Michael Burke: Ever have one of those moments when you just know everyone else has got it wrong and you’ve got it right? When you say, I don’t care what the fashion is, showing off your brand of boxer shorts in public is plain daft? Well, have some sympathy then for those faced with the tricky task of formulating Ireland’s economic policy. Everyone else may be going round recklessly attempting to reflate their economies, but you won’t catch the leaders of Ireland’s current economic direction doing that. Oh, no.
The arguments against reflation are that we are in a crisis (so is just about everyone else); we can’t afford it, our deficit is ballooning (ditto), we are in the Euro (along with 15 other economies), we are an extremely open economy and stimulus will just stoke imports (so is Belgium) our debt is headed to 100% of GDP (ditto, along with others), and our pay rates rose during the boom (as they did generally, so that Ireland is a middling Euro Area economy as far as relative pay rates are concerned).
Now, when outside observers don’t chime with the Irish consensus, like Stiglitz they are labelled mavericks (unlike Roubini, who hadn’t read the NAMA proposals) or David Blanchflower, who according to Philip Lane is offering prescriptions that might work elsewhere but do not apply to the Irish conditions.
The latest observer to fall into this trap seems to be veteran commentator Martin Wolf. Writing in the FT on November 3, on Ireland and others, he noted that “the deterioration in the fiscal position is a result of the cutback in the private sector’s spending, not a cause of it. Not surprisingly, the fiscal deterioration is also biggest where the private sector has cut back most: in the post-bubble economies”.
And, “Of course, governments could have tried to tighten fiscal positions in the teeth of the crisis. All that would have done is turn the recession into a depression. As a result, they would also have transformed part of the structural fiscal deficit into a cyclical one. This might well have lowered the private sector surplus, but only by destroying private income even faster than spending. This would have been a monstrous blunder. In a world in which the private sector is driven towards austerity, as now, governments must offset this behaviour, not reinforce it.”
This commentary is not mere rhetoric. Governments across the globe are taking and continue to take measures to reflate their economies. The latest one is the new Rightist government in Germany with a rolling programme of tax cuts equivalent to 1% of GDP, which follows previous measures equivalent to 3.3% of GDP. Another government of the Right in France had announced at the end of September a “Grand Loan’ scheme to finance huge infrastructure projects amounting to €35bn over 2years. This will probably prove more effective than the German measures, as they tend to raise trend productivity and lower real wages. But both have said they will not attempt to bring the budget deficit below 3% of GDP before 2014.
Against this it is argued that Ireland must meet the deficit target in 2013, or it will face the wrath of the European Commission. But, how to justify picking on Ireland, when the leading economies have no intention of meeting the target by then? Alright, but the bond market will definitely take fright with deficits ballooning. Yet benchmark yields were unchanged after both the French and German announcements.
Even so, Ireland is not France or Germany. We are a small very open economy (our import bill is over 80% of GDP), more easily pushed around by the Commission, with a public debt level spiralling towards 100% of GDP. Well, so is Belgium. And it did come under pressure from the Commission for fiscal consolidation. Probably now regretting its own acquiescence in the light of the French and German announcements the (Right-leaning coalition) government in Belgium responded with an increase in taxes on those that had been supported by rescue packages or those that are doing well during the recession banks and insurers in the first case, energy producers in the second.
In not a single case is the policy of competitive wage cuts being adopted, even though, in every case the size of the public sector is relatively greater in the rest of the Euro Area than in Ireland. And there is a reason for that.
As Martin Wolf says, that would have been a monstrous blunder.
Michael Burke has worked as an economist for nealy 20 years in a variety of institutions, including 5 years as senior international economist with Citibank in London. He is currently preparing a book on the crisis in Ireland.
7 comments:
Michael, if you would like to me to build a megaphone with a four hundred mile carry, just say the word.
@Michael Great Post. Enjoyed your article in
http://socialisteconomicbulletin.blogspot.com/
Interesting aspect of the recent SPV tweak on NAMA is that it is paralleled by a French adaptation to get around their SGP constraint. Clearly, there is scope for adjusting debt levels and buying time where the EU Commission is concerned.
As many say on this site, I am not an economist; but...
I am beginning to loose faith with the ideals that seem so lucidly presented here by Michael's article and others.
I have just watched an earnest Toaiseach explain in a very believable manner that anyone who did not think that cutting was not even a debate, was just not wired right and would lead us to an eonomic collapse.
I watch these current affairs programmes and to be honest I feel like changing my mind and saying., look, lets just take the cuts; as it is necessary - because all these people simply can't be wrong. I also get pangs of thinking that - well look the people on this and similar websites are economists, and could be simply wrong again - maybe by trying too hard to compensate for previous mistakes; they are all wrong again.
You see the lack of cohesive thought caused by being so under the influence of a relatively uniform media. And so I ask the economists among you who are clearly animated on this website and against the government's current policy.
Are you sure?
