Head over to our T
All the Wrong Options Have Been Pursued
Read more about: Economy 
In today’s Irish Times 28 economists, academics and analysts have signed an op-ed attacking the Government’s failed economic strategies while providing an alternative way forward. In short, they argue that the Government’s deflationary policies are leading us to a low-growth, high-debt future with unacceptable levels of unemployment; in short, a joyless, jobless future.
Instead, we should embark on a substantial investment programme to address our long-term economic and social deficits (infrastructure, public services, poverty and inequality) which can not only ‘grow the economy’ but reduce unemployment. This can be financed through a mix of borrowing and a progressive expansion of taxation and expenditure.
This is the first sustained challenge to the conservative fiscal and economic consensus that has dominated the economic debate to date. It starts with:
‘The Government’s economic strategy is failing.’
It ends with:
‘Embedding investment, rather than debt, into the economy while restructuring taxation and expenditure in a progressive and expansionary manner to ensure a job-rich recovery – this, and not the current deflationary strategy, is the road to success.’
In between it shows where we are going wrong and where we can start going right.
I’m not an expert on the world of Irish academia, but are these people really leading economists?
It would seem to be me that what they have in common is a political view point rather than a specific academic focus or expertise.
I’d be happy to be corrected on this point though.
My point isn’t to invalidate their article, but I think it is being presented as an academic consensus of some sort, when it clearly isn’t. It seems to me that it seeks to imitate the earlier economists on Nama article in the Irish Times
Hardly an impressive list of the economic greats.
Put 100 economists into a room. You’ll get 120 predictions for the future. One of these will turn out to be correct and it will be a triumph of economics.
Reading this article it would seem these economists would fall into the gambler category. You know the type. The middle aged guy who never quite achieved his potential and now has too much time to think. He believes you can solve all your financial woes by putting the last of your life savings on a sure tip in the 3:10 at Newbury.
In theory all this seems like a good idea. In the real world outside academia the sad thing is any investment of extra debt will be squandered by corrupt private sector chancers and lazy public sector incompedants. The best thing is to cut back to a realistic level of spending. Secure the foundation of the economy and start to rebuild from there.
Michael,
I found the article depressing as it’s no more than a rehash of what was said before the Budget by yourself and by ICTU. There’s nothing new in it and the fact is that we’ve moved on. Everyone knows that taking €4bn out of the economy would inevitably have a deflationary effect, but the two main opposition parties signed up to it before the Budget, accepting it as necessary to secure the country’s survival. If they were in government – and they are the only alternative on offer – they would not have done anything substantially different to what the current government has done. Had they been in power last December and tried to operate along the lines suggested in the IT letter, then right now we would be facing the same situation as Greece. I have to agree with Michael and Colm’s comments above.
As for the economic argument, Philip Lane’s comments on irisheconomy.ie sum it up more eloquently that I ever could:
“…However, given the massive shock to the economy and the public finances, the over-riding imperative in setting fiscal policy has been to demonstrate a commitment to fiscal sustainability. If the government had not undertaken a sizeable fiscal adjustment, the spread on sovereign debt would surely be much higher than the current elevated level and the upward movement in interest rates (influencing the funding costs for the banking system as well as for the government) would have had an even more contractionary impact on the economy.
Conditional on the environment facing the country, the path of fiscal adjustment is more certain of returning growth to the economy than an aspirational alternative that seems to rely on investment-led growth to jointly solve the fiscal crisis and the economic crisis without having to resort to cuts in the level of public expenditure (beyond any savings from efficiency gains). The international economic consensus highlights that the optimal fiscal response to the crisis varies substantially across countries, with fiscal adjustment required for those countries that face a difficult funding situation. As such, it is perfectly consistent to advocate more expansionary fiscal policies for some countries while also supporting fiscal adjustment in Ireland.”
I would agree with you, though, that there needs to be a public debate about where we go from here. One of the first things that needs to happen is for the ICTU public service unions to get around the table with the government side and hammer out a deal on public service reforms. I believe that such engagement is not just in the interests of the country, but also of workers in the public services who have lost money and can ill afford to lose more through strikes.
There’s no possibility of any reversal of the Budget pay cuts. Even if the current government was brought down by industrial unrest in the public sector, any government replacing it will not reverse the pay cuts already imposed. It’s more likely that the replacement to the current lot might have to contemplate even further cuts on public service pay or, alternatively, cuts in public services in next December’s Budget because of the damage caused to the economy by the industrial action. Engaging with the government now offers the possibility of negotiating some sort of framework where the pay losses suffered particularly by lower paid public servants can be restored over time and within a reformed civil and public services model that every recent recruit to the public sector that I’ve ever come across is crying out for.
