Michael Taft: The EU Commission has announced that Ireland will get an extension to the target date for return to Maastricht compliance. Instead of 2013, it will be 2014. But don’t think that feet will be taken off the contractionary pedal. The EU Commission has called for even deeper deflationary measures spread out over a longer period than the Government had intended. The future just got bleaker.
In one sense, the extension was inevitable. The Government’s strategy to reach Maastricht compliance by 2013, outlined in the April budget, was growing more untenable by the day. Back in April, they hoped to hold the deficit at 10.7 percent by the end of 2010. Over the next three years they intended to reduce the deficit by 2.5 percent annually. That, according to the plan, would see the budget home at -3 percent by 2013.
Already, though, this math ahs gotten knocked off-course. The ESRI has projected the deficit will fall to 12.8 percent next year. Further, GDP will be below the Government’s projection. On that basis, the 2.5 percent annual reduction wouldn’t make it. Already, Goodbody Stockbrokers, the NIB and Ernst & Young claimed the Government would fail to reach the 2013 target.
Enter the helpful EU Commission. They are now allowing the Government until 2014 to reach Maastricht compliance. EU Commissioner Almunia tried to put a positive gloss on this – claiming that this extra year was given in acknowledgement that the Government is going down the right course. However, it had little to do with good intentions – it was merely an acknowledgement of cold math.
The bottom-line in all this is not that the Government is being given extra breathing space. Rather, it is that the Government will have to continue its deflationary fiscal strategy – the planned average annual 2 percent contraction up to 2013 – for another year. The economy has not been given a respite – its deflationary sentence has just been lengthened.
How will this play out in the medium term? Despite media reports that the Government is more optimistic about the economic numbers this year (this is in line with all other forecasters), the issue is what are the growth numbers going forward? In April, the Government projected a growth rate of over 10 percent between 2010 and 2013. Some forecasters disagree. IBEC is projecting 6 percent while NIB is slightly more optimistic at 8 percent. Only Ernst & Young, so far, believe growth rates to 2013 will be as strong as the Government projections.
However, extending the deflationary period will only dampen economic growth longer. To put it metaphorically (and much of the debate is played out at this level – ‘take the pain upfront’, etc.), the economy is likely to trough sometime next year. When it hits the bottom of the recessionary sea it will try to swim back up to the surface. However, the Government’s deflationary strategy is acting like an anchor tied around to the economy’s foot, making that upward swim harder and slower.
There are bleaker growth projections. At a recent economic forum organised by Dublin City Council:
‘Jonathan Stenning of Cambridge Econometrics was considerably more downbeat about the prospect of recovery, saying he expected the Irish economy would pick up slowly and grow at an average rate of 1 per cent per annum between now and 2013.’
If Mr. Stenning is correct, the economy will struggle further. It will not be able to generate the necessary tax revenue; it will not be able to generate the jobs to meet the needs of new labour market entrants, never mind those already on the dole; consumer spending and investment will remain depressed; the economy will be mired in a period of low-growth, high-debt.
I really hope the Mr. Stenning is wrong. For if he isn’t, the EU Commission will be coming back to the Irish government again, saying what a good job they are doing, and because of the that they will be giving them another target date extension – to 2015.
But what they will really be doing is lengthening our deflationary sentence. Again.
Thursday, 12 November 2009
Wednesday, 11 November 2009
Home truths from abroad
Michael Burke: It’s in the nature of a globalised economy that all economies tend to exhibit a specific combination of global trends. For a small extremely open economy such as Ireland, this is an inescapable truth. It is especially true in a period of crisis. So, despite widespread claims to the contrary, there is little that is unique in the current Irish crisis. And there is nothing which justifies the uniquely pro-cyclical fiscal policy that is currently being implemented. Instead, to treat the Irish patient, what must be diagnosed is the specific combination and strength of the widespread virus that it has acquired in the current pandemic.
The European Commission’s latest biannual economic forecast for the European Union is useful in this respect. It shows, amongst other things, what is and what is not unique about the current situation in Ireland. In doing so, it helps to undermine some the myths that have grown up regarding the features of the current crisis. Below are some of the key issues for Ireland that are worth highlighting:-
* Ireland’s bloated public sector: Before the current recession Ireland’s government spending as a proportion of GDP was the lowest of any economy in the Euro Area, 33.6% in the years 2002-2006, compared to a Euro Area average of 47.4% (Table 35, p.205). A number of countries, France, Belgium and Austria, have a public sector which is proportionately 1½ times greater than Ireland, at over 50% of GDP.
* There is no scope to raise taxes: In the same 2002-2006 period Ireland’s tax take was also the lowest of any Euro Area economy, at 34.9% of GDP compared to Euro Area average of 44.9% of GDP (Table 36).
* Ireland has a uniquely high level of public debt: Even with the disastrous and counter-productive policies currently being pursued, the Commission forecasts that Ireland’s public debt level will rise to 96.2% of GDP in 2011, compared to 135.4% for Greece, 117.8% for Italy, 104% for Belgium and a Euro Area average of 88.2% (Table 42). Shifting the goalposts a bit, it is also often claimed that Ireland’s export successes should be ignored in calculating debt ratios (even though exports can provide part of the taxes to fund deficits). But even if GNP is used, Ireland’s debt ratio is still the second lowest in the Euro Area at 38.4% of GDP, and still way below the average.
* There’s no scope for fiscal stimulus: Ireland’s output gap relative to potential GDP is expected to be up to 8.5% of GDP in 2009 and will still be as high as 5.4% of GDP in 2011, the largest in the Euro Area and compared to averages for the Euro Area as a whole of 3.6% this year and 2.5% in 2011 (Table 13).
* Ireland has become uncompetitive internationally: In the years 2002-2006, the price deflator for Ireland’s exports fell at an annual average rate of 2.7% and the price deflator for imports fell at an annual average rate of 2.3%, compared to Euro Area average rises of 0.5% and 0.7% respectively (Tables 18 & 19). In addition, Ireland’s growth of per capita labour productivity was an annual average 2.2% compared to just 1.2% for the Euro Area, and 1.6% for Britain and 2.1% for the US (Table 26).
Absolute, historical and relative comparisons are all useful to establish context. It is certainly the case that the pace of the rise in Ireland’s public deficits is the most dramatic of all the OECD economies. According to the EU, there has been a deterioration in public debt equivalent to 12.3% of GDP in just two years, compared to a Euro Area average of just 4.7% (Table 37).
But, as shown above, this had nothing to do with the entirely false assertion that Ireland has a bloated public sector. Instead, it relates to two genuinely unique factors in Ireland, in addition to the very small and narrow tax base which has exacerbated the rising public deficits.
The first unique factor is the depth of the recession itself, a forecast decline of 13% in GDP over the recession and more than double the average decline in the Euro Area (Table 1). This has driven down taxation revenues as well as forcing welfare spending higher. The second is the bank bailout, which at 232% of GDP is greater in Ireland than the next worst 4 Euro Area economies put together.
In relative terms, compared to the Euro Area economies, Ireland is unique in these two particulars; a uniquely severe downturn, as well as a uniquely dysfunctional banking sector which is sucking the lifeblood from the economy. The scope of the economic decline would require uniquely dramatic stimulus measures to revive it, while a rapid exit strategy from the policy of bailouts for bank bond and shareholders is also urgently needed.
The European Commission’s latest biannual economic forecast for the European Union is useful in this respect. It shows, amongst other things, what is and what is not unique about the current situation in Ireland. In doing so, it helps to undermine some the myths that have grown up regarding the features of the current crisis. Below are some of the key issues for Ireland that are worth highlighting:-
* Ireland’s bloated public sector: Before the current recession Ireland’s government spending as a proportion of GDP was the lowest of any economy in the Euro Area, 33.6% in the years 2002-2006, compared to a Euro Area average of 47.4% (Table 35, p.205). A number of countries, France, Belgium and Austria, have a public sector which is proportionately 1½ times greater than Ireland, at over 50% of GDP.
* There is no scope to raise taxes: In the same 2002-2006 period Ireland’s tax take was also the lowest of any Euro Area economy, at 34.9% of GDP compared to Euro Area average of 44.9% of GDP (Table 36).
* Ireland has a uniquely high level of public debt: Even with the disastrous and counter-productive policies currently being pursued, the Commission forecasts that Ireland’s public debt level will rise to 96.2% of GDP in 2011, compared to 135.4% for Greece, 117.8% for Italy, 104% for Belgium and a Euro Area average of 88.2% (Table 42). Shifting the goalposts a bit, it is also often claimed that Ireland’s export successes should be ignored in calculating debt ratios (even though exports can provide part of the taxes to fund deficits). But even if GNP is used, Ireland’s debt ratio is still the second lowest in the Euro Area at 38.4% of GDP, and still way below the average.
