A Progressive Development (growth) Policy for Europe

Paul Sweeney: Did you know that last year 22.9 million people in the EU were unemployed, of which, a staggering 10.9 million people were long-term unemployed. At the current pace of reduction, the unemployment rate would take 7 years to return to its pre-crisis level in Europe. This is one of the many interesting points in a new economic study from European progressive economists.

The authors of the Independent Annual Growth Study “The Elusive Recovery”, expect that economic growth is going to slow down in the EU in 2017 to 1.6% after 1.9 % in 2016 and to 1.5% in 2018 because “tail-winds are turning into headwinds.” Brexit, higher oil prices and especially the slowdown in trade will impact negatively, along with uncertain politics.

Debt, Growth and Coding Errors

Tom McDonnell: Reinhart and Rogoff's finding that the growth rate starts to decline once the public debt to GDP ratio exceeds 90% has become embraced as a stylised fact by the commentariat and in particular by the austerians. However, a recent paper by Thomas Herndon, Michael Ash and Robert Pollin has critiqued this finding. As Slate reports here, Herndon et al. find that the Reinhart and Rogoff result is attributable to a coding error, and they also raise other methodological objections. Herndon et al. find that overall the evidence contradicts Reinhart and Rogoff's claim that public debt loads greater than 90% of GDP consistently reduce GDP growth.


It will be interesting to see how Reinhart and Rogoff respond to the Herndon critique.


 

Launch of NERI Quarterly Economic Observer/Facts

The NERI has published, today, its fourth Quarterly Economic Observer (QEO) along with the latest Quarterly Economic Facts (QEF). A link to the full QEO together with a short summary of key points is contained here.

The QEF may be accessed here.

Later today staff of the NERI will present these publications at a special seminar at 3pm (earlier time than normal NERI seminars) in Dublin. All are very welcome to attend. Details are here.

The next (Spring 2013) QEO will be focussed primarily on the Northern Ireland economy while retaining the NERI's all-island mandate in the publication itself.

The advocates of austerity are now calling for growth

Paul Sweeney: When all of the advocates of austerity are now calling for growth as well as more cuts, is it no wonder the public is confused?

The peoples of Europe have clearly decided a) that the level of austerity imposed on them is too harsh, b) it is hitting the poorest hardest (what is new?) and c) it is not working (after four years, they know it for sure!). So the conservatives have a new hymn sheet with the word growth peppered at the end of every refrain instead of amen. But people are not fools. They know that the growth policies being proposed are “Structural.” They are impacting only on supply side, with cuts in minimum wages, basic hours, benefits and all the rest of it where it impacts on the precariat.

Our own government is deeply disappointing in its slavish adherence to the Supply Side Approach to the economy. Four years on, plummeting domestic demand – by 26 per cent and still falling - and large falls in GNP and GDP are worrying. There was a rise of 0.7% in GDP last year. This fact has been trotted out at every opportunity as a great economic “fact”. Unfortunately, this piddling performance could be revised down to 0.0 shortly and even at this pace, it will take 15 years to get back to where we were.

Sebastian Dullien has a good critical perspective on what needs to be done here. It ties in nicely with the finely honed Demand Side analysis, recently undertaken by the Irish Congress of Trade Unions for boosting jobs and confidence in Ireland’s collapsed economy.

A new deal is required

Tom McDonnell: On Monday and Tuesday we will be treated to the latest instalments of the austerity show. While the structural deficit does need to be closed there are good and bad ways to do this. What we almost certainly wont get next week is a credible growth strategy.

It is clear the current pro cyclical fiscal stance is embedding the depression. Long-term unemployment is now at crisis levels and there is a huge risk that high levels of cyclical unemployment will transform into high levels of structural unemployment with disastrous long-term social impacts. Out debt burden (public and private) is consistent with years of future stagnation. If we cannot reduce the debt burden or spark nominal GDP growth then the next few years will be very grim.

We have a Euro zone wide failure of policy. The institutional architecture of the currency union has failed. This is not a cause for shame. Prototypes and innovations fail all of the time. But we have now put the Euro through its paces and it has burst into flames at the first sign of adversity. We must learn the lessons and causes of failure if we are to improve the model. We know the reasons for its failure. A common currency without a fiscal union is incoherent. There are a number of design flaws including:

1. Imposing a single interest rate over a non-optimal currency area amplifies booms and busts
2. The absence of a lender of last resort magnifies the likelihood of sovereign debt crises
3. There are no mechanisms, protocols or conditions for writing down debt
4. There is no EU-wide special resolution regime for banks
5. There are no centralised fiscal mechanisms to provide counter cyclical support for depressed regions
6. There is no transfer mechanism to compensate countries blighted with an overvalued currency
7. There is no centralised financial regulation
and yes
8. There is insufficient budgetary coordination and integration - although this demands greater democratic accountability

All of these mistakes need to be rectified. It seems reasonable to ask whether the Euro is worth saving. Yet the consequences of a Euro break up are likely to be catastrophic.

It is evident the Greek write-down does not go far enough. Write downs or restructurings are probably required for other countries including Ireland. We could start with the promissory notes. But reducing the debt is just one side of the equation. The other side is growth.

We need a new deal for Europe and for Ireland. A new Marshall plan. A deal that would allow the continent to recover. A sister organisation to the ECB responsible for fiscal policy and economic growth should be established. A beefed up European Investment Bank is one candidate to occupy this role.

