Monday, 23 November 2009

A Social Dis-Grace

Slí Eile: "Why, then, is there such an emphasis on cutting public expenditure and on the McCarthy Report (when services in health, education, prisons and so on are often so inadequate), and so little emphasis on the Report of the Commission on Taxation?’ asks Jesuit Gerry O’Hanlon at a recent Citizenship service in Dublin. He goes on to say:

'Given the behavior of our banks, given NAMA, why are we talking about reducing social welfare rates, in effect suggesting that ‘Ireland’s poorest people are being forced to pay for the recklessness and corrupt activity of a number of extremely wealthy people and institutions’ (Social Justice Ireland, Budget 2010)

The entire talk can be downloaded here.

It is a case of forgive us our debts but not as we forgive those who owe us – prison for non-repayment of loans and fines and bail outs for those at the top of the pile.

Quite correctly the Jesuit did not mince his words in drawing on liberation theology:

Truly all this is a social dis-grace

He does also endorse public sector reform and draws attention to the ‘fact’ that ‘we’ have been paying ourselves ‘too much in both public and private sectors’ (well depends on who the ‘we’ is … but he is right if you look at the big earners in each sector). As Garret Fitzgerald keeps saying we are an under-taxed country as Government focuses exclusively on cutting spending (and to a large extent Fine Gael as it plumps for a ratio of 3:1 on spending cuts: tax hikes within the annual €4bn fiscal adjustment that the three major political parties are now committed to (part of the Dublin Consensus now melded into a Brussels-Paris-Washington Consensus for the Irish = cut your way out and do it by 2014).

Finally, Noel Coghlan, has some thoughtful things to say in a recent article in Studies(‘What now for Ireland?’). It deserves to be read in its entirety here.

He observes that ‘A low tax economy had relentlessly dismantled the social safety nets upon which so many now depend.’

But we have seen nothing yet. All the fuss over how much blood will be drained out of Welfare, Health and Education (the big Social Three) this year is only one year in a now-to-be five year purgatory to lead us back to fiscal balance and competitiveness. The poor don’t count. In an eloquent display of positivist economics, Jim O’Leary, in a piece directly aimed at the ICTU, reminded us last Friday ‘Notions of Fairness Should not Dictate Fiscal Policy’ Don’t worry. They don’t.


Anonymous said...

With the greatest of respect to everyone who contributes to this blog, it is becoming very repetitive. You cannot introduce fiscal stimulus to a country that imports almost everything it consumes. It will leak. Badly. We equally cannot justify current expenditure levels which were based on a tax base that has now completely evaporated. The borrowing has to stop otherwise we will default or bury the country under an even bigger mountain of debt that will never be paid back.

We do need to have a debate about what kind of country we want. I spent the last few years enraged about the Irish people’s toleration of corruption and crony capitalism but it doesn’t change the fact that we must make some very tough economic decisions. That’s step one. Yes, people who had no hand or part in this crisis are going to suffer. That’s unfortunate but at this point unavoidable in my view.

Michael Burke said...

@ Anonymous

You are right. Some of us here are becoming (have become?) repetitive in arguing against fiscal contraction and for reflation. But that's only because an endless list of assertions are trotted out as to why Ireland, uniquely, cannot reflate. Recently the most widely-used assertion is that any stimulus would leak abroad via import demand.

I have a suggestion, why don't both sides stick rigidly to verifiable evidence? Then, the argument can proceed on the basis of evidence, rather than assertion, supposition or appeals to the consensus.

I'll set the ball rolling by reference to the evidence produced elsewhere on this blog, and would simply request that any refutation similarly relies on evidence:

1. Lane/Benetrix numbers show that capital investment starts from 1.2 in the first year, to 1.6 in the second. For Government consumption of market goods/services it hits at over 2 in the first year. As these numbers range over two decades, they would impact higher during a recession. There's little evidence of widespread leakage - Michael Taft

2. In terms of recent history, during the boom final demand in Ireland grew by 38.4% while import demand grew by 41.6% (2003-07, CSO). There is no evidence from the data that Ireland has an exceptionally high propensity to import. In fact the difference between the two growth rates is marginal.

3. The recent research by Eichengreen et al shows that fiscal stimulus works, and only failed because it was tried insufficiently during the Great Depression

4. The recent research from IMF staffers which shows the same (with government investment once again coming out on top as the most effective method of reviving activity)

4. The fact that most other countries are reflating, including countries with a similar import ratio to Ireland, such as Belgium. And that the reflation is working.

Anonymous said...


Thanks for the response and for providing a link to Lane / Benetrix study.

1. Constantin Gurdgiev, has posted what amounts to a counter argument on his blog here:

Who are we to believe?

2. To make a political point rather than an economic one. I think most people reject the logic that borrowing should increase to maintain current expenditure and, in particular, current pay rates in the public service.

To be fair, the prevailing wisdom here is that deflationary policies should be avoided at all costs, and that is a legitimate position. But for many, having watched our tax base obliterated, the notion that we should increase borrowing to maintain 2007 spending levels rather than cut back is counter intuitive.

Ultimately, with the deficit as bad as it is, with the money we will be paying out under NAMA, and with no real idea how we are going to fill the whole in our economy left by the construction industry, is it really feasible to ramp up borrowings even further?

James Conran said...

"Who are we to believe?"

Now you sound like Jim O'Leary when he talks about fairness! For some reason I don't think this is going to cause Jim (or anyone else) to throw their hands ini the air and declare "Empirical Economic Research Should not Dictate Fiscal Policy"

James Conran said...

I think Anon is right to warn about sustaining possibly unsustainable levels of current spending (including the public sector pay/pension bill) with borrowed money. I also think he/she is right to warn about the threat of being bogged down in huge public debt for a decade (or decades) - debt repayments will have the same deflationary effect as fiscal contraction, sucking money out of the economy.

The one thing Anon misses is this: the likelihood of being so bogged down does not arise only from the absolute size of the debt but also from the economy's growth potential (and hence it's ability to service the debt). The denominator is as important as the numerator in the debt/GNP ratio.

So just pointing to the absolute size of the debt doesn't tell us much unless we also consider growth potential, and how this might be affected by the present collapse in investment and the long-term productivity effects of mass long-term unemployment.

All these things point to the need to shift spending from current to capital purposes - regardless of the overall fiscal stance, be it contractionary or expansionary.