Monday, 2 November 2009

'Cut Deep, Cut Now and Keep on Cutt'n'

Slí Eile: The cage was truly rattled, today, by David Blanchflower, UK economist, who challenged the home consensus about deflation. Speaking at the third in a series of 'Crisis' conferences today in Dublin he said that he was against pay cuts, cuts in public spending and deflation to right the economy. He is very concerned that as Governments respond to the crisis by cutting off stimulus interventions too early or - worse still - adding fuel to the fire by undertaking sharply deflationary approaches there is a real danger that the economy will be 'pushed over the cliff'.

When pressed by a perplexed audience of sensible mainstream Irish economists to comment on the current Irish fiscal situation, he made it clear that he was not in favour of the deflationary push. This created some concern and reaction including an intervention by John Fitzgerald, the chair of the first session, to provide a stout defence of a rapid 'fiscal adjustment' and the unworkability of a fiscal stimulus in current Irish fiscal situation. This was followed up by a lengthy presentation by Philip Lane in which he gave a very rounded and robust defence of the current strategy and against any let up in adjustment (even arguing for more cuts in addition to the €4bn adjustment envisaged this year and again for each of the coming two years). His background notes for the conference can be downloaded here.

A clear difference opened up on ends and means. The fiscal adjustment at all costs school believes that we must adjust quickly or else the 'markets' will lose confidence and the recovery will be stretched out over 10 years instead of 3 or 5. Everything else follows - peace, jobs, prosperity.... This view is firmly established in Government, the Department of Finance, the ESRI, nearly all the major newspapers, most political parties and most academic economists who comment on these matters in public. Only the odd TU economist, lefty or Nobel economist from America or Britain who doesn't, well ... fully understand the unique Irish situation (and how bad it is and how dependent we are on markets for sovereign debt risks and how screwed up we are because 'public spending exploded' in last few years). We are now on the road to socialist serfdom as spending has rocketed to over 51% of GNP (much of the increase last year was pure cyclical and advance payments into the NPRF).

Brian Nolan wondered if one way of dealing with unemployment is to distribute it more evenly and avoid unhealthy concentrations. Colm McCarthy says that the choice is between a 30% youth unemployment rate (which is what it was in July of this year) for five years or for 10 years (essentially if we don't follow his prescriptions).

It is really unusual and refreshing to hear an 'outsider' such as Joseph Stiglitz last month or David Blanchflower now challenging this consensus view. Not a few people resent the comments by 'outsiders' as ill-informed and not suitable for Irish situation. Specifically, Philip Lane in a clear response to Blanchflower said that the Irish situation was very different:
* small open economy with high import leakage and low fiscal multipliers
* extremely bad debt situation made worse by pro-cyclical policies in the past (and with the result that we must be pro-cyclical now)
* no option of currency devaluation.

For Lane and all mainstream economists the only solution is 'real depreciation' through salary, wage, rent and other cost reductions allied to cuts in public spending (Lane concedes some room for investment programmes but only at the cost of even more cuts elsewhere in public spending).

Blanchflower who has researched and published extensively on unemployment sees the rise in youth unemployment as profoundly worrying and threatening. It has huge implications for social cohesion, health and morale. There is clear evidence that a whole cohort of young people in the UK suffered from 'permanent scars' as a result of a period of unemployment in their late teens or early twenties (citing, e.g., 1958 birth cohort studies in the UK tracked over 50 years). He argued that we needed to throw everything at this problem because the social costs are incalculable. Not only did he support continuing stimulus measures abroad he clearly favoured some type of counter-cyclical measures in Ireland too. He is very concerned about a 'double-dip' or W-shaped recession - building on evidence from previous recessions and the timing of a slow recovery. He was also scathing in his criticism of 'economics' and 'macro-economics' not only in failing to understand and anticipate the crash but also in making the problem worse by adherence to dogma. He was not optimistic about a recovery any time soon and thought that the world might be headed for a fresh recession especially if Government over-react by withdrawing stimulus spending.

Blanchflower also commented on the state of banking (he was an external member of the Bank of England's Monetary Policy Committee up to last June). He stated bluntly that if you 'don't own it' (banking) you cannot effectively get banks to lend (please, sir, lend). There is no evidence, he says, that banks will start lending any time soon to businesses.

