I Don't Get It: The Recession Diaries - October 9th

Some arguments I just don’t get. For instance, if I were an owner or manager of an enterprise that sold goods and services into the domestic economy (that’s most enterprises) I would be concerned at falling consumption. After all, if people cut their spending, my sales fall. If people are worried about holding on to their jobs, my sales fall. If people’s wages or hours are cut, my sales fall. And if people are made redundant, my sales really fall.

The best thing for my business would be to see more money in people’s pockets, more people at work, more confidence in the economy.

Therefore, the last thing I’d like to see is some of ISME’s proposals being implemented; namely cutting social welfare, cutting public sector wages (at least those on low and average incomes who make up the bulk of my customers and the bulk of the public sector payroll) or see any worker – public or private sector – lose their jobs. All these would represent a real blow to consumer spending and consumer confidence.

But ISME seems to be acting less like a representative of the interests of their members and more like a PR machine on behalf of certain neo-liberal nostrums. They seem intent on pursuing policies that would directly impact on their members – and not in a good way.

Just yesterday, ISME’s Mark Fielding was on the New at One, having a go at David Begg’s recent call for a new fiscal policy. Fair enough – how else would you know it’s an ISME representative if they’re not attacking trade unionists?

Interviewer: What is your reaction to the trade unions’ declaration that the sky is blue?

ISME Representative: This is just one more example of trade union bullying and intimidation. They threaten to paralyse the economy. Now they're making demands on the sky. The Government must ignore them.

Okay, tongue in cheek but the following real exchange wasn’t that much less surreal.

RTE: From your own point of view . . . if there’s less money circulating in the economy your members are going to have less money coming in the door to their businesses.

FIELDING: Yes. And at that moment that is happening as well. But it’s happening because of economic uncertainty and because of a lack of consumer confidence. People are afraid to spend at the moment because we don’t know where we are going at the moment. They’re look at the Government dithering at the moment and wondering – are we going to see a Bord Snip or not, are we going to water it down.

This is strange even by ISME’s standards. In essence, Fielding is saying there is less spending in the economy because people are concerned that the Government might not have the will to cut people’s disposable income which would result in . . . less spending.  Hmmm.

Now, if I were an owner or manager of an enterprise, I would be seriously concerned. Here’s why.

Even with the recession slowing down – tax increases and public spending cuts will hamper consumer spending. The ESRI provides some indication of the likely impact on consumption.

  We see that, in both expenditure cuts, consumption falls considerably. Combined, they total nearly a 2% cut. To put some numbers on this, based on ESRI projections for next year, we could eventually see a fall of €1.5 billion by the second year. That’s a lot money taken out of consumer circulation – and this will be felt in firms’ turnovers.

This is not a good time for this to occur. Though some forecasters are now a bit more upbeat about consumer spending (Davy forecasts consumer spending to increase by 1.5 percent next year), the Retail Sales Indexhas yet to stabilise according to the latest data.

The last month we have data for, July, shows a month-on-month decline. That this occurred after a volume increase in June (the first monthly increase Since September of last year), shows that consumer spending remains fragile. This is confirmed by Exchequer returns which saw VAT revenue coming in well under target. In September, VAT receipts fell 13% below the monthly target. We have some ways to go before consumer spending stabilises.

Yet, rather than address the fall in consumption, ISME ups the deflationary stakes by calling for social welfare cuts, including Child Benefit cuts. If the McCarthy Report recommendation is implemented – the cut in €850 million in social welfare cuts will make another dent in consumption, especially as this will hit people who have a higher propensity to spend.

The CSO is still recording a fall in prices. This will force businesses to (a) drive down prices, or (b) drive down their costs – of which wages will be one. In the former, revenue will fall further if it is not being recouped through an increase in volume. Of course, it can get to such a stage that a business can’t cut prices anymore and goes out of business.

In the latter, while it may seem ‘penny-wise’ at the firm level to cut wages (reducing costs), it would be ‘pound-foolish’ at the national level because it would lead to a further reduction in consumption – spiralling ever downwards.

And in both cases, public finances worsen as deflating prices and falling wages undermines tax revenue.

If I were an owner or manager of an enterprise I would know this instinctively. I would want the Government to reflate the economy – to do everything possible to maintain and enhance incomes, maintain and expand employment. Because that will increase my turnover and end the need to cut margins to attract volume, traffic, football. The deflationary pressures would stop and the economy could start spiralling upwards.

That’s when you pursue fiscal consolidation strategies – after the economy is on growth path. That’s when it will get produce positive rather than negative returns.

If I were an owner or manager of an enterprise, I would cancel my membership to ISME.

Comments

[Proposition Joe]

"those on low and average incomes who make up ... the bulk of the public sector payroll"

Michael, can you back that assertion with some numbers and a source?

I find it really hard to believe that the "bulk" of the public sector earn less that the low forties (which is the average income across the economy). In the normal sense of "the bulk" meaning a sizable majority.

Seeing as the average public sector salary is slightly north of 50k, it would be just about credible for the median to be in the low 40s.

But it would require a very odd salary distribution indeed for a large majority (as opposed to a bare 50.1%) of public servants to earn below 40-odd thousand.