* There’s no scope for fiscal stimulus: Ireland’s output gap relative to potential GDP is expected to be up to 8.5% of GDP in 2009 and will still be as high as 5.4% of GDP in 2011, the largest in the Euro Area and compared to averages for the Euro Area as a whole of 3.6% this year and 2.5% in 2011 (Table 13).
* Ireland has become uncompetitive internationally: In the years 2002-2006, the price deflator for Ireland’s exports fell at an annual average rate of 2.7% and the price deflator for imports fell at an annual average rate of 2.3%, compared to Euro Area average rises of 0.5% and 0.7% respectively (Tables 18 & 19). In addition, Ireland’s growth of per capita labour productivity was an annual average 2.2% compared to just 1.2% for the Euro Area, and 1.6% for Britain and 2.1% for the US (Table 26).
Absolute, historical and relative comparisons are all useful to establish context. It is certainly the case that the pace of the rise in Ireland’s public deficits is the most dramatic of all the OECD economies. According to the EU, there has been a deterioration in public debt equivalent to 12.3% of GDP in just two years, compared to a Euro Area average of just 4.7% (Table 37).
But, as shown above, this had nothing to do with the entirely false assertion that Ireland has a bloated public sector. Instead, it relates to two genuinely unique factors in Ireland, in addition to the very small and narrow tax base which has exacerbated the rising public deficits.
The first unique factor is the depth of the recession itself, a forecast decline of 13% in GDP over the recession and more than double the average decline in the Euro Area (Table 1). This has driven down taxation revenues as well as forcing welfare spending higher. The second is the bank bailout, which at 232% of GDP is greater in Ireland than the next worst 4 Euro Area economies put together.
In relative terms, compared to the Euro Area economies, Ireland is unique in these two particulars; a uniquely severe downturn, as well as a uniquely dysfunctional banking sector which is sucking the lifeblood from the economy. The scope of the economic decline would require uniquely dramatic stimulus measures to revive it, while a rapid exit strategy from the policy of bailouts for bank bond and shareholders is also urgently needed.
Monday, 9 November 2009
Balanced media?
Slí Eile: Scaring? Balanced? A sample of headlines from the Sunday papers last weekend
FW: Main Headlines Today's Newspapers Sunday 8 November, 2009
Tax hikes ' will exile well paid'
Private sector snubbed the protest
Civil Service ' privilege day' perks escape axe
The tides that can pull us back from the brink
What did Friday's day of action achieve for all the rest of us?
Public sector protest had already fallen at Frontline
Stop talking, it's time for action
State pay cheques for the protesters will bounce by March unless Cowen does what he has to do
Willingness to scarifice jobs shows what's important to union barons
War in the workplace
Health spend faces €1bn cut in budget
Revenue denies ICTU claim of €1.8bn in uncollected taxes
No room to manoeuvre- the economy
Cabinet Unites as spending cuts loom
Unions try to delay the evil hour - piece about teacher unions
OECD highlights need to tackle interest groups
Urgent need to stabilise income tax rates
Public service world is different from the rest of society
Country's fate cannot be left to special interests
More must pay their share of income tax
Unions face backlash as pay cuts now inevitable
Workers in 54 state bodies earn average of €70k salary
Contradictions of trade unions are untenable
Union assertions do not make sense, and neither does dithering
Union splits delay deal on pay cuts
ICTU and the wailers- piece on the economy
Put anger to one side. We all have to change
Cutting state jobs will save the public sector
'O make me a Keynesian (but not yet)' ?
Slí Eile: The entry by UK economist David Blanchflower into the domestic economic debate (re-flation versus deflation) created a stir last week. For a moment, it took us away from the narrow, Irish insular debate of ‘public sector versus private sector’, ‘job cuts versus pay cuts’, ‘public spending cuts versus tax hikes’, ‘your grandmother versus your job’ and ‘your left arm versus your right hand’ – all false dichotomies and enforced choices thrown on a public already anxious and dispirited. When you hear the Prime Minister of a country saying that he has a vision for the future and that vision is a smaller public service then you know we have a vision-crisis as well as a values-crises. Blanchflower’s message is simply that we cannot afford to condemn a generation of young people to long-term unemployment with all the devastating consequences that this entrails.
Blanchflower’s talk can be podcasted here.
and his talk can be downloaded here.
(as can all the papers for the Dublin Economics Workshop here)
Blanchflower’s main policy conclusion is
“The time to act is now. The young must be the priority.” (his words)
He also warns that Recovery may not be V-shaped but W-shaped. (IMF and other bodies are cautioning against a premature withdrawal of stimulus measures).
Before considering his menu of policy options, some of the key points he makes at the outset are that:
* The costs of unemployment will vary across countries and between groups within populations. * The young will be hit hard.
* The duration of the slump may be much more prolonged than most people are expecting and … * Much will be changed both in our ideas and in our methods before we emerge.
* During a long period of unemployment, workers can lose their skills.
* Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression and in a few cases suicide.
* The long-term unemployed are at a particular disadvantage trying to find work. People's morale sinks as duration rises.
* As unemployment rates increase, crime rates tend to rise, especially property crime.
* Increases in the unemployment rate, lowers the happiness of the population, not just the unemployed. The fear of becoming unemployed in the future lowers a person’s subjective wellbeing
* Unemployment while young, especially of long duration, causes permanent scars rather than temporary blemishes. He cites solid UK longitudinal evidence to back this up.
His policy prescription is decidedly Keynesian:
1) Maintain or even increase aggregate demand through stimulative fiscal policy
2) Target assistance on the young through active labour market programs and continuing training and expansion of education, wage and employment subsidies for the young, incentives for hiring the young in public sector organisations such as in education and health and ‘lowering the minimum wage for the young’
Blanchflower argues that ‘moves to cut public expenditure or public sector wages or employment’ in the depths of a recession are ‘a mistake and may turn a recession into depression’
Little wonder that there was such a lively and adverse reaction from the economics mainstream here
In that thread Michael Burke asks:
A challenge to all the slash and burn advocates: Name another advanced economy which intends to pursue a course of slashing public spending currently in the way that Ireland intends.
One detects a severe case of Augustinian Keynesianism among the Irish economics confraternity (while we would love to stimulate fiscally we will not because.....):
O Lord make me a counter-cyclical Keynesian - but not yet.
Blanchflower’s talk can be podcasted here.
and his talk can be downloaded here.
(as can all the papers for the Dublin Economics Workshop here)
Blanchflower’s main policy conclusion is
“The time to act is now. The young must be the priority.” (his words)
He also warns that Recovery may not be V-shaped but W-shaped. (IMF and other bodies are cautioning against a premature withdrawal of stimulus measures).
Before considering his menu of policy options, some of the key points he makes at the outset are that:
* The costs of unemployment will vary across countries and between groups within populations. * The young will be hit hard.
* The duration of the slump may be much more prolonged than most people are expecting and … * Much will be changed both in our ideas and in our methods before we emerge.
* During a long period of unemployment, workers can lose their skills.
* Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression and in a few cases suicide.
* The long-term unemployed are at a particular disadvantage trying to find work. People's morale sinks as duration rises.
* As unemployment rates increase, crime rates tend to rise, especially property crime.
* Increases in the unemployment rate, lowers the happiness of the population, not just the unemployed. The fear of becoming unemployed in the future lowers a person’s subjective wellbeing
* Unemployment while young, especially of long duration, causes permanent scars rather than temporary blemishes. He cites solid UK longitudinal evidence to back this up.
His policy prescription is decidedly Keynesian:
1) Maintain or even increase aggregate demand through stimulative fiscal policy
2) Target assistance on the young through active labour market programs and continuing training and expansion of education, wage and employment subsidies for the young, incentives for hiring the young in public sector organisations such as in education and health and ‘lowering the minimum wage for the young’
Blanchflower argues that ‘moves to cut public expenditure or public sector wages or employment’ in the depths of a recession are ‘a mistake and may turn a recession into depression’
Little wonder that there was such a lively and adverse reaction from the economics mainstream here
In that thread Michael Burke asks:
A challenge to all the slash and burn advocates: Name another advanced economy which intends to pursue a course of slashing public spending currently in the way that Ireland intends.
One detects a severe case of Augustinian Keynesianism among the Irish economics confraternity (while we would love to stimulate fiscally we will not because.....):
O Lord make me a counter-cyclical Keynesian - but not yet.
John Baker on The Spirit Level
John Baker of UCD's School of Social Justice has just posted an illuminating review of Wilkinson & Pickett's recent book, The Spirit Level: Why more equal societies almost always do better, on Irish Left Review; you can read it here.
Scaring us into greater inequality
James Wickham: In a recent article in the Irish Times (4 November) Philip Lane warned that higher levels of income taxation could restrict Ireland's ability ' to attract and retain the highly skilled mobile professionals that are key to future economic growth'. This argument needs some discussion.