The problem in this debate is that there are a number of unstated assumptions – assumptions which have yet to be substantiated. One is the proposition that ‘cuts = savings’. The ESRI simuations show that cuts in public sector wages and consumption are fiscally trivial and economically damaging. The second is that fiscal stabilisation is co-incident with public spending cuts. It is only so if one accepts the Government’s strategy to maintain a low-tax model. Once one looks outside that, other options become apparent. The third is that deflationary policies will return the economy to growth. However, deflationary policies will contain shocks over years which will depress growth below levels than what they would have been otherwise – hence the TASC article’s warning of a ‘low-growth, high debt’ future. One aspect of this is that even by 2014, the Government’s own projections show the Exchequer Borrowing Requirement still rising faster than nominal GNP growth. If growth rates were to come up even marginally short – as the NCB shows – debt will rise much higher than the Government’s targets.
As to Philip Lane’s comments re: bond spreads – it might be worth looking into the Irish Economy debate and Michael Burke’s take on comparative bond spreads. Even if one doesn’t fully accept Burke’s explanation, clearly deteriorating bond costs are co-incident with the banking crisis starting with the crisis in the late summer 2008 and peaking with the nationalisation of Anglo-Irish.
Though late in the day, at least an alternative has been provided to the conservative fiscal and economic consensus that is dominating the debate. The issue is not whether one has an ‘investment strategy’ or ‘fiscal stabilisation’; TASC has argued that you can’t have one without the other and to sacrifice either would be detrimental to our economic fortunes (this is the new element in the debate). One may agree or disagree with that – but at least there are now two options on the table. Hopefully, the debate will be fact-based.
Michael,
I agree that the deteriorating bond costs are directy related to the near collapse of our banking system, which in turn was caused by a property bust precipitated by an international credit squeeze, which in turn left a major hole in the public finances as property-related tax income melted away like snow on a ditch on a warm day, which left the government required to borrow €22bn in order to fund public service wages and the provision of basic public and social services.
I think everyone agrees that our survival rested on being able to borrow €20bn + not just to cover running costs in 2009, but again in 2010, and possibly also in 2011. To be able to do that meant having to demonstrate that we could bring the fiscal deficit under control. As a small open economy, it is also generally agreed that our options are limited and do not include borrowing for investment in ‘long shots’.
I’m more than half of the way with you on the need for an investment strategy to complement the fiscal stabilisation strategy, but its not so much that you can’t have one without the other; it’s more that they go hand in hand. This, or any other government, would need to very careful about how many eggs they choose to place in which baskets. The crazy nonsense that erupted a couple of weeks ago over Ryanair’s so-called 300 jobs ‘promise’ demonstrates how hysterical the public policy response can be when presented with the sniff of jobs even from the most unlikely sources.
I can’t agree either that today’s IT letter represents an alternative option; it would need to have a lot more to it to make that grade and to do so credibly.
Expansionary strategy cannot be cost effectively pursued until our wages, infrastructure, supply chain and energy COSTS are all further reduced.
I agree that the austerity and deflationary measures are not a plan alone but they are a stage in the process; investment can be substantially upscaled when the entire current expenditures of business and government are lowered.
I believe that figuratively speaking Brian Lenihan’s plan is to take the country about five steps backwards and sideways before progressing forwards again. And I believe its a plan that can work. And i believe my opinion to be as valid and educated as any of those signatories. Academic economists are a dismal lot of scientists.
Which academic economists Des, the ones you agree with, or the ones you don’t?
Des,
The majority of signatories to this letter were social scientists, not economists.
The last group of economists, the ’46′, who pulled the open letter trick on Nama got fairly hammered for getting some basic predictions wrong and were set upon by no less than Alan Dukes and Garret Fitzgerald for their presumptions.
I don’t think the ‘open letter’ has all that much credibility as a tactic for influencing public policy anymore. It is passe in this day and age. Public perception of the wise counsels of elite groups are not so kind as they were twenty five years ago. Even then when 364 economists wrote to the London Times to point out to a monetarist Chancellor where he was going wrong, he effectively dismissed the challenge, noting that: “an economist is someone who knows 364 ways of making love but who doesn’t know any women.”
I read this in the IT today, and found it interesting but slight on detail. And there were definite echoes of Fine Gael’s NewERA proposal – bonds as a long-term investment in infrastructure. Boldly going where Richard Bruton has gone before?
The last group of economists, the ‘46′, who pulled the open letter trick on Nama got fairly hammered for getting some basic predictions wrong and were set upon by no less than Alan Dukes and Garret Fitzgerald for their presumptions.
Rather being hammered, they were nit-picked to death by GarretFitz splitting hairs on the precise definition of the public borrowing requirement. As it turned out the prediction of ‘the 46′ for the 2009 deficit was more accurate than Garret’s. But once that became clear the damage was already done.
