It is quite difficult to comprehend the credibility granted to the economic establishment in terms of defining the options that we can adopt to address our economic problems. This is all the more extraordinary when considered against what can only be described as the worst reputational performance by any set of associated professions in history. Over a period of a decade or more the combined wisdom and skill-sets of accountants, financial managers, regulators, economists, ministers and specialist departmental personnel failed to manage, predict, regulate or successfully remedy the crash of the national economy. Yet, these are the very same people now defining the parameters of rational discussion and acceptable comment. According to this conventional viewpoint all options must involve the socialising of speculation-incurred debt; the rejection of default options; remaining within the Euro zone; viewing personal indebtedness as a problem for families not the state; and subjecting all sovereign decision-making to EU/ECB/IMF direction.
What is truly disturbing is the level of stricture applied within the media, even by those facilitators whom one would consider liberal in terms of widening the boundaries of debate or admired for their ability to draw out alternative perspectives. Offering non-establishment options immediately brings a wall of ridicule and an aggressive pursuit of chapter and verse solutions – ignoring the fact that definitive solutions have been as scarce as hen’s teeth on the conventional side. So, those who advocate even limited default are faced with responses that paint a picture of desolation and breakdown – empty ATM machines, collapsed public services, no credit for business, irretrievable reputational damage etc. But these things might happen anyway if we maintain our present course of action, and perhaps the only chink of light that might compel us into some sort of realistic consideration is the growing consensus that sovereign default is now more likely given the sheer scale of the debt burden that has accumulated. Undoubtedly, there is no easy way out of the mess but a constructed solution is preferable to one eventually imposed by circumstance, and it is high time that we began to bend our brains to this end.
Even though Ireland is a particular and extreme case, the difficulties introduced by laissez faire capitalism are relatively universal. For some decades now the unfettering of global capital has resulted in a flow towards speculative investment rather than investment in production, because of the greater return (assisted by generous tax breaks) this afforded. To some degree, this is an outcome arising from the sheer efficiency of capitalism in increasing the output of goods, resulting in market saturation, over competitiveness and declining profits. What should have followed, in the developed world in any case, was a steering of capital towards technological development (especially green energy development) and growing the services sector, particularly leisure, learning, healthcare, child/elder care and personal development – a natural pathway for advanced societies, whose material needs have largely been met by existing production capability. However, this is not the time to begin an analysis of capitalism, even though it will undoubtedly have to be scrutinised for its applicability and relevance in an era of climate change and declining carbon energy resources. However, before returning to national problems let us contemplate some historical wisdom that emerged from the last great economic downturn that began with the Wall Street Crash in 1929.
John Maynard Keynes was the economist who described a normal functioning economy as a circular flow of money driven by worker’s consumption – basically one person’s wages contributes to the employment of others by virtue of their purchasing of goods and services. When this circulation gets interrupted through unemployment, hoarding of savings and declining demand – as happened with the collapse of the housing bubble in Ireland – then artificial means have to put in play to restore the flow, either by increasing the money supply or by intervening in the market to stimulate spending. In a recession private sector capability is much reduced, therefore this stimulus must be provided by the state. If the stimulus is focused on poorer people, through investment in employment-creating projects then the effect is more direct, since poorer people spend a greater proportion of their income on basic items such as food, clothing, heat etc. This is the strategy being employed in the USA by President Obama. Unfortunately, economic policy in the European theatre is driven by a different belief system.
Neo-liberal economists have an unshakable belief in market forces, the so called ‘invisible hand’, which they believe always ensures that the natural laws of supply and demand will right any aberration in the market. Neo-liberals do not like state intervention. Thus they advocate addressing spending deficits arising from a reduced tax take (because of unemployment and less spending) through austerity measures – cutting public services and selling off publically owned utilities. But they are perfectly happy for the state to capitalise busted banks at the expense of its citizens, and they justify this socialisation of private debt on the basis that the state has a duty to create the conditions for market forces to operate – a moot point, but there you are. You will have gathered at this point that the European Central Bank head Jean Claude Trichet is no Keynesian, neither is the EU (in its various forms) nor the International Monetary Fund.
It is a double misfortune that we as a country, having been driven to ruin by a reckless government, are now subject to the direction of neo-liberal ideologues. The ECB-EU-IMF is determined that Ireland will refloat its banking system even if it impoverishes its citizenry in the process. Paul Krugman writing in the Irish Times last week (29/3/11) lays out the outcomes of this process to those US cheerleaders who urged a similar strategy in 2009 to the Irish one – bond yields topping 10% for the first time, unemployment at 14.7%, a doubling of interest rates on debt and an unsustainable debt burden. Dan O’Brien writing in the same paper (2/4/11) outlines a worst case scenario that may involve stress testing Ireland Incorporated, creating a banking panic. All of this is set against a backdrop of negative growth and no real signs of recovery.
