May 22nd Morning: The Recession Diaries

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Jim Stewart has come up with a provocative idea to stimulate one small part of the economy:

‘Some possible measures to stimulate spending could be vouchers which must be spent within a limited time period, or vouchers which can only be spent in hotels / guesthouses (accredited by Bord Failte). This latter policy has the advantage of minimising leakage, and most likely stimulating spending of a multiple of the value of the voucher.’

Interesting. There is a tendency to conceive of economic solutions as silver bullets, big ideas. The orthodoxy wields a big axe. Even stimulus arguments have a ‘big-cheque’ sense about them. However, Jim’s proposal raises the prospect of economic recovery as a series of small, targeted endeavours – in this case, a series of forensic stimulus initiatives.

It raises, however, another question – what role can consumer spending play in recovery? This is, unfortunately, complicated by another concern – the role of materialism and ‘consumerism’. This can lead us into a bottom-less pit of debate over general statements like – ‘We’ve become too materialistic’. Does this refer to the quality of our consumption? The wastefulness? The longing for some ideal of a slower, richer quality of life that existed (or not) in the past? A critique of the ‘keeping-up-with-the-Jones’? Such phrases can mean anything you want.

In any event, it is an old debate. Karl Marx, the comeback kid of the 21st century, put it first and probably still best:

‘The extent of the power of money is the extent of my power. Thus, what I am and am capable of is by no means determined by my individuality. I am ugly, but I can buy for myself the most beautiful of women. Therefore I am not ugly, for the effect of ugliness is nullified by money. I am lame, but money furnishes me with twenty-four feet (a horse and carriage). Therefore I am not lame. I am bad, dishonest, unscrupulous, stupid; but money is honoured, and hence its possessor. Money is the supreme good, therefore its possessor is good. Money, besides, saves me the trouble of being dishonest: I am therefore presumed honest. I am brainless, but money is the real brain of all things and how then should its possessor be brainless? Besides, he can buy clever people for himself, and is he who has a power over the clever not more clever than the clever? Do not I, who thanks to money am capable of all that the human heart longs for, possess all human capacities? Does not my money, therefore, transform all my incapacities into their contrary?’

I spend (if I have the dosh), therefore I am. So to what extent have the Irish bought into rampant consumerism? And should we incentivise people to spend more? On the first question, international comparisons don’t really put us in the big spender league.

Private consumption makes up less of our GNP than the EU average (and even below the frugal Germans). Private consumption makes up less than 49 percent of our GNP compared to an Eurozone average of 57 percent. It’s not much different from other countries with small home markets (e.g. Luxembourg, Netherlands, etc.).

When it comes to spending per capita we’re again well down the league. The Irish spend, per capita, 13,500 (PPP) compared to the average in other EU-15 countries (14,560 PPP). Every man, woman and child could spend 8 percent more and they’d still be only average spenders.

Retail Spending

Maybe the Irish, though, are irresponsible spenders – blowing our money on shoes and lotto tickets while our children starve in rags. It’s a theory but, again, the statistics are more interesting.

Since 1995 overall Irish personal spending more than trebled as you would expect – rising to over €91 billion before taxes. For every €100 of that increased consumer spend, a third – €34 – went on housing, food (excluding eating out) and utilities. This is fairly necessary expenditure. But there are other little nuggets.

We spent nearly as much on public transportation as we did on clothing and footwear. Of course, the volume of clothes purchased increased substantially – but we can thank exploitative world trade for that; all those sweatshops in Asia driving down prices.

Okay, we probably spent more on booze and fags than what was good for us – but in monetary terms, we didn’t go crazy. And all those cars and petrol, it still doesn’t make up a significantly high proportion – especially give land-use policies that forced people further into the hinterlands with few public transport options.

We can have a lot of fun dissecting these numbers (and getting a breakdown by household income would be fascinating) but the one thing that is noticeable that a substantial proportion of our increased spend is on services – personal, professional (medical, education, etc.) and others. This is noteworthy because one of the arguments against stimulus is that people would spend it on imports. However, services have a high labour-content and in many areas – education for example – a low import-content. If one excludes necessary items (food, housing, utilities), more than 35 percent of our extra spend went on services.

That’s not to dismiss the ‘import’ argument in our spending patterns. The cars, petrol, clothes, washing machines – they all have to be imported. But there are a couple of points to remember:

  • First, most imports are purchased by the business sector to produce their goods and services. Clearly, no one would argue that we should dampen enterprise in order to avoid leakage.
  • Second, even those items imported for private spending have a high domestic content. Take clothes – the primary product is imported. But how much of the primary product is reflected in the final price and how much the domestic output? After all, it has to be brought on shore, transported, warehoused and shelved, sold and bagged, etc. This all is home-grown activity. And what about the services the retail enterprise purchases – legal, financial, advertising, cleaning; again, largely domestic activity. Of course, the picture looks different when examining car sales – where the primary product comprises most of the final price.

A more thorough examination would show us to what extent spending is ‘leaked’ and what stays here – but on the CSO numbers a large part of it stays put. All that said, we have to do something about consumer spending. It wasn’t very large to start with – in comparison with EU averages. And, if the Retail Sales Index is anything to go by, it is collapsing – with all the downside that has for employment and enterprises reliant upon domestic demand.

Excluding motor sales, retail spending is falling – in value terms – by 11 percent annually. And it’s accelerating. The collapse is more severe here than in almost any other EU-15 country (only Spain is suffering more). That’s where Jim’s proposal comes into play. A voucher for hotels has a number of advantages:

  • First, it increases ‘sales’ in a sector heavily reliant upon labour – probably the most labour-intensive sector we have.
  • Second, other services benefit in the locale where the hotel voucher. I stay at a hotel/B&B in Westport. I’ll be spending money in restaurants, shops pubs in the area. It becomes a stimulus for the local area beyond just accommodation.
  • There are other down-stream benefits. Instead of consuming ‘transport’ abroad (private or public), I consume it here, via my car or CIE. Yes, there is leakage here but the money goes to an Irish transport company, an Irish petrol station.

Of course, there might be issues regarding state-aid rules. But I suspect this is going to be less severely applied than in normal times. After all, nationalisation is all the rage while payroll subsidies paid out by some countries like Germany and the Netherlands could be distortive of competition – but they’re going ahead anyway. Making vouchers available to all EU citizens to spend in Ireland might get over that problem – and be a welcome boost to export earnings.

From Jim’s simple proposal we could – if we had the data (e.g. import content, labour content, domestic output and activity – survey the whole range of domestic activities (even down to hairdressers) that could be boosted with forensically targeted stimulus measures.

This is what the Obama administration has done – broken down its stimulus package into a series of targeted measures; businesses from all sectors are lining up to get a piece of the action. For ultimately, stimulus is the most pro-business activity you can have in a downturn.

None of this implies that there aren’t issues regarding our spending. Socially-conscious spending, ethical spending, sustainable spending, consumer conscious spending; we need to assess how we spend and what impact it has – on the environment, on society, on community bonds. A stimulus package could become the first in a series of lessons on responsible spending (we could even extend Jim’s vouchers only to those establishments that recognise their employees right to collectively bargain, pay ‘living wages’ and are tax-compliant).

So let’s spend wisely, spend well and, with the help of state resources, help spend our way out of the recession.

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One Response

  1. Jim Monaghan

    May 27, 2009 8:29 am

    If memory serves me right the Social Credit movement in Canada wanted a time limited currency like the voucher idea to force people to spend. When they won a majority in one proviince Canadian law was changed to prevent them doing it.
    I think the Credit Unions are a product of this movement