The greatest challenge for the Irish Government and for Europe is to get its people back to work. Austerity will not achieve this. In Ireland we need programmes to transform the skill sets of the unemployed and other workers to match the needs of the economy. The G.I. bill in the United States is one model we could pursue. The G.I. Bill was a law that provided vocational or college education for returning World War II veterans. The simple fact is the skill base of the unemployed segment of Ireland's labour force is likely to be far out of step with the future needs of the economy. This is particularly the case for the 100,000+ former construction workers that have lost their jobs. For many of these workers there is little prospect of future employment in Ireland. Yes this will cost money, but we still have €5 billion in the National Pension Reserve Fund.

As the weeks pass into years hope for the long term unemployed fades farther into the distance. The Government has an opportunity to start turning the tide next week. It is time for a new deal.

Budget 2012 - Choices

Tom McDonnell: According to Eurostat, Ireland will have the lowest rate of gross fixed capital formation in the EU next year (see pages 68-69 of the pdf).

Fitch partially justified their downgrading of Portugal to junk status on the basis of Portugal's stygian and austerity related growth prospects. As austerity bites harder throughout Europe, the OECD is now forecasting the Eurozone and UK economies will enter recession again next year. In this context Tony Dolphin, the chief economist of the UK think-tank "the Institute for Public Policy Research" (IPPR), has released a short piece suggesting 10 ways to promote growth in the UK economy.

No one denies the Irish Government is heavily constrained in terms of its fiscal stance. However within those constraints the Government still has the ability to make choices. As Olli Rehn wrote today in the Irish Examiner:

“the programme leaves considerable policy discretion to the Government in terms of how to meet its key objectives. It is the Government, and not the so-called "troika", that is responsible for taking the key decisions that matter to the lives of Irish people.”

Ajai Chopra has expressed similar sentiments in the past.

Those who say we have no choices are not being honest. But has the Government chosen well?


The UK's Office of Budgetary Responsibility OBR has looked at the 'impact multipliers' of changes in different taxes and types of spending on growth.

OBR Estimates of fiscal multipliers - tax decreases/spending increases
- Changes in personal tax allowance and national insurance contributions 0.3
- Change in VAT 0.35
- Welfare measures 0.6
- Current spending 0.6
- Capital spending 1.0

What is crucial for policy is the relative efficacy of the measures. Changes in personal tax/social insurance are the least effective measures at stimulating growth while capital spending measures are the most effective. Of course capital spending has the additional advantage of adding to the economy's productive capacity over the longer term. See this discussion last year in the UK parliament on fiscal multipliers. Thus it was a curious decision by the Irish Government to choose to double the level of cuts to capital expenditure. Presumably this was to avoid the politically more difficult choices of increasing taxes and cutting current spending.

Best international evidence suggests the Irish Government's policy choice was the worst decision they could have made in terms of future economic growth and employment. For example see this IMF Position Paper on fiscal multipliers. The effects of the different policy measures can be seen in the Appendices of the document starting on page 22 of the pdf. The IMF paper shows capital spending to be the most effective measure for increasing growth.

Of course cuts to capital spending are politically easier than other choices. One wonders if political concerns are overriding sound economic policy. A lamentable start by the new Government.

Google and the case for broadband investment

Tom McDonnell: It is too easy in these days of high drama on the European stage to forget the fundamentals that will drive our eventual economic recovery. And we will recover provided we make the right strategic decisions.

It was welcome therefore to see this intervention by Google's executive chairman Eric Schmidt. He stated yesterday:
“The thing the Government can actually do that’s hard is [to] work with the telecommunications providers to get more broadband. It’s very difficult for small businesses to do,”

“There are very few things that are better use of your money than long-term infrastructure in information technology that serves the interests of the citizens of the country.”

My own doctoral research has focussed on the development of telecommunications infrastructure in Ireland and there is a wide body of theoretical literature and empirical evidence that backs up Schmidt's claim that 'broadband' matters for a country's growth prospects.

The rate of knowledge acquisition in an economy plays an important role in the long term growth rate of that economy. Broadband internet reduces the costs associated with learning and is a facilitator of knowledge acquisition and diffusion par excellence.

It is what is known as a General Purpose Technology. That is a transformative technology like the steam engine and electricity which affects the entire economy.

And Ireland is a broadband laggard.We are at the bottom of the class with Portugal and Greece.

Fixed (wired) broadband subscriptions per 100 inhabitants in the EU15 and Norway, Iceland and Switzerland (June 2010)
Rank Country Total
1 Netherlands 37.8
2 Denmark 37.3
3 Switzerland 37.1
4 Norway 34.2
5 Luxembourg 34.1
6 Iceland 33.3
7 Sweden 31.8
8 France 31.4
9 Germany 31.3
10 United Kingdom 30.5
11 Belgium 30.0
12 Finland 26.4
13 Austria 23.0
14 Spain 22.2
15 Italy 21.3
16 Ireland 20.3
17 Portugal 18.9
18 Greece 18.7
Source: OECD

A number of factors have hampered broadband development in Ireland, for example, low population density and a geographically dispersed population.

A lack of infrastructural investment by Eircom has also contributed negatively to broadband development in this country. One reason for the lack of investment is that the company was loaded with debt in the years after privatisation. Eircom now has debt levels approaching €4 billion. This was a legacy of Leveraged Buy Outs which the state had made itself powerless to stop.

Eircom's troubled finances will prevent it from investing sufficiently in the future. Although the Government's finances are perilous, the case for state investment in broadband is strong.

Headline growth

Michael Burke: Irish Economy Grows Fastest In Three Years, runs one headline on the Blooomberg news agency. It would be great to think that after all the sacrifices to date, their truly was a corner being turned at last.

