April 14th Afternoon: The Recession Diaries

That wild and whacky outrider of neo-liberalism, Constantin Gurdgiev, has taken a scalpel to the Government’s budget numbers and I find myself . . . agreeing with him. No surprise there. People from wildly varying perspectives can still agree the sky is blue. Even if the great Fianna Fail sky-gods are doing everything possible to paint it black and blacker.

In my piece on Indymedia, I suggested the Government’s deflationary policies wouldn’t work, even on their own terms. If the goal is to reduce the annual budget deficit to less than -3 percent by 2013, it will fail. And this can be deduced from the Government’s very own numbers. While the Government accepted the collapse in output this year and next, they are bullish from 2011 on. From projecting a decline of nearly 8 percent this year the Government is proclaiming (and basing fiscal policy on this hosanna) a great turnaround – nearly 3 percent growth by 2011. Hurrah!

Have they read the runes? Have they studied the forecasts? No. They merely cut the headline growth rates from the January Addendum figures and pasted them into the new April growth projections; the same January figures which were so implausible they had to be torn up (back then they predicted a decline of less than half than what they are now). They took these discredited numbers, slapped them down in the current framework and reworked the percentage increases in the sub-components. Neat, eh?

Comrade Constantin saw this, too, and went off a-calculating. Here’s what he returned with:

• -11.5 percent to -12.5 percent decline over the next two years (compared to the Governments -10.6 percent projection)

• For 2011 to 2013, modest growth of 5.5 percent (Government: 10.9 percent)

This may seem just numbers on the page, but Constantin’s projections (and they are just that, projections) would certainly spell failure for the Government’s fiscal deficit by 2013 – a spectacular failure.

Already the Government’s fiscal ship has been blown off course. Because of the deflationary impact of the budget, Ulster Bank wrote down it’s projections the very next morning – now projecting a -9.5 percent fall in GNP compared to a pre-budget figure of -8 percent. What does this mean? The Government will not be able to maintain it’s deficit target of -10.75 percent without even more cuts later this year.

I projected, at a minimum, that the deficit will fall back to -11 percent this year. Constantin is more pessimistic. He projects the deficit to deteriorate further – to between -12.5 to -13 percent. Now remember – the very reason why we had an emergency April budget was the realisation by the Government that the deficit was running out of control – at -12 percent. They rejected the -9.5 target as being too uber-deflationary and settled on -10.75. If, however, Constantin is correct, or even close, then we will be right back where we started. But worse.

That’s the problem with pursuing deflationary policies in the middle of a recession: it’s like running in quicksand. Yes, you work up a sweat, even work the muscles; you give the sense of action and exercise but in truth, you are going nowhere. You’re just sinking faster. It’s a mugs game.

But where is the alternative? And who is proclaiming it? The Left seems content to exploit the Government’s difficulties but is giving these difficult calculations a wide berth. The trade union movement is preparing to re-enter ‘dialogue’ with the social partners after Easter; what are they going to talk about? How to distribute the pain more evenly? How to equalise everyone’s share in a collapsing economy?

What is so frustrating is that the instincts of the Left and the trade union movement are correct – that you can’t cut and tax your way out of a recession. You have to grow and pursue policies that generate and sustain that growth. In the first instance, this means putting the brakes on the decline, stabilising the economy and then prepare it for growth. Progressives throughout this island know this. Why, then, the hesitation?

So let’s give our instincts their collective head. Start from where we know is right. That doesn’t diminish the challenge – not only do we have mounting unemployment; now we have this NAMA lark (which I will be discussing in a couple of days) to contend with. Every indicator is going the wrong way but the Left and the trade union movement are in danger of being dragged along in the orthodox undertow for want of a concrete alternative.

If this is not the moment for the courage of our convictions – I don’t know when it will ever be.