We could and probably should talk about whether it's desirable to commit ourselves to a form of economic growth that gives 'highly skilled mobile professionals' a veto over taxation policy. But there are smaller scale more empirical issues that can usefully be discussed.
Research on mobile professionals shows that taxation is only one of the reasons why people choose to live in a country. There is evidence that taxation influences location choice, but other things also matter. Issues here range from personal safety to the quality of life. Indeed there is a whole literature in urban geography associated with Richard Florida's claim that young and mobile professionals (the 'creative class') move to cities that offer social, cultural and intellectual diversity. Slightly facetiously, we could say: forget about taxation, just ensure there's some decent music and good craic...
Of course the point is that much 'quality of life' involves public expenditure. A decent health system, a proper public transport system, public broadcasting, even decent public spaces, do not come free. And interestingly, we do have research that suggests these things can attract people to live or stay in a country, and equally we do know that many young and mobile professionals bemoan the lack of such things in Ireland (e.g. Boyle (2006)).
It's also important to disaggregate these 'highly skilled mobile professionals'. For example, we could differentiate between 'visitors' who have no commitment to the country, and 'settlers' who intend to spend much of their life here; we could differentiate between 'experts' who earn say over than €60k (the current minimum income for the Irish Green Card permit) and 'stars' who receive more than (say) €150k. It's clear that what motivates visiting stars is probably very different to what motivates settler experts. Some people (visitors) do move temporarily to Dubai, but it's not clear whether such people are the same as those needed in Ireland - and do we really want to develop Dubai-type expat zones in Ireland anyway?
It can also be argued that relying on visiting stars has dangerous implications for the labour market - it creates a culture of high reward short termism, otherwise known as greed.
Most fundamentally of all, surely it's time to start discussing the disadvantages of inequality. Work such as Wilkinson & Pickett (The Spirit Level - Why More Equal Socieities almost always do better) has alerted social scientists to the detriminetal effects of inequality on all members of the society. In other words, in an unequal society even the better off do worse. And furthermore, these effects are generated by inequality 'at the top' (gap between the very wealthy and the rest) rather than just by inequality 'at the bottom' (gap between the poor and the rest). Facilitating visting stars, in other words, may actually have very detrimental indirect effects on the whole society.
We could and probably should talk about whether it's desirable to commit ourselves to a form of economic growth that gives 'highly skilled mobile professionals' a veto over taxation policy. But there are smaller scale more empirical issues that can usefully be discussed.
Research on mobile professionals shows that taxation is only one of the reasons why people choose to live in a country. There is evidence that taxation influences location choice, but other things also matter. Issues here range from personal safety to the quality of life. Indeed there is a whole literature in urban geography associated with Richard Florida's claim that young and mobile professionals (the 'creative class') move to cities that offer social, cultural and intellectual diversity. Slightly facetiously, we could say: forget about taxation, just ensure there's some decent music and good craic...
Of course the point is that much 'quality of life' involves public expenditure. A decent health system, a proper public transport system, public broadcasting, even decent public spaces, do not come free. And interestingly, we do have research that suggests these things can attract people to live or stay in a country, and equally we do know that many young and mobile professionals bemoan the lack of such things in Ireland (e.g. Boyle (2006)).
It's also important to disaggregate these 'highly skilled mobile professionals'. For example, we could differentiate between 'visitors' who have no commitment to the country, and 'settlers' who intend to spend much of their life here; we could differentiate between 'experts' who earn say over than €60k (the current minimum income for the Irish Green Card permit) and 'stars' who receive more than (say) €150k. It's clear that what motivates visiting stars is probably very different to what motivates settler experts. Some people (visitors) do move temporarily to Dubai, but it's not clear whether such people are the same as those needed in Ireland - and do we really want to develop Dubai-type expat zones in Ireland anyway?
It can also be argued that relying on visiting stars has dangerous implications for the labour market - it creates a culture of high reward short termism, otherwise known as greed.
Most fundamentally of all, surely it's time to start discussing the disadvantages of inequality. Work such as Wilkinson & Pickett (The Spirit Level - Why More Equal Socieities almost always do better) has alerted social scientists to the detriminetal effects of inequality on all members of the society. In other words, in an unequal society even the better off do worse. And furthermore, these effects are generated by inequality 'at the top' (gap between the very wealthy and the rest) rather than just by inequality 'at the bottom' (gap between the poor and the rest). Facilitating visting stars, in other words, may actually have very detrimental indirect effects on the whole society.
Sunday, 8 November 2009
Hutton on Brown and Tobin Tax
There's an interesting piece by Will Hutton, writing in today's Observer, on Gordon Brown's championing of a transaction tax, or 'Tobin Tax', at the meeting on G20 finance ministers. In September, Paul Sweeney wrote on PE about German calls for a Tobin Tax.
Are we going too far?
Last week, on PE, guest blogger Michael Burke, in a post entitled Why is the Rest of the World out of Step with Ireland?, made the case for a reflationary approach to Ireland's current economic woes. This weekend, over on Irish Economy, John McHale asks Is Ireland that Different? - is our fiscal policy becoming too pro-cyclical?
Friday, 6 November 2009
The Moral Basis for Taxation
Nat O'Connor: Do progressive economists have a shared belief in the moral basis for taxation?
Let me start by referencing Daniel J. Mitchell's 2006 paper "The Moral Case for Tax Havens". (Aside: Ireland is mentioned on page 9, in glowing terms).
I am taking certain core arguments in this paper to be reasonably representative of free market philosophy.
Let me go further, and agree with Mitchell in two respects:
Firstly, I agree that tax havens do have a role in helping people who live in brutal non-democratic regimes. (This deals with a lot of second half of his paper, which isn't really relevant to this post, except to note that I argue taxation does not have the same moral basis in non-democracies. That's quite important, because a lot of the philosophy on the moral basis for taxation referred to by free market proponents occurred centuries ago, before democratisation and is limited by that).
Secondly, he notes on page 27 that "Opponents of tax havens do make one compelling argument. It is unfair, they say, for some people to avoid taxes while others are stuck carrying the load. For those who believe that the law should apply equally to all, this is an important issue."
I understand this to mean that we need the rule of law (including tax law), which should be non-discriminatory. I'll come back to this point of agreement.
My main problem with Mitchell's paper is illustrated in the first paragraph on page 4, "The first responsibility of any government is to protect the safety of its citizens, either from external aggression or domestic crime. The second responsibility is to provide an environment conducive to economic growth and opportunity. There are several steps needed to create that environment, including property rights, the rule-of-law, and a stable currency. One of the main conditions for prosperity, though, is a tax system that rewards – or at least does not unduly discourage – productive behavior."
The paper combines two strands of argument. Firstly, there is the belief that low tax policies lay the basis for economic growth, which in turn leads to widespread prosperity and better social outcomes. In other words, it is an argument that the results of free market economics justify its structure and the lack of regulation. I think this argument has been somewhat refuted by the global crisis, not least the assumption that 'growth' at all costs is a good thing. But more specifically, it fails to convince that low taxes are a causal factor in this growth. At the same time, I am equally unconvinced that excessively high taxes will lead to economic prosperity either. So, we are left arguing about tax rates but not its moral basis, so I leave that for other posts.
I see the second strand in Mitchell's argument as a political philosophy that characterises a certain set of personal rights as inviolable by the state. The state's primary role is presented as the protection of these rights (specifically property rights) through the rule of law. And taxation is then justified only by the provision of services, primarily the protection of citizens and their rights, and then provision of an environment conducive to economic activity. This circumscribes the role of taxation.
Didn't I start by agreeing that we need the rule of law? Yes I did. And I can also agree that human rights are universal and indivisible, including property rights. But I don't agree that all these rights are inviolable, and that's the essential difference in getting to the moral basis of taxation.
If rights, including the right to property, are not inviolable, who gets to decide on their limits? Surely the state has to be constrained or it could abuse its power?
I take the fundamental principle here to be political equality. That is, each person affected by the decision has equal participation rights in making the decision, even if he/she chooses not to use them.
Hence, all laws and all taxes must be derived from a democratic process (that is, the action of this fundamental principle). It may not be possible to reach consensus, so decisions may be made by voting (or through elected representatives) but democracy requires that all participants accept the results of the process. Hence, we must have the rule of law, including tax law.
Hence, if tax results from a democratic process, then it can be for whatever purposes are agreed by the participants, above and beyond protecting citizens' rights. Participants can define the 'common good' or 'public interest' as they see fit.
To move to the specifics of the Irish case. The moral basis for taxation is premised on the argument that, at some point in time, Ireland became a democratic state.
We can argue about when that defining moment was; for example was it the first election conducted with universal suffrage or the first time an election resulted in the peaceful replacement of one party in government by another, etc.
You can of course argue that Ireland is not in fact a democratic state at all, but I am going to simply reject that argument and argue that Ireland is now undeniably democratic, hence our taxes are based on the principle of political equality in determining their level and purpose.
