November 14th Evening: The Recession Diaries

Some on the Left are trying to put a brave face on the Irish Times poll today. ‘Consolidating’ support at 14 percent is one rationalisation. Another is that the Labour leader has the highest satisfaction rating of any party leader (or rather the least dissatisfied); yet Pat Rabbitte outpolled Enda Kenny in every MRBI poll. Brendan Howlin, TD, claimed this support level could win Labour 30 Dail seats. Maybe, but not likely – and not just because Labour faces the prospect of several senior TDs stepping down. In a strict PR system, 14 percent would gain 23 seats. The vagaries of STV means the seat total can vary. However, in 1992 Labour’s 19 percent gained them 33 seats. So it would be a climb at current levels.

But no, none of these really work. After months of daily bad econ-news, of a budget ineptly handled, of U-turns and defecting Government TDs – Labour declined marginally while the three progressive parties fell back from a combined 28 percent to 26 percent. So much for the idea that recessions benefit anti-conservatives.

Fine Gael is the unabashed winner and it’s not hard to see why. They have put forward a clear and consistent line; they have produced documents and briefings; their several spokespersons have all been on-message; their Finance Spokesperson, Richard Bruton, speaks with knowledge and confidence on a range of issues; and, of course, Fine Gael is the historical alternative – inertia alone gives them pole position.

How much different on this side of the house. The Greens are caught up in a terrible contradiction, aligned with policies they would otherwise bitterly oppose. Sinn Fein has yet to make an important intervention. And, while Eamon Gilmore has recently put forward some potentially constructive analyses, it is not clear how much this emanates from the party as a whole, or just from his office. On the News At One today he said:

‘We’re setting out a separate and very distinctive and clear Labour Party message. We’ve been doing that on the economy, on issues like the banking crisis, on areas like unemployment, and on the issues of the quality of the public service. . . . it is the Labour Party that is arguing for the rebooting, the re-energising, the revitalisation and the regrowing of the economy. In doing that we are putting forward a point of view very much in line with what Obama is proposing in the United States, what Gordon Brown is proposing for the United Kingdom and what many of are sister parties are proposing in other European countries.’

That is over-stating it. First, Eamon suggested using the Pension Fund for commercial capital projects within Ireland, has argued that borrowing for capital investment is appropriate and that projects like social housing should be targeted. All quite welcome, but hardly distinctive – these are also positions Fine Gael has laid out in their briefings. Indeed, very few have a problem with borrowing for capital projects.

Second, what is being proposed in other countries is of a qualitatively different order than anything discussed here. In the US they are contemplating a ‘big bang’ – an expansionist programme that reaches into industrial bail-outs, health care, financial institutions, protection of home-owners, infrastructure, etc. In the UK, the Labour Government is looking to blow a hole in their ‘golden rule’ of keeping their debt under 40 percent of GDP. In Germany they’re coming up with a ‘cyclically justified growth policy’ – deficit spending to you and me: direct investment in public transport, education, the car industry, and small and medium sized-firms.

Eamon has said that the fiscal crisis is the result, not the cause, of the economic crisis. This opens the door to a large-scale economic stimulant package of the type being canvassed elsewhere, but Labour has yet to walk through it - never mind return with a package for the Irish public to consider. And this leads to the third problem:

The few positive noises coming from Labour seem to be confined to Eamon. There is little party content to this: no documents and briefings to outline the scale and extent of such intervention, few if any Labour spokespersons on-message; no systematic critique of reckless fiscal conservatism (which would surely merit a swipe or two at Fine Gael).

In short, it calls for an alternative political narrative – a new story that requires the Left to enlist sympathetic media commentators (shouldn’t take that long, there’s not that many), social organisation, trade unions, other political parties, bloggers, whomever – inviting them to play a full active part in this programme.

We’re a long way from that. We’re so far away, in fact, that everyone is lining up Labour to support a Fine Gael-led government. Even though Eamon kicked to touch when asked by Sean O’Rourke three times to rule out supporting Fianna Fail, the Labour leader did make this clear:

'If there were a general election based on those figures today, there would if be a change of government and the Labour Party would be part of it . . and it was pretty clear in that poll that Fianna Fail would not be in government.'

It’s a roundabout way of saying the Left will be in government, supporting Fine Gael and probably not Fianna Fail, if these numbers hold. Whatever's the case, who needs a new political narrative? The old one – the two-and-a-half party system – is doing just fine.

Comments

[James]

God isn't it depressing to hear that "will you/won't you go in with FF?" thing back again - it seemed like that was the only thing Labour pols got asked for about 3 years prior to the last election.

More substantively - I think we need to maintain a distinction between two types of argument for a greater role for the state.

