March 9th Evening: The Recession Diaries

Jim O’Leary rightfully points out our tendency to view our problems in isolation from the rest of the world – as if we were somehow unique. He suggests we look abroad, to other examples. He selects my home state California to see what lessons we can draw. His principle is sound, his selection curious.

It’s not just that California is unlike most other places. After all, we have elected a Zen Governor, a B-movie Star Governor and, currently, a champion body-builder Governor (we Californians don’t do anything by half). It’s that California’s position is not analogous to our own. It is a subordinate tax jurisdiction, operating under a law that prohibits deficits, and has a Federal Government available to bail them out (all of which Jim mentions). It also has a peculiar provision that allows voters, through propositions, to impose both costs and tax policies on to state finances; in other words the executive and legislature share budgetary policy with voters.

But there’s one thing he didn’t bring out. There’s much to admire about Governor Schwarzenegger – he is a strong social liberal and promotes sound environmental policies (to the point that he is referred to as a ‘Rino’: Republican in name only). But Arnie is a fierce promoter of a crude low-tax model – so much so that the first thing he did when he took office was repeal an unpopular car tax hike, with no regard to the effect it would have on an already overwhelming budget deficit. His continued attempt to promote this model in the face of economic reality has helped bring my home state to its sad condition. Sound familiar? Yes, there is much to learn from the California experience – but not the lesson Jim has drawn.

But, hey, let’s not get hung up on one example. Let’s take Jim’s sound principle on a whirlwind global tour to see what other countries are doing in response to the international recession. Thanks to a link provided by P O'Neill over at Irishelection.com, we can turn to a new IMF publication which charts these initiatives.

The IMF considers the G-20 nations (the world’s largest economies). And what does it find? All the G-20 nations, with the exception of Turkey, are putting forward stimulus plans. Some are small (India), some are quite large (China, Saudi Arabia) but they are all engaging in various forms of stimulus tailored to their own economic needs.

Now, just because everyone’s doing the same thing doesn’t necessarily make it right. After all, look how many bought into the casino-capitalism of deregulated finance markets. But it would not be wise to ignore this international trend – especially as countries with divergent ideological perspectives are taking up similarly reflationary cudgels.

Nor does it mean that all measures are equally efficient or applicable across the board. Australia, for instance, is boosting their house building programme; not terribly relevant here with all our empty houses. Some are cutting taxes, others are ramping up public sending (the IMF considers that latter to be more effective than the former – more than twice as effective). The US is doing a bit of both – a result of the inevitable compromises their political system demands. So what are all these countries doing?

Almost two-thirds of stimulus measures are expenditure based, with particular emphasis on higher capital investment such as transportation networks (Canada, France, Germany Korea and others).

Others are boosting social protection measures: strengthening unemployment benefits (Russia, the UK and the US), cash transfers to the poor (Korea) or supports to children (Australia, Germany) or pensioners (Australia, Canada).

Some are stepping up support for SMEs (Korea) and strategic or vulnerable sectors, such as construction (in Germany, for energy efficient buildings and repairs and renovations).

Others still others are using stimulus measures to promote public services such as health and education (US, Australia and China), or introducing incentives for environmentally-friendly technologies (China, Germany, and the UK).

What are the masters of the Irish economy considering? Just about the exact opposite of all of the above:

• They will probably cut capital investment and are already overseeing cuts in our public transport network (CIE)

• They are making it more difficult to get social insurance (and even considering means-testing it), while imposing income levies on low and average incomes

• They are pretty much doing nothing for our SME or enterprise sector – letting them fall like dominos (compare this to Germany’s recent initiative to provide up to €10 billion support for enterprises in critical economic sectors)

• They are cutting health and education – in some cases, viciously so.

On the revenue side, some countries are cutting taxes in an attempt to boost disposable income and, so, consumer spending. Nine countries are cutting income taxes (Brazil, Canada, France, Germany, Indonesia, Japan, Spain, the UK, and the US); while six others are cutting indirect taxes (UK).

Cuts in the corporate income tax have not been as large: outright reduction in the tax rate (Canada, Korea, and Russia), investment incentives (France and Korea), or more favourable depreciation schedules (Germany, Russia, and the US).

Not only are these measures not as efficient as expenditure measures; in any event they would probably be unwise in the Irish context -  especially as our burgeoning deficit is not so much a result of cyclical factors, but of stubborn structural ones. And there’s only so much corporate tax we can cut from an already ultra-low base.

However, there is no doubt that we have to find ways to raise consumer spending. That will require more creative strategies than crude tax cutting which doesn’t necessarily result in higher spending (it can result in higher saving or paying down debt – a rational household choice but not much good for economy today). But the Irish Government doesn't do creative strategies – it is figuring out ways to take more money off people through new general tax increases.

So everyone’s doing it. Almost all countries are responding in a responsible and urgent way – all save for Ireland. We stand alone, moving in a completely opposite direction. Maybe Brian Cowen, Brian Lenihan and Mary Coughlan all have some unique economic insight that has eluded other leaders; maybe they have, after careful study, identified fatal flaws in the programmes of all other industrialised nations.

Maybe they, and pretty much they alone, have found another, better way to get us out of the recession – cut investment, cut wages, cut expenditure, impose tax after tax on low and average income groups.

Maybe they have sat up all night, pouring over models and analyses and learned papers, to come forward in the morning light with the only viable strategy: that the road to prosperity lies in trashing our economy.

Maybe.

But with even the CIF’s Tom Parlon claiming that deflation is the wrong thing to do, allow some of us to doubt.

Really, really doubt.

Comments

[Tipster]

And the mandarins in Depts Finance and ETE deserve some of the kicking that FF is getting for the advise they seem to be offering. Well, they deserve their own dose of it.

[Fergus O'Rourke]

Are any of the countries you cite comparable in terms of being small open economies ? No, I suggest.

You say "we have to find ways to raise consumer spending". Why ?

In a closed economy, the answer is easy. But Ireland is not such an economy.

And IMHO we are better off without the mad consumerism of the last decade. The fall in new car sales is for me A GOOD THING.

[James]

Re: small open economies, there was a report in yesterday's FT about a Norwegian stimulus package. Plenty of links if you google for it. Would be interesting to know what Greece, Italy, Spain and Portugal (our fellow Eurozone bad boys) are doing.

[Michael Taft]

Fergus, no, none of the countries in the G-20 are small economies. But as James points out, Norway is promoting stimulus, along with others. The question is, rather, what countries are trying to cut their way out of the recession. I haven't come across any (which doesn't mean there aren't any). However, I will root around and see what othe small economies are doing.

The reason why we need to reverse the slide in consumer spending is because 50% of our GDP is made up of consuer spending. And its not just spending on imports (actually business imports more goods and services for re-export in new goods and services). It's both goods and services. Most enterprises sell into the domestic economy. If private consumption gets hit, there's less sale revenue which results in wage cuts, short-timing and redundancies. And down and down we go.

You're right, though, about some private expenditure. The Government should not bring in a car scrappage scheme because replacement cars are, of course, imported. Any stimulus - which should come through primarily investment and associated job creation/retention - will have to be carefully crafted for a small open economy. Just because we are such an economy is not ipso facto an argument against stimulus, only dumb, inappropriate stimulus.