Begruding the Recovery

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mdhCliff Taylor asks why President Michael D. Higgins is not celebrating the recovery we are experiencing.

‘The President is not comfortable saying anything positive about the Irish economic recovery.’

Apparently, the President is a bit of begrudger; indeed, all of us who opposed austerity are.

‘But if you are in the anti-austerity camp then the fact that the Irish economy is now growing strongly is an inconvenient truth.

Not only is reality inconvenient, we are guilty of being fantasists.

‘The anti-austerity brigade seems to assume there was some way for Ireland to magically escape cutbacks when a huge gap had emerged between annual spending and revenue even before the bank bailout costs.’

But then Cliff bemoans the lack of ‘measured discussion’.   Does labelling people begrudger, reality-deniers and fantasists constitute measured discussion?  At the risk of further labelling, let’s try to engage in some of that – measured discussion, that is.

A good starting point is the Central Bank’s recently published Economic Letter which summarises a major study on fiscal consolidation in the Eurozone between 2011 and 2013. The study used two models to measure the impact of austerity – the EU and the ECB model.  They further utilised three scenarios:  a baseline, one where business debt was factored in and, thirdly, credit-constrained households.  In short, the study found:

  • The impact of austerity measures were much more severe than previously estimated – so much so that for €1 billion of austerity, the economy fell by €1 billion and more
  • That spending cuts had a more severe impact than tax increases
  • That debt rose in the years after the austerity measures were introduced – only falling some five or six years (and possibly longer)
  • That the austerity measures were the primary reason behind the Eurozone’s slugging growth performance

They concluded by saying it was a mistake to pursue austerity measures while the economy was in a slump; addressing the debt should have been postponed until after the economy recovered.  If this were done, the debt would fall more quickly and the economic damage (unemployment, falling wages, business bankruptcy) would have been less.   While this was a study of the Eurozone as a whole, there is no doubt that Ireland experienced this – especially as our level of austerity was nearly double that undertaken in the Eurozone as a whole.

This study is nothing new.  In Ireland, evidence has been emerging that tells a similar story.

  • ESRI research suggested that the massive austerity measures undertaken in 2009 over three budgets had little impact on the deficit.  According to the author this pointed ‘to the difficulties of implementing austerity cuts in a period of deflation’.  This is macroeconomics 101 – pursuing deflationary budgetary measures at a time when the economy is already in deflation means you are just running in quicksand.
  • Both the ESRI and the Nevin Economic Research Institute have highlighted how cutting public sector employment didn’t help the public finances, it only made them worse.   The Government reduced public sector jobs by over 32,000 between 2009 and 2013.  All this it did was reduce economic growth, cost private sector workers jobs (through loss of consumer demand) and drive up unemployment costs.  The result was, perversely, higher debt.  Again, this is common sense: if you reduce employment during a jobs recession, it rarely turns out well.
  • NERI has specifically highlighted how cutting public investment, similarly, drove up the debt.  This is because any deficit gains were wiped out by the economic impact of the cuts (lower growth, higher unemployment, less tax revenue).  This was confirmed recently by the IMF which showed that, conversely, increasing investment actually reduced the debt – by driving growth, employment and incomes.

As the data comes on stream, as the evidence mounts, we are getting a better understanding of the inadequacies and contradictions of austerity – specifically that many of the policies were self-defeating; they didn’t improve public finances, they only made it worse (or had little impact – or poor value-for-money).

The Great Mistake

Future historians may well regard the Great Recession to have been unnecessarily lengthened and deepened by what could be called the Great Mistake.  During the crisis, domestic commentators claimed that austerity was not a choice, but necessity.  This is the core of the TINA assertion.  Was this really the case?

Let’s treat employment as a proxy for falling output.  We can see that the Irish recession was primarily fuelled by the contraction in construction employment.

employment07-10

In the five years following the first fall in construction (building jobs and property prices started falling a year before the economy went into official recession).  60 percent of job losses were concentrated in the construction sector.  This, however, doesn’t include all property-related activities (professionals, manufacturing suppliers, transport, etc.).  The impact on the non-property related sectors was much smaller – and was driven by the loss of construction employment and domestic demand.

This would have been fortunate (if that’s the word) for any government.  Sectors like construction and public employment are directly influenced by government policy unlike the export sector which is dependent on external demand.  So what would have been a rational response within a crisis management situation?

  • Maintain construction employment through public investment during the crisis years.  This would have economic and social benefits:  launching a water & waste investment drive, building social houses, continue necessary road construction, etc.
  • Redirect public sector employment to labour-intensive services to facilitate social equity, labour supply and domestic demand.  This would have been a good time to launch affordable childcare.
  • Pursue forensic consolidation measures that would have had minimal impact on domestic demand – withdrawal of property tax-relief, increased taxes on high-income earners and other unproductive activity

Would this programme have avoided the recession?  No.  However, the first rule of fiscal prudence is to lessen the impact of recession and shorten its length.  The quicker you do this, the quicker you return to growth.  That’s when you start raising taxes; it is less painful when wages and incomes were rising.  That’s when you undertake real public services reform – when such reforms don’t result in deterioration and withdrawal.  That’s when you reduce the reliance on construction activity – when jobs are rising in other sectors.

Of course, come commentators would say we couldn’t afford this – namely, maintaining construction employment.  However, this is not the case.  In 2008 and 2009, the government was flush with cash –between €37 and €43 billion.  Much of this would end up with the banks.  However, the National Treasury Management Agency had the foresight to pre-borrow substantial money, leaving a substantial cash surplus for the Government.  In short, the resource for investment was there.

Would we have avoided the impact of recession if we ‘burned the bank bondholders’?  Again, no.  Before the substantial bailout money was handed over, the speculative activities of the financial sector had already done severe economic damage – through the housing collapse, interest rates and the severe reputational damage by tying the banks’ balance sheet to the state’s.  Would letting Anglo-Irish fall (i.e. let the bondholders take the haircut) have helped?  Yes, but it still wouldn’t have avoided the profound fiscal crisis.

But the picture that is emerging is one of denial and crisis-paralysis.  The Irish Times today reports a Central Bank and the Financial Regulator in denial about the property bubble, as far back as 2004.  And when the elephant in the room finally sat on everyone, the Government panicked – launching unnecessary deflationary policies.

Fast-forward to today and Cliff again bemoans that the President ‘suspects’ the recovery rather than welcomes it.  This is interesting because in the same paper on the same day, we had the Governor of the Central Banksuspecting’ the recovery.

‘The rate of economic growth is being exaggerated . . . the outgoing Central Bank governor Patrick Honohan has warned the Government.  The business activities of multinational companies were affecting the figures, he said, creating a risk that Government policy would not be based on a realistic view of future prospects.’

Sound familiar?  Maybe the Governor is a begrudger, too.

An evidence-based reasoned discussion of the past seven years is needed.  In that, there will be plenty of room for disagreement and different perspectives; good.  That is not possible, though, when evidence is ignored and labels are hurled about.  We’ve had too much of that.

Let’s not let the future be similarly contaminated.

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