This is reflected in the Constitution:
Preamble: "We, the people of Éire ... Do hereby adopt, enact, and give to ourselves this Constitution."
Article 1: "The Irish nation hereby affirms its inalienable, indefeasible, and sovereign right to choose its own form of Government, to determine its relations with other nations, and to develop its life, political, economic and cultural, in accordance with its own genius and traditions."
Article 5: "Ireland is a sovereign, independent, democratic state."
Article 6.1 "All powers of government, legislative, executive and judicial, derive, under God, from the people, whose right it is to designate the rulers of the State and, in final appeal, to decide all questions of national policy, according to the requirements of the common good."
Articles 21 and 22 of Bunreacht na hÉireann describe Money Bills and clearly imply that the Dáil can impose taxation.
The Constitution gives specific mention to property rights in Article 43.1 1° "The State acknowledges that man, in virtue of his rational being, has the natural right, antecedent to positive law, to the private ownership of external goods." and 2° "The State accordingly guarantees to pass no law attempting to abolish the right of private ownership or the general right to transfer, bequeath, and inherit property." However, this right is qualified by Article 43.2 1° "The State recognises, however, that the exercise of the rights mentioned in the foregoing provisions of this Article ought, in civil society, to be regulated by the principles of social justice." and 2° "The State, accordingly, may as occasion requires delimit by law the exercise of the said rights with a view to reconciling their exercise with the exigencies of the common good."
In other words, we the people can define "the common good" through a democratic process and then proceed to levy taxes to fund public policies to achieve that end.
Let me start by referencing Daniel J. Mitchell's 2006 paper "The Moral Case for Tax Havens". (Aside: Ireland is mentioned on page 9, in glowing terms).
I am taking certain core arguments in this paper to be reasonably representative of free market philosophy.
Let me go further, and agree with Mitchell in two respects:
Firstly, I agree that tax havens do have a role in helping people who live in brutal non-democratic regimes. (This deals with a lot of second half of his paper, which isn't really relevant to this post, except to note that I argue taxation does not have the same moral basis in non-democracies. That's quite important, because a lot of the philosophy on the moral basis for taxation referred to by free market proponents occurred centuries ago, before democratisation and is limited by that).
Secondly, he notes on page 27 that "Opponents of tax havens do make one compelling argument. It is unfair, they say, for some people to avoid taxes while others are stuck carrying the load. For those who believe that the law should apply equally to all, this is an important issue."
I understand this to mean that we need the rule of law (including tax law), which should be non-discriminatory. I'll come back to this point of agreement.
My main problem with Mitchell's paper is illustrated in the first paragraph on page 4, "The first responsibility of any government is to protect the safety of its citizens, either from external aggression or domestic crime. The second responsibility is to provide an environment conducive to economic growth and opportunity. There are several steps needed to create that environment, including property rights, the rule-of-law, and a stable currency. One of the main conditions for prosperity, though, is a tax system that rewards – or at least does not unduly discourage – productive behavior."
The paper combines two strands of argument. Firstly, there is the belief that low tax policies lay the basis for economic growth, which in turn leads to widespread prosperity and better social outcomes. In other words, it is an argument that the results of free market economics justify its structure and the lack of regulation. I think this argument has been somewhat refuted by the global crisis, not least the assumption that 'growth' at all costs is a good thing. But more specifically, it fails to convince that low taxes are a causal factor in this growth. At the same time, I am equally unconvinced that excessively high taxes will lead to economic prosperity either. So, we are left arguing about tax rates but not its moral basis, so I leave that for other posts.
I see the second strand in Mitchell's argument as a political philosophy that characterises a certain set of personal rights as inviolable by the state. The state's primary role is presented as the protection of these rights (specifically property rights) through the rule of law. And taxation is then justified only by the provision of services, primarily the protection of citizens and their rights, and then provision of an environment conducive to economic activity. This circumscribes the role of taxation.
Didn't I start by agreeing that we need the rule of law? Yes I did. And I can also agree that human rights are universal and indivisible, including property rights. But I don't agree that all these rights are inviolable, and that's the essential difference in getting to the moral basis of taxation.
If rights, including the right to property, are not inviolable, who gets to decide on their limits? Surely the state has to be constrained or it could abuse its power?
I take the fundamental principle here to be political equality. That is, each person affected by the decision has equal participation rights in making the decision, even if he/she chooses not to use them.
Hence, all laws and all taxes must be derived from a democratic process (that is, the action of this fundamental principle). It may not be possible to reach consensus, so decisions may be made by voting (or through elected representatives) but democracy requires that all participants accept the results of the process. Hence, we must have the rule of law, including tax law.
Hence, if tax results from a democratic process, then it can be for whatever purposes are agreed by the participants, above and beyond protecting citizens' rights. Participants can define the 'common good' or 'public interest' as they see fit.
To move to the specifics of the Irish case. The moral basis for taxation is premised on the argument that, at some point in time, Ireland became a democratic state.
We can argue about when that defining moment was; for example was it the first election conducted with universal suffrage or the first time an election resulted in the peaceful replacement of one party in government by another, etc.
You can of course argue that Ireland is not in fact a democratic state at all, but I am going to simply reject that argument and argue that Ireland is now undeniably democratic, hence our taxes are based on the principle of political equality in determining their level and purpose.
This is reflected in the Constitution:
Preamble: "We, the people of Éire ... Do hereby adopt, enact, and give to ourselves this Constitution."
Article 1: "The Irish nation hereby affirms its inalienable, indefeasible, and sovereign right to choose its own form of Government, to determine its relations with other nations, and to develop its life, political, economic and cultural, in accordance with its own genius and traditions."
Article 5: "Ireland is a sovereign, independent, democratic state."
Article 6.1 "All powers of government, legislative, executive and judicial, derive, under God, from the people, whose right it is to designate the rulers of the State and, in final appeal, to decide all questions of national policy, according to the requirements of the common good."
Articles 21 and 22 of Bunreacht na hÉireann describe Money Bills and clearly imply that the Dáil can impose taxation.
The Constitution gives specific mention to property rights in Article 43.1 1° "The State acknowledges that man, in virtue of his rational being, has the natural right, antecedent to positive law, to the private ownership of external goods." and 2° "The State accordingly guarantees to pass no law attempting to abolish the right of private ownership or the general right to transfer, bequeath, and inherit property." However, this right is qualified by Article 43.2 1° "The State recognises, however, that the exercise of the rights mentioned in the foregoing provisions of this Article ought, in civil society, to be regulated by the principles of social justice." and 2° "The State, accordingly, may as occasion requires delimit by law the exercise of the said rights with a view to reconciling their exercise with the exigencies of the common good."
In other words, we the people can define "the common good" through a democratic process and then proceed to levy taxes to fund public policies to achieve that end.
Guest post by Niall Douglas: Tax Sin, Never Good
Following TASC's Autumn Conference in October, we have been carrying an occasional series of guest posts from some of the attendees. This is the second post by Niall Douglas.
Niall Douglas: One of the major themes of the recent TASC conference was the need for a stimulus plan for Ireland – and it got my mind thinking about what shape such a stimulus plan should take. Encouraged by the comments to my last post which suggests there is an interest in progressive conservative economics, I thought I might try applying one of their most important mantras to the current poorly state of the Irish Economy and see what happens. That mantra is simple: Tax Sin, Never Good.
To quickly explain, orthodox economics holds that taxation – which it views as an evil made necessary only by the requirement to provide public goods – ought to be placed upon goods and services which are the most “inelastic” (which is the economic jargon for “insensitivity of consumption to price changes”). In other words, the reason why petrol, cigarettes, alcohol, new cars (in the form of VRT) and your income are much more heavily taxed than other items is because Economists have determined that people are most likely to continue to buy these items no matter their cost: one therefore biases taxation towards necessities rather than luxuries. Because the maximisation of production of stuff is the single most important thing in Neo-Classical Economics, taxes placed on inelastic goods are inferred to have the least effect on output maximisation, and therefore on employment maximisation because it requires people to make all that stuff.
That sounds sensible, but note firstly how amoral such a proposal is: on the one hand most people would agree that petrol, cigarettes and alcohol ought to be heavily taxed because none of these are good for you or society at large, so economic theory and morality coincide. However there is considerably less moral alignment with the taxation of work: how can it be morally right that living off of Jobseeker’s Allowance is not taxed, yet the first step into legal work is immediately taxed at 5-10% (this the total cost to society i.e. it includes Employer’s PRSI) after which it rises rapidly to consume some twenty-five percent of the average worker’s earnings before all taxes? This sends a signal to society that, rationally speaking, working and self-reliance is to be punished and that indolence and helplessness is to be rewarded. It is this viewpoint of that situation, and the logical reaction to it, which underpins the anger felt towards the welfare system in general by conservative parts of society.
