May 18th Morning: The Recession Diaries
The ESRI’s recent ‘Recovery Scenarios for Ireland’ offers us a glimpse of the ‘nirvana of the return to normal’ - a set of projections that could see the economy, if not flying high, then at least gliding well above ground level within a couple of years. It assumes that ‘if-only-we-can-get-through-this-spot-of-bother’ we can resume high levels of growth and relatively low (relative to today) levels of unemployment. Is it plausible? Maybe, except that the ESRI, chasing the chimera of ‘real devaluation’ and budget fundamentalism, doesn’t tell us where all this growth is going to come from.
In short, the ESRI predicts that, if we can only bring the public finances under control and cut wages, the Irish economy, on average, will grow by 5.5 percent annually between 2010-2015 if the world economy recovers next year (short recession). If the world economy suffers a prolonged recession (recovers in 2011), our economy will still grow by nearly 5 percent. In addition, in both scenarios, unemployment will fall from a high of over 17 percent to an average 6 to 7 percent between 2010-2015 - more than halving.
This seems too good to be true. In 2010, they are projecting the economy will still be losing ground (-1 percent). But in the succeeding five years, it will suddenly turn around and average something like 5 percent. This compares favourably with recent periods of growth.
While not reaching the dizzying heights of the mid-90s - when foreign investment fuelled the economic boom - the ESRI is projecting the economy will clearly match the run-in to first Celtic Tiger boom and the years of the property boom.
Their projections regarding unemployment also compare favourably. Between 1995 and 2000, unemployment fell from 12.2 percent to 4.3 percent - a decline of 7.9 percent. The ESRI projects that unemployment will fall by an even higher rate - over 10 percent in a five-year period.
No doubt Fianna Fail Ministers will be taking great comfort from all this. If only they can survive the upcoming democratic exercise (i.e. the elections) and the Greens tetchiness over the Programme for Government; if they can just get to 2012, the economy will not only have turned the corner but will starting to grow rapidly. They can go to the electorate and say - yes, it was tough, but it was worth it. It’s all coming right.
Yet, there is this nagging question - where is the growth, where are the jobs going to come from?
In the mid-90s, one out of every eight jobs created were due to multi-nationals - as foreign direct investment flooded into the country. Is the ESRI suggesting that we will experience a similar FDI renaissance? This is not likely. Not just because we are facing into more competition from other low-tax countries, not just because we should expect FDI expansion to be more risk-averse in the years ahead; but also because the character of FDI is changing - to more capital-intensive, high value-added employment. While this is a good and inevitable development, it will not be as labour-intensive as the mid-90s; better paying but fewer new jobs.
We cannot - and wouldn’t want to - return to the property-based job creation starting in the early 2000s, when nearly one-in-six people were employed in construction/property-related sectors.
The ESRI takes some solace in the reduction of the savings ratio and, so, an increase in consumer spending, we should be more cautious. However, in the years ahead, with disposable incomes being reduced by increased taxation - people will be trying to get out under a mountain of debt. The ESRI doesn’t address this problem of household deleveraging.
In addition, public sector job creation contributed to employment growth. If anything, this is going to be reversed under current policy (a policy that the ESRI enthusiastically supports).
There is a serious question over where our growth - economic and employment - will come from. If we can’t return to the halcyon days of FDI, don’t want to return to a property bubble, if there is little likelihood of future credit-fuelled consumer spending, and with public sector employment likely to contract - that leaves us relying primarily on the indigenous sector. Yet, only 10 percent of jobs growth in our traded services sectors came from this sector. Our indigenous sector has always been reliant on the downstream of FDI, property and retail, and the public sector (either direct or through public procurement).
The ESRI has taken into account none of these developments. They have relied on textbook models. But we don’t have a textbook economy (no country does, by the way). They claim, again without any substantiation, that wage cuts will give our export base a boost - even though we are a relatively low-wage economy. They call for drastic adjustments (read: cuts) in public expenditure - even though this is the only sector capable of undertaking the economic investment to give our indigenous sector a boost.
In short, I don’t get it.
This doesn’t make the ESRI’s report a worthless exercise. We may still learn from it. And one of the main lessons is to be sceptical, very sceptical of models that project a return to normal.
