Friday, 19 March 2010

Jobs and recovery

Tom O'Connor: The Labour Party are holding a public seminar in Cork tomorrow on solutions to Ireland's economic crisis. The speakers including myself will look at the causes of Ireland’s economic crisis and solutions to it with a particular emphasis on job creation and national recovery.

I will be focusing on jobs and national recovery. My starting position is that to tolerate 430,000 unemployed on the live register is economically disastrous for the economy. Just as importantly, it is morally and socially unacceptable.

Two years ago this June I predicted in the national media that unless the economy received a significant short term stimulation, that it would spiral downwards in to recession.

I said (Summer 2008) on national radio that this would be accompanied by constant increases in unemployment and a resultant falling tax take and widening hole in the public finances. It was obvious two years ago that this perilous situation, in the absence of economic stimulation, would necessitate further cuts, more economic depression, more unemployment, more falls in tax takes, increased deficits and then more a spiral downwards.

In the summer of 2008 a huge hole was opening in the government finances: reports at that time were that it was running a deficit of 4 billion. By the start of December, the government stated that it’s deficit for the first 11 months of 2008 was 8 billion. In fact, its end of year deficit for 2008 was 12.7 billion.
The government announced in its October 2008 budget that it expected the end of year deficit for 2009 to be 13.4 billion. In the extra budget in April, the government forecasted and far bigger end of 2009 deficit of 20.35 billion. On the sixth of January 2010, the government announced that the final end of year deficit for 2009 was 24.6 billion.

In May 2008 as the government’s finances started to deteriorate, live register unemployment stood at 201,800 (deficit 4 billion). In February 2009 live register unemployment was 352,453 (deficit of 12.7 billion). In January 2010, this figure was 436,936 (deficit of 24.6 billion) and in February it was 436,956.

That amounts to clear evidence for the cuts- economic depression- unemployment- falling tax takes- ballooning budget deficit prediction. The overall government tax take at end of 2007 amounted to around 47.8 billion (unemployment 198,000 Feb 08). At the end of 2008, with the recession after starting in June, this figure was 41.6 billion (Feb 09 352,000 unemployed). By the end of 2009, the tax take came in at 33 billion (unemployment 437,000 Jan 2010).

So, the government tax take fell by 15 billion over the 24 months in 2008 and 2009 accompanied by a rise in unemployment of 240,000 over the period. Over that period, the budget deficit rose from 1.6 billion to 24.6 billion. In 2009, the government also spend 4 billion out of exchequer funds to recapitalise Anglo Irish Bank. Consequently, 19 billon of the total accumulated deficit from the end of 2007 to 2009 can be accounted for by a huge tax fall, due to untreated unemployment and 4 billion spent on Anglo Irish Bank.

This is a critical observation: it shows that the government’s finances are mostly caused by a fall in aggregate demand due to the recession. Were it not for unemployment and Anglo Irish Bank, our government deficit would have accumulated only to 6 billion over 2 years, which does mean that some tightening is needed, but this is not the main problem. The main problem is unemployment.

The government should have tackled this head on. It still needs to. All the opposition parties and social partners in the past two years have called for the government to stimulate the economy: Fine Gael and Labour proposed stimulus packages in last summer’s local elections worth around 13 and 5 billion respectively. The Greens called for a 2 billion sustainable energy stimulus package last autumn. The Irish Congress of Trades Unions, the Construction Industry Federation and the Irish Small and Medium sized Enterprise associations have all called for similar interventions.

But the Irish government will is ignoring these and the experience of other countries such as the USA, the UK and Australia. It is doing this principally because it wants to ‘correct ‘what it and others perceive as a structural weakness in the economy, living wages. Its solution is to leave unemployment high and with no or negative inflation alongside cuts in social welfare, people will work for a lower minimum wage and wage cuts will become widespread. This will not succeed as countries in Eastern Europe, China and elsewhere will always work for a fraction of even these lower wages.

The solution is not to have very high wages either but living wages. These wages can be maintained by securing a competitive advantage and technological advantage over other countries engaged in lower knowledge work. Productivity and profits for business can be kept up in this way. Significant government investment is needed in high knowledge areas coupled with synchronised up skilling. This is one part of the stimulus package which will be sustainable. The other is the investment in key infrastructural areas which are badly needed: mental health services with the implementation of Vision for Change (700 million); schools building programmes and others.

This can work as follows: There are about 350 incubated companies mainly in the high knowledge area at the moment and the government has been and continues to pour 1 billion a year in to them from exchequer funding. There are over 10,000 researchers, including PhDs working here. The areas which a high proportion of these are researching are new areas for global demand for the next 12 years according to the government’s Expert Strategy Group Report: Ahead of the Curve. Some of the areas identified are:

• Sustainable energy (govt cut SEI budget in April!!)
• Telematics
• Biomedical devices
• Biopharma (govt cut funding for courses!!)
• High quality food exports
• Health and education services for export

Research clusters here need to be mainstreamed or ‘spun out’ in to the Irish economy. Other business ideas should also be considered. There were 13 companies ‘spun out’ as fully fledged trading companies. However, once they are spun out, they are at the mercy of venture capitalists to secure capital. This restricts their growth to employing only about 8 people per company, as they need to grow slowly, resulting from venture and other capital investment in them as businesses, which is far too low. Indigenous small high knowledge companies of this type are kept small or else bought up by huge global companies who can then make handsome gains on the research and development that was paid for by the Irish state.

