' excoriating markets as being driven totally by self-interest, as being malign and hegemonic. Not a hint of it now. I must have imagined this expression of ideological purity which, if it, as I fear, is widely held on the progressive-left, will prevent the emergence of the progressive plurality that is required to change the current economic order.
We are using the Blogger platform. Some comments got caught by the anti-spam function.
@Nat O'Connor,
Fair enough. I'm not alleging censorship, but the glitches hinder engagement. Even if I'm beginning to doubt the benefit or wisdom of this engagement.
The neocon reaction from the mid 1970s usurped the progressive plurality that sustained the post-war economic order built on expanding economic prosperity and social justice. This necoon reaction reached the height of its dominance in 2007 and is now struggling to re-establish its hegemony.
My interest is in reconstituting this progressive plurality, but I find that many on the left are locked in an ideological time-warp with (a) their loathing of markets, (b) their failure to recognise that capitalism will never be suppressed and that the pursuit of self-interest in properly policed and regulated markets is in the public interest and (c) their belief that the state is the answer to every problem.
While this mindset retains its grip on the left, engagement is probably futile.
I suspect there is less difference between us than you think.
TASC has been clear that it supports markets where they are shown to work well in the broader public interest. However, using market mechanisms is different from a 'free market' approach.
I don't agree with the idea/ideology of 'free markets' when that represents a reluctance by market participants to allow better information for consumers or regulators, or when this means that certain effects of the market (like pollution or growing inequality) are disregarded by market participants as 'necessary evils' or just inevitable.
Granted, the problem is the attitude of companies or individual people towards regulation, not the abstract concept of market competition. However, there is a 'free market' school of thought that is ideologically disposed towards the light touch regulation that has severely damaged Ireland's economy and society. It is thus reasonable to oppose 'free market' ideology with ideas of a 'social market economy' or a 'mixed economy', where the state plays an important role as both regulator of some markets, and participant (sometimes sole) in others.
That still leaves plenty of room for discussion: how much regulation does each market need; are some goods and services not suitable for markets; what is the role of democratic participation in governing the economy versus 'independent' regulators; how to improve the state provision of services; etc.
To return to your claim that totally unfettered capitalism is different from totally free markets. Yes they are. In the former case, we are discussing the unequal distribution of power and resources in society, and the leverage used by wealthy individuals and corporations to have rules and laws changed so that they can do business as they wish to. In the latter case, totally free markets is an ideology that believes effecient outcomes will result from competitive markets where participants have perfect information, costless entry into the market, and various other theoretical assumptions that are unrealistic for most markets. As alluded to above, there are schools of thought about 'realistic markets' that deal with the weaknesses of the free market assumptions and try to find ways of gaining some benefits from competition despite imperfect information, costly market entry, tendencies of companies towards monopoly, etc. And thus we return to the role of the state - in some form - to regulate markets.
I think we largely agree, except on the use of the word 'free'.
@Nat O'Connor,
"TASC has been clear that it supports markets where they are shown to work well in the broader public interest."
I appreciate your efforts to identify potentially broad areas of agreement, but this statement reveals a divide that any number of words won't bridge.
The implication here is that markets are always guilty until they prove themselves innocent. My position is that markets formed from the free economic interactions of individuals and firms and subject to appropriate policy, legal and regulatory governance are not 'persons' to be found innocent or guilty. It is only market participants who may be so found and all market participants are innocent until proven guilty.
This is a profound political, economic and philosophical difference.
It is the essence of the difference between liberalism (not the neo-liberalism with which neconnery seeks to conceal its real agenda) and the classic state socialism of UK Labour's Clause IV.
There is no evidence that the Irish progressive-left has any interest in seeking to cross this divide.
Paul,
You argue about the left all the time and its ideological purity, blind to the logic of its own position and the wisdom and benefits of this benevolent beauty that if only those "neocon" beasts hadn't ravished her would have us in the best of all possible worlds.
I can give you 100,000,000,000 reasons why you're wrong.
Incredibly, you're pretending that this is the action of some rogue players, some neocon cowboys who usurped this wonderful construct for their own malign ends and led all the innocent fools on a merry dance.
Paul, this is about as systemic a crisis as it gets. The efficient market hypothesis is a joke, and has been proven to be as such.
Do you think that electronic high frequency trading that has increased the number of trades per day from about 15 million in the late 90's to several billion in any session, is beneficial? How many times do stocks and shares change hands per second? This is not about allocation of wealth, or providing equity capital, but taking the debt generated by the shadow banking system and allocating it though casino activities. Is it neocon? or neoliberal? Who cares?