[MichaelBurke]

An excellent post. The moral argument is a compelling one; why should the poor bail out the rich who have gambled heavily and lost? But the economic rgument no less so. The slump is a collapse of investment, led by propoerty and contstruction. The deficits are a function of that (+ the bailouts). A policy aimed at curbinf the deficit hrough spending cuts will have the oppostite effect ('reverse multipliers', if you like), while only a policy (state-sponsored who else?) of reviving investmet has a chance of reversing the downturn. The economic revival will take care of the deficit. Attempting to do the opposite would simply be to repeat the mistakes of the 1930s, still as tragedy though, not farce.

[Martin O'Dea]

Michael, having read your posts for a long time in 'The Recession Diaries' and trying to understand the tenor of your detractors and that somewhat justifiable innate reluctance to spend when things are going not to well, a thought struck me today - and that is that we are pre-programmed from the collective consciousness' recollection of trying to kickstart an economy in the 70's, pouring money down the tube; and then heading into another decade of indebted monetary misery.

However, I believe the key difference here - and the reason that these fears can be negated is that we now have a high functioning economy. We have the companies, the structures, the employees, some of the infrastructure, a public that can recall positive consumer attitudes and though a diminshing wage intake (and large amounts of personal debt - still a significant amount of money is in circulation.

In the 70's there, of course, was an oil crisis a key element of the actual economy disrupted in a largely manufacturing based Irish economy. Of course, there may well be serious resource difficulties in the coming decades, this isn't one of those occasions - there is a readjustment to be made, piscally and psychologically and certainly the housing boom would have repurcussions and the banking crisis needs time to right itself and all of this offers an opportunity for social change - you are right, we have got to stop a depression taking fut as cut follows cut down a spiral of economic inactivivty and job losses.

[Eoin O'Mahony]

And yet the source of these data, the ESRI, this morning call for a 20% cut in child benefit?

[Martin O'Dea]

For whom do the ESRI speak? On who's authority?

[Michael Taft]

Proposition Joe - the raw data can be found here (http://www.kildarestreet.com/wrans/?id=2009-02-17.826.0). Annualising the CSO's latest figures, the average industrial wage is currently €42,800. Using the raw data, we can see that 43% of public servants earn below €40,000; 54% below €45,000 and 66% below €50,000. Two caveats, though: (a) these are not full-time equivalents. There are a number of part-time workers at the lower end. I have tried to find the stat but have so far been unsuccessful; (b) this is without taking into account the pension levy which is in effect a wage cut.

Thanks for the comment, Michael and you're dead on. I would just make one small point - pursuing a stimulus approach will be able to deal with the cyclical portion of the deficit (that is, that portion of the deficit arising out of depressed economic activity). It won't be ale to deal with the structural part of the deficit (that is, the part of the deficit that would remain once the recession is over; this was caused by inane Fianna Fail policies of cutting stable taxes in the past and over-relying on property tax revenue). No one will be able to identify this until after the recession is over and we start closing the output gap (the ESRI has estimated it to be 8%, the Government says 6%).

However, this doesn't undermine your point. Attempting to address the deficit - whether cyclical or structural - through deflationary policies will only worsen the cyclical end without impacting on the structural end. Fiscal policy must do one thing and one thing only: shorten and lessen the impact of the recession. Once we are out of the recession, we can let normal growth reverse the cyclical deficit and examine the most progressive options to deal with the structural aspect - at a time when fiscal consolidation measures will be more beneficial. Hey, it's not like the structural deficit is going anywhere.

Martin - I think you're right. Whatever about the problems we have today - and many of them are indemic to a distorted economic base (low investment, over-reliance on FDI), we have a much stronger export base and a much higher skill base than when we emerged from the 1970s/1980s. What is so frustrating is that the Government (and thier allies in the media) don't see the strengths we can play to in trying to get out from under recession. As to the ESRI - I guess they speak for themselves (though, unfortunately they speak for the economic orthodoxy as well). You might be interested in the post I just did on the ESRI commentary out today (link below).

Eoin, yes - the ESRI wants to cut Child Benefit by 20%. They want the Government to proceed with a €4 billion fiscal correction next year - made up of the tax increases and spending cuts. Even factoring this into their rojections - they accept that this €4 billion cut (and the tax increases will cut people's disposable income), the deficit will only fall by €550 million and the burden will remain the same as this year. Is anyone doing the maths?

Comment on ESRI Report: http://www.progressive-economy.ie/2009/10/deficit-rising.html

[Martin O'Dea]

Michael,
forgive my little analogies, just to try and straighten things in my own mind; but this seems to me in line with a pair of doctors talking with a patient who is suffering muscle wastage as a result of being inactive. ESRI suggests staying in bed as your a little weak - of course, you wany to go out (its a lovely day) TASC etc suggests that the longer you stay in bed the worse the wastage will become and wants to help you up and on your way again. ESRI/FF suggests that that is what you want to do but is bad for you and that it requires leadership to advise you to remain where you are.

In reality this caution v optism arguement is false in its premise, you NEED exercise and - as you rightly point out in your linked article - we have kept you in bed for a year now and the wastage is verifiably worse