The Economy in 2008 and Beyond, “Tough times” and “tightened belts”

This post actually started a while back, the last time Bertie mentioned we would be tightening our belts this year, I decided to finish it because he mentioned it again yesterday.

We know that the US is as good as in a recession, their central bank doesnt seem to have much capacity to stall the bad numbers via interest rate cuts and the ECB has no inclination to lower rates here due to 3%+ inflation. We are where we are and there is little we can do to affect macroeconomic change. Yet the exchequer figures are almost E516 million behind target, construction is slowing to a halt, job creation is dwindling and we are facing a ‘tough year’ ahead.

There are two ways to work through this, meander along talking about cost control when a ten year record shows an inability to control costs in the ad-hoc fashion we seem addicted to or construct some coherent policy framework to address our issue. The latter is obviously the most attractive option, as it gives us some measure of control over our own destiny. Indeed so-called doom merchants like David McWilliams are even turning their thoughts - again ahead of the game - to what we can do to turn this into an opportunity.

It was with interest that I listened yesterday to a discussion on The Last Word, where David went through outlining his article with Sean Murphy from Chambers Ireland. What struck me was that the business community still seem to be stuck in ‘plan a’. The positive spin on the construction numbers was that ultimately they would lower inflation, wages and costs making us - once again - attractive to FDI from abroad and all would be well.

The point that was being made by McWilliams - one which it is hard not to give credit to Michael Taft for originally making - is that we need to see that this only gets us so far. Business is not an evil entity per se. It can deliver to people security, jobs and foster social inclusion while also making a valuable contribution to wider society.

This effect is not some predetermined outcome however and if we are to enter into a virtuous cycle of sustainable business government needs to begin looking at ways in which its current approach - focussed solely on big-business abroad - needs to become more local, more nuanced and more open. You all may not have read the feedback from Paddy’s Valley but the biggest bum not that struck me was the intransigence of Enterprise Ireland to a group of self-starters heading off to pitch, chat and hopefully connect with Silicon Valley.

Yes, we all remember the dot-com bubble and no, we should not have an economy as reliant on tech as it was on construction for growth but we should have one that sees a ‘knowledge economy’ as serving domestic needs. Michael Hennigan has written extensively (and will feature in next Thursday’s Inside Out) about the fact that current government policy has put all its eggs in the science research basket with little sense of direction. Paying €8 billion for R&D skills makes sense, if you know what those skills are to serve. Should we be including innovation in domestic industry under that rubric? Or are we hoping solely to produce white-coats for the multinationals.

I don’t think it is sustainable to focus solely on the FDI market as the place researchers need to go, we could do with sustained upgrading of skills and entrepreneurship in Ireland but most positively we could do with government backing for domestic startups.

Michael has put it better himself speaking about saving the Tiger;

“direct intervention by the state (however limited) to promote enterprise development – whether foreign or indigenous – in key economic sectors. It will require a programme to get us back to that policy framework which was jettisoned by the irresponsible actions of Fianna Fail and, in particular, Finance Minister Charlie McCreevey.”

For as long as we spend 48 times more on property abroad than we do supporting local enterprise, the national attitude will almost constantly lead us back down the dark path from which we drag ourselves. For as long as we are looking at managing costs during the downturn we are barking up the wrong tree. We need to be investing, continually, in society and economy as a whole to ensure that the situation will not get worse, nor repeat.

Politically speaking, for we must don’t you know, Pat Leahy made the point that this downturn and the response to it - I refrain here from ‘managed’ because the point of this article is that managed now needs to be augmented with creativity at a domestic level and supported by government as a matter of need - could rid Fianna Fail of their last trump card. Personally I think their trump card currently leads the opposition but I take his point. The government ran unopposed on the economy for three elections. The last time out the opposition were simply too timid to express views on their performance. If this next two years, or possibly longer, goes badly then you will see Fianna Fail are far more beatable but as a more economically literate society the opposition will need a coherent plan, a clear vision and implementable policies. This is unlikely to prove a step to far if they commit to it but they do need to get to the detail fairly soon.