But a closer inspection of the CSO report reveals a much less rosy picture. GDP rose by precisely €500mn in the Q1 (in real, seasonally-adjusted terms). Bu this was more than accounted by the rise in exports of €1,471mn. In addition, imports fell, as households are too impoverished and business too unwilling to invest. They fell by €106mn so that net exports rose by €1,577mn, or more than three times the recorded rise in GDP.

As we know, the export sector is an ‘enclave’ in this economy, employing relatively few workers and requiring even fewer inputs from the domestic sector of the economy. Indeed, some of the activity recorded as exports is not real economic activity undertaken here at all but simply foreign (usually US) Multi-National Corporations booking activity in Ireland t avail of the ultra-low taxes.
The domestic economy remains deeply in the mire. This is the sector that both employs the vast majority of workers and is responsible for nearly all the taxation revenues. GNP contracted by 4.3% in Q1 and is now 15.4% below its peak level.

Nearly all categories of the economy continue to contract. Household consumption and government expenditure both fell by 1.9% in Q1 and now stand 12% and 11.2% below their respective cyclical peaks. Inventories continued their decline.
The sole recorded rise was in investment (gross fixed capital formation), up €46mn in the quarter. That this now amounts to a 1.1% rise shows just how far investment has fallen. Even so the decline in investment still accounts for a total annualised loss of over €22.3bn in the course of the recession and is 59.2% below its peak. This is more than the entire recorded fall in GDP (because exports have risen) and 95% of the entire fall in GNP.

There can be no idea of a sustained recovery without a rise in investment. The latest tiny pick-up in investment makes barely a dent in that huge shortfall. If investment were to return to its pre-recession peak (which was a full one year before the recession began) then at this pace it would take 34 years to achieve it.
As this economy is gripped ever tighter in the ‘austerity’ vice it is perhaps worth recalling that the core countries of the Euro Area did not respond to their own economic and fiscal crises with the same medicine. Their strong growth at the beginning of this year is not the accounting tricks of US MNCs but real activity by their own producers, with the result that recorded growth has been accompanied by job-creation and a lower deficit.

Perhaps the Bloomberg headline should have read: US Accountants Create First Appearance of Irish Growth For Three Years.

A new emergency Budget

Michael Taft: Whatever about the disputes over facilitating the passage of the Finance Bill, what people want to know is what parties are going to do about it when they get into office. And this is where progressives can stop feuding with each other and get the debate back to where it belongs – showing how Budget 2011 will do such harm to economic recovery and fiscal stability. And, more importantly, what can be done to remove that harm and show how a progressive platform will bring immediate benefit to the economy and living standards.

Here’s one way of doing that: a precondition for entering government should be the enactment of an emergency budget within 60 days based on three concrete pledges:

• Repeal the Universal Social Charge
• Immediately release funds for public investment
• Reverse the cuts in social welfare income and the minimum wage

Let’s go through these three pledges.

Pledge 1: Repeal the Universal Social Charge

The Universal Social Charge (USC) should be repealed and the previous tax regime – the Income Levy and Health Contribution Levy – should be reinstated. This has no budgetary implications as it would be, per Government estimates, fiscally neutral. But the benefit to households and the economy would be considerable:

As seen, low-income earners could benefit by up to €10 per week while higher income groups would lose out. This would help economic growth – low-income earners spend their additional income; high-income earners tend to save.

This platform could be developed. For instance, the Health Contribution Levy, while marinating its former thresholds, could be integrated into the Income Levy which has a more progressive base (e.g. rents and dividends are exempt from the Health Levy). Therefore, abolishing USC could actually be a revenue raising measure.

In addition, further progressive tax measures could be introduced alongside repealing the USC. The Community Platform, TASC, ICTU and other civil society organisations – all have put forward practical and easily implemented proposals in the areas of tax expenditures and extension of levies to capital income.

The total impact of this would be to increase tax revenue further while providing a small stimulus to low-average income households in the form of removing deflationary tax increases.

Pledge 2: Immediately Release Funds for Public Investment

The second pledge would be to immediately release €2 billion for investment – to come from a combination of the Pension Fund and Exchequer cash balances (we still have nearly €30 billion in liquid assets). This would be done in tandem with re-opening negotiations with the IMF/EU to ring-fence our cash and assets for investment/fiscal consolidation purposes.

To ensure it gets on-stream as quickly as possible, this investment would be largely pumped into ‘shovel-ready’ projects at central and local government (a good start would be refurbish every school to best standard in time for autumn classes).

However, we can go beyond ‘bricks and mortars’ – as UNITE has shown: modern information systems, preventative health initiatives, one-on-one tutoring to raise literacy and numeracy skills (both in schools and in the community), loan guarantee schemes for SMEs, etc.

The economy would not get a full year benefit from this increased investment. But let’s assume 50 percent of the total multiplier gets into the economy by year’s end (it will continue to benefit the economy for an additional 5 and a half years):

• 10,000 jobs created directly with an additional 3,000 to 4,000 spin-off jobs
• Reduction in unemployment and related costs
• An additional €350 million in tax revenue
• A GDP boost of 0.75 percent

A big impetus – which would take some time to get off the ground – would be an announcement that a public enterprise company will be established to build a Next Generation Broadband network to reach every household and business by 2015. While publicly-directed and owned, private investment can be leveraged in. This would be a clear signal of intent: that we are going to invest our way to economic recovery and fiscal stability.

