Monday, 15 June 2009

Guest post: Growing the economy

Michael Taft: UNITE the union has published a set of economic proposals – Growing the Economy – as a challenge; both to the orthodoxy which dominates the current debate, and to progressives, to start constructing an alternative framework. It is a first step towards a new narrative – but only a first step.

Its starting point is the failure of current Government policy to stop the recessionary slide (indeed, it argues that Government policy has actually deepened and lengthened the recession). Its alternative is rooted in identifying very real deficits of our productive capacity and how, by addressing these, we can at the same time create/save jobs and, so, address the fiscal deficit. In other words, it is unemployment and the lack of productive investment that is the disease, the fiscal crisis is the result:

• Our physical infrastructure is ranked as one of the worst in the industrialised world, while our social infrastructure is European in name only;

• Whatever the fall-out in the banking crisis, the immediate priority is to establish a bank dedicated to extending credit to SMEs – the first step in a broader reform of our banking structures.

• That people’s income and living standards are not an obstacle to growth but rather part of the solution – particularly those on low and average incomes; therefore, it calls for a new wage agreement, which disproportionately benefits these income groups through flat-rate payments.

• That it is cheaper to save jobs rather than create them; therefore, we need payroll subsidies for enterprises that short-time workers rather than resort to redundancy.

• That the development of an indigenous enterprise can start with an expansion of public enterprises to modernise our physical infrastructure through ICTU’s proposed State Industrial Holding Company (something Fine Gael has copied to argue that new public enterprises can create up to 100,000 jobs).

These measures can ensure that on the other side of the recession we will have a stronger infrastructure from which we can better exploit the eventual recovery in global demand; we will have saved a number of viable enterprises that would have otherwise collapsed owing to the credit crisis; that key skill-sets will have been saved through payroll subsidies and public equity; and we will have new enterprises under ICTU’s proposal – with the downstream jobs created/saved as a result.

Of course, there is a question of financing. However, as UNITE points out, our deficits and borrowing requirement are on the verge of spinning out of control under current policy (the EU Commission predicts the deficit to rise to over 15% next year). However, even on current trends, our overall debt level will remain under the Eurozone average for the next two/three years. This, in effect, is our window. By increasing our borrowing levels to European averages, we can direct expenditure towards these investments – which will reduce unemployment and increase economic activity, thus lowering the annual deficit.

A range of other measures would accompany this: increasing taxation on less-deflationary sources of revenue (unproductive capital, unearned and high incomes); reform of regressive tax expenditures; and the issuing of Economic Recovery Bonds to take advantage of our growing savings ratio.

Ultimately, UNITE claims that the way out of this crisis is productive investment, employment and growth. It has put forward a menu of other proposals (some developed here as Jim Stewart’s proposed consumer vouchers). It challenges the deflationist orthodoxy. But it is not the last word, merely the first.

Most importantly, it invites other progressives – trade unionists, left political parties, social organisations – to get into this debate with enthusiasm. There are, no doubt, other and better ways to achieve what UNITE is attempting to sketch out.

We won’t know that, however, until we engage in the hard work of constructing an alternative, a new narrative. The quicker we start that task, the better it will be for the economic debate – and for the future of the Irish economy.
Michael Taft is research officer with UNITE


Nat O'Connor said...

A number of commentators have suggested that the current policies of the Irish Government are making the recession worse and not better. The UNITE paper provides a nice illustration of this (p.5) with a series of arrows showing the vicious cycle that the Government policy accelerates.

It runs as follows:
The Government’s response to the fiscal crisis is to increase tax and cut public spending.

Less income and less spending in the economy

Less economic activity

More job losses, less profits and wage cuts

Less tax revenue, higher welfare costs

The Fiscal Crisis persists...

This vicious cycle is also something that Paul Krugman raised in his much discussed New York Times article (

He wrote: “to satisfy nervous lenders, Ireland is being forced to raise taxes and slash government spending in the face of an economic slump — policies that will further deepen the slump. … As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back. … And the lesson of Ireland is that you really, really don’t want to put yourself in a position where you have to punish your economy in order to save your banks.”

Now, UNITE suggests that “While some commentators are claiming that investors are turning their back on Ireland, the NTMA is quietly proving them wrong. They have issued four bonds so far this year – all of them over-subscribed. Not only has the NTMA secured nearly half of our borrowing needs for 2009, they are turning bond investors away.” (p. 16)

UNITE suggests that its proposals will generate sufficient economic growth to allow Ireland to pay off its debts once the recession is over, but this assumes that Ireland can borrow at a reasonable rate now. So, what is the current situation? Can Ireland get enough affordable credit to kick start the series of economic boosts that UNITE is suggesting? Or are we “really, truly without options” as Paul Krugman claims?

Conor McCabe said...

nice bit of editing there Nat, you left out the bit between "slump" and "as far as responding.." which goes "As I read the debate among Irish experts..."

Having come from one blogsite where this article was severely misquoted, I now find myself on another where yet again Krugman's article is chopped about to fit a conclusion - in much the same way, it has to be said, as Krugman chopped and changed the historical facts surrounding Ireland's financial predictament in his original article. Lord give me strength.

Slí Eile said...

Good on you. Who is arguing for a comprehensive, targeted and jobs-friendly fiscal stimulus in the halls of Irish economic orthodoxy? The debate over on:
shows a deep prejudice in some quarters against the State playing a proactive role through fiscal policies to counteract recession, job loss and a further contraction. It also shows a lack of imagination when it comes to State investment in new technologies. It also shows a deep ideological belief in the ability of the markets to clear and for the books to balance and the need to appease the gods of international finance. If such a fiscal stimulus package is dismissed by some so have other proposals including the spirit of Ireland (whatever its merits) refer to:
What is the alternative to a fiscal stimulus? A Government fiscal contraction of €4bn this December followed by a similar amount next year and so up to 2013. This is designed to balance the books by 2013 and meet SGP criteria. But will it? This is the nub of the argument. If it doesn't work it condemns us to an L-shaped landing and possibly a lost decade as happened in Finland (where it is acknowledged Government fiscal contraction went to hard in the first phase) in the 1990s.

The more reasoned among the critics raise two key objections:
Low domestic multipliers because of high import content (with an estimated multiplier of 1.11 according to Leddin and Walsh)

Perilous borrowing and debt/GDP ratios ruling out further borrowing (whether off-balance sheet or on)
Both of these points need to be dealt with in follow-up work. However, the multiplier effect is very much conditional on nature of stimulus and sectors targetted. In regard to borrowing - if it is possible to borrow more to invest in income-generating, socially useful projects then why not. All of this needs to be inserted into a bigger discussion about such issues as corporate governance, institutional change, international coordination etc. A fiscal stimulus is essential to avoid the risk of prolonged slump in Irish national income. Rather than crowding out private investment and consumption it could crowd them in through targetted, confidence-building measures to put people to useful work.

However, it is not a substitute for a radical change in thinking, institutions, governance etc - to avoid the terrible mess we are now in so that never again in this century must a new generation be robbed on foot of reckless spending, taxation and de-regulation decisions of a former generation.