For the sad reality is that, when examining the real economy sector by sector, there is no normal to return to.
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EU Should Admit Greece is Bankrupt | Christian Rickens
The unvarnished truth - the second Greek Bailout should not have happened.
The mistake isn’t the size, but the construction of the bailout package. It isn’t geared to the requirements of the people of Greece but to the needs of the international financial markets, meaning the banks.
How else can one explain the fact that around a quarter of the package won’t even arrive in Athens but will flow directly to the country’s international creditors? The holders of Greek government bonds are to get some €30 billion as an incentive to convert their old paper into new bonds. The aim is to keep alive the illusion that Greece isn’t bankrupt — after all, the creditors are voluntarily forgiving part of the debt. The financial sector is cleverly manipulating the fear that a Greek bankruptcy would trigger a fatal chain reaction.
That leaves €100 billion. But that too isn’t geared to what Greece needs in order to get back on its feet. It’s linked to an estimate of how much debt the Greek economy can bear without collapsing. International technocrats agree that with debts amounting to 120 percent of gross domestic product, the country can just about go on servicing its debt. That’s the level at which the cow can go on supplying milk without dying of exhaustion. So 120 percent became the goal.
Collaboration, with our European partners | Cunning Hired Knaves
The European project was supposed to be a bulwark against the dangers of fascist ambition, but now it is the instrument used to dismantle European democracy in the interest of the risk adverse looking for a steady income stream from the provision of the social net by those who cite the words and actions of old fascists while doing so.
The post Collaboration, with our European partners by Richard of Cunning Hired Knaves summed up in one sentence. For much better sentences and many more urgent points read the post.
On Sunday there were massive demonstrations throughout the Spanish state, with half a million people on the streets of Madrid and 450,000 in Barcelona, protesting against the labour ‘reform’ planned by the Partido Popular, the right-wing party that most closely represents the interests of the power elites that conserved their position when the transition from dictatorship to democracy was undertaken.
S.P.A.R.K. protest at cuts to lone parents, Dublin 18th February 2012
Many families were cut in the last budget but lone parent families were particularly hit by the Fine Gael/Labour Party government.
The key elements are that single parents can’t take advantage of training such as Community Employment (CE) Schemes and when the youngest child turns 7 years old, the parent is declassed as a lone parent but treated as an ordinary worker even though there are few affordable creche places. There is a bill coming up in March which will copper fasten some of the worst elements of government plans.
There is particular anger directed at the Labour Party because they are associated with women’s rights and a more progressive society.
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Exiting the euro | Michael Roberts
Michael Roberts argues that those in Greece who cite the example of Argentina when suggesting that Greece should leave the Euro are not necessarily looking at the whole picture. The situations are not the same, Roberts points out, citing Argentina’s former central bank governor at the time, Mario Blejer and his recent piece in the Financial Times. He also points to research based on the the experience of five recent devaluations of economies in crisis (including that of Argentina) which “shows that they lead to a 10-20% fall in real GDP and take five to ten years to recover to previous real GDP levels. But that is not to say that there is no alternative to “lowering wages, privatising the state sector, reducing taxes for the corporate sector (especially big business) and ‘deregulating’ labour markets i.e. the super-exploitation of the Greek people to raise profitability.”
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Solidarity campaign to support the people of Greece
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[...]
During the Cold War, opponents of communism routinely, and not entirely wrongly, claimed to be champions of liberty. Freedom for capitalists and freedom of speech and thought go together, it was claimed. “Freedom is indivisible” wrote Bruce Winton Knight in 1952. “Economic freedom is…an indispensable means toward the achievement of political freedom“ wrote Milton Friedman in Capitalism and Freedom. And back in 1944 Friedrich Hayek complained that “We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past.”
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In The Observer, Sunday 12 February 2012
Anyone who has followed the crisis will understand that the real economy of businesses and commodities is being upstaged by complicated financial instruments known as derivatives. These are not money or goods. They are investments in investments, bets about bets. Derivatives created a booming global economy, but they also led to turbulent markets, the credit crunch, the near collapse of the banking system and the economic slump. And it was the Black-Scholes equation that opened up the world of derivatives.
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