Minister Throws Everything into the Pot, But Only Ever Draws One Conclusion
He kicked off by saying if his officials knew he was here in my house, there’d be war. They thought I was a maverick. I took it as a compliment.
He got to the point quickly. He was sitting opposite me and he had a habit of looking around rather than catching my eye as if he expected someone to join us at any minute. I told him we were on our own, just the pair of us and the puppy.
He leaned over and, in a hoarse voice, almost whispering, he said: “What would you do?”
This is an excerpt from David McWilliams’ account of his first meeting with Brian Lenihan in McWilliams’ home in September 2008 when the econo-columnist outlined a bank guarantee scheme to the late arriving Minister for Finance. It’s an account that is being disputed by the other attendee at the meeting in the kitchen (the puppy, one presumes has not been asked to comment) but that hardly concerns us here.
More important is the notion that the Minister for Finance considers the opinion of a single economist with the gravitas that McWilliams suggests. Much of the story is self-serving, but there is a betting chance that most of it happened as he describes, including the cheap novelist descriptions of garlic munching and the prodigious quantity of tea imbibed. What stretches credibility is that Lenihan relied on McWilliams to provide the best solution rather than suggesting a solution which met with Fianna Fail’s ultimate concern.
As events have unfolded it seems that every decision that has been made about the banking crisis, including the original guarantee scheme and NAMA itself, have had one underlying objective - to save the banks. To avoid at all costs anything that would lead to the altering of their structure, and in doing so provide the means for them to continue with business as usual. So when Lenihan went to McWilliams that night he was looking for a possible mechanism which would preserve the banks as much as possible at a time when they were sinking fast and he was faced with the possibility that a major restructuring would ensue.
What is also self-serving in McWilliams’ account is that he imagines himself to be perceived by the Minister and his mandarins as a ‘maverick’. It is true that as an economist with a high media presence his opinion, on the housing bubble in particular, differed from the majority of economists who had a similar level of access to the nation’s media. At the time of the boom, however, the majority of these were economists associated with banks or stockbrokers. Since the crisis began they have been joined by some academic economists very much of the orthodox camp, and even the ultra-orthodox in the form of Colm McCarthy.
One example of where McWilliams differs from this cohort is his idea of leaving the Euro. However, this is not so radical - if anything it is quite conservative. The traditional way of dealing with a recession when you have a sovereign currency, from an orthodox point of view, is to devalue. This makes your goods more ‘competitive’ in the international market place. The benefit of this can be seen by the effective devaluing of Sterling in relation to the Euro and how this lead to a significant surge in shopping north of the border. Ireland can’t devalue in the Eurozone, so what are the other options? The alternative to devaluing is to reduce the cost base of your products to boost their ‘competitiveness’ and the principle cost that economist always go for is wages. Of course, to make this argument you have to state that wages have been too high in the first place, even when the evidence is there to contradict it.
McWilliams has correctly stated that you should avoid any action that we lead to deflation in a recession, so for him cutting wages is a deflationary measure and so is not an option. Instead he says that we should leave the Euro. There is another idea which McWilliams has never entertained seriously - the idea of continuing to borrow and to invest in growth and employment.
David Blanchflower, a leading labour economist and a former member of the Bank of England’s monetary policy committee was in Dublin to talk at the latest Dublin Economic Workshop, which was chaired by Colm McCarty. Blanchflower’s opinion about the Irish economy is straightforward:
You can’t balance the budget in the middle of a recession and that you certainly should not cut public sector pay, which is one of the stabalizers in the economy during a downturn.
During an interview on Morning Ireland yesterday (15 mins 15 secs in) Aine Lawlor referred to him a dissenter, which seems to suggest that his opinion is somehow, outside of the mainstream. But his ideas are just straightforward Keynesian notions that you shouldn’t add to deflation in a recession - ideas shared by many mainstream economists around the world. Indeed, the only place where he appeared to be a dissident was on the platform of the Dublin Economic Workshop with John Fitzgerald, Philip Lane and Colm McCarthy yesterday.
Slí Eile of Progressive Economy was there and gives a very detailed account of proceedings including the very telling reaction of the audience to his talk:
Speaking at the third in a series of ‘Crisis’ conferences today in Dublin he said that he was against pay cuts, cuts in public spending and deflation to right the economy. He is very concerned that as Governments respond to the crisis by cutting off stimulus interventions too early or - worse still - adding fuel to the fire by undertaking sharply deflationary approaches there is a real danger that the economy will be ‘pushed over the cliff’.
When pressed by a perplexed audience of sensible mainstream Irish economists to comment on the current Irish fiscal situation, he made it clear that he was not in favour of the deflationary push. This created some concern and reaction including an intervention by John Fitzgerald, the chair of the first session, to provide a stout defence of a rapid ‘fiscal adjustment’ and the unworkability of a fiscal stimulus in current Irish fiscal situation. This was followed up by a lengthy presentation by Philip Lane in which he gave a very rounded and robust defence of the current strategy and against any let up in adjustment (even arguing for more cuts in addition to the €4bn adjustment envisaged this year and again for each of the coming two years).
It is the sort of opinion we hear little of from our own economists, although he is only saying things that the left already knows. Or should know. In the news, of course we now hear Sean Sherlock of Labour arguing for public sector pay cuts, and Peter McLoone admitting to officials in IMPACT that they’ll have to accept pay cuts over job losses. This is depressing stuff, but another indication that we are allowing the right to win even the weakest argument.