The Dukes impact on the other hand was minimal. His credibility has been shot since he decided to sup with the Anglo devil. And there’s only so long one can dine out on his patriotic abdication of the late 80s.
“All the Wrong Options Have Been Pursued”
You could say that again and again. You could also say that the solutions, actual and proposed, deflationary or inflationary etc etc, are also way off the mark.
For anyone who is interested in finding out why and how we are in the position we are in today I gather that the book by David DeGraw “The Economic Elite versus the People of the United States of America.” is worth a read.
The solution obviously lies in the middle-class taking back control of economic, political, media, religious and social policy as was the case in Ireland up to 60 years ago.
PJ,
Michael said he wanted a debate based on the facts. So even though the fate of the ‘46’ is a side issue, maybe we should acknowledge the facts, and who got what wrong, as Karl Whelan did in his own blog on 5 January last:
“The December Exchequer returns have now been published. The Exchequer deficit for 2009 was €24.6 billion, almost twice the level recorded in 2008. That said, the figures came in a bit better than most people expected a number of months ago, which is good news.
As an aside, I’d note that this outcome clearly falls somewhat short of the “close to €30 billion” deficit mentioned in the letter signed by the 46 economists in August.”
Garret Fitzgerald’s objection to the use of the €30bn figure by Lucey and Whelan was that it was sloppily based and that such a prediction at that time, coming from such eminent and respected economists, could do serious damage to Ireland’s reputation. He had a valid point.
As for Alan Dukes deciding to ‘sup with the Anglo devil’, this is a misrepresentation of his role, and is unfair and unjust. He was appointed by the Minister for Finance with the approval of the leader of Fine Gael, as a representative of the public interest, which is you and me, on the Anglo board. By the same token, Dick Spring was appointed as a Public Interest Director to the board of AIB.
Are you suggesting that Spring, a figure of integrity throughout his political career (as was Dukes), is also ‘tainted’ by association with AIB? If so what is the point of nominating Public Interest Directors to our troubled financial institutions to represent our interests on their boards? Why would anyone ever accept such an appointment if they’re just going to become the subject of cheap shots?
“Spring, a figure of integrity throughout his political career”.
Is that the same Dick “Eircom” Spring who on the board or Eircom as a public interest director while the public lost their shirts on the whole fiasco. He isn’t exactly making up for past mistakes with his performance as public interest director on AIB.
Colm,
Far as I remember he was on the board as a representative of the workers’ shareholding, not as a public interest director, and I don’t know that they ever expressed any particular concerns about his performance. As one of those who lost money on those shares, it’s still painful to be reminded of the debacle. Always blamed McCreevy myself for setting the share sale price too high, but I guess we all want someone to blame when we get stung for all the good that ever does.
I think we have a long way yet to go on the banks and its going to be very messy, so it’s a bit early to be casting judgements.
@Veronica
If memory serves, Garret predicted a deficit of €20, so the actual figure of €24.6 billion is 23% more than his estimate. Whereas the G46 predicted €30 billion and thus were in error to the tune €5.4 or 18% of their estimate. So their guess was indeed more accurate that Garret’s.
On Dukes’ credibility, its not sufficient to just wear a hat labelled “public interest director”, one must also actually act in the public interest. Which he has signally failed to do, otherwise he would not be advocating for the continuation of that costly farce where we all pretend Anglo has any type of commercial future other than to suck a huge amount of money from exchequer for no good reason. Anglo should never have been included in the bank guarantee, and even after it was, we could credibly claim that the guarantee was rendered void by criminality within the bank that was unknown to the state when the guarantee was issued.
@ Michael (not Taft):
It seems to me that it seeks to imitate the earlier economists on Nama article in the Irish Times
You mean that earlier bunch with a “common [...] political view point”, namely that the private sector he-men will save us all (after they got us into this, that is)?
@ Colm:
In theory all this seems like a good idea.
F*cking better spending it on building schools and such than flushing the cash down the toilet in giving it to the banks and to developers.
@ Veronica:
I believe that such engagement is not just in the interests of the country, but also of workers in the public services who have lost money and can ill afford to lose more through strikes.
You deep concern for the best interests of PAYE workers is obvious, and has been for some time. I’m sure we should get right on with following your advice.
@EWI I thought what they had in common, the original 46 was a skepticism of NAMA and a common academic (rather than ideological) background. Similarly I’d point to all the lawyers who wrote together against last year’s criminal justice bill.
The 46 were at least 46 economists. Where as this appears to be more of a rag tag bunch, described as “28 leading economists, social scientists and economic analysts”.
What is the difference between an economist and an economic analyst? And who are the leading economists in Ireland?