Martin - I certainly understand how you feel. There are a couple of points I'd like to bring to your attention. First, as to 'can all these people be wrong'? If the world was Ireland we get unnerved. Thankfully, we can look out beyond our shores and see what the debate looks like - and it looks like so much different. For instance, Michael Bourke (on another post on some other blog that I can't immediately find - hopefully he'll follow this up) highlighted the new German Goverment's response which was to ramp up debt-financed stimulus. Remember, this is Germany - they don't do debt and inflation; and this is a Christian Democrat government with an extremist right-wing party as junior parnter. But they are rightly prioritising growth as the only means to ensure that debt doesn't become a millstone.
David Blanchflower believes the Labour Party's stimulus doesn't go far enough. Ditte Paul Krugman and the Democrat's package. Richard Koo from Japan (where debt is heading towards 200% of GDP) is calling for more debt-financed stimulus.
These are not raging lefties or vested interests. These are considered responses grounded in sound economic theory. When we look at the world around us we find that it is not progressives who are out of step, it is the Government and their allies.
Much emphasis is put on the current deficit. Yes, this is growing - aided by deflationary fiscal measures. But we have a very healthy debt profile. Simply put, we could invest €30 billion now and not raise our debt/GDP ratio by 1 percent. We could invest €30 billion now and borrow over €12 billion more than the Government intends and still be low debt nation (i.e. below the Eurozone average). None of this emerges in the debate (though some of us have tried) for very good reasons - the thrust of the cuts agenda is ideologically, not economically driven.
But you have put your finger on major problem - Martin: the weak response from progressives and the trade union movement. There are good people doing good work (and this blog is an excellent contribution to that debate). But as a whole, we have not consistently and coherently challenged the Government agenda - either by critiquing their failures or coming up with a credible alternative. Because we have not challenged the deflationists on the core issues of debt, borrowing and deficits. This is, at the end of the day, not about a 'spending cuts vs. tax increases' debate, it is certainly not about 'public job cuts vs. public wage cuts', it is not about sharing the pain equally (whatever that means). it is about deflation vs. reflation. We have fallen down on that issue and as long as we fail to address that head on with fact-based arguments, we will continue to be on the defensive. And morale will be sapped.
@ Martin O'Dea
Sorry for the delay in reply.
Yes, I'm as sure as the ESRI.
As has been pointed out elsewhere, the Budget spending cuts proposed, while very large, will yield only a fraction of that amount in terms of savings. €4bn in spending cuts will yield just €550mn in savings, as the cuts themselves deflate the economy and lower other taxation revenues.
http://notesonthefront.typepad.com/politicaleconomy/2009/10/over-the-next-few-days-there-will-be-considerable-analysis-of-the-esris-current-quarterly-review-id-like-to-highlight.html
As ESRI says, "The consequences of such a further sharp correction are, by our estimation, significantly deflationary. Were there to be a neutral budget in 2010, then our estimates would suggest that the recovery in GDP would occur much earlier in the year leading to positive growth in GDP for the year as a whole."
So there are two scenarios: 1. savage cuts, depressed activity and minimal savings, or 2. no cuts, quicker recovery and (although ESRI doesn't say it) increased tax revenues.
There is though another scenario; 3.increased government investment, replacing the main hole in GDP, private investment. This boosts growth, raises trend productivity growth and significantly increases tax revenues.
The Toaiseach may be earnest. But he is completely wrong.
And he doesn't have to take anyone's word for it here. The next time he speaks to one of his German/French/Spanish/etc. counterparts, he can just ask them.
A Brave new world.
Michaels I am feeling a little bit more positive now. Had a few days off from computer and reading many smart people explain why the track we are currently taking is so wrong. I began to realise that perhaps it is the numbers of people that are presenting these arguements and that are teasing out new ways that economic society may be structured for the mutual benefit of all that can be seen as nothing but a really positive thing.
Unfortunately difficulties seem to raise intellectual innovation and creativity, one might even cite the arts in Ireland for the first part of the last century achieving such internationally recognised high standards at a time when there was much political and societal difficulty as evidence of this trend. Or more simply see that people are intellectually engaged more when difficulties that relate to them arise.
So, is it possible that this wave of innovation will go unfulfilled or can we be safe that it will inform future society.
Here, I would worry somewhat. The political currency illustrated by Gordon Brown when reversing track and looking at Tobin Tax as outlined by Will Hutton, shows real and unusual potential for innovatve ideas to gain real traction across the global political spectrum.
However, there is a real urgency to all of this. As much as we may wish otherwise in a coming growth period much of this would be forgotten and that that was not forgotten, silenced. Increasing pay packets impact on re-elections would have a major sway in maintaining whatever new (or old) paradigm we find ourselves at at that juncture.
In Ireland we need new and real Leadership, now. We need to push for a society forged on succesful care and careful success on a marriage of energetic engagement with the ever changing new business markets and product and service opportuinities, as well as a very real and honest application of the concept of mutual benefit.
We need to also use this position along with every other nation in the developed world to work hard at eliminating the concept of a developing world. Perhaps, having such global inequality permits a greater acceptance domestically than would otherwise exist, but in any event this is an opportunity for everyone to choose a worthile future out of the infinte possibilities that lie open to us now
Ireland already has the highest debt-financed stimulus in the world. How mush higher should it go to reduce unemployment?
Post a Comment