This then further weakens our indigenous company base and makes us more and more susceptible to global economic shocks where global companies shut down and set up elsewhere. It also involves a knowledge stripping of Irish companies which the Irish taxpayer has paid for which delivers the innovation profits to companies based in New York or elsewhere. This may make a handful of Irish entrepreneurs immensely wealth overnight after the takeover of one of these Irish companies but this delivers poor returns to the country.

Paradoxically, given the recession, we have an opportunity to try to redress this problem to some extent. If the Irish government were to use some or all of the 5 billion left in the National Pension Reserve Fund to spin hundreds of high knowledge companies on the market with sufficient capital to allow them to become large players rather than fledgling ones employing less than 10 people, a significant opportunity for long-term sustainability of Irish owned high knowledge companies could for the first time be created.

Fledgling companies are currently bought out by huge global companies because they are too small to survive despite their excellent business ideas. They do not have the economies of scale to compete seriously. The government now has an opportunity to spin out large companies with a large capital and asset base to allow them to compete on their own on International markets.

These in turn, within a reasonably short period of time, can employ hundreds of workers each at the very least and become internationally sustainable. In turn, his would contribute to an improvement in our balance of payments as these Irish companies would not engage in either transfer pricing or profit repatriation, which most of the large global Trans National Corporations do.

The chain of events needed might look like the following:
• Government needs 5 billion at least stimulus 2010 + 2011
• Companies should be vetted and viable one’s aided within 3 months
• Government should give 50% grants in return for shares to be redeemed over 10 years and 50% in loans
• High quality retraining should happen in parallel through state training agencies to match the skills needs necessary
• Re-training allowance of 330 euros
• Priority should be given to indigenous
• Viable and strong State Owned Enterprises which would pay dividends to state and should be part of this
• A state Development Bank should be set and work alongside higher budgets for Enterprise Ireland.

The alternative of not investing significant resources from the NPRF and significant employment creation is: most of the 10,000 researchers including PhDs will continue to do more post docs as they do now or emigrate; there will still be only a trickle of a dozen or less than 20 most which will be spun out in to the market and because of their small venture capital funding and small size they will employ less than 10 people and then get taken over by TNCS who will reap the benefits of years of Research and Development which will have cost the state up to 3 billion Euros and where the Irish state acts as a nursery for global capital. Once knowledge has been harvested, these companies may then site elsewhere.

A plan of this nature could create thousands of jobs. It would create sustainable employment and start the process of making Ireland a leader and not a follower. It would be attractive to all social partners, benefitting workers and entrepreneurs. It would also give to country an opportunity to start breaking the high risk twin dependence on both construction and global capital

Global companies will always play a huge part in Irish economic development, but we need to start the process of taking control of our own economic affairs and through large Irish companies, in high knowledge areas going forward, such as sustainable energy, biomedical, telematics and food, we can start to insulate the country from the economic shocks which cause recessions. In this way, the current recession can be used as an economic opportunity.


Proposition Joe said...

That amounts to clear evidence for the cuts- economic depression- unemployment- falling tax takes- ballooning budget deficit prediction.

Correlation and causation are not the same thing.

And I don't say that to in any way make light of the jobs tragedy unfolding, having myself joined the 436,956 in February. Hopefully not for long, but I can fully empathize with the plight of the other 436,955 unfortunates.

I just think its overly simplistic to claim a good ol' stimulus would avoided the carnage. It may have temporarily softened the bust, but many of those job losses were a result of massive misallocation of capital (both human and financial) to the construction industry during the boom. One way or another, this misallocation would have to be unwound eventually.

Tomboktu said...

Proposition Joe: It may have temporarily softened the bust, but many of those job losses were a result of massive misallocation of capital (both human and financial) to the construction industry during the boom. One way or another, this misallocation would have to be unwound eventually.

To use an analogy, why did the evacuation of the building have to result in people getting crushed? Was it not possible to arrange the evacuation -- to "unwind" in a more orderly fashion that may have put us is less comfortable accommodation, but left 400,000 of us uncrushed?

Proposition Joe said...


A better analogy would be a frenzied mob building a house on sand ... the longer they continue building, the more unstable the edifice becomes and the more destructive the eventual collapse.

We already had far too much construction in this economy, keeping it going for longer would only left us with more unusable housing stock and over-specified motorways, while delaying the required retraining and redirection of human resources.

As long as the brickie has a job, he's not going to go back into adult ed and get the leaving cert he never did because of the lure of easy money on the sites. Similarly for the architect, she's not going to go back to do a conversion course in software engineering as long as the building boom splutters on.

In fact it would have been much more healthy if the crash had happened earlier, as it could have done in early 2002 if McCreevy & Ahern hadn't conspired to replace the reality-based export-led celtic tiger with a construction and public sector fueled boom.