One is the philosophical argument - social democracy versus neo-liberalism (and versus christian democracy as well if you like). This is the general argument that social democracy (basically the "Nordic model") represents an attractive combination of economic efficiency and social justice/security/inclusion. This is the argument we made 5 years ago and will still be making 5 years from now.

The other is the Keynesian argument for fiscal stimulus to compensate for the unused capacity for economic output during recession - the state puts unemployed labour and capital to work when the private sector won't.

I've been thinking about this and I have some doubts over a Keynesian strategy for Ireland. For big countries, the case for fiscal stimulus is incontrovertible - hence the packages on the way in most of the big economies. One potential pitfall of fiscal stimulus is that part of the stimulus spills over into imports. This can cause a serious balance of payments (and exchange rate) shock - cf the disastrous experience of the French Socialists in 1981-2, which many took as proof that "Keynesianism in one country" was no longer possible given the growing integration of the world economy.

Obviously we don't need to worry about affecting our exchange rate due to the euro. And clearly there's no danger of "Keynesianism in one country" at the moment either. But a small country inevitably sees more of its stimulus spill into imports (since we already spend way more on imports as a proportion of GDP). This means less bang for our stimulus buck - and that buck costs us more to borrow.

One conclusion is that it makes more sense to do stimulus through government spending rather than putting money in people's pockets (i.e. tax cuts), since the government can make sure a) that it is actually spent and not saved and b) that it is spent domestically. But even then some of the multiplier will go to imports. And the collapse in revenues is so dramatic that even Lenihan's deflationary (i.e. anti-Keynesian) budget still involved a deficit of 6.5% of GDP (maybe worse).

Also: we will see the benefit of other countries' stimulus (i.e. for our exports) regardless of what we do.

So I'd be interested to hear any thoughts on how attractive or viable Keynesianism is in a small open economy such as our own. Didn't Keynesianism fall flat on its face the last time we tried it here (i.e. mid-'70s to early '80s)?

[Gerry]

If you put more money in people's pockets then some of it will certainly go on imports. So we should therefore make an egalitarian virtue out of economic necessity and target the poorest - whose consumption is quicker, more direct and local and less likely to be diverted towards luxury imports and foreign holidays.

It does indeed make more sense to focus on government spending as a means of stimulus and now is a good time to re-emphasise the "social wage" element of spending. As this recession is likely to be painful and long-lasting it should be easier for the left to make the case for more egalitarian public policy for sustainable economic reasons as well as on the grounds of social justice.

[Tomaltach]

One problem for the left - in terms of the argument for say higher taxes - is that the voters in Ireland seem to be against it. (I know this isn't directly related to the argument about borrowing, but it is related to the idea that the left can make headway out of this). According to a poll reported in today's Irish Times "When voters were asked if the Government should place more emphasis on spending cuts or tax increases to deal with the financial crisis 52 per cent opted for spending cuts, while 32 per cent backed tax increases and 16 per cent had no opinion.". It seems the electorate just doesn't want a more left wing analysis.

[Michael Taft]

James, you hit the problem on the head - how can we pursue an expanionist policy without ending up in the same position as we did in the 1970s/80s. First, the O'Donoghue experiment failed because it didn't prioritise the export base, over-estimated the ability of the indigenous sector to meet increased demand and under-estimated the limitations of a small home market. Result: import-fuelled inflation, continuing job losses and fiscal crisis. What a miscalculation.

To learn from that, while still maintaining an expanionist approach, means an emphasis on public investment tied with the medium-term strategy of building a new enterprise base. This still means pain in the short-term but the issue here is to shorten the technical recession and hasten the closing of the output gap (the hangover stage).

In this respect, I share your priorities, Gerry, though I would still be dubious about the effects of stimulating incomes - for the simple reason that even if targeted at low-average incomes, we may not get as much bang for our buck - though I would be open to proposals. One that is being pushed by economists in the Obama administration is to increase unemployment benefit. Here, that would mean re-introducing pay-related benefit. We're not going to stop job losses in the short-term. But these job losses are the biggest drain on demand. At least we can ensure that incomes don't dip to dangerous levels.

Tomaltach - two things I'd point out. First, higher income groups favoured tax increases - the AB class by 55-39%. In other words, those with the money accepted the need to make a bigger contriubtion. But more importantly, if the left-wing analysis is that general tax increases are necessary to resolve our fiscal problems - well, that's not an analysis I share (and I must say, I'm not sure where progressive parties stand on this critical fiscal issue). General tax increases reduce what little demand there is in the economy. What the Left should be arguing is for a fiscal stimulus package based on borrowing, targeted taxation on unproductive capital (i.e. the property holdings of the wealthiest 10% income group) and the opening up of the Pension Fund to commercial capital projects in Ireland (e.g. Metro North, new generation broadband, repurchase of Eircom, the inter-connector and grid upgrades, etc.).