Pledge 3: Reverse the cuts in social welfare income and the minimum wage

A pledge to reverse the cuts in social welfare income and the minimum wage should also be non-negotiable. This measure would boost demand and GDP, increase business turnover, protect retail employment and raise tax revenue (e.g. VAT, etc.). Therefore, it would end up costing the Exchequer far less than the headline cost of repealing the social welfare cuts (€397 million) while the reversing the minimum wage will actually boost Exchequer revenue.

There are other measures – minimal in cost but capable of lifting inequitable burdens on those on low incomes while increasing demand:

• Repealing the GMS co-payments – not likely to cost much after administrative savings are taken into account
• Protect all minimum wages – namely, no cut in pay rates and working conditions under Joint Labour Committees
• Increase Family Income Supplement by the amount as in Budget 2010 - €6 per child per week: this will enhance living standards of thousands of low and average income families with children.

Any increase on the public expenditure side would be more than compensated by tax measure introduced on high income groups (under Pledge 1), tax revenue from investment activity (under Pledge 2), and the benefit of higher demand that increasing people’s living standards would produce (under Pledge 3).

Its win-win-win.

* * *

This simple three-point programme does not address all the economic and social issues which progressive parties will have to address in their election manifestos, never mind when they are in government.

However, it would give a short, sharp signal to the electorate about progressive values and priorities. It will show people how people will be better off after 60 days of a progressive government. It will give everyone a clear picture of the medium-term direction of the new government.

And it will give something for progressive to agree over, instead of attacking each other. Such feuding only brings the prospect that more of the same failed economic thinking will dominate in the next government.

And who wants that?

Recovery? What recovery?

Michael Taft: The ESRI’s new quarterly analysis is out (though not available on-line for 30 days). Though its forecasts are more pessimistic than the Government’s projections, they state:

‘ . . . we would not place too great an emphasis on the difference. Instead, we take it as being an on-going indicator of the challenges which are faced in restoring the public finances to a sustainable path.’

Maybe so, but the challenges, then, are getting even challengier. Let’s summarise.

Economic Growth

The ESRI is projecting sluggish growth coming off the recession. Whereas the Government is hoping for 4.9 percent GDP growth over the next two years, the ESRI suggests it will be only 3.7 percent.

The gap between the two is even larger with GNP – 3.6 percent compared to 1.7 percent. The domestic economy, according to the ESRI, will grow by less than half the rate the Government projects.

That considerable gap is more understandable when we see that the ESRI projects that the economy will still be in a domestic-demand recession by 2012 – the fifth year running.

Employment

The Government is hoping that net job creation over the two years will be positive – 21,000. The ESRI, reflecting their pessimism on the domestic economy, sees employment falling – by 20,000. Industry will continue to slide despite the increase in merchandise exports, falling by over 4 percent, with the service sector registering a smaller percentage fall.

Emigration, which is rightfully getting big headlines, is projected to be 100,000 over the next two years. The Government projected emigration to be 100,000 as well – but over the four year period up to 2014. Even with this higher emigration, the ESRI projects that the unemployment rate will still be higher than the Government’s estimates by 2012: 13 percent compared to 12 percent.

Investment

The fall in investment has been the driver in the Irish recession. According to the ESRI it will be some time before it is a driver in the recovery (at least under current policy). Investment is expected to fall, in nominal terms, from €18 billion to €17.6 billion by 2012.

Let’s put that in some perspective. In 2007, capital formation stood at €46 billion. Of course, much of this was part of the boom which was always going to melt away. But the Government hasn’t helped – cutting public investment by half since 2008, from €9 billion to €4.7 billion this year (and €3.5 billion by 2014). The even greater reliance on private sector investment will mean minimal growth over the years ahead.

Exports

This is the one category going from strength to strength. The ESRI is even more optimistic than the Government, projecting exports to grow by 11 percent over the next two years, after a strong performance last year (estimated at over 8 percent). But while the ESRI predicts growth in all sectors (goods, services, tourism), they are most bullish on what is essentially the modern sectors which are dominated by multi-nationals. As pointed out here, growth in the multi-national sectors will have a far less impact on the domestic economy than growth in indigenous exports. So the headline rate looks positive, but we will need more details on the composition of exports (which the ESRI doesn’t have) to assess its final impact on economic growth.

Consumer Spending

Another category of negative growth. The Government is hoping that consumer spending will grow, though only marginally (0.9 percent over the next two years); the ESRI is projecting a further fall of – 1.5 percent. This is due to income tax increases, cuts in social transfers, falling employment and emigration, etc. We can also throw in rising interest rates – the ESRI projects that the ECB main rate will rise from 1.0 to 2.5 by 2012. Higher payments on mortgages and other debt, means less spending on goods and services. All in all, consumer sentiment is expected to be cautious with the savings ratio remaining high.

Public Finances

Domestic demand, investment, consumer spending, employment – all down from Government projections. Yet, the ESRI is still hopeful that Government deficit targets can be met. In 2012, they are projecting a deficit of -7.7 percent, only fractionally worse than the Government’s own -7.4 percent projection. They explain it this way.

On the revenue side, the ESRI estimates that tax revenue will be €1.6 billion lower than Government estimates by 2012 – reflecting low economic and employment growth.

On the expenditure side, the ESRI estimates that net current spending will be €900 million less. This is made up mostly of declining interest payments (€800 million) arising from the reduction of the Exchequer cash balances as part of the IMF/EU bail-out.

If interest payments fall at the rate ESRI projects, the Government might hope to reach their target. But with revenue slipping and more demand on expenditure arising from higher unemployment and low incomes, the ESRI may be too optimistic on this score.

