Wednesday, 29 July 2009

Dublin Consensus rattled by Begg article

Slí Eile: Nothing better to create some heat over on or in follow-up comments to an op ed on the Irish Times than an article by ICTU General Secretary, David Begg, arguing against deflation and for a fiscal stimulus. Fulminations followed in quick succession. Interesting to see such passion, conviction and certitude. Remember, a key point of the Dublin Consensus is that There Is No Other Way. Say it often enough, loud enough and confidently enough and the message will stick especially when it is backed by stylised and 'obvious facts'. One commentator on even commented: 'Begg’s quoting of Joe Stiglitz’s comments on the US fiscal stimulus in support of his (Begg’s) critique of Irish fiscal policy is quite ridiculous.' Others were even more strident and impolite.

Michael Taft has been contesting some of these 'obvious facts'.

David Begg was spot on in drawing attention to the very dangerous policy currently pursued. Analysis based on modelling of the Irish economy shows how various policy scenarios including pay cuts, public spending cuts and international recovery would impact on GDP, public sector borrowing and consumption (which I will hasten to add doesn't deter the ESRI from joining the Dublin Consensus). Public sector pay cuts offer extremely limited returns in terms of borrowing reductions.

Two key point that should not be lost in today's article by David Begg are the following:

1 "A very formidable deflationary coalition has been assembled in support of current policy. This was in evidence at the MacGill Summer School – an irony given Patrick MacGill’s commitment to working people – and it includes many of the State agencies like the ESRI and IDA."

2 ".... there is a growing chasm of scepticism between the elite and the population at large concerning the efficacy of the policy prescription."

The first point is vital because I sense that the room for rational debate based on evidence, research and values is very limited because:
  • openess to debate and conflicting ideas is not as welcome as it should be in state organisations
  • the Irish economics profession is predominantly ... well, right-wing (how else can one put it)
  • issues which have a long-term implication (environment, social equality, democractic reform) are crowded out due to an unusually high degree of short-termism - hence, for example, Oireachtas reform is reduced to a discussion about how many T.D.s we should have.
Begg's second point is particularly salient and relevant. The 'population at large' is not convinced. It may be that we are are living on borrowed time, but I have a sense that the current mood could swing very suddenly and dramatically against ... the Dublin Consensus. Iceland was a very nice, phlegmatic and respectable place until recently. Hence, our passivity engendered, perhaps, by an initial shock and awe will give way to more public protest. Last year's demonstration by our seniors (the medical card issue) could be the thin edge. Ireland has yet to generate a Margaret Thatcher, to face down this opposition and no candidate is in the offering.

In conclusion - the switching to terminology of 'devaluation' over on is very misleading. The 1986 and 1993 currency devaluations adjusted the prices of Irish exports on world markets and imports on Irish markets. It also kept inflation high for a time. Many differences apply between now and then, one of which was the extent to which product and labour markets internationally played a role in helping - eventually - Irish recovery. A so-called real devaluation now based, on wage-cutting, is a dangerous and possibly ruinous gamble. This was the point of Begg's article. The alternative is targetted stimulus based on recovery bonds in the context of a high national savings rate (as consumers are scared to spend) and the beginnings of a strategic investment in skills, jobs, innovation, new traded services. Otherwise, we may face a missed decade like we had in the 1950s, and like Finland initially underwent in 1991-94. Can we not learn from this? There is another way.


Anonymous said...

On the other hand, Mr. Begg could be doing what Union leaders are supposed to do, protect the pay and conditions of their members.

Are commentators here suggesting that wage rates in the public sector are sustainable given the rate we are already borrowing? Is it not the case that we just don’t have the tax base any more to support it?

Michael Taft said...

As well, Anonymous, it could be argued that the Government pursued policies in the full knowledge that their impact would actually result in limiting the tax base. Imagine the Ministers prior to the last budget, looking at the retail sales index, noting the decline in activity. They would reasonably conclude that this was due to people losing their jobs, being short-timed, having their wages frozen or cuts (in some sectors) and a general decline in confidence. In essence - because people have less money or are concerned about having less money in the future. So what do they do? They introduce huge levy hikes, which further reduces the money people have. The Retail Index declines again, consumption is cut even further, shops close, jobs lost - the tax base is cut even further.

And we pay these people to come up with these ideas.

Anonymous said...

Sli Eile,

Yes, an investment stimulus is required, but it makes no sense to add to growing mountain of national debt.

1. Suspend this futile attempt at creating competitive electricity and gas markets on the island of Ireland - the markets are simply too small to generate bebefits for consumers. They actually generate additional costs to present the optical illusion of competition.
2. Merge the generation and supply businesses of the ESB and BGE to create a player in the larger Irish and British and EU markets.
3. Privatise the networks with tight qualification requirements on bidders, e.g., no affiliation with supply businesses into or in the EU, only long term investors, pension funds etc.
4. Allocate and maintain existing ESOTs, maintain existing management-union agreements.
5. Compel energy regulator to accept market values to compute lower network revenues - and lower final prices.
6. Use proceeds to leverage the financing of (a) taking fixed telecomms network into public owenership (cf Donal Paclic above)(b) creating a single semi-state water and water business out of fragmented LA provision, (c) developing renewable energy technology etc

Tomaltach said...

I think you are being unfair Slí. You picked out one daft comment on irish economy. You mentioned the passion, conviction and certitude. No question, too much certitude is cocky and arrogant. But if there is one thing stands out about irish economy is it the quality of the debate. Many of the arguments have been well put, and the engagement with the issues facing the economy has been commendably thorough. There is passion and conviction yes, which I see as positive not negative.

While there is an undoubted nexus in Ireland between FF and builders, and a lazy, unscrupulous, right of centre media, I think it is rather glib to reach for the 'right wing' economist label at every turn.

Far better to stick with the nuts and bolts of the argument - as has mostly been the case on this site. But I think the case of the left is undermined by repeatedly drawing caricatures of right wing economists simply because you disagree with them.

This works both ways of course. Yet I think irisheconomy is one of the best sites of discussion on the subject - not least because of the often quite robust interchanges between people with differing views.

Slí Eile said...

I agree that there is a good quality interchange much of the time on However it doesn't all come down to rational argument and facts. Not infrequently, values, suppositions and world views dominate over the evidence. In that sense, 'economics' never was or never will b e neutral. Incidentally, my quotation of response to David Begg was not a one-off. A few other highly barbed responses were made. Its all art of the cut and thrust of blogosphere. However, I continue to argue that some type of fiscal stimulus is better than the present deflationary course. The fact that relatively few economists in Ireland are prepared to back this - in public - is significant. Then again, a sizeable number were cheering on when taxes were being cut and the economy fuelled by the property bubble some years ago.