Other presentations were by Colm Harmon on the role of education as a medium-term strategy to position us in the global market and John McHale (on pensions). Both papers should be available on the web in the next day or two (see Geary Institute).

In the wrap-up discussions there was some debate about stimulus measures. George Lee, TD tried to pin down the platform including Colm McCarthy on how much they would need to cut to get the deficit down to a required level. In other words, is there a level of cuts that they would not go beyond ? (Lee). McCarthy ducked.

The timing of adjustment also featured with McCarthy, Lane and Fitzgerald warning against any delays ('we don't want to go down the road of the 1980s..'). So, cut deep, cut now and keep on cutting and if a whole generation is lost through unemployment, emigration and despair - that's just the way it is. We can get back to 'sustainable growth' more quickly by restoring competitiveness (read profitability through driving down other costs). Two speakers (Lane and McCarthy) claimed that the public deficit would be as high as 15% (instead of 13% now) were it not for the fiscal adjustment in last April's budget (but the target was to reach 10.75%). Implicitly, and not so implicitly, one had a clear impression that nobody in this assembly believed that the 3% SGP target would be reached by 2013. However, as we cut and cut we delude ourselves with the thought that had we not cut the deficit would have spiralled up and up (someone even mentioned a possible 20% deficit). no evidence, no modelling, no counter-hypothesis was provided to support these assertions.

Again George Lee asked 'must people be crucified to reach some target?' to which McCarthy replied ' how long do we want to be crucified?'

Please, can decent women and men get up, speak out and stand up.

And could we have a more broad-based debate than one dominated by failed economics which simply doesn't care about the impact of its failure on people.


James Conran said...

"...the rise in youth unemployment as profoundly worrying and threatening. It has huge implications for social cohesion, health and morale."

It also presumably hurts the growth potential of the economy (and hence our ability to service the national debt) given the long-term negative effect on this cohort's productivity and labour market potential. This, together with the collapse in private (and reduction in public) investment must be taken into account when weighing up retrenchment versus stimulus as far as fiscal policy is concerned.

I don't feel qualified to make that judgement and don't think I can confidently reject the seemingly overwhelming consensus among Irish economists that stimulus is not a good option for us, even though personal (and political) inclination would be pro-stimulus. I don't think it's good enough to dismiss this consensus with breezy references to "failed economics" and people not caring about people suffering.

Note that the doyen of the pro-stimulus party in the US, Krugman, has accepted that there are situations where a country finds itself between the rock of recession and the hard place of fiscal insolvency - in fact he has suggested that Ireland looks like it might be in this unenviable location. Also it seems to me that many of our leading economists (eg Philip Lane and Karl Whelan) are not opposed to stimulus for ideological or political reasons (in the way many right-wing economists seem to be in US). Indeed I would guess that they are in favour of stimulus in the US and elsewhere, and are probably highly influenced by Krugman in both this and their anti-NAMA views.

Anyway I look forward to reading Blanchflower's paper - maybe a heavyweight like him weighing in on the Irish sitation might shake that consensus and allow someone like me believe what I would like to believe!

Tomaltach said...

... with McCarthy, Lane and Fitzgerald warning against any delays...So, cut deep, cut now and keep on cutting and if a whole generation is lost through unemployment, emigration and despair - that's just the way it is.

That is the most disingenous presentation of the position of these men that I have yet seen. Here again, Slí Eile, an avowedly left wing commentator, piles onto the moral high ground and demonstrates his or her monopoly of compassion. This is mighty language to rouse the troops but a poor way of discussing political economy. But Saoi, you must be aware that for anyone really interested in engaging in the debate, be they economist or otherwise, this kind of rhetoric is simply repelling.

You know, the argument that we should persist with our Celtic tiger era salaries, despite the return of economic gravity might we be viable. The argument that a pot of rich gold lies at the end of the rainbow might also be true. And it might be the case that paying one euro in five to repay debt by 2013 leaves plenty of spare cash to sustain services. These arguments might all be right: though, evidently, I have my doubts. Right they may turn out to be, but they are not more moral. Their counterarguments, and those made by Lane etc, are equally valid - and for those willing to dump a kilo or two of ideological bagage - far more persuasive.

