February 17 Evening: The Recession Diaries

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There will be a variety of slogans on placards on the National Demonstration this Saturday:

There is a Better Way • Bail Out People, Not Banks • Punish the Corrupt, Not the Victims  • Workers Unite

All catchy in their own way.  But here’s the text for a placard that should be carried by thousands and memorised by millions:

‘No economy has ever deflated its way to growth.’

Okay, it doesn’t trip easily off the tongue and I can’t imagine demonstrators chanting it through the streets of Dublin.  But strip away all the arguments on all the issues surrounding our economic crisis and this placard would say it all.

So many of the posts I have written revolve around this theme.  But I can’t take credit for putting it this succinctly.  That goes to David McWilliams writing in the recent Sunday Business Post.  He pulls no punches:

‘There is no point playing the conservative game and waiting for the global economy to pick up. Equally, we should stop trying to be respectable members of a monetary union dominated by ‘‘balanced budget fundamentalists” when we are faced with an economy which is contracting by the hour due to a lack of demand.’

And:

‘The Great Depression was caused by trying to balance the books in the face of debt deflation. Listening to mainstream economic discourse in Ireland, it looks as if we are going to repeat the mistakes of history. This is social vandalism. If we actively accelerate the slump by slashing and cutting simply to balance the books, we will never be forgiven . . If Ireland continues to make massive cuts in public spending, the country will simply contract further.’

Amen, brother.  It is well past time these arguments come into the mainstream debate.  I don’t know if this signals a leftward shift.  I don’t know if David is getting ready to join the great club of social democracy (if he is, I’ll help him with the paperwork).  But no matter.  For we are in a life and death struggle with ‘balanced budget fundamentalists’.  If we lose, it will be of little avail to plan for a social democratic, or any other, future.  So let’s leave our disagreements until tomorrow and concentrate today on building a coalition of common sense.  And given Goodbody’s latest projections, we need that coalition now more than ever.

Goodbody’s latest report, ‘A Rocky Road’ doesn’t make for pleasant reading. For 2009:

  • GDP:  – 6 percent
  • Consumption:  – 7 percent
  • Investment:  – 22.6 percent
  • Government deficit: – 12.3 percent (of GDP)
  • Unemployment:  12.6 percent

And that’s just this year.  Unemployment is expected to grow to 15 percent by next year and it won’t be until 2013 before we get back to 2007 output levels.  But it’s not only dismal projections that Goodbody produces, they also come up with some pretty dismal solutions.

Their primary concern is not to reduce unemployment or generate economic activity.  Their focus on curing our woes is to balance the budget – in a most fundamental way.  For, as they point out, if the Government is intent on bring the budget back to the Maastricht guidelines by 2013, there would need to be €16.5 billion in either cuts, tax raises or a combination of both.  That comes to 8 percent of GDP – eight percent taken out of the economy.

However, under Goodbody’s assumptions, the scale of cuts and/or tax increases would need to be nearly double that – over 15 percent of the GDP.  We could rip the shreds out of the economy and still be unable to bring budget back to Maastricht guidelines level.  And, after laying waste to our economic and social base, in what shape would we be in to take advantage of an international upturn?  Bad shape, I would conjecture. Incapable.  To close the gap is to close the door on recovery for years and years to come.

The task is impossible – and irresponsible in the extreme to even attempt it.  In charting out a different path, though, we should take note that have little economic advice:  for while Goodbody brings an economic analysis to its projections, employing all the tools of that trade; when it comes to prescriptions it falls into the trap that McWilliams describes:

‘Crucially, we have to avoid the mantra of increased taxes to balance the books. This canard, to which many economists amazingly subscribe, mistakes economics for accountancy.’

For instance, there is no analysis of the multiplier effect resulting from the deflationary policies which Goodbody proposes.  For instance, if the Government launches further cutbacks, especially in the areas of social transfers (i.e. social welfare payments), to what extent will this drive down domestic demand and consumption and, then, how much will this accelerate GDP decline. Similarly, with tax increases – how much will this hit consumer spending?  Will people spend less, resulting in even more unemployment, more loss of tax revenue, higher welfare payments: what impact will this have on the growing deficit?

In other words, Goodbody – like so many commentators who mistake accountancy for economy – does not take into account the dynamic effects on both the economy and the fiscal crisis of their deflationary proposals.  A pension levy – in either a fair or unfair form – may look good on the accountancy sheets.  Has anybody modeled its effects on consumption?  Has anyone assessed the impact of withdrawn spending it will have on the domestic demand sector?  Now add in the effect the Government’s freezing of public sector pay is having on the remainder of the economy.  This ‘demonstration effect’ has resulted in IBEC effectively ripping up the wage agreement’ – even for profitable companies that can afford it.  What will the effect of that be?

I don’t have that model and can’t produce the numbers.  But it’s a sure bet it will create a vicious cycle:  recessionary effects that are self-reinforcing through feedback loops with no tendency towards an equilibrium.  It’s a spiral downwards.  And for the immediate future there is no sign of a floor.

Even those ‘accountancy sheets’, on which those cuts seem to look good – that paper is already looking tattered.  The ‘€2 billion cuts’ were meant to reduce the deficit from €18 billion to €16 billion.  But Goodbody is now projecting a €21 billion deficit.  If the €2 billion cuts go through, we will be still be above €18 billion.  The ground is shifting so fast that even running, we’re not standing still.  We’re falling further behind.

Let’s be clear:  we cannot cut or tax our way out of this mess.  We can only grow our way out.  What we need now more than ever is an economics for our time, an economics of recovery, an economics to launch a virtuous circle.

I look forward to Comrade David McWilliams’ next opinion piece.

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