January 28th Afternoon: The Recession Diaries

I had intended to treat each of the offerings in the Irish Times ‘What is to be Done’ series individually, hoping that they would provide us with new, innovative ideas. Boy, did I call that wrong. Jobs are being lost, enterprises are closing, our GDP is contracting, confidence is being lost – and all we get are folk so fixated on the budget deficit that they can’t see the house around them falling down. John McHale starts off: 

'It should never have come to this. Fiscal austerity in the face of recession means breaking what Nobel Laureate Paul Krugman calls the “Keynesian compact” – the expectation that governments can and will aggressively manage demand to counter severe downturns.'

However, just as John Fitzgerald dismissed economic stimulus out of hand, McHale concurs. Because the downturn resulted in a fiscal crisis.  This is a strange logic - the reason why you should engage in economic stimulus is the very reason why you can't.  We are, it seems, condemned to repeat the mistakes of past Fianna Fail Governments: just as they pursued pro-cyclical policies in the boom (fuelling demand through tax cuts at a time of rising demand) so now we must pursue pro-cyclical policies in the bust (deflationary fiscal measures while the economy is deflating).

This ‘trap’ is best seen in the call by all three economists - McHale, Alan Ahearne and Richard Tol to cut public sector wage cuts – in some cases, quite draconian. McHale calls this ‘the least the wage bill gives the least-deflationary bang for the euro cut.’ Yes, it may be the least-deflationary but to what degree is it deflationary? Will it still be a substantially so? To what degree will such cuts be met by a reduction of savings and a reduction of spending? And is this deflationary move justified or helpful during an economic contraction? At least, Ahearne provides a cautionary warning:  it won’t really save that much. And:

'I suspect that much of the rhetoric in the media about public sector pay and reform is an attempt by some of the least well-informed commentators to distract attention from the main source of our economic woes. The mess in which the Irish economy finds itself largely stems from the house price bubble, not from problems in the public sector. It is probably not a coincidence that some of the most vocal critics of the public sector today were among the most conspicuous cheerleaders for the housing boom.'

Yes, it was the property boom that what done it. But this was layered on top of pre-existing and already glaring deficiencies in our economic base – a poor indigenous enterprise sector, a poorer physical infrastructure and a social infrastructure which only European only in name. Still, his point is taken. Which is why it is disappointing to hear him come out with a cliché – one that is hardly reflects social reality.

'Put simply, we are living beyond our means.'

Whoa, wait a minute – it is not so simple. Over 1.4 million earn below the average industrial wage – or about two-thirds of all taxpayers. Add in all those on social welfare and we could find that up to three-fourths have incomes of less than the average wage. Even at the household level – yes, expenditure exceeded income in the lowest 70 percent of households. This ‘living-beyond-our-means’ is best understood against a backdrop of relatively low wages compared to European norms, social welfare rates below the relative poverty line, high levels of relative poverty and low-pay, and low universal provision of services that other European citizens take for granted (primary health care, childcare, primary education, etc.). To blame people with relatively low incomes for our fiscal crisis is missing the point.

But pain is the name of the game these days. All three economists claim ‘pain’ is unavoidable, is necessary, even purgative. But in McHale’s case, he seems to fall into a contradiction:

'As the Asian economies found out over a decade ago, immediate pain is the price to restore confidence.'

Yet, a few paragraphs later he states:

The IMF appears to have learned a lesson from the Asian crisis, where excessive upfront austerity worked to undermine confidence rather than enhance it.'

So, immediate pain restores confidence, but upfront austerity (and that’s where the pain comes from) undermines confidence. I’m sure there is a logic here – it’s just that I can’t figure it out.

Ultimately, the problem with the analysis of the three economists is that they have put the cart before the horse. If the fiscal crisis is the result of economic decline (the property bubble bursting, the structural deficit arising from previous tax cuts, the loss of ‘competitiveness’), then how can we assume

(1) That ‘fixing’ the fiscal problems will result in economic growth, or

(2) Assume it is even possible to ‘fix’ the fiscal crisis during a period of rapid economic decline?

To work the symptoms and overlook the disease is a sure way to ensure the disease festers. That is the trap the three economists fall into, a trap laid by the way the Irish Times framed the debate. At least Ahearne tries to broaden it a bit – listing new taxes and tax increases to close the fiscal deficit. These deserve a longer treatment than I can afford it here. Suffice it to say that general tax increases during a severe contraction may only exacerbate the contraction and, so, the deficit. That is not to dismiss the idea of taxation – clearly, when growth resumes we will have to abandon the low-tax model that prevailed in the past, if only to overcome the structural deficit caused by over-reliance on property-related and spending taxes. But to impose it now on working income?