The Governor is wrong

Michael Taft: Patrick Honohan, the Government of the Central Bank, was on News at One today. He stated:

‘€3 billion next year will not do it [move us towards the Maastricht Guidelines by 2014]. The economy has drifted so weak that this will not do it. The balance between moving forward with fiscal correction and allowing the economy to grow is, to some extent, a false dichotomy . . It is not a question of growth versus fiscal correction, its fiscal correction leading to growth.’

This is wrong.

Just as the debate is now, finally, entertaining the common-sense and economically verifiable proposition that austerity measures depress future growth which, in turn, undermines deficit reduction (because they depress tax revenue and maintain high unemployment costs) the Central Bank Governor is trying to pull the debate back. He is wrong.

In a paper widely unread, with analysis largely unreported on, the ESRI put forward two models of growth and the subsequent impact on the deficit.

• In their High-Growth model they projected an annual average growth rate of 4.6 percent between 2011 and 2015. This would result, according to their model, in an annual deficit of -1.8 percent by 2015.

• In their Low-Growth model they projected an annual growth rate of 3.2 percent in that same period. Their projected annual deficit by 2015? - 4.1 percent. We miss the Maastricht target by a significant amount.

See a pattern? Higher growth leads to lower deficits. The ESRI reinforces this in their analysis of the structural deficit:

• Under their High Growth model, the structural deficit is projected to be -1.8 percent.

• Under their Low Growth model, the structural deficit is projected to rise to – 4.1 percent.

Here is the key point that has been made numerous times on this blog: economic growth is, itself, fiscally corrective. It is lower growth that engenders higher deficits.

The Governor wants more fiscal adjustment in the 2011 budget (either spending cuts or tax increases or a combination of both). The ESRI projected that a €3 billion package would knock approximately 1 percent off GDP growth. More fiscal contraction will cut GDP growth further.

If under the ESRI’s Low Growth model we miss the Maastricht target by a wide margin, how does cutting that growth even further assist us towards the goal? It won’t. It will embed more deflation in the economy going forward. This, in turn, will depress growth further. This will result in ever higher levels of debt.

The Governor is simply wrong. But if the Government listens to him (as it appears they are) it is the Irish economy that will suffer – through more spending cuts, higher unemployment, lower incomes and poorer public services.

No recovery yet - and debt deflation

Michael Burke: The Q1 real GDP figures show the economy expanding by 2.7%. No doubt these will be hailed as a turning-point, and even a vindication of policy. If only that were true.

As everyone knows, this is a twin-track or two-speed economy. Organisations such as the ESRI, OECD, IMF and EU Commission all forecast that the export sector would recover reflecting the rebound in global demand following the recession, but that the domestic economy would remain mired in recession. That's what is happening. GNP, the domestic sector of the economy contracted again in Q1 by 0.5%, for the ninth consecutive quarter, far longer than in any other Euro Area economy.

But even this is to understate the true picture. Usually, growth data is presented in real terms, so that it is real activity that is captured not just inflation. But Ireland is experiencing deflation, a generalised fall in prices. So, concentrating on the 'real' numbers means not extracting the effects of deflation. To do that, we have to go to the nominal numbers, the actual Euros produced or spent in each category of national income.

Then the picture is more accurate. Just much worse. On this measure, GDP grew by just 0.1% in Q1 (€38.752bn compared to €38.715bn in Q4 2009- that's just ¤37mn) and GNP contracted by a massive 6.8% in the quarter. Nominal GDP fell 4.4% year-on-year and is now 20.2% below its end-2007 peak. GNP fell 8.6% from a year ago and is now 27.6% below its peak. This is an Irish Depression.

If we take the components of growth the data are as follows: personal consumption is down 4.6% year-on-year, -19.6% from the peak; current govt. spending down 8.9%, -11.2% from peak, and investment remains the biggest single contributor to the slump with gross fixed capital formation falling 7.6%, -66.4% from its peak. The decline in investment actually exceeds the decline in GDP, and accounts for 93% of the decline in GNP. Exports are the only bright spot, up 3.5% from a year ago, belying the idea that the economy is uncompetitive, they are 5.1% below their peak. But the improvement in net exports is actually greater as import demand continues to decline.

Unsurprisingly, given the litany of declines in all other sectors, net exports more than accounts for the entirety of quarterly GDP growth, €2,137bn of a total improvement of just €37mn. Taken together, personal consumption, government current spending and investment fell by more than ¤2bn in the quarter. Because this is on export-only recovery and the sector is capital-intensive, dependent on imports and has ultra-low taxes, this 'recovery' will actually lead to increased joblessness, bankruptcies and a widening of the deficit. Even worse, rampant deflation will increase the real debt for all households, businesses and of course the government, making interest payments and debt repayment more burdensome from shrinking national incomes.

Property taxes and economic growth

Tom McDonnell: Nat O’Connor’ post on this blog on May 18th provided an excellent overview of the debate on property tax. Another important aspect of the debate relates to the effect of a property tax on economic growth.

It is important to stress at this point that I’m restricting my comments here to ‘bricks and mortar’ property. Bricks and mortar property is no more or no less a form of property than a financial asset or a car, but as it is likely that any property tax introduced later this year will effectively be a bricks and mortar tax, I won’t include those other categories of property in this post. Of course, from an equity perspective an all-encompassing property tax is preferable to just a bricks and mortar tax, because most low and middle income earners do not have substantial assets besides the family home.