This doesn't immediately address the issue that James raises - how can we expand while avoiding the pitfalls witnessed three decades ago. But it, at least, allows us to escape the limited parameters of the fiscal conservative consensus - namely, that the deficit must be prioritised (as if it was the cause, rather than the effect of the decline) and that it must be addressed by either cutting spending and/or raising general taxes.

[Tomaltach]

Michael - yes, I agree that it is important to keep the borrowing option on the table and not to mix it with simply increasing taxes. If we take the short to medium term view and the need for a stimulus that's one thing. But in the long term I'm pretty sure that it _is_ a stated priority of some on the left to increase our level of spending as a proportion of GDP. Many argue that in the long run that is the only way to build high class public services in health, education and transport. The finding I referred to suggests that the Irish electorate as a whole (the AB class are, after all, a relatively small percentage of the electorate) rejects the idea of higher tax - not just now because they think it dampens demand - but long term. That has been what I have sensed over these past 15 years and why the low tax bidding war that eventually spread to labour became so appealing.
So I still maintain there is a real challenge there for the long term.

Back to the immediate. I applaud your suggestions in relation to borrowing though I'm not totally convinced yet that our borrowing for current spending should be significantly increased. (Would you agree that in terms of current spending we should now be thinking of not letting borrowing get much higher?). In term of the capital spend - that too must have limits. Perhaps we are nowhere near those limits, but surely they exist. We cannot simply borrow as much as we want, because a) those who lend will recognise we may not be able to pay and b) we are shifting a burden onto the next generation which is certainly something that cannot be ignored.

Given that we have guaranteed the banks and may have to borrow significantly for capital there, and that our overall borrowing requirement is looking pretty high, what'd I'd like to understand better is, where is the safe borrowing limit? In other words, how high can we go as a percentage of GNP/GDP without actually tipping over into unsustainable territory?

This does not mean I'm a fiscal conservative with an ideology that mandates balanced budgets. It's just back to what you mention - the danger of going back to where we were three decades ago.

As a footnote - the idea of channeling Irish savings and Irish wealth into productive uses as you suggest - is certainly something that I would go along with.

[Gerry Burke]

Labour needs to start demonstrating that FF and FG are essentially two tribes with the same ideology. Indeed, FG seems to be slipping nicely into the vacated PD shoes and getting away with more of the same tax-lowering twaddle, thanks to the calm demeanour of Richard Bruton. But it's all style and little substance.

Labour needs to put clear blue water between itself and both FF and FG. The two need tarring with the same brush.

The evidence for a higher tax base is fairly substantial - have a look at Jeffrey Sachs' 2006 analysis in Scientific American of Nordic countries compared with English-speaking countries http://www.sciam.com/article.cfm?id=the-social-welfare-state (if the link doesn't work just google Jeffrey-Sachs+welfare-state and it should come up). The key seems to be Nordic countries' prudent, collective investment in basic research and R&D - this yields high quality jobs. Consider Denmark, which has a tax rate of 50% of GDP (compared with less than 30% in Ireland). Denmark's tax revenue comes almost entirely from only two sources - personal income tax and sales tax. The International Monetary Fund's latest World Economic Outlook (October 2008) predicts. almost incredibly, that Denmark will have 2.6% unemployment in 2009, compared with 7% in Ireland. Denmark will have a general government surplus of 3% while Ireland will have a 4.6% deficit. In other words, Danes remain in a position to put money aside while continuing to benefit from high quality universal health care and education. And they have virtually eradicated the scourge of poverty.

In stark contrast, thanks to years of mindlessly irresponsible government in Ireland, which allowed the economy to spin out of control by failing to moderate the flow of capital, our younger citizens now face an uncertain and probably bleak future. The shortsighted improvidence of the boom years, during which the government spurned many opportunities to implement a prudent system of taxation that would have left some legacy for the next generation, is to be repeated in the bust years by the astonishing stupidity of cutting back on our children's education.

If we had, during the boom years, increased the tax take from 29% of GDP to about 34% (still lower than other western European country), and simply put the money aside, we'd probably have a sovereign fund of €100 billion now, the interest alone of which would sort out this year's budget deficit.

Barack Obama, in his convention speech in Denver, said: “Government cannot solve all our problems, but what it should do is that which we cannot do for ourselves: protect us from harm and provide every child a decent education; keep our water clean and our toys safe; invest in new schools and new roads and new science and technology.”

In Ireland, we are being governed by imbeciles. FG will be no better.

It falls to Labour to present an alternative vision for Ireland, radically different to the FF/FG vision.