Stiglitz and Job Creation

Nat O'Connor: Joseph Stiglitz has an interesting three-page article in Vanity Fair where he reassesses the causes of, and therefore necessary solutions to, the current "Long Slump" in the USA, comparing it with the Great Depression.

In addition to the massive damage caused by the banking system and financial speculation, there were social and technological changes underpinning the Great Depression and (Stiglitz argues) similar changes in employment patterns underpin the current Long Slump.

Before the Great Depression, one in five Americans worked on a farm. Today, it is one in fifty. Before the Great Depression took hold, agriculture in the USA was already in difficulty. Technological improvements in machines, seeds, etc had lead to much higher production. While this might seem good for one farmer, when all farmers have higher production, prices fall due to the surplus supply. Part of the long-term solution, Stiglitz argues, was the painful move of many Americans away from farming to working in manufacturing. The main driver of this was World War 2, which led to massive Government spending on war industry, which laid the basis for a massive shift towards industrial production post-war. Combined with the GI Bill, which gave veterns access to university education, the nature of employment was transformed.

Obviously, Ireland had a quite different history of development. Movement away from the land was slower and we have maintained small farms, whereas the US has moved to large-scale industrial agriculture. Alhough Ireland had some earlier industrialisation (Lemass/Whitaker), only in the 1980s and 1990s did Ireland see employment rise in newer industries like IT, pharmaceuticals, etc. Nevertheless, Ireland experienced the same technological shifts in agriculture that have resulted in far less people working in farming now than was the case in the 1930s. Unlike the USA, mass emigration out of Ireland disguises the extent to which there was an exodus from the land to other areas of employment.

Stiglitz then goes on to argue that similar improvements in production (largely) combined with global competition from low wage countries (but perhaps to a lesser extent) mean that machinisation is now dominant in US manufacturing, rather than mass employment. Hence, there is a need to shift the expectations (and skills) of a great number of people from industry to services.

Sitlitz has two conclusions about how to bring about the transformation from manufacturing to service industries. His second conclusion is that banking reform is still necessary and that little has been done to date in the USA. We need to put much more regulation on the banking system to ensure that it serves society and lends money to the job creating small and medium enterprises in the real economy. (This point seems equally relevant to the Irish case.)

His first conclusion is more challenging. Stiglitz argues that the only way to resolve the crisis in jobs is for the State to engage in a massive programme of productive investment; preferably without another war. We know what the long-term drivers of economic development are: education, technological innovation and infrastructure. The State needs to borrow to invest heavily in these - reversing decades of declining investment - in order to do no less than transform employment patterns.

It's a big challenge to the failed strategy of austerity, which has seen cutbacks and job losses combined with an unreformed banking sector that continues to pay bonuses and engage in financial speculation, with public money.

It is obviously more difficult for the State to engage in major productive investment in Ireland because of the difficulty in borrowing money. Nevertheless, there needs to be much more discussion of the development path we are on. What is the future for jobs in Ireland? We know we can't go back to 12 per cent of the work force employed in construction. Half of that level would be a long-term norm. So just where are the jobs going to come from in 2016 and 2021? Even if resources for investment are limited, we still need to focus on education, technological development and the hundreds of different supports needed to retrain workers and build the capacity of Ireland's businesses to create jobs. And it seems likely that the State needs to lead the way towards increasing productive investment in every way it can.

When Irish Eyes Are Crying

Paul Sweeney: Financial journalist Michael Lewis will have an article in Vanity Fair magazine next month, “When Irish Eyes are Crying”. You can read it here.

He wrote the now famous pieces on Greece and on Iceland in the same magazine. I am reading his book “The Big Short” and it is excellent – so well written.

He says that the Irish enjoy suffering! “They will take it and take it and then one day they will go Snappo!”

That will be on the 25th!

He argues strongly against Fianna Fail’s line that we must slavishly pay up every penny that Fitzpatrick, Sheehy and all ran up (for the FF builders and speculators). He says the Irish will have no choice but to default on the private debt (i.e. it is not sovereign debt).

Vanity Fair says “Lewis interviewed Lenihan in an attempt to uncover the man’s reasoning for his actions. Lenihan asserted that he had no choice in the matter. “Under English law,” he explained to Lewis, “bondholders enjoy the same status as ordinary depositors. ” As Lewis points out, this is legalistic—“narrowly true, but generally false. The Irish government always had the power to impose losses on even the senior bondholders, if it wanted to.” When he made the decision in 2008, Lenihan said it was done to prevent contagion. But, as Lewis points out, this wasn’t true either. A year and a half later, Lenihan offered a different reasoning, claiming that the bonds were owned by Irishmen. “The Irish, in other words,” Lewis writes, “were simply saving the Irish. This wasn’t true.” The bondholders were mostly foreigners.

Here is a link to Michael Lewis on CNBC talking about his meeting with Brian Lenihan, Irish Bankers and others and the role of Merrill Lynch in Ireland’s downfall.

Merrill Lynch fired an employee who wrote a report that the Irish banks were over-lending dangerously. Yet Lenihan’s Dept Finance hired ML at big bucks to help shovel the cr*p generated by low / no regulation, low interest rates and shifting taxes from income to consumption and overall low direct taxes which created the financial crisis.