The second logical problem with inelastic taxation is this: inelastic goods are, by their very definition, the most important to society and therefore they are the most utilised by society i.e. they are the fundamental building blocks of an economy from which economies of scale are most possible. Maximising total output, as orthodox Economics would do, assumes the equivalence of a single luxury product costing €100 and one hundred necessities costing €1. When viewed like this rather than through output maximisation, any emphasis of taxation upon necessities such as a person’s income is not only morally unjust but also the most economically retarding and taxation regressive of any economic policy because it severely punishes the most impoverished and weakest in our society. Therefore, the social conservative with a strong moral conscience has particular issue with taxation as the damnation of the poorest and weakest – which if you are religious as say most Americans are, means that taxation is sinful.
It is upon these two fundamental arguments that progressive conservative economic policy rests: perhaps you now understand why the right is always so concerned with income tax cuts and why progressive conservatives such as Milton Friedman were so adamant that taxation of income hurts the poor the most – which of course is in direct and total contradiction to the position of the left which regards progressive income taxation as a tool to help reign in the growing inequalities in income. The truth is that both positions have merit, and the economics effects of both positions are amply covered even in the reduced worldview of the Neo-Classical Economic model.
In future posts I shall identify a set of good and bad behaviours – as according to the economic literature – in the Irish Economy and then proceed to investigate what might happen should we eliminate all taxation on the good things and make up the shortfall by taxing bad things. I shall try wherever possible to provide figures and links to research for my proposals. In so doing, I hope to lay out one possible revenue-neutral stimulus plan for Ireland in as much detail as I am able. I look forward to reading your comments.
Niall Douglas: One of the major themes of the recent TASC conference was the need for a stimulus plan for Ireland – and it got my mind thinking about what shape such a stimulus plan should take. Encouraged by the comments to my last post which suggests there is an interest in progressive conservative economics, I thought I might try applying one of their most important mantras to the current poorly state of the Irish Economy and see what happens. That mantra is simple: Tax Sin, Never Good.
To quickly explain, orthodox economics holds that taxation – which it views as an evil made necessary only by the requirement to provide public goods – ought to be placed upon goods and services which are the most “inelastic” (which is the economic jargon for “insensitivity of consumption to price changes”). In other words, the reason why petrol, cigarettes, alcohol, new cars (in the form of VRT) and your income are much more heavily taxed than other items is because Economists have determined that people are most likely to continue to buy these items no matter their cost: one therefore biases taxation towards necessities rather than luxuries. Because the maximisation of production of stuff is the single most important thing in Neo-Classical Economics, taxes placed on inelastic goods are inferred to have the least effect on output maximisation, and therefore on employment maximisation because it requires people to make all that stuff.
That sounds sensible, but note firstly how amoral such a proposal is: on the one hand most people would agree that petrol, cigarettes and alcohol ought to be heavily taxed because none of these are good for you or society at large, so economic theory and morality coincide. However there is considerably less moral alignment with the taxation of work: how can it be morally right that living off of Jobseeker’s Allowance is not taxed, yet the first step into legal work is immediately taxed at 5-10% (this the total cost to society i.e. it includes Employer’s PRSI) after which it rises rapidly to consume some twenty-five percent of the average worker’s earnings before all taxes? This sends a signal to society that, rationally speaking, working and self-reliance is to be punished and that indolence and helplessness is to be rewarded. It is this viewpoint of that situation, and the logical reaction to it, which underpins the anger felt towards the welfare system in general by conservative parts of society.
The second logical problem with inelastic taxation is this: inelastic goods are, by their very definition, the most important to society and therefore they are the most utilised by society i.e. they are the fundamental building blocks of an economy from which economies of scale are most possible. Maximising total output, as orthodox Economics would do, assumes the equivalence of a single luxury product costing €100 and one hundred necessities costing €1. When viewed like this rather than through output maximisation, any emphasis of taxation upon necessities such as a person’s income is not only morally unjust but also the most economically retarding and taxation regressive of any economic policy because it severely punishes the most impoverished and weakest in our society. Therefore, the social conservative with a strong moral conscience has particular issue with taxation as the damnation of the poorest and weakest – which if you are religious as say most Americans are, means that taxation is sinful.
It is upon these two fundamental arguments that progressive conservative economic policy rests: perhaps you now understand why the right is always so concerned with income tax cuts and why progressive conservatives such as Milton Friedman were so adamant that taxation of income hurts the poor the most – which of course is in direct and total contradiction to the position of the left which regards progressive income taxation as a tool to help reign in the growing inequalities in income. The truth is that both positions have merit, and the economics effects of both positions are amply covered even in the reduced worldview of the Neo-Classical Economic model.
In future posts I shall identify a set of good and bad behaviours – as according to the economic literature – in the Irish Economy and then proceed to investigate what might happen should we eliminate all taxation on the good things and make up the shortfall by taxing bad things. I shall try wherever possible to provide figures and links to research for my proposals. In so doing, I hope to lay out one possible revenue-neutral stimulus plan for Ireland in as much detail as I am able. I look forward to reading your comments.
BBC podcast: The Economist's New Clothes
Nat O'Connor: I found this BBC Analysis podcast to be a good overview of the crisis in the economics profession. I particularly liked the discussion about returning economics to a closer relationship with political philosophy.
Note: It is only available to listen to until around 8th November
Note: It is only available to listen to until around 8th November
Wanted: an Economic Policy Analyst
TASC is recruiting an Economic Policy Analyst. The successful candidate will be responsible for researching, analysing and advising on public policy from an economic perspective. S/he will be a trained economist with excellent research and analytical skills and highly developed written and oral skills. S/he will have had extensive engagement with Irish economic and social issues, and will relish the challenge of developing progressive approaches to these issues.
The Economic Policy Analyst will report to the Head of Policy. There is an attractive remuneration package commensurate with experience. Secondment arrangements will be considered. TASC is an equal opportunities employer.
Click here to download a job specification.
Application with CV to be forwarded by email or post to the Director at the address below by 26th November 2009. Interviews week of 14th December.
13-17 Dawson Street, Dublin 2. T: +353 1 6169050 F: +353 1 6753118
The Economic Policy Analyst will report to the Head of Policy. There is an attractive remuneration package commensurate with experience. Secondment arrangements will be considered. TASC is an equal opportunities employer.
Click here to download a job specification.
Application with CV to be forwarded by email or post to the Director at the address below by 26th November 2009. Interviews week of 14th December.
13-17 Dawson Street, Dublin 2. T: +353 1 6169050 F: +353 1 6753118
Thursday, 5 November 2009
Social Justice Ireland Alternative Budget
Slí Eile: Social Justice Ireland is to be commended for taking on the Dublin Consensus by working on an alternative budget. SJI has gone through the numbers to come up with a more just way of fiscal adjustment - taking the €4bn adjustment as a given it takes up the previous commitment to raise taxes by €1.9bn and cut spending by €2.25bn. In a paper summarised here, it takes some ideas from the McCarthy report on cutting some areas of public spending while defending - at all costs - those in poverty and low pay through no reduction in social welfare.
It places the challenge
'If we are going to have Romanian levels of taxation then we have to be prepared to accept Romanian levels of social services and infrastructure as well as Romanian levels of salaries.'
On the downside, I see major disadvantages in operating within the framework, assumptions and parameters set by Government. In other words, instead of falling into the 'cuts or taxes' and 'right limb or left leg' dilemmas we need to pursue a twin track approach of investing in infrastructure and helping to boost economic activity and, secondly, widening the tax base to bring in our wealthier brethren into the net.
'There is a better way than cuts'
Slí Eile: In the interest of balance and with due regard for many economists, it is necessary to point out that not all economists believe that we must cut our way out of the Great Irish Recession. Dissent comes from Professor Ray Kinsella, reported from the annual Céifin conference in yesterday's Irish Times as follows:
Tomorrow, Friday 6th November, is an opportunity to begin a fight-back. But, we also need a solid intellectual counter-position backed by detailed analysis and facts and not just slogans. The ICTU Ten point plan is a good start.
"Ray Kinsella, professor of banking and financial services at UCD, said he rejected the idea that cuts were the way forward in healthcare. “It’s certainly leading to extraordinary incidents of psychosocial stress,” he said. Many people taking their own lives in recent times had no record of psychiatric illness but they were desperate and could find no way out.He said he wanted to challenge the orthodoxy that cuts were the only solution: “There is a better way than cuts.” Prof Kinsella said we were unable to get out of this crisis because our existing political framework was obsolete and incapable of reform; our banking system was “malign”; and we could not build a new economic order on a failed political paralysis."
While one may not concur with every pronouncement by the said Professor, the Award for Honest Straight Talking must be given. With the battle lines clearly drawn - OECD economists prescribe cuts in social welfare for the unemployed, old and sick in Ireland and reductions in the minimum wage - unions, community organisations and parties of the left must stand together to defend the poor, the low-paid and those excluded from decision-making.Tomorrow, Friday 6th November, is an opportunity to begin a fight-back. But, we also need a solid intellectual counter-position backed by detailed analysis and facts and not just slogans. The ICTU Ten point plan is a good start.
