Wednesday, 13 May 2009

Do it, Explain it, Avoid it

Sli Eile:Do it, Explain it and Avoid it” is the advice of Jens Henriksson. He also says that ‘A few powerpoint slides, a report and a good one-liner can have an enormous impact.’ Ten Lessons about Budget Consolidation (which, interestingly, was free for download from the Breugel site in February, but is now offered for sale) became the received economic wisdom earlier this year. Even the Irish Congress of Trade Unions invited Jan Henriksson to speak. The ICTU ten-point plan There is a Better, Fairer Way argued that budgetary consolidation should be designed as a package with fairness its cornerstone. But be careful what you buy. As Jim O’Leary pointed out back in February, Henriksson’s recipe lessons contain some very nasty medicine such as pay and social welfare cuts. In fact, the Henriksson recipe tastes like a very orthodox slice of ‘balance the books’ before you move on to anything else.

A previous post by Peter Connell (The Swedish experience: lessons to be learned) has drawn attention to the 'political’ and not just ‘economic’ nature of the ‘lessons’ contained therein. It also reminded readers that both the international context of the early 1990s, as well as the legacy of the Swedish social model and partnership, made adjustment possible and sustainable.

To what extent is public policy drawing from the Henriksson ‘Ten Lessons’ (they were originally construed as ‘commandments’ but Henriksson wisely toned it down to ‘lessons’ for international consumption)? And is it the only effective medicine available? Lets run through, briefly, the medicine in 10 steps:

Lesson One: Sound public finances are a prerequisite for growth

Henriksson even goes so far as to suggest that ‘risk aversion is king in economic policy’. It certainly was in the first wave of responses to the Great Crash in 1929 with the disastrous consequences that followed. Getting the public finances right is certainly one element of the recipe. The main contention here, is how the burden is shared and adjustments made. A cartoon from the 1930s depicted various members of society on a ladder descending into the sea with those higher up the ladder saying ‘we should all take a cut and move a step down’.

Certainly, the Government, here, has shared the cost by imposing proportionately similar cuts to those on about the average industrial wage as to those much higher up the income ladder. With so many tax reliefs in place it is hard to know the real effect for those outside the PAYEE tax net.

So, it is the way you do it that matters and not just the fact of balancing the books.

2 If you are in debt, you are not free

Mortgage holders would agree. Again, the issue here is not the level of debt at any point in time as much as the relationship of debt to long-term capacity to generate new income to repay debt. Clearly, some level of risk is involved as it is for individuals. Being a member of a currency union is help in this context as is the relatively low level of debt to GDP ratio for Ireland, currently. The lack of freedom arises from the way in which finance markets interfere with the political process by compromising other issues that fall outside narrow measures of credit-worthiness. If the global markets are king along with its weapons of mass destruction = financial derivatives then the way to address this is not for individual nation states to slaughter the weak and the poor but to work together to regulate markets and financiers that ushered in this crisis in the first place.

The way to relative freedom is through investment in Ireland’s ‘smart economy’ supported by a ‘smart society’ founded on protection of the weak and provision of social services through a balance of taxation at local and national level.

3 The one responsible must put her or his job on the line

Point well made. But, there is little culture of responsibility here whether in State, Corporate or Church worlds except when someone is forced out whether by media, backbenchers or other trend-setters. One of the issues that needs to be brought center stage to any analysis of the current economic malaise is the essentially undemocratic nature of markets as they currently operate as well as processes in our national polity. People need clear yardsticks by which to measure Governments and leaders. Governments should contract with the people not just at each General Election (essentially people don’t vote on which Government to have but on a menu of parties which put together Governments depending all sorts of considerations that may not be foreseen in the run up to an election). The Oireachtas needs radical reforming to make Governments more accountable.