But, so far, the Irish Times has been worth it - mainly due to Richard Tol's contribution.  It is a masterpiece. I am cutting it out and hanging it on my wall. It is almost mystical in its perverse way – like the medieval flagellants who divined the face of God while flogging themselves to death. For Tol, pain is an end it itself:

Cut spending now, next year and the year after that • Cut public sector wages, even the lower-paid • Cut supports to exporting industries • Privatise the ESB and CIE and An Post • Sell-off shares in Aer Lingus • Cut capital investment • Cut social welfare • Cut fuel allowances • and on and on and on • and on some more

I didn’t know economists could be so funny and scary at the same time.

Comments

[James]

I think McHale's point about wage cuts having a relatively low deflationary effect is a strong one, albeit "relatively" is as you point out a key word here. Even if we were having a fiscal expansion rather than contration it would not make sense to do this through increased wages (nor through tax cuts, for the same reasons). If the government cut the public sector pay & pensions bill by €2bn (hard to do I know) and spend that €2bn on capital spending the net result would be stimulatory.

[Yvonne]

Yes, scary in that Tol and Fitzgerald have the ear of government as members of the ESRI, but still a bit funny that Tol's 'analysis' isn't terribly analytical: "There are probably too many meetings, seminars, workshops, and conferences; and attendance at international meetings is often unnecessarily large."

These may be presented as disinterested, pragmatic critiques but reflect a deep ideology - and not one that is about creating a more equal society.

I must say, I grow more depressed by the day and having already weaned myself off the Irish Times and RTE will probably have to stop reading this blog too, or the comments anyway. Suddenly, everyone is co-opted into solving the crisis. "We all have our part to play ... blah de blah". Perhaps, I'm naive but money hasn't suddenly exited the system. It hasn't gone up in smoke. Those that have it are by and large retaining it and manipulating the system. How do we make them pay? And how do we create an economy that isn't reliant on over consumption? And how do we create meaningful work for people in an era of increasing technologisation?

[liam]

Yvonne,

I feel that your weariness with RTE and the Irish Times is a contagious disease. I myself have sneezed when opening those pages; and a headache forms whenever I hear RTE whine.

Our economists and those of a general right wing persuasion have an immunity to this disease. Their immunity comes in many forms, but can be best summed up as cognitive capture (Willem Buiters phrase) or believing their own bullshit. For they really do believe it.

You see, when you or I develop a headache or go into involuntary spasms or muscular convulsions, these people hallucinate. And what they see when they hallucinate is a vision of untold riches and sumptuous splendour. And they see the splendid beauty of an organic order. And this becomes religion. So when the degenerate and crippled, and sick, and struggling, come to them and say they're hurting, they are armored by a righteousness called productivity. You suffer because you're not productive – moralism is out of fashion. And so the disease spreads: ignorance.

You see, though we're in d'mergency, and there are lots of questions that definitely need to be asked, they are a sort of an independent issue because whether booming or imploding, we are answered with the same mantras, ad-nausea, by these high priests of visionary impoverishment. We are intellectually hamstrung. All the parts of the body are working, but we can't walk anywhere.

And all the while we are filled full of metaphors: tsunami’s – waves long travelled grown upon the shallow shores of our ideas – to be feared, not harnessed.

Ultimately, the only advice I have is when you listen to them – these cubs of their delusions and inflated aspirations, these right-thinking men of no gentle persuasion – understand that they see relative loss of wealth but never relative poverty, and know that they can’t define the disease, our distributional illness, because they are the rich diet that clots our discourse, the stroke in our national consciousness.

[Richard Tol]

Yvonne,

There is clear evidence that some civil servants treat international meetings as holidays at the taxpayers' expense.

There is also clear evidence that there are so many meetings etc that some civil servants in fact do nothing but listen to other civil servants talk.

[Ciarán]

And Richard Tol's point is?
Oh yes, some civil servants go to unnecessary meetings: ergo, wreck the public sector, demoralise its employees, cut payments to the most vulnerable, cut wages for all workers. And, of course, throw billions more at the bankers. How many billions, you ask? Well, "we don't know", it could be five it could be ten but, don't you know, a "stable banking system is a key to economic recovery". The guiding principle of Irish economic and political life is again glaringly apparent: rewarding failure for those at the top and punishing those from the middle to the bottom of the rung for just, well, for just being. Tol, Ahearne, Fitzgerald, Rossa White - although all qualified economists - are in a sense to be pitied. All outline policies to restore economic stability, yet the same policies guarantee social and political instability. Oh, but wait, there's no relationship between the economy and social or political life. Phew! That's a relief.