Guest post by Michael Burke: Why is the rest of the world out of step with Ireland?
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.
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.
Wednesday, 4 November 2009
Where are all the (cash) savings going?
An Saoi: Hidden inside the Central Bank’s monthly statistical reports is an analysis of household cash holdings in banks and credit unions (Table B2.2). These figures seem to tell a very different story to the one being broadcast by the stockbroker employed economists. While they are suggesting that there is a massive increase in saving underway, cash held by households is declining.
I have extracted the figures for the past three years, which provide a potted history of the period. Cash saving peaked in May 2007, the final month of the SSIA scheme. Cash held has fallen 15.5% since then. In 2008 the banking crisis saw substantial withdrawal of €8,600M between July and December. While savings had increased steadily for the first six months of the year, perhaps as money moved back from the mattress to the bank branch, the decline in the past two months has been substantial
The importance of this decline in cash deposits held by households cannot be overstated. Most ordinary people use banks or their local credit unions for regular saving and immediate access to this cash when necessary is crucial to help people pay unexpected bills. In due course, the slimmed down Irish banks will have to move to sourcing cash savings to balance their lending books. This will have to come from domestic savings.
Other assets normally included as part of household saving are not easily accessible, if at all. Even those that can be cashed in will normally incur a substantial tax charge on any withdrawals. Pensions are taxable as earned income and investments held through investment funds may incur an exit tax. Capital withdrawals from housing stock are one of the reasons we are in the mess we are in.
A Eurobarometer survey on the public’s perception of the social effects of the current crisis, available here, suggests that many people are beginning to struggle to make ends meet with 19.6% suggesting that they would be at high risk of being able to meet an unexpected bill of just €1,000.
There maybe some signs that people are paying off debt, which is reflected the decline in spending. However, this may be due to lack of access to new lines of borrowing rather than any concerted effort to get personal finances in order. In the case of credit cards we have had 12 months of continuous decline in their use, but no decline in the outstanding balances. The Central Bank’s explanation of decline in private sector debt is sobering,
“The vast majority of this annual decline is a result of valuation effects, such as write-downs of loans and increased bad-debt provisions given more difficult economic conditions…”
Further cuts in expenditure are going to see a greater squeeze on personal savings and pressure on organisations like St Vincent de Paul society, who report a 30% increase in calls for assistance.
I have extracted the figures for the past three years, which provide a potted history of the period. Cash saving peaked in May 2007, the final month of the SSIA scheme. Cash held has fallen 15.5% since then. In 2008 the banking crisis saw substantial withdrawal of €8,600M between July and December. While savings had increased steadily for the first six months of the year, perhaps as money moved back from the mattress to the bank branch, the decline in the past two months has been substantial
The importance of this decline in cash deposits held by households cannot be overstated. Most ordinary people use banks or their local credit unions for regular saving and immediate access to this cash when necessary is crucial to help people pay unexpected bills. In due course, the slimmed down Irish banks will have to move to sourcing cash savings to balance their lending books. This will have to come from domestic savings.
Other assets normally included as part of household saving are not easily accessible, if at all. Even those that can be cashed in will normally incur a substantial tax charge on any withdrawals. Pensions are taxable as earned income and investments held through investment funds may incur an exit tax. Capital withdrawals from housing stock are one of the reasons we are in the mess we are in.
A Eurobarometer survey on the public’s perception of the social effects of the current crisis, available here, suggests that many people are beginning to struggle to make ends meet with 19.6% suggesting that they would be at high risk of being able to meet an unexpected bill of just €1,000.
There maybe some signs that people are paying off debt, which is reflected the decline in spending. However, this may be due to lack of access to new lines of borrowing rather than any concerted effort to get personal finances in order. In the case of credit cards we have had 12 months of continuous decline in their use, but no decline in the outstanding balances. The Central Bank’s explanation of decline in private sector debt is sobering,
“The vast majority of this annual decline is a result of valuation effects, such as write-downs of loans and increased bad-debt provisions given more difficult economic conditions…”
Further cuts in expenditure are going to see a greater squeeze on personal savings and pressure on organisations like St Vincent de Paul society, who report a 30% increase in calls for assistance.
Tuesday, 3 November 2009
Public intellectuals and the crisis
Slí Eile: ‘We shall require a substantially new manner of thinking if mankind is to survive.’ (Einstein)
In an excellent piece in last Saturday’s Irish Times, UCD Sociologist Andreas Hess, discusses the role of intellectuals in the current economic and social crisis (Time to Consider our Position as Citizens and not Consumers).
He argues that as we face a crisis of ideas in which little has, so far, emerged to fill the vacuum.
‘While the majority of economists and the right – the current political caste hardly knows the distinction – still lecture us and are trying to squeeze the last goodwill and surplus out of us, the left is still looking for the revolutionary subject that they hope will emerge from the crisis.’
Hess cites the work of Michael Sandel the US political philosopher who has recently published (in the US) What’s the Right Thing to Do?
As Governments around the world wrestle with hard choices, uncertain outcomes and extremely fragile financial markets and ‘real’ economy there is a huge question confronting them – What is the right thing to do?
Sandel argues that society is not just a loose collection of individuals in which ‘everything is mediated through or determined by market forces’ (Hess). This takes us to the heart of ‘civic republicanism’ – the notion that we are bound together in a chain of mutual obligation and solidarity and that citizenship is much, much more than some legal status or passport entitlement. And it goes beyond our market roles as consumers or workers. It is about our belonging to a community in which we care for one other and receive obligations and norms.
The Royal Irish Academy will hold a half-day conference on 27 November (Public intellectuals in times of crisis: what do they have to offer?)
Academics, researchers, political thinkers and activists and many civil society organisations lay heavy criticism (and rightly so) on the failure of Governments, banks, big business and some of the intellectual elites that nursed the neo-liberal nightmare whose fruits are all too evident to see now.
But, what would you do tomorrow if you had the reigns of power? What advice would you give to a listening ear of someone to decide the shape of banking, budgetary policy and institutional reform? Not an easy one to deal with in the real world, here and now, tomorrow, next month with consequences now, next year, 10 years time.
The role of ‘intellectuals’ in this crisis begs a number of questions:
* Where are they to be found? – More importantly where can we access ideas of most relevance to the current state of human evolution?
* If some of the old models of thinking and believing are broken what new models are worth considering or tinkering with?
* How can public debate be fostered about where we are, where we envision the future and how we get there?
As a people we are renowned for talk, pragmatism and ‘pulling together’ when the chips are seriously down (example cited of 1987).
However, there seems to be, currently, a huge deficit of ideas, fresh thinking and imagination.
In particular, there seems to be a large disconnect between thinking and action.
‘You know what is wrong with the world – the people who act don’t think and the people who think don’t act’ (attributed to Peter Maurin of the Catholic Workers’ Movement in the film: Entertaining Angels: The Dorothy Day Story)
In an excellent piece in last Saturday’s Irish Times, UCD Sociologist Andreas Hess, discusses the role of intellectuals in the current economic and social crisis (Time to Consider our Position as Citizens and not Consumers).
He argues that as we face a crisis of ideas in which little has, so far, emerged to fill the vacuum.
‘While the majority of economists and the right – the current political caste hardly knows the distinction – still lecture us and are trying to squeeze the last goodwill and surplus out of us, the left is still looking for the revolutionary subject that they hope will emerge from the crisis.’
Hess cites the work of Michael Sandel the US political philosopher who has recently published (in the US) What’s the Right Thing to Do?
As Governments around the world wrestle with hard choices, uncertain outcomes and extremely fragile financial markets and ‘real’ economy there is a huge question confronting them – What is the right thing to do?
Sandel argues that society is not just a loose collection of individuals in which ‘everything is mediated through or determined by market forces’ (Hess). This takes us to the heart of ‘civic republicanism’ – the notion that we are bound together in a chain of mutual obligation and solidarity and that citizenship is much, much more than some legal status or passport entitlement. And it goes beyond our market roles as consumers or workers. It is about our belonging to a community in which we care for one other and receive obligations and norms.
The Royal Irish Academy will hold a half-day conference on 27 November (Public intellectuals in times of crisis: what do they have to offer?)
Academics, researchers, political thinkers and activists and many civil society organisations lay heavy criticism (and rightly so) on the failure of Governments, banks, big business and some of the intellectual elites that nursed the neo-liberal nightmare whose fruits are all too evident to see now.
But, what would you do tomorrow if you had the reigns of power? What advice would you give to a listening ear of someone to decide the shape of banking, budgetary policy and institutional reform? Not an easy one to deal with in the real world, here and now, tomorrow, next month with consequences now, next year, 10 years time.