The parlous state of the public finances seems to be making the prospect of some form of bricks and mortar property tax ever more likely. But fixing the hole in the public finances is not the only reason to introduce such a property tax. From an economic growth perspective, recurrent (e.g., once a year) taxes on immovable property are generally considered to be desirable because they do not penalise productive activity. One rationale is that, in the long term, recurrent taxes on immovable property will shift some investment out of housing into higher return investments and so increase the rate of growth. Taxes on property transactions are considered less desirable than recurrent taxes for a number of reasons, for example because they reduce labour mobility. Recurrent property taxes are also preferable to taxes on property transactions because they are stable over the economic cycle

Recent evidence indicates that the tax structure does appear to impact growth performance. The OECD looked at various taxes from an economic efficiency perspective and found that property taxes may be the least damaging to growth prospects. Heady et al (2009)also find that recurrent taxes on immovable property are the least harmful (or most beneficial) tax instrument in terms of its effect on long-run GDP per capita.

The full tax-and-growth rankings are (from best to worst):

1. recurrent taxes on immovable property
2. consumption taxes (and other property taxes)
3. personal income taxes
4. corporate income taxes

Finally, it should be noted that the better-off are disproportionately likely to hold property, and that it should therefore be possible to construct a progressive property tax. An inequality-proofed and poverty-proofed property tax is long overdue in Ireland.

Rising tides, luxury yachts and leaky fishing boats

James Wickham: Everyone assumes that the aim of economic policy must be to return to "growth". But more than ever, we need to ask what sort of growth?

There is a growing awareness that conventional economic measures of growth are not necessarily related to quality-of-life and correlate with increased ecological damage. However, we also need to discuss the relationship or relationships between economic growth and inequality. The conventional wisdom is of course that "a rising tide lifts all boats". In the Celtic Tiger years everyone felt better off, even though income inequality remained constant or perhaps increased.

However, such discussions ignore the new role of the very rich in Ireland and the world. Traditionally, economists and sociologists have assumed that the very rich don't matter as individuals. Economists assume redistributing from the very rich will have negligible consequences overall, since the amounts of money involved are tiny once distributed across the rest of the population. Sociologists assume that what matters are social groups (e.g. "the service class"); they may recognise an elite but assume its members hold their positions as occupants of roles in a structure -- what matters is the role, not the person.

Today however individuals matter as individuals-- if they're very rich. The very rich are now economic agents in their own right. The wealth of somebody like Richard Branson or Michael O'Leary means that they have an impact as individuals, not as representatives of some larger corporation. This has also has implications, such as the importance of individuals of "high net worth" the banks, for economic policy and for philanthropy.

Since the 1970s in the USA and more recently elsewhere, the very rich have been pulling away from the rest of the society. In other words, they have been appropriating a greater share of the results of economic growth. In some cases indeed they have simply been appropriating or transferring resources to themselves. This appears to be the case for "salaries" at the top of the global financial services industry. According to the Financial Times (December 30, 2009) on Wall Street "About half of revenues are diverted to bonuses at many investment banks".
In economic history there have been periods and places where the rich have become richer simply by appropriating more resources: the palaces get bigger, the cottages get smaller. In Africa today the new palaces of the kleptocratic rulers go side by side with deteriorating living conditions of the masses. We are not there yet, but it's worth remembering that sometimes big yachts swamp little fishing boats...

Growing our way out of the trap

This from Ray Kinsella in the Irish Times this morning:

"[...] We need to grow our way out of this trap. This means listening and responding to real businesses: removing constraints on them and incentivising them to maintain, or even increase, employment. The scale of the task can be seen from the figures above. We need to more than double the size of the economy to make ends meet based on our current spending trajectory. That is a measure of what it will take to return to sustainability and to relieve pressure on political, let alone, economic, stability.

Misconceived fiscal policies, conformed to a failed and humbled economic orthodoxy, are part of the problem. The last three budgets have bled the economy of domestic demand at a time when international trade and foreign direct investment are contracting. Equally, the costs of recapitalising financial institutions, whose business model and corporate modus operandi precipitated the crisis in the first place, is now equivalent to half of the costs of funding the health system."

Any comments?

Making the case for pluralism in economic thinking

John Barry: After writing a post asking Where's our 'Green' Whitaker?, I was reflecting on the relationship between the imperative for orthodox economic growth (and the conventional neo-classical economic theory and thinking which accompanies it) and sustainability, (in)equality and well-being.

I'll begin by citing Thomas Friedman, once the cheerleader for unfettered neoliberal globalisation, who has recently become a 'proto- green' (at least from an economic perspective). In an extremely interesting op ed piece for the New York Times in March he states:

"Let’s today step out of the normal boundaries of analysis of our economic crisis and ask a radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said: ‘No more’.”

Welcome to the party, Thomas. Us greens have been saying as much for at least four decades.

Couple that with two excellent discussions this week - one by John Woods, director of Friends of the Earth Northern Ireland, and another by Richard Wilkinson and Kate Pickett – both of which spoke to the same key issue, namely that we have the empirical evidence that economic growth is not just ecologically unsustainable (i.e. not compatible with 'one planet living') but also needs inequality which undermines general well-being in society.

John Woods presented a summary, and outlined the implications for Northern Ireland, of Tim Jackson (Economics commissioner of the UK's Sustainable development Commission) and his recent SDC publication Prosperity without Growth http://www.sd-commission.org.uk/publications.php?id=914. John's talk and Tim's argument is, basically, that what the green movement has been saying for decades is true: beyond a certain point, economic growth does not only not add much to general and average well-being but, through positional competition, status competition and 'defensive' consumption, actually undermines human well-being. Here the real challenge is how to design public policy and especially macro-economic policy which aims to enhance human flourishing rather than a narrow focus on one means to flourishing i.e. conventional economic growth.