So, McWilliams is not a maverick and Blanchflower is not a dissident. The question is, even if they were either would the Minister for Finance be interested in their expert opinion if it provided the most sensible solution?
Of course not. This crisis, and the measures being put in place by the Irish government have more to do with protecting class interests than they have to do with finding the best solutions using the best available evidence and the finest economic minds.
Blanchflower’s opinion is not on message enough to ever be sought, even if it was provided with the finest tea and the freshest garlic in the most perfectly appointed kitchen, with the cutest little puppy nuzzling at the intellectually adroit Minister’s feet.
But aside from Blanchard’s common-sense view which runs counter to the narrative that is driven home to us so regularly, there is another important message that the English economist had to deliver and which is once again asynchronous to current government thinking.
As mentioned in the Dublin Economic Workshop and provided in more detail in this September 2009 paper Blanchflower suggests that we may be looking at a double-dip or W shaped recession and that it is far too soon for governments to retrench now that some indications of growth have appeared on the horizon. In other words what we are seeing now is what Keynes, writing in 1930, called a ‘semi-slump’:
‘The duration of the slump may be much more prolonged than most people are expecting and … much will be changed both in our ideas and in our methods before we emerge. Not, of course the duration of the acute phase of the slump, but that of the long, dragging conditions of semi-slump, or at least sub-normal prosperity, which may be expected to succeed the acute phase.”
Referring to the opinion of Nouriel Roubini, as expressed in The Financial Times on the 23rd of August last, Blanchflower argues that the recovery is certainly not over and is threatened by countries removing the various stimuli too quickly. Even Dominique Strauss-Kahn, Managing Director of the IMF expects ‘this recovery to be relatively sluggish’. And, Blanchflower goes on to say, ‘the inevitable consequence of a weak recovery is to delay further any sign of light in the labour market’.
Considering the optimism of the Irish Government when projecting the state of the deficit and its ideas about when recovery to growth may occur, as outlined by Michael Taft yesterday, and the fact that its entire economic policy is based one idea: a return to considerable growth in the World economy sometime between 2011 and 2013, it is important that we take Blanchflower’s point of view seriously.
The largest problem with sluggish growth is the scale of future unemployment which will act as a drag on any potential recovery, particular unemployment among the young.
“Who has been impacted the most, by the rising levels of unemployment? The answer is the young, in every country. Table 7 shows the rise in youth unemployment rates from July 2008 to July 2009. Currently youth unemployment rates for the under 25s in the Eu27 are 19.7% and 17.8% in the United States. They are especially high in Spain (38.4%). They are everywhere higher than adult rates.”
And in which country did we see the greatest decline in employment?
“Up to the first half of 2009, Ireland, Spain and the United States experienced the greatest declines.”
So in a country with one of the greatest decline in employment, and with efforts to reduce employment through an active deflationary policy firmly in place, any potential opportunities for those who are going to enter the job market soon are evaporating rapidly. The consequences of this are described in the conclusion to the paper:
“What has been absent from the policy response thus far […] is a coherent approach to the treatment of younger people who have not yet entered the labour market. We know that these are particularly vulnerable individuals, whose long-term opportunities can be damaged by adverse events early in their labor market experience. We also understand that the discounted social and health costs associated with youth unemployment are extremely high. It is thus extremely important to introduce policies which enhance the skills and capabilities of younger workers and which assist them to join the labor market as quickly as possible.
Spells of unemployment while young create permanent scars. Unemployment is higher in the years ahead if a young person doesn’t make a successful toe-hold into the labour market early in their lives. Solving youth unemployment is the most pressing problem governments are facing today. Not dealing with the problem of high, and rising levels of youth unemployment hurts the youngsters themselves and has potentially severe consequences for us all for many years to come. The time to act is now. The young must be the priority.”
Blanchflower’s argument is right of course, and necessary and important for any government to understand. But I doubt that Brian Lenihan would even cock an ear, never mind stay up late to listen to it.
The photo of David McWilliams posing at the Potsdam Conference with Churchill, Roosevelt and Stalin is courtesy of Conor McCabe at Dublin Opinion.
Discussion
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Comment by: Eoin O'Mahony
Nov 3rd 2009 at 15:11
Thanks for that Donagh, the most cogent piece I have read on this ego-fest. As an aside can I offer the the prospect of a full-blown Brian Lenihan charm offensive in the run up to the budget. He likes puppies, he’s a little eccentric (the garlic chewing), he’s a family man (O’Callaghan RTE last weekend) and he talks to the little people.
Comment by: donagh
Nov 3rd 2009 at 17:11
Thanks Eoin. I was thinking of making more of McWilliams’ way of telling the story and his little portrait of Lenihan. The level of detail is quite weird.
As someone suggested to me, its a bit like Roger ‘Verbal’ Kint/Keyser Soze providing more detail than is needed using whatever is available. Maybe I am being too critical, but I suspect that McWilliams is a fan of detective novels where the detective always has a number of props that define him. If it hadn’t been confirmed that Lenihan does actually eat garlic you’d think that he made it up. But you’re right, there is a charm offensive on the go at the moment. No doubt when he is announcing the cuts in social welfare in the December budget the isolated tear running down his cheek will get a good mention in Miriam Lord’s wry account.