The role of ‘intellectuals’ in this crisis begs a number of questions:
* Where are they to be found? – More importantly where can we access ideas of most relevance to the current state of human evolution?
* If some of the old models of thinking and believing are broken what new models are worth considering or tinkering with?
* How can public debate be fostered about where we are, where we envision the future and how we get there?
As a people we are renowned for talk, pragmatism and ‘pulling together’ when the chips are seriously down (example cited of 1987).
However, there seems to be, currently, a huge deficit of ideas, fresh thinking and imagination.
In particular, there seems to be a large disconnect between thinking and action.
‘You know what is wrong with the world – the people who act don’t think and the people who think don’t act’ (attributed to Peter Maurin of the Catholic Workers’ Movement in the film: Entertaining Angels: The Dorothy Day Story)
Monday, 2 November 2009
'Cut Deep, Cut Now and Keep on Cutt'n'
Slí Eile: The cage was truly rattled, today, by David Blanchflower, UK economist, who challenged the home consensus about deflation. Speaking at the third in a series of 'Crisis' conferences today in Dublin he said that he was against pay cuts, cuts in public spending and deflation to right the economy. He is very concerned that as Governments respond to the crisis by cutting off stimulus interventions too early or - worse still - adding fuel to the fire by undertaking sharply deflationary approaches there is a real danger that the economy will be 'pushed over the cliff'.
When pressed by a perplexed audience of sensible mainstream Irish economists to comment on the current Irish fiscal situation, he made it clear that he was not in favour of the deflationary push. This created some concern and reaction including an intervention by John Fitzgerald, the chair of the first session, to provide a stout defence of a rapid 'fiscal adjustment' and the unworkability of a fiscal stimulus in current Irish fiscal situation. This was followed up by a lengthy presentation by Philip Lane in which he gave a very rounded and robust defence of the current strategy and against any let up in adjustment (even arguing for more cuts in addition to the €4bn adjustment envisaged this year and again for each of the coming two years). His background notes for the conference can be downloaded here.
A clear difference opened up on ends and means. The fiscal adjustment at all costs school believes that we must adjust quickly or else the 'markets' will lose confidence and the recovery will be stretched out over 10 years instead of 3 or 5. Everything else follows - peace, jobs, prosperity.... This view is firmly established in Government, the Department of Finance, the ESRI, nearly all the major newspapers, most political parties and most academic economists who comment on these matters in public. Only the odd TU economist, lefty or Nobel economist from America or Britain who doesn't, well ... fully understand the unique Irish situation (and how bad it is and how dependent we are on markets for sovereign debt risks and how screwed up we are because 'public spending exploded' in last few years). We are now on the road to socialist serfdom as spending has rocketed to over 51% of GNP (much of the increase last year was pure cyclical and advance payments into the NPRF).
Brian Nolan wondered if one way of dealing with unemployment is to distribute it more evenly and avoid unhealthy concentrations. Colm McCarthy says that the choice is between a 30% youth unemployment rate (which is what it was in July of this year) for five years or for 10 years (essentially if we don't follow his prescriptions).
It is really unusual and refreshing to hear an 'outsider' such as Joseph Stiglitz last month or David Blanchflower now challenging this consensus view. Not a few people resent the comments by 'outsiders' as ill-informed and not suitable for Irish situation. Specifically, Philip Lane in a clear response to Blanchflower said that the Irish situation was very different:
* small open economy with high import leakage and low fiscal multipliers
* extremely bad debt situation made worse by pro-cyclical policies in the past (and with the result that we must be pro-cyclical now)
* no option of currency devaluation.
For Lane and all mainstream economists the only solution is 'real depreciation' through salary, wage, rent and other cost reductions allied to cuts in public spending (Lane concedes some room for investment programmes but only at the cost of even more cuts elsewhere in public spending).
Blanchflower who has researched and published extensively on unemployment sees the rise in youth unemployment as profoundly worrying and threatening. It has huge implications for social cohesion, health and morale. There is clear evidence that a whole cohort of young people in the UK suffered from 'permanent scars' as a result of a period of unemployment in their late teens or early twenties (citing, e.g., 1958 birth cohort studies in the UK tracked over 50 years). He argued that we needed to throw everything at this problem because the social costs are incalculable. Not only did he support continuing stimulus measures abroad he clearly favoured some type of counter-cyclical measures in Ireland too. He is very concerned about a 'double-dip' or W-shaped recession - building on evidence from previous recessions and the timing of a slow recovery. He was also scathing in his criticism of 'economics' and 'macro-economics' not only in failing to understand and anticipate the crash but also in making the problem worse by adherence to dogma. He was not optimistic about a recovery any time soon and thought that the world might be headed for a fresh recession especially if Government over-react by withdrawing stimulus spending.
Blanchflower also commented on the state of banking (he was an external member of the Bank of England's Monetary Policy Committee up to last June). He stated bluntly that if you 'don't own it' (banking) you cannot effectively get banks to lend (please, sir, lend). There is no evidence, he says, that banks will start lending any time soon to businesses.
Other presentations were by Colm Harmon on the role of education as a medium-term strategy to position us in the global market and John McHale (on pensions). Both papers should be available on the web in the next day or two (see Geary Institute).
In the wrap-up discussions there was some debate about stimulus measures. George Lee, TD tried to pin down the platform including Colm McCarthy on how much they would need to cut to get the deficit down to a required level. In other words, is there a level of cuts that they would not go beyond ? (Lee). McCarthy ducked.
The timing of adjustment also featured with McCarthy, Lane and Fitzgerald warning against any delays ('we don't want to go down the road of the 1980s..'). So, cut deep, cut now and keep on cutting and if a whole generation is lost through unemployment, emigration and despair - that's just the way it is. We can get back to 'sustainable growth' more quickly by restoring competitiveness (read profitability through driving down other costs). Two speakers (Lane and McCarthy) claimed that the public deficit would be as high as 15% (instead of 13% now) were it not for the fiscal adjustment in last April's budget (but the target was to reach 10.75%). Implicitly, and not so implicitly, one had a clear impression that nobody in this assembly believed that the 3% SGP target would be reached by 2013. However, as we cut and cut we delude ourselves with the thought that had we not cut the deficit would have spiralled up and up (someone even mentioned a possible 20% deficit). no evidence, no modelling, no counter-hypothesis was provided to support these assertions.
Again George Lee asked 'must people be crucified to reach some target?' to which McCarthy replied ' how long do we want to be crucified?'
Please, can decent women and men get up, speak out and stand up.
And could we have a more broad-based debate than one dominated by failed economics which simply doesn't care about the impact of its failure on people.
When pressed by a perplexed audience of sensible mainstream Irish economists to comment on the current Irish fiscal situation, he made it clear that he was not in favour of the deflationary push. This created some concern and reaction including an intervention by John Fitzgerald, the chair of the first session, to provide a stout defence of a rapid 'fiscal adjustment' and the unworkability of a fiscal stimulus in current Irish fiscal situation. This was followed up by a lengthy presentation by Philip Lane in which he gave a very rounded and robust defence of the current strategy and against any let up in adjustment (even arguing for more cuts in addition to the €4bn adjustment envisaged this year and again for each of the coming two years). His background notes for the conference can be downloaded here.
A clear difference opened up on ends and means. The fiscal adjustment at all costs school believes that we must adjust quickly or else the 'markets' will lose confidence and the recovery will be stretched out over 10 years instead of 3 or 5. Everything else follows - peace, jobs, prosperity.... This view is firmly established in Government, the Department of Finance, the ESRI, nearly all the major newspapers, most political parties and most academic economists who comment on these matters in public. Only the odd TU economist, lefty or Nobel economist from America or Britain who doesn't, well ... fully understand the unique Irish situation (and how bad it is and how dependent we are on markets for sovereign debt risks and how screwed up we are because 'public spending exploded' in last few years). We are now on the road to socialist serfdom as spending has rocketed to over 51% of GNP (much of the increase last year was pure cyclical and advance payments into the NPRF).
Brian Nolan wondered if one way of dealing with unemployment is to distribute it more evenly and avoid unhealthy concentrations. Colm McCarthy says that the choice is between a 30% youth unemployment rate (which is what it was in July of this year) for five years or for 10 years (essentially if we don't follow his prescriptions).
It is really unusual and refreshing to hear an 'outsider' such as Joseph Stiglitz last month or David Blanchflower now challenging this consensus view. Not a few people resent the comments by 'outsiders' as ill-informed and not suitable for Irish situation. Specifically, Philip Lane in a clear response to Blanchflower said that the Irish situation was very different:
* small open economy with high import leakage and low fiscal multipliers
* extremely bad debt situation made worse by pro-cyclical policies in the past (and with the result that we must be pro-cyclical now)
* no option of currency devaluation.
For Lane and all mainstream economists the only solution is 'real depreciation' through salary, wage, rent and other cost reductions allied to cuts in public spending (Lane concedes some room for investment programmes but only at the cost of even more cuts elsewhere in public spending).