In the excellent discussion which followed John's talk, it was clear that the dominance of the discourse and myth of 'economic growth' is one of the main reasons for people to misunderstood greens and others who question 'growth'. The issue seems to be that many people cannot but view a non-growth argument as anything but 'bad', whereas the real issue is to separate out growth from 'prosperity' (as Jackson does), 'flourishing' (after Sen) or in my own work 'economic and social security', or to simply draw a distinction between economic growth and well-being. The evidence behind Jackson's report is pretty compelling, drawing on decades of research in economics, behavioural economics, psychology and cultural studies, all of which show that growth after a threshold does not appreciably add to average well-being (the infamous 'crocodile graph', is illustrative here demonstrating rising GNP over decades coupled with well-being flatlining since around 1960).

Wilkinson and Pickett's talk was also robust in its empirical evidence. They were talking about their new book The Spirit Level: Why More Equal Societies Almost Always Do Better http://www.equalitytrust.org.uk/resource/the-spirit-level and presented an impressive range of statistical and cross-country analysis which shows the strong correlation between inequality and a range of issues from obesity, lack of trust, crime, imprisonment, mental health. What I found particularly striking was their evidence that inequality does not simply negatively affect the least well off: in fact, almost everyone does less well the more unequal the society.

So, the upshot? Well... green critiques of economic growth now have a firmer evidence base, the need for more redistributive economic policies is apparent, the creation of less unequal societies not only is inextricably linked to challenging economic growth (i.e. if you are an egalitarian or on the left, you should be in alliance with greens), and what is needed above all is more pluralism in economic thinking. What does public policy look like when it’s free from the imperative of economic growth, competitiveness and all the other guff of 'there is no alternative' economic thinking, and what does public policy look like when its aimed at directly improving quality of life, human flourishing rather than economic growth?

Prosperity without growth?

Ahead of the G20 summit in London, the UK's Sustainable Development Commission recently published Prosperity Without Growth? arguing that "the current global recession should be the occasion to forge a new economic system equipped to avoid the shocks and negative impacts associated with our reliance on growth".

Any comments?

Getting ideological

Paula Clancy: David Quinn is right about one thing: we do need to start asking ourselves what kind of society we want when we come out of the current crisis. I think most of the allegations in his column last Friday are unfounded, but any call for a real debate on the choices facing us must be supported wholeheartedly.

David seeks to blame the Left, in Ireland and internationally, for leading us into the current crisis; to absolve the “free market” of responsibility for the financial system’s destruction; and to transfer the blame instead onto out-of-control public spending.

For the last 15 years or more, economic commentary in Ireland has been dominated by economists promoting the line that inequality is good; public is bad; and, if the market and competition is allowed to do its thing, most of us will be rich. Most of these economists were rewarded handsomely for their pains. Those who were not directly employed by the banks and stockbrokers frequently had secure university posts which allowed time for consultancy services with regular access to industry, finance, government and the news media. Meanwhile, progressives who did warn about the flaws, inequalities and missed opportunities of the Tiger model were sneered at as jonahs, or dismissed as old-fashioned begrudgers, or both.

The attempt to absolve the “free market” and its fundamentalist ideologues of responsibility is more flimsy still. It is perverse to blame regulators – public servants, albeit overpaid – for the failure of a system which we were told was best with virtually no regulation, instead of blaming those running our financial services institutions who pocketed tens of millions of dollars in annual salaries while making what they now admit to be ‘poor decisions’. Last week, in response to an article which similarly blamed the regulators, one correspondent from a financial services firm wrote in the Financial Times “Excuse me, but, in the Anglo Saxon world, we were lectured incessantly – and arrogantly lectured others – that markets worked best when free of government intervention and with minimum regulation”. That says it all.

Out-of-control public spending is the other named culprit. Recent history tells a different story. Former President Clinton balanced the budget before he left office, but did so largely by slashing programmes for the poor. Of course, the second President Bush subsequently ballooned the deficit through massive tax cuts for the super rich and the illegal war in Iraq. The OECD, which has impeccable “free-market” credentials, said that Ireland's “public spending and employment growth has not kept up with population and GDP growth. Government policy has decreased the number of public employees as a % of the labour force and the overall public sector wage bill as a % of GDP. Compared with other OECD countries, government employment in Ireland is relatively low.” And, despite the scaremongering, Ireland’s national debt is not out of control. In fact, on current government projections, it will be only slightly higher than 60% in 2010, compared to more than 75% for the Eurozone as a whole.

It is not that progressives are fixated on a “big state” or “high taxes” per se. We do believe that the pursuit of equality is a sound principle for a successful society and ought to be a primary objective of public policy. Quality public services, universally available, are the single biggest contributor to such a society. For obvious reasons, we have as great, or indeed greater, interest than right-wing ideologues in ensuring that these are efficient, well-delivered and popular. It is, however, a fact that no country in the world has achieved the level of equality and public wellbeing that we should aspire to, with public spending as low as ours.

Our focus on equality is not just a product of the politics of envy. Reducing inequality is good for everybody, not just the worse off. Just read The Spirit Level by Wilkinson and Pickett for proof, across a whole range of measures, that people live longer, healthier and more fulfilling lives the lower the level of inequality in that country, city or community, regardless of wealth or per capita income. Inequality is simply bad for us all.