It is pretty apparent that European imposed solutions do not have our interests at heart. Whatever about the noble ambitions of Jacques Delors to create a unified, mutually dependent and collective Europe it is abundantly clear that that project has long since been colonised and diverted by fiscal conservatives and big business. Despite having engineered the biggest economic meltdown since the Great Depression neo-liberals continue to dominate the policy stage. Only this week Morgan Stanley listed Ireland as ‘good for investment’ because it is a fully liberalised and deregulated economy, making it apparent that bankrupting Irish citizens is secondary to maintaining a liberal market model.
So what sort of options other than ruinous loan repayments should be given space and consideration? Well, we could default – and may anyway, if we read the subtext of previously cautious commentators. How disastrous would that be? Despite the howls of horror and quivering fingers pointing to Argentina, an Irish default would be quite different, being confined to the private debt assumed quite rashly by the previous government. True sovereign debt would not be defaulted upon, so there would be every opportunity to convince the markets that we remain honour-bound to meet our sovereign obligations.
What of the banks? Well we did manage without banks for six months in the early 1970s, and while it was a bit awkward at first, commercial life carried on as normal. Nonetheless we would need to re-establish a banking system, and to this purpose we could invite in foreign banks or bolster the few existing clean institutions to carry out this function. Since our existing contaminated banks have no capacity to provide credit to businesses they are of little commercial use anyway, so why bother resuscitating them. Admittedly, this would add to job losses, but there will be a massive reduction in staff numbers anyway, as these banks are forced to reduce the scale of their operations under the EU/ECB/IMF agreement.
One other option would involve retaining the commitment to recapitalising the banks at the expense of generations of tax payers, but with repayments stretched over a reparation-type timeframe, say twenty or thirty years, perhaps even longer. This would allow the restoration of a normal economy alongside a debt repayment regime – something post war Germany was able to achieve with considerable success. Alternatively, we could simply write down the personal debt, which is the next big hurdle we will meet – fairly soon too, if the ECB persists with its intention to impose a gradual rise in interest rates to prevent inflation (conservative economists tend to be paranoid about inflation even though it has not been a critical factor since the 1980s). This would as a matter of course also require us to seek a write-down of state assumed debt.
Now for the crunch question, and perhaps the greatest inhibitor to a widening of discussion and the onset of lateral thinking: how, if we abandon the EU/ECB/IMF package, do we meet the day to day costs of services and salaries? Well, in the normal run of events, the straight answer is through taxation, like any other prudent state. Unfortunately the Progressive Democrat-Fianna Fail illusion that the provision of quality public services is compatible with a low tax regime means that an immediate restoration of responsible levels of taxation would be a tremendous burden for families, coming on the back of increasing debt repayments, ad hoc levies and increasing unemployment. In addition, the size of the deficit, €19 billion, is too big to plug with taxation alone. Difficult as it is to swallow there will have to be savings in public expenditure, which probably means a reduction in the public service wage bill.
Although it is an evolving situation, subject to wider political agendas and perhaps the very future of the European monetary project, it is becoming fairly clear that there are no ‘one stroke’ solutions to the problems we face. A combination of debt restructuring, burden sharing with bondholders and fiscal consolidation together with a targeted investment programme to stimulate growth is the most likely package to succeed.
Trying to deal with the debt problem while restoring growth is a difficult one, but we still have some €4.9 billion in the National Pension Reserve Fund and €9 billion in cash reserves. There are also high levels of personal savings, perhaps €100 billion, a portion of which could be elicited through a national bond issue – something akin to war bonds, which could be promoted as an investment in ourselves as a nation.
These are only some of the options that might be considered, but undoubtedly there are others that debate and discussion could throw up, if it was permitted.
Finally, while a debt burden of the magnitude that Ireland has accumulated may seem insurmountable experience shows that once growth returns and employment increases significant inroads can be made into the debts that a nation carries. As things stand we are in a very bad situation and are understandably over-focused on banks, debts and indebtedness. We need to concentrate on creating jobs, facilitating entrepreneurship and resourcing public enterprise, which will in turn bring a degree of confidence and a flow of spending – which brings us right back to John Maynard Keynes and the restoration of the money circle.