Proposition Joe said...


"Please, can *decent* women and men get up, speak out and stand up (links to ICTU 10-point plan)"

Any thoughts on the *decency* or otherwise of those women and men publicly touting a 10-point plan, point #1 of which is entitled "Protecting Employment", while privately strategizing to trade off job loses against pay-cuts?

Tomaltach said...

Prop Joe,
The current crisis has exposed the union leaders as fraudulent, hypocrtical, self-serving, arrogant, and unaccountable. Generally they have come across as a pretty loathsome bunch of guys. Jack O'Connor's desparate performance on Frontline last night turned genuinely comical as he acrobatically leaped from one evasion to another; But while it was kind of funny to see him sumersault backwards and forwards over the facts, there was an element of pathos in the spectacle as well. This man was threatening to, and will, bring the nation to a halt. And claiming to care about welfare and the vulnerable when everyone, except the most trenchant union supporters, knows that the union leaders will trade anything - welfare, taxes on low and middle earners, and now, even public service headcount which is certain to hurt the children and sick they profess to protect - for keeping their members' conditions as close to celtic tiger levels as possible.

Martin O'Dea said...

Tomaltacth, Proposition Joe, More McDowel posed a hypothetical last night to Jack O'Connor, asking if he would assume that the €4 billlion figure was required. Could I now ask you to assume that the public sector took a pay cut and allowing for reduced incomes for public sector workers and the declining intake of revenue that has grown throughout the last 18 months, to outline how we then proceed, and so as More was doing try to bring the conversation outside of the agree/disagree public pay cuts. Also to say that there are those on this website who do not represent unions but agree largely with their stances

Michael Taft said...

Tomaltach - I don't think that terms like 'loathsome' advances the debate.

Proposition Joe said...


"outline how we then proceed"

A lot depends on how quickly and strongly the recovery comes.

But as a general principle, I'd avoid any suggestion that we'd return to the well on public sector pay rates in any budget after the upcoming one. Which is why I think it would be best for the proposed cuts not to be fudged or long-fingered.

So where does 2011's 4 billion come from? I think we'd have to dust off the Bord Snip report and try to identify the least damaging of McCarthy's proposed cuts and implement them fairly ruthlessly.

All the while we have to be continually retooling our tax system, introducing some form of wealth tax, an alternative minimum tax with real teeth for ultra-high earners, and I'm afraid we'll also have to bring more of the just-below-average earners into the tax net.

I don't think anyone really disagrees on the need for aggressive reform of public service work practices. The question is more whether such reform can be traded off against pay cuts. Personally I think it'll have to happen in addition to pay cuts, but I'd front-load the latter onto this budget and then try to push the reforms through over a longer period. The disadvantage of course is that the good-will within the public sector workforce may well have evaporated at that point.

Finally, I'll leave it as an exercise for the reader to add in your favourite bit of green/smart/knowledge economy guff here :)

Martin O'Dea said...

Sorry, Proposition Joe, what I was trying to extract from you was - assuming that the public sector accept another pay cut - say enough to raise 2 billion recurring annually (which would surely be a satisfactory outcome for those looking for public cuts now)

Then working on the fact that the actual financial information we have thus far; which Micheal has outlined a number of times has been deteriorating consistently, regardless of any cuts realised already.
Incorporating all the evidence that shows declining consumer confidence, increased unemployment, declining economic activity and -if you will - acknowledging that the competitive argument does not actually work as our exports are the only element of our economy holding its own and so we know that it is, in fact, domestic demand that is at the core of our difficulties - what would you then suggest to do, considering that a stimulus is ruled out by the lack of finance that is arguing for these cuts right now. As I write the tax intake is reported down again, not the spend up. Honestly Proposition Joe, I am a private sector employee and I have no allegiance to trade unions but I feel that the compulsion to argue this point is allowing us to be distracted and confused through a disastorous lack of activity by a compromised and lame government

Slí Eile said...