Comments

[bogdodo]

Why don't we get coherent and bold initiatives from the constitutional left? Perhaps they are simply afraid of taking power at this stage. Perhaps they are right - even if the global economy ever recovers from financialisation and debt-based 'growth', there is peak oil and climate chaos looming in the wings, with no evidence the rulers and all but a small minority of the ruled have any taste for a rapid de-carbonisation of the material economy.

Labour, at least, is going have to grapple with the problem sooner rather than later. My suspicion is that FF are going to cement the NAMA in place and get the best deal possible for their banking and property developer constituency and then call an election (possibly after having 'won' a second Lisbon Treaty vote) leaving FG and Labour flounder around in their legacy. So Labour is trimming policy to post-election coalition, as always, and the trades union leadership seem unwilling to step outside a shrinking public sector reservation. Why no national strike yet? What are they getting out of 'partnership talks'?

I'm very interested to read what you have to say about NAMA. As far as I can see the fundamental problem is: a) We can't pull the plug on the banksters and still borrow to fund reflationary policies. b) Unless we pull the plug on the banksters there will be no money to fund reflationary policies.

I admire your efforts to propose workable Keynesian solutions, but I suspect we've gone beyond that stage in the current crisis in this country at least.

[EWI]

In Macroeconomic terms, we are no longer living in Ireland. We are living in Cuba where numbers are fudged, forecasts are semi-transparent and the state knows better than the workers as to what we deserve to keep in terms of the fruits of our labour

And all of this on a marginal tax rate of 41%! This gets interesting, though.

If we use Comrade Economist Gurdgiev's benchmark of a 41% top tax rate as "Cuba", and the US at 25% (at the beginning of the Irish tax bracket) as the Great White Hope of Capitalism, then where does that leave the UK at 40%...? As Venezuela, perhaps?

(That dictator Gordon Brown may need to be concerned about Libertas-linked Russian economists calling for his assassination...)

[Liam]

Michael, you might remember my call that we are no different, just early to the table. Well, latest assessment of Germany here:

http://www.eurointelligence.com/article.581+M55f43ddc30f.0.html

[Michael Taft]

bogdodo - I'm afraid the trap is worse than you put it. We can't afford to pull the plug full stop. Even without the guarantee no state will let depositers go down the tube - and not just for political reasons; the economic consequences would be just too profound (hence, the phrase, 'too big too fail). And we can't afford not to have a reflationary package, unless we want to have a hollowed-out economy and society. I'm afraid this thing is getting worse by the day - a slow-moving train and we're chained to the tracks (and the on-lookers are actually waving the train on!). I've tried to address the NAMA problem in today's post but in truth everything is problematic, is risk. No getting away from that. No wonder so much of the Left and the trade union movement sticks to the safe ground (safe, that is, until they get into office).

EWI - at least if we lived in Cuba we'd have some good tunes, some sunshine and damned fine rum (but, then, there's that hurricane thing)

Liam - thanks for the link. The IMF is now saying that deterioration is slowing down (not ending, mind you) but other econmists have warned of a 'sucker's rally' whereby we experience a number of false dawns (apparently Wall Street experienced five upswings between 1930-1933, none of them to any effect). What makes this crisis so profound is that not only do we have a crisis in demand, but a financial crisis as well. A real perfect storm.

Germany is particularly vulnerable, relying so heavily on export markets. Japan, too, especially as they have a strong demographic (elderly) that don't spend and won't spend regardless of Government policy; still the Japanese Government is pumping in over a trillion yen.

I suspect a lot will hinge on the US. If they get going, China sells more goods and then starts buying German capital goods and Japanese consumer items - and so on. In the meantime, the rest of us will have to play to the few strengths we have (Ireland still has a large domestic sector that could use some stimulating), and hope the 'green shoots' won't rot in the fields.

Of course, it would really help if the ECB/EU took the bit between the teeth and started pumping. But with that ol' whacky inflation-hawk Trichet in charge, I doubt that will happen this side of the abyss. And on the other side it's too late.

[Niall]

Michael, You are so right in your last statement. If the Irish left can't convince people to jump aboard at some point in the next few years then I can't ever imagine it ever will. Great article.