September 17th Evening: The Recession Diaries

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dice.JPG As of this writing, the full text of the draft pay deal is still not readily available but the broad outlines are clear.  The pay element contains real wage cuts, the provision for the low-paid is minimal, there is no acceptance of the right to collective bargaining and as for mandatory pensions (one of ICTU’s main demands entering the negotiations) – they don’t even get a mention in the Government’s statement on the draft agreement.  There will be time to dissect the draft agreement over the coming days and weeks (it always helps to read it first – all sort of interesting nuggets and surprises buried within) but for now let’s take a step back and try to outline the Government’s policy landscape.First, the Government is intent on reducing public expenditure.  The ostensible reason for this is to fill the gigantic hole in the Exchequer’s finances but, as has been pointed out in previous blogs and by other commentators, that fiscal hole can be addressed by other methods which would not impact on the overall level of Government spending and, indeed, would increase it (e.g. withdrawal of regressive tax subsidies, new taxes on unproductive investment and activity, cutback on inequitable subsidies such as fee-paying schools, etc.).  Why is maintaining government spending important?

Paul Tansey put his finger on it when he was analysing the last CSO National Accounts report.  He pointed out that while most other sectors of the economy were sluggish and, thus, pulling against GNP growth, it was only growth in Other Services that was keeping the economy somewhat up.

It was left to “other services” to save the economic ship from capsizing altogether in the first quarter of the year. “Other services” registered a growth rate of 4.5 per cent, due principally, it is understood, to the expansion of education and health services.

Since that report, things have probably worsened – especially in the area of financial services activity and, so, services exports.

So what does the Government do?  It starts cutting back on the only sector that can ‘save the economic ship from capsizing altogether’.

Second, SIPTU – in it’s aptly named ‘Don’t Turn a Recession into A Depression’ – pointed out the dangers of falling wages and their impact on private consumption.  Simply put, consumer demand is now a significant driver of economic growth.  And it’s money in the hand (along with confidence) that maintains that demand.  Falling demand means falling sales, falling profits, short-timed and laid-off workers, etc.

So what does the Government do?  It aligns itself with IBEC to push wage growth below the level of inflation.

What Fianna Fail is doing is rolling some dice – in true casino fashion.  They are cutting active economic sectors, they are cutting the ability to maintain private consumption – but they are going to do everything possible to maintain capital spending.  You see, it’s their hope that if enough capital investment is made, then this will magically produce indigenous enterprise activity.  Of course, it hasn’t happened before but that doesn’t bother Fianna Fail; they’re gamblers without any sense of history or the odds.

What a contrast with the US Republican Administration.  They’re taking a more pragmatic approach.  They’re nationalising financial institutions – three down, how many more to go; they’re flooding the economy with liquidity, they’re sending tax rebates out (up to $1,200 for a couple) in the hope of stepping up spending.  It’s debatable whether any of this will work, so mired down are they in their ideological morass; but at least they’re working against the right-wing grain.

But not here.  Fianna Fail is making the mistake that other ‘market-obsessed’ governments have done – cutting back at the very moment we need controlled and forensic expansion.

That’s why, after all the parsing of the details of the draft agreement, we should ask a more fundamental question:  is it in the national and economic interest to support it?

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