But there are some grounds for optimism. The election of Barack Obama might just signal the end of a dark age where growth and greed were the gods, and society was just a dump for the little people. Here in Ireland we did not escape the infection of the Reagan/Thatcher virus, so perhaps the slow wake of the PDs signals our recovery moment. The world which follows the current depression will be radically different, and we must recognize that we do not have the planetary resources to accommodate never-ending rampant growth, consumption and greed. We will have to work out an economic and social model which is more collaborative and can generate a better return in terms of individuals’ wellbeing than the consumption and ever-higher GNP model has managed.

Exchequer Returns Emphasise Need for Growth Strategy

Yesterday's exchequer returns mark the end of Ireland's tax strategy since the end of the 1990s. As capital gains taxes collapse and stamp duty returns are all but eliminated, corporation tax is also dropping as Ireland is particularly vulnerable in this area given the amount of transfer pricing and profit shifting for tax purposes within our corporate sector.

This marks the end of what has been a strategy for public revenues that could only work during the boom times. We are now faced with a heavy reliance on income tax and VAT at a time when both are falling (see table below)



Capital gains taxes and corporation taxes won't be improving any time soon (and many of the great and good will be writing off their other taxes against capital losses for years to come). Stamp duty revenues are gone.

We can expand the tax base - carbon taxes and property taxes are the obvious candidates. If a property tax is introduced, we should consider a credit for stamp duty paid in the past ten years (reducing revenue but increasing ability to pay - and fairness). The recent QNHS employment figures show job losses among the younger age groups, who are likely to be carrying heavy mortgages. Any property tax increases would need to be accompanied by anti-foreclosure measures.

We can raise income taxes - some of this has happened already and more is on the way. But we need to be careful how and where we do this.

As Aedin Doris notes in her comment here: "Remember that the tax-free portion of income is pretty much set to exempt those working full-time, full-year on the minimum wage; if 38% of the working population aren’t paying tax, it’s because we have a lot of people working part-time and/or on low hourly pay".

And of course, those people working for these low wages are particularly likely to suffer from the lack of the social, collective goods that come with strong public services in other countries.

This leads her to conclude:

"In my view, widening the tax net should be considered only after all possible tax expenditures have been pruned away, and the extent to which any one individual can benefit from them strictly limited."

So let's clean out a lot of those tax reliefs. Their incentive effects, which were often minimal or perverse, are largely irrelevant these days when stimulus will be much more important. The government cut the state agencies it didn't like pretty quickly when it wanted to - let's have a quick run at the tax reliefs this time around.

The crux of the matter is that this gap is too huge to close with cuts and tax increases, even though those will play a part. We have scope for borrowing, given our low debt ratio but this will give a few years 'breathing space' at best.

What can close the gap is growth. After all, in 1987 we introduced some cuts but the public finances improved when we managed to generate growth. We need to be crafting a stimulus plan for growth, incorporating fiscal measures and programmes that generate employment and are geared towards the medium to long term developmental needs of the economy and society (education and training, greening the infrastructure and economy, small business development, innovation, urban design, caring and other social and reproductive work, and more). Bell and Blanchflower suggest a plan for the UK while Block and Keller propose 'stim-novation' measures, combining stimulus with innovation policy, for the US (see also this report from the Information Technology and Innovation Foundation). We have barely begun this discussion.

Our growth cannot free ride on international trends as it did in the 1990s - it will have to be based on developing new capacities and forms of participation in the economy that keep people attached to the labour market through the recession, meet social and economic needs, and build capabilities that will serve us well when recovery comes. Fixing the financial system so that private investment is forthcoming will be an essential part of this process. Public investment - and therefore borrowing - will be crucial.

This is the kind of debate that might have occurred were the institutions of social partnership playing a central role in the process. ICTU's ten point plan is perhaps the only attempt at such a plan to this point. It is a debate we need to have urgently.

Return to Growth Paradigm in Petrochemical Economy not an Option

Peadar Kirby: The focus of public attention and debate on recession and cutbacks at the moment indicates the extreme poverty of public discourse in this country. Essentially it confirms that at the heart of our current crisis is a crisis of ideas and imagination. Those academics contributing to the debate seem to be vying with one another in describing the cuts in living standards facing us all (though, of course, those whose actions created the bubble economy have so far not suffered in any direct way at all), but few are offering a way forward beyond the vacuous mantra of ‘competitiveness’.

A number of key debates are urgently needed:

1) What sort of state do we want? All attention so far has been focused on cutbacks to the current state apparatus – through the actions of the so-called An Bord Snip Nua, through public spending cuts and through cuts to the incomes of all public employees. But this begs the question of devising an agenda for reform of the state, fashioning a state that can effectively carry out the tasks that are required of it. Indeed, it needs to be acknowledged that the Irish state is constantly managing crises and has developed very little ability to plan proactively across the range of public policy areas.

2) Answering what sort of state we want requires us to debate how the state and the market should relate to one another: in other words what is the role of the state in configuring the market for social development and how should the state play that role? This raises another set of very important issues which most Irish economists seem completely unable to address because of their neo-classical training.

3) Setting the context for economic and social recovery: commentary on our current situation fails most of the time to take any account of the fact that decisions in Copenhagen in December will require us to reduce carbon emissions very substantially and very fast. The only way we are addressing this is through presenting the ‘green economy’ as a possible source of new jobs. Yet, while this is true, there is no chance whatsoever that we can achieve anything like the necessary cuts in carbon emissions by that means alone; huge changes in how we source our food and drink, in our patterns of mobility, in our sources and uses of energy will also be required.

If we could begin debating these wider issues, realising that some attempt to return to a growth paradigm within the petrochemical economy is simply not an option if we are going to survive as a species, we might free the imagination and generate some really creative thinking about what future we can build for ourselves.
Professor Peadar Kirby teaches at the University of Limerick