Blanchflower who has researched and published extensively on unemployment sees the rise in youth unemployment as profoundly worrying and threatening. It has huge implications for social cohesion, health and morale. There is clear evidence that a whole cohort of young people in the UK suffered from 'permanent scars' as a result of a period of unemployment in their late teens or early twenties (citing, e.g., 1958 birth cohort studies in the UK tracked over 50 years). He argued that we needed to throw everything at this problem because the social costs are incalculable. Not only did he support continuing stimulus measures abroad he clearly favoured some type of counter-cyclical measures in Ireland too. He is very concerned about a 'double-dip' or W-shaped recession - building on evidence from previous recessions and the timing of a slow recovery. He was also scathing in his criticism of 'economics' and 'macro-economics' not only in failing to understand and anticipate the crash but also in making the problem worse by adherence to dogma. He was not optimistic about a recovery any time soon and thought that the world might be headed for a fresh recession especially if Government over-react by withdrawing stimulus spending.
Blanchflower also commented on the state of banking (he was an external member of the Bank of England's Monetary Policy Committee up to last June). He stated bluntly that if you 'don't own it' (banking) you cannot effectively get banks to lend (please, sir, lend). There is no evidence, he says, that banks will start lending any time soon to businesses.
Other presentations were by Colm Harmon on the role of education as a medium-term strategy to position us in the global market and John McHale (on pensions). Both papers should be available on the web in the next day or two (see Geary Institute).
In the wrap-up discussions there was some debate about stimulus measures. George Lee, TD tried to pin down the platform including Colm McCarthy on how much they would need to cut to get the deficit down to a required level. In other words, is there a level of cuts that they would not go beyond ? (Lee). McCarthy ducked.
The timing of adjustment also featured with McCarthy, Lane and Fitzgerald warning against any delays ('we don't want to go down the road of the 1980s..'). So, cut deep, cut now and keep on cutting and if a whole generation is lost through unemployment, emigration and despair - that's just the way it is. We can get back to 'sustainable growth' more quickly by restoring competitiveness (read profitability through driving down other costs). Two speakers (Lane and McCarthy) claimed that the public deficit would be as high as 15% (instead of 13% now) were it not for the fiscal adjustment in last April's budget (but the target was to reach 10.75%). Implicitly, and not so implicitly, one had a clear impression that nobody in this assembly believed that the 3% SGP target would be reached by 2013. However, as we cut and cut we delude ourselves with the thought that had we not cut the deficit would have spiralled up and up (someone even mentioned a possible 20% deficit). no evidence, no modelling, no counter-hypothesis was provided to support these assertions.
Again George Lee asked 'must people be crucified to reach some target?' to which McCarthy replied ' how long do we want to be crucified?'
Please, can decent women and men get up, speak out and stand up.
And could we have a more broad-based debate than one dominated by failed economics which simply doesn't care about the impact of its failure on people.
Sunday, 1 November 2009
Ignorance is not strength
Michael Taft: I would say this debate is turning for the worse, but that would be incorrect. You need to have two sides in a debate. All we get is an orthodox drumbeat, calling forth the animal spirits of just one side. Still, let’s at least celebrate some of the more surreal contributions in this one-sided debate.
Take Cliff Taylor, for instance, writing in the Sunday Business Post. He warns that too much agitation in the streets will undermine international investor confidence. No surprise there – spooked international markets is a basic ingredient in the deflationary stew. What is really eyebrow raising, though, is this little treat:
‘We got some international kudos for taking steps to get our public finances back in order.’
Oh.
I didn’t realise that was what Fianna Fail has been doing. I didn’t realise that’s what it’s called. Let’s run through the chronology
• In October last year Fianna Fail introduced an income levy and some cuts to social welfare in order to hold the fiscal deficit at -6.5 percent
• A few week later they said they would hold the fiscal deficit at -9.5% by cutting public sector pay by €1.4 billion and some education cutbacks
• In another few weeks, fearful that the fiscal deficit would blow out over -12 percent, Fianna Fail introduced even more levies, cut spending even more to maintain a new fiscal target: -10.7 percent
26 weeks – three different fiscal targets, one lower than the other.
And now? Well, that last target has bitten the same dust. The ESRI projects the fiscal deficit to be 12.9 percent at year’s end. They project next year’s deficit to be 12.8 percent – and that’s counting the €4 billion contraction planned for the upcoming budget.
Only in Ireland, only when discussing public finances, would missing three targets in one year, would seeing your original target balloon over double its size, be called ‘getting our public finances back in order’. There are other phrases that more readily come to mind – gross incompetence, failure, public finances disorder.
There are two processes at work here in this one-sided debate presented in the media. No one should be allowed to question the desirability of pursuing fiscal measures that actively cut growth during a time of contraction (or if they do, they are to be accused of not being serious, of being a vested interest, of not facing reality).
No one should be allowed to ask why, when investment is collapsing, the government should cut investment further. Or why, when consumer markets are being hit, the government should cut disposable incomes through either tax increases or public spending cuts. Or why, when unemployment is rising, the state should do nothing to create new jobs – even if for a short period.
Essentially, no one should be allowed to question the desirability or the workability of deflationary measures in deflationary times.
But there’s another, more unnerving process at work: we are being asked to forget. There is an insistence that we forget about all these targets that were set and missed. If we remembered, we might start asking those inconvenient questions – about growth, investment, consumer spending and jobs. If we forget, then commentators can call what is happening ‘putting our public finances back in order’. And we all nod and go back to sleep.
So, even if we disagree about how to proceed, at least let’s remember. War is not peace, freedom is not slavery, ignorance is not strength,
And a fiscal shambles is not fiscal order.
Take Cliff Taylor, for instance, writing in the Sunday Business Post. He warns that too much agitation in the streets will undermine international investor confidence. No surprise there – spooked international markets is a basic ingredient in the deflationary stew. What is really eyebrow raising, though, is this little treat:
‘We got some international kudos for taking steps to get our public finances back in order.’
Oh.
I didn’t realise that was what Fianna Fail has been doing. I didn’t realise that’s what it’s called. Let’s run through the chronology
• In October last year Fianna Fail introduced an income levy and some cuts to social welfare in order to hold the fiscal deficit at -6.5 percent
• A few week later they said they would hold the fiscal deficit at -9.5% by cutting public sector pay by €1.4 billion and some education cutbacks
• In another few weeks, fearful that the fiscal deficit would blow out over -12 percent, Fianna Fail introduced even more levies, cut spending even more to maintain a new fiscal target: -10.7 percent
26 weeks – three different fiscal targets, one lower than the other.
And now? Well, that last target has bitten the same dust. The ESRI projects the fiscal deficit to be 12.9 percent at year’s end. They project next year’s deficit to be 12.8 percent – and that’s counting the €4 billion contraction planned for the upcoming budget.
Only in Ireland, only when discussing public finances, would missing three targets in one year, would seeing your original target balloon over double its size, be called ‘getting our public finances back in order’. There are other phrases that more readily come to mind – gross incompetence, failure, public finances disorder.
There are two processes at work here in this one-sided debate presented in the media. No one should be allowed to question the desirability of pursuing fiscal measures that actively cut growth during a time of contraction (or if they do, they are to be accused of not being serious, of being a vested interest, of not facing reality).
No one should be allowed to ask why, when investment is collapsing, the government should cut investment further. Or why, when consumer markets are being hit, the government should cut disposable incomes through either tax increases or public spending cuts. Or why, when unemployment is rising, the state should do nothing to create new jobs – even if for a short period.
Essentially, no one should be allowed to question the desirability or the workability of deflationary measures in deflationary times.
But there’s another, more unnerving process at work: we are being asked to forget. There is an insistence that we forget about all these targets that were set and missed. If we remembered, we might start asking those inconvenient questions – about growth, investment, consumer spending and jobs. If we forget, then commentators can call what is happening ‘putting our public finances back in order’. And we all nod and go back to sleep.
So, even if we disagree about how to proceed, at least let’s remember. War is not peace, freedom is not slavery, ignorance is not strength,
And a fiscal shambles is not fiscal order.
Recovery is not reform
Recovery is not reform. The government’s intended path to recovery is a mixture of borrowing, pay cuts, and spending cuts. All recovery plans treat the symptoms of a downturn. Global aggregate demand has been buoyed by injections of capital by governments. There is evidence the medicine is working. Global recovery looks in sight. Reform however, is a deeper, and more important, matter.
What kind of permanent changes to the international financial system do we want to see to reduce the likelihood of prolonged downturns in the future?
You can read the rest of Stephen Kinsella's piece in today's Sunday Independent here.
What kind of permanent changes to the international financial system do we want to see to reduce the likelihood of prolonged downturns in the future?
You can read the rest of Stephen Kinsella's piece in today's Sunday Independent here.
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