What is the difference between an economist and an economic analyst? And who are the leading economists in Ireland?
Buggered if I know. The supposedly ‘real’ economists have more the smell of philosophy rather than science about them in any case (a condition that has begun to infect the ESRI, I fear).
@EWI
You mean that earlier bunch with a “common [...] political view point”, namely that the private sector he-men will save us all (after they got us into this, that is)?
In what sense did the G46 get us into this?
They come a long way after short-sighted incompetent politicians, bankers with a criminally insane appetite for risk, and a greedy grasping economically-illiterate populace.
Your deep concern for the best interests of PAYE workers is obvious, and has been for some time.
Are you trying to establish “PAYE worker” as a synonym for public servant?
In what sense did the G46 get us into this?
My apologies if that was unclear – I meant the same ‘entrepeneurs’, though the cheerleading of certain high-profile economists (and their utility to politicians and the media in providing cover for this stuff over the years) has a large part of the blame.
Are you trying to establish “PAYE worker” as a synonym for public servant?
It’s not a synonym for bankers or property developers (or politicians or the corporate media or our extreemly privileged middle-class). I’m sure that there’ll be unionised private sector workers who’ll once more have their turn to be the recipients of such benevolent concern, soon enough (and indeed I see that Aer Lingus is in the news again).
@EWI
It’s not a synonym for bankers or property developers (or politicians or the corporate media or our extreemly privileged middle-class).
For all their faults (and they are many!), most of our bankers are salarymen and thus pay PAYE.
Similarly with politicians (though they have arranged tax-free treatment of the most valuable components of their compensation package, unvouched mar dhea expenses and the massive benefit-in-kind of their extremely generous pension entitlements).
Some journos are free-lancers, but the more “corporate” onces are generally permanent and pensionable employees and thus also pay PAYE.
In addition, many of our “extremely privileged middle-class” pay PAYE. All well-paid public sector workers do so, as do a large component of the private sector middle class, those who are not self-employed.
Conversely many traditionally working class occupations, especially in the building trade, are now self-employed and thus would not pay traditional PAYE and instead be part of the self-assessment system.
So I don’t see any strong class or sectorial correlation with the payment of PAYE.
One of the isssues highlighted by the viewpoints expressed here is that our old class and social assumptions have been turned on their heads now in this country.
The traditional working class who actually work, have many self-employed in their ranks and briefly became middle class but now are financially disadvantaged and a weakened lobby group.
Similiarly many of the traditional merchant class and professionals are the new poor, not entitled to a medical card for instance and wont /dont know how to play our welfare system to their benefit.They are however probably able to play the bank systems to ensure their survival to contribute to rebuilding business some time in the future.
Conversely our unionised workers led by the flag wavers who talk in terms of a left/right world order are now part of the vested interest elite with a place at the table. Economic necessity now dictates that the party at that table is over. Attempts to break up the party are being met with mixed results as some of the players unfortunately are getting a goodie bag and others arent.The inequity of that arrangement is a failure of national leadership which I would acknowledge.
We can’t have municipal bonds when we don’t have proper local government that has revenue raising powers. Would you buy bonds for Dublin or Limerick City Council?
What they are basically saying is we should borrow even more than we are now, but they are talking about what are investments that won’t be able to contribute to paying off that borrowed money for a generation. Early childhood education! Are we going to train 4 years old to clean chimneys or polish the inside of artillery shells?
Amazingly putting money back into the pockets of some by taking it out of the pockets of others by raising taxes will magically boost the domestic economy. It’s all the same bloody money!
Now, I tend to agree that the pensions system needs to be urgently looked at and the current set up whereby people are simply deferring earned income until later in life and given tax holiday on it is wrong. And the money saved would help, but it won’t fix everything.
And as for this “We urgently need measures to tackle five key areas which require fundamental reforms: our substantial physical infrastructure deficits; our poor social infrastructure – early childhood education is poorly developed, primary and community healthcare lag behind European norms, housing lists continue to lengthen, while Irish public transport remains inadequate and under-funded; our high levels of relative poverty and income inequality; our under-performing indigenous business sector –”
All laudable and all things that need cold hard cash that we should have done when we had it, but the beards who had the ear of the Taoiseach wanted income tax cuts not social investment in those days and they got them.
Would appear the plan is working:
http://www.fiannafail.ie/page/invite/recoveryspreads
@James,
It would also appear from last night’s news that common sense is breaking out all over and the government side and the public sector unions have the opportunity to agree a reform package and a long term public pay strategy. In public statements a few weeks ago the LRC head, Kieran Mulvey, made it clear he would not get involved in any talks process unless he believed there was a real prospect of serious business being done with both sides. Should be interesting!