Or what about the global imbalances that worked here? I'm not talking about China v US, or Germany v Spain, but the one the market actually endorses: namely inequality. Inequality is recognized even by the IMF as having been a driving factor behind this crisis. It's not a small bit ironic that the most unequal of developed countries, bar the US and UK, had the biggest property blowout. Is that a market failure? Neocon or neoliberal?
You talk about the use of the state as some bad thing. And having read comments of yours both here and abroad, you’re a very strong advocate of both privatization and a minimalist state. But I would argue that it was actually the presence of a large state actor that led to the era of prosperity you so readily assign to the markets. I’ll presume you’re aware that the taxation rates reached over 90% for the upper decile of the US labour market, in that very period? Would you consider that to be a prerequisite to a correctly functioning market?
@ Paul Hunt
"The implication here is that markets are always guilty until they prove themselves innocent."
No. My argument (that markets must act in the public interest) is that any group of people affected by the formation of a market should decide the rules of how that market functions. There are few markets that only affect the direct participants. Pollution, distribution of wealth, public safety, etc are all effects, and therefore a collective democratic response is required to set rules to limit those effects (i.e. a state role).
"My position is that markets formed from the free economic interactions of individuals and firms and subject to appropriate policy, legal and regulatory governance are not 'persons' to be found innocent or guilty. It is only market participants who may be so found and all market participants are innocent until proven guilty."
I think your philosophical position is taking for granted that there will be a state role in markets, and this is different from (at least some) conventional liberal depictions.
If we start from a liberal philosophical position, there will not be any "appropriate policy, legal and regulatory governance" for individuals and firms in a market to comply with. There will simply be 'free individuals' interacting.
What I mean by markets acting in the public interest is that the substantive content of the very same "appropriate policy, legal and regulatory governance" must be adequate to deal with the effects of implementing a market mechanism in the real world (e.g. pollution, inequality, etc.)
What we are then left to discuss is what is "appropriate" governance.
@Nat,
On another blog a poster engaging in debate with me, generously alluded to my 'relentless reasonableness'. You are more deserving of this accolade than I am; and it is this that encourages me to respond.
I am pleased that we seem to have arrived at a position which moves on from - and, indeed, rejects - the knee-jerk, reflexive villification of markets frequently vented on this board. We now appear, more usefully, to be focused on the source and nature of the governance of markets. But again I suspect - on this matter - our positions are likely to diverge.
Rather than attempting to consider the huge variety of markets and the associated variety of governance regimes that may be or are applied, I think it would be useful to focus on two associated industries, gas and electricity, where the issues of competition, market mechanisms, regulation and privatisation are currently subjects of policy and popular interest and concern in all developed economies - and, indeed, in emerging economies.
The European Council, at its February 'Energy Summit', committed itself to ensure the completion of the internal energy market project in electricity and gas. And, by the end of this year, the terms of the EU/IMF support programme require a detailed assessment of the Irish electricity and gas sectors.
The fundamental problem is that the EU is pursuing its electricity and gas liberalisation project in precisely the same manner as the ill-designed and ill-governed Euro project. Already it is imposing inefficiencies and deadweight costs on all final energy consumers. Opportunities abound for rent capture and demands by market participants for public subsidies. All EU final energy consumers and citizens are being penalised - and this is only the start.
The full roll-out of retail competition, mandated by EU and, subsequently, national legislation, since July 2007 is intended to increase consumer choice and competition. In fact it has left consumers isolated, atomised, diesenfranchised and vulnerable to price-gouging and other anti-consumer practices by energy suppliers and other service providers. The short time horizons of energy suppliers and traders conflicts with the long time horizons of investors in energy production and infrastructure and curtails investment. The result is much higher prices to atract this investment or public funding of investment (paid for by citizens) or both.
The economic rationale is based on a flawed application of the naive, narrow neeoclassical economic theory of markets. (In this respect - and in this respect alone, I agree with some commenters.)
The potential for collective adversarial action by local gas and electricity distribution companies against bulk energy supply and transmission businesses has been eliminated. Rather than providing bundled supply and pipe-or-wire distribution services subject to effective regulation, they have been broken up into separate businesses. The ability to convert the long-term, almost indefinite, willingness of final consumers to pay for gas and electricity into long-term, tradable contracts for energy and transmission services has been obliterated. The result has been increased consolidation and vertical integration along the electricity and gas supply chains. 85% of EU energy supply is now delivered by no more than 12 huge companies.