4 Set goals and stick to them

Setting goals is not easy especially if there is more than one. The Swedes had to choose between fiscal stability and unemployment. They gave priority to fiscal priority (just as the Irish Government is doing now) and, implicitly, let unemployment float downwards as conditions improved – eventually. It was painful (as was the case in Finland) but, according to Henriksson, it worked. However, the Swedes (and Finns) had the advantage of at least (i) relatively strong levels of internal social cooperation and solidarity and (ii) favourable external circumstances and international trade. Add to this a strong native base of outward indigenous industry and services and the Nordic countries were able to survive and overcome their severe economic problems of the 1990s

5 Consolidation should be designed as a package

Here the advice turns particularly political – even Machiavellian. Henricksson writes (p19):

...there is also empirical work showing that a right-wing government that raises taxes is more likely to succeed in budget consolidation than a rightwing government that only adheres to expenditure cuts. The opposite goes for left-wing governments…..

The problem, in an Irish context, is that up to now we have had a choice of two kinds of political arrangements – both right of centre and both committed in practice to low taxes and by direct implication low spending too. The options for any incoming administration over the next 3-4 gloomy years are stark – unless they really want to break new ground and depart from the Henricksson scipt.

The key point under lesson 5, according to Henricksson, is that Government need to inflict pain as uniformly as possible on the grounds that (p19):

When one strong interest group complains, you are in trouble. But if everybody complains, you are not.

6 Act structurally but be consistent

Only an economist could talk like this! The advice here is that it is better to go for a flat, across-the-board cut of say 10% (or 11% as was actually cut from all items of Government consumption in the Swedish case) rather than target this area or that budget line. The blunt approach sends an extremely strong signal to everyone. The problem with this is immediately obvious though – it is one thing for someone on €500,000 a year to take a cut of 10%; it is another for someone on €200 a week to take a cut of €20 (even if average prices are falling). It is quite unfair, regressive and deflationary to cut spending especially where people are already on the bread line. But, consistency was never part of the vocabulary here and not even during the current economic impasse. You know this when people in the corporate and public sectors walk away with pensions in the high six digits.

7 Do not leave the problems to the Local Authorities

Given Sweden’s history of strong local government with responsibility (and funding from local taxes) to provide education, healthcare and childcare as well as other services, Central Government did shift much of the adjustment to local authorities and this was not a good thing according to Henricksson. But, Ireland is not Sweden when it comes to local taxation or delegation of powers and revenue-collecting.

8 Be honest to citizens and financial markets

Here the advice is to keep to a conservative set of fiscal assumptions and make it clear from the outset how painful things will be. The aim is to get the ‘markets’ (everything comes back to this) to buy-into what Government is saying and to enable the national authorities – eventually – to get into a ‘virtuous circle’. A series of botched budgets and serious macro-economic under-shoots in the Irish case does not help. And Government has a credibility problem where citizens, investors and international capital markets are concerned.

9 Stick to one message

Here Government has been more successful. The ‘One’ message coming through has been to CUT:

Cut (real and nominal) wages and welfare rates;

Cut public expenditure and spread taxes increases to bring in more of the lower paid; and

Thereby inch back into export markets, foreign direct investment and the ‘smart’ economy which, by now, everyone is paying lipservice to.

10 Stick to it

Once a country emerges from the painful adjustment, it must avoid going back to ‘the old system’ and ways.

Summing up

Lets be clear, the Henricksson medicine, if applied comprehensively here, would be brutal medicine politically, economically and socially. Even if it attracted widespread political buy-in (through for example a national Government of all the main political parties) or revamped social partnership, it would involve a winding down of public spending and household consumption at a rate not seen in recent decades. It would imply escalating levels of unemployment, poverty and in all likelihood would set back levels of public health. It may be countered that this will happen anyway and that the Henricksson medicine would enable us to get over it more quickly than muddling through.

It is necessary to question the moral basis on which any society or elected Government can sacrifice the health and well-being of its citizens on the altar of market clearance and fiscal rectitude. There has to be a better way – a fairer way. What would it look like? Moving beyond the immediate crisis and response, what major actions can be taken by Government, here, to help rebuild the economy? Over on , Michael Taft has provided some interesting ideas under ‘What a Progressive Government Would Do in the First 100 Days (or Start to Do)

One final point – notwithstanding the rigidity and apocalyptic tone of the Henricksson medicine (which, if progressives actually read it, one would not advocate here as part of some new social solidarity pact…) – Henricksson clearly counsels against cutting too much in the areas of education and research. One wonders why.

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