Apologies if I veered away 'playing the ball'

The point remains that we have stark choices that will shape opportunities for the coming generation. Blanchflower was trenchant in his critique of macroeconomics before the crash. The current cosy consensus is far too certain of its own position, far too distant from the reality of living in poverty and far too unrepentant of past complacency in the face of the gathering storm. There is a major crisis of trust in those who were meant to know. How can we trust this €12bn over three years gamble?

A point made by Blanchflower is that low interest loans for a 10-year investment project (he could have cited early childhood infrastructure) should be pursued. A lot depends on the leadership and ingenuity of coming with costed, feasible and socially desirable projects that yield returns. Fiscal consolidation is possible at the same time by moving closer to North Western European tax norms.

Incidentally, I would not be surprised if the entire €12bn adjustment will be wiped out in the coming year by a fresh recapitalisation of the banks including the big zombie one.

Tomaltach said...

I withdraw the loathsome remark - I allowed my disgust at union leader behaviour to overrun me. Here's why I'm disgusted: the unions' refusal to accept pay cuts will inevitably result in extended hiring freezes and thereby reduced headcounts over time. Indeed this seems to be a position they are playing for. This is the most hurtful avenue possible for those who depend on puplic services - yet union leaders always talk about protecting the vulnerable, especially the sick and the young. That is what disgusts me. And it is an Orwellian manipulation of the terms of this debate on their part. Their position is wholly indefensible.

James Conran said...

Apart from anything else I don't think the union leaders are being manipulative or in any way misrepresentative of their membership. This is shown by both the outcome of the strike ballots and, less quantifiably, the apparent mood of public sector rank and file as observed via the mass media. That being the case it makes no sense to focus too much ire on the people representing the PS - that's their job.

Having said that, and speaking as a strongly pro-union person, I think some of the TU leadership are doing a very poor job in their public communication - Jack O'Connor being the most important example. Too much comes across as bluster and stonewalling. Seems to lend a tin ear to the sensitivities of those not already sympathetic to the union cause. To change minds you have to be able to a degree to internalise the main objections to your position.

Jack could also do with making clear in every interview that his membership is primarily private sector. People don't know this. In fact at this stage "union" and "public sector" have become virtually synonomous.

Speaking of which, it's surprising, given how much the right is focused on attacking the privileges (real and imagined) of the public sector, how nobody seems to be pointing out the obvious solution - much increased unionization in the private sector. Obviously this would call some people's bluff. But it is also genuinely the best insurance against exploitation of private sector workers by public sector workers.

Proposition Joe said...


On the issue of wider private sector unionization ...

Most certainly for those workers who are vulnerable to exploitation.

However consider for a second the knowledge workers in the private sector (who are probably the most comparable to the bulk of the public sector in terms of skills & qualifications). What do think the effect would be of transplanting highly rigid and demarcated work-practices from the unionized sector?

Remember much of these workers' value proposition to their employers is tied up in their agility and adaptability. Also keep in mind that a consensus-based management style is more common in this part of the economy. A confrontational style of industrial relations would not play well in that context.

Or would it be a kinder, softer, more reasonable style of union that you'd in mind?

James Conran said...

I'm not overly familiar with the academic litirature on the subject but I think it's pretty obvious that unions are compatible with successful private firms (and at the macro level high rates of private sector unionization are equally compatible with successful economies). Of course there is great diversity of practice among unions just as there is among management.

Marise said...


"The unions' refusal to accept pay cuts will inevitably result in extended hiring freezes."

I was pretty certain that extended (2012-ish) freezes were going to happen anyway. The rank and file would certainly like the freezes lifted. Does anyone here know for sure?

I have seen a few union leaders in my time that seemed pretty questionable and that deserve censure, but I could easily say the same about the guys on the other side of the table.

You are free to voice your opinion and castigate Sli Eile for assuming a monopoly on compassion, but frankly the actions and statements of our policy makers do make that a cakewalk. We can see (and read) actual proof of a lack of compassion by them, whereas I have no idea about Sli or even David Begg.

I don't think I'm going out on the limb here by being convinced that the arguments I'm hearing from the consensus are of a propagandistic nature. I am not really intelligent or academic, but I've been on this earth long enough to know when I'm being sold. And my BS radar goes up when one side of a debate's main response to opposition is "anyone who says otherwise is not serious." Red flag.