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(Ironically, the US gas industry - and parts of its electricity industry - has retained and developed these institutions and procedures and has prospered to the ultimate benefit of final consumers. Wholesale gas prices in the US are half those in the EU.)
There is probably no proper remedy without a major repeal and amendment of EU and national legislation. For member-states beginning with state-owned vertically integrated businesses, the process has probably gone too far in the direction of anti-consumer organisation and fragmentation - with full legislative and regulatory support. For member-states starting with strong local distribution businesses, these businesses have been fragmented, disempowered and swallowed up - again with full legislative and regulatory support.
Nevertheless, the solution is clear. Abolish the requirement for full retail competition and allow local distribution companies to provide bundled gas supply and pipe distribution services, bundled electricity supply and wire distribution services or both subject to national or sub-national regulation. Completely unbundle transmission businesses from generation and supply subject to national and EU-level regulation. Allow the local distribution businesses to contract with bulk suppiers of energy (gas producers and electricity generators) and with providers of transmission services and to trade energy contracts and transmission contracts in liquid wholesale markets.
Ownership is an entirely secondary matter. Getting the structure and the regulation of the industries right is far more important.
This is the kind of project the progressive-left throughout the EU should be pursuing. It is an excellent example of the use of markets subject to effective regulation and with the full application of collective action by local companies on behalf of consumers and citizens. In addition it would have effective consumer advocacy as a key part of the regulation of local distribution companies.
And this devolution of market power to market players - and, ultimately, to consumers and citizens - with checks and balances at different levels may be contrasted with a total reliance on the 'state'. The trend throughout the EU has been towards excessive executive dominance by governments - although some parliaments are kicking back. But Ireland is at the extreme in terms of the exercise of executive dominance.
So I think we know how this game will develop in Ireland. The Government will propose some bastardised structural arrangements that will, in some form, comply with the fundamentaaly flawed EU programme of liberalisation. The unions will dig in and demand a return to some unachievable 'status quo ante', public opinion will be divided, but there will be no proper scrutiny of the proposals and the Government will ram it through the Oireachtas using its overwhelming majority.
(apologies if this appears twice; first attempt seems to have disappeared):
(Ironically, the US gas industry - and parts of its electricity industry - has retained and developed these institutions and procedures and has prospered to the ultimate benefit of final consumers. Wholesale gas prices in the US are half those in the EU.)
There is probably no proper remedy without a major repeal and amendment of EU and national legislation. For member-states beginning with state-owned vertically integrated businesses, the process has probably gone too far in the direction of anti-consumer organisation and fragmentation - with full legislative and regulatory support. For member-states starting with strong local distribution businesses, these businesses have been fragmented, disempowered and swallowed up - again with full legislative and regulatory support.
Nevertheless, the solution is clear. Abolish the requirement for full retail competition and allow local distribution companies to provide bundled gas supply and pipe distribution services, bundled electricity supply and wire distribution services or both subject to national or sub-national regulation. Completely unbundle transmission businesses from generation and supply subject to national and EU-level regulation. Allow the local distribution businesses to contract with bulk suppiers of energy (gas producers and electricity generators) and with providers of transmission services and to trade energy contracts and transmission contracts in liquid wholesale markets.
Ownership is an entirely secondary matter. Getting the structure and the regulation of the industries right is far more important.
This is the kind of project the progressive-left throughout the EU should be pursuing. It is an excellent example of the use of markets subject to effective regulation and with the full application of collective action by local companies on behalf of consumers and citizens. In addition it would have effective consumer advocacy as a key part of the regulation of local distribution companies.
And this devolution of market power to market players - and, ultimately, to consumers and citizens - with checks and balances at different levels may be contrasted with a total reliance on the 'state'. The trend throughout the EU has been towards excessive executive dominance by governments - although some parliaments are kicking back. But Ireland is at the extreme in terms of the exercise of executive dominance.
So I think we know how this game will develop in Ireland. The Government will propose some bastardised structural arrangements that will, in some form, comply with the fundamentally flawed EU programme of liberalisation. The unions will dig in and demand a return to some unachievable 'status quo ante', public opinion will be divided, but there will be no proper scrutiny of the proposals and the Government will ram it through the Oireachtas using its overwhelming majority.
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