Monday, 21 June 2010

The urgent priorities

Michael Taft: Professor Ray Kinsella, a leading light in common sense economics, put it this way on Saturday View:

‘The economic strategy upon which the state is embarked upon is counter-productive and will not work . . . We face another series of budgets that are bleeding demand from the economy . . . Our priorities have been to shore up banks that have been at the epicentre of this crisis; to stabilise the public finances; and, at some distance, to support families and businesses. We have it the wrong way around. We should be engaged in hand-to-hand fighting to support every business in the country with joined up thinking. We should support families. That in itself should stabilise the public finances . . . We have much less time to do all this than we think. Europe is in crisis. Greece has been downgraded to junk status. Portugal and Spain are in big trouble. The stabilisation fund that was announced last May has not been bought by the financial markets. We are in big trouble in Europe and unless we get our act sorted out here together. . we will have run out of track.’

Out of track; progressives should heed this warning. There is an urgency to unite around a common analysis and a common set of demands. For let’s be honest: to date, progressives have been all over the place. Some accept the fiscal conservatism of the orthodoxy, some argue for tax-driven consolidation, some accept spending cuts, some call for traditional stimulus measures, some urge long-term investment measures; there is no common thread running through any of this.

Added to this, with some exceptions, is the aspirational nature of many of our demands. To call for jobs or any other kind of stimulus without stipulating exactly what this means; to call for stimulus while at the same time acquiescing to the Government’s fiscal parameters (that is, fiscal contraction); to call for all manner of good things without specifying where we are going to source the money: why should anyone take us seriously?

Progressives must break from what is, in many respects, our own self-imposed irrelevancy. Therefore, I put forward the following three principles around which it might be possible to build a broad alliance for a new economic departure. These are only principles – not an entire programme. But starting points are crucial to mapping our way of this morass.

1. Stop Digging an Even Deeper Hole

The Government’s fiscal consolidation policies are failing. Cutting spending during a recession is irrational and self-defeating. The only way to a balanced budget is through increasing income. And the only way to do this is to increase investment and employment levels. Full stop. Anything that undermines growth, investment and job creation is only adding to our long-term debt. Full stop.

Therefore, a key demand coming into the autumn and the budget debate is that there should be no real cuts in current public spending. Cutting spending has been an economic disaster at every level – driving down output, consumption and employment. First rule when you’re in a hole: stop digging.

This is not the same as saying unproductive spending shouldn’t be cut; it should be (though those who claim there is billions of wasteful spending rarely give examples). Cut unproductive spending if it can be found and re-direct it into productive spending; this is money we won’t have to borrow – see below. But most of all – stop digging.

2. Investment, Investment, Investment

Economic investment has been cut to shreds. Overall investment is, in nominal terms, back to 1999 levels. Now, the Government intends to cut public investment by over 20 percent in real terms by 2014. There’s one word for this: madness.

Investment will have to be either supplied by the state or directed by it. Waiting for private sector investment to find its way into productive economy could be a long, long wait. As Davy pointed out, during the period of easy money, investment (save for the public sector) was mostly blown on housing or unproductive activities. Now that money’s tight, what chance of this changing?

But if we argue for more investment where should it go? What are the projects or areas that will (a) add to our productive capacity and (b) get people back to work? What are the investment priorities that we would need to make in any event, regardless of the fiscal crisis? Here are some concrete, specific proposals to start that debate:

• Fine Gael’s NewERA proposals: the expansion of, and establishment of new, public enterprises to drive infrastructural investment

• Green New Deals: Labour, ICTU and Comhar have all forward proposals under this heading.

• IBEC’s Capital Investment proposals: the employers’ body has provided a detailed list capital projects to raise out productivity and economic efficiency.

• Human Capital: Sinn Fein’s ‘GI Bill-type’ proposal could help integrate the various bodies, agencies and programmes into a comprehensive investment programme into human capital.

• Adelaide Hospital Society’s Universal Health Care: increasing output and equity for the same price as we spend on our two-tier health service – now that’s real reform

• Children and Families: public networks of early childhood education, childcare and wrap-around or full-service schools would boost knowledge capital and employ thousands (though the real returns would be long-term).

As many of these would have a long-lead in time from inception to implementation to return, we need temporary measures to get an immediate bang for our buck. There are a number of shovel-ready capital projects – particularly at the local authority level – that should be immediately financed. These would constitute interim measures.

The above list shows the range of proposals already being advanced to boost growth and employment. There are more. Professor Kinsella’s proposed specialist science and technology bank is an example of positive forward thinking. Tom O’Connor’s updated Telesis approach to indigenous tech-companies is another. We will need to model, cost and prioritise these – striking a balance between long-term productivity gains and short-term employment boost. But the point here is that there are a considerable number of job-creation proposals – let’s move on them.

3. Where’s the Money? Here’s the Money

How do we get our hands on the investment to get these output, productivity and employment-raising activities going? The Government’s deflationary strategy has ended in tears in the international markets (our 10-year spreads vie with Portugal to be the worst in the EU-14). Resort to international borrowing, possible at the start of the recession, is now being closed off.

There are five areas we can identify for investment resources:

Public enterprise: they have the ability to leverage investment for commercial return projects. Take Next Generation Broadband: IBEC estimates the cost of a network to be €2.2 billion with a 12-year ROI time horizon. A model outlined by Donal Palcic shows how a public enterprise-private investment partnership can work. And rather than costing the state, it would be a beneficiary in the short-term as two-thirds of the cost is made up in civil engineering work (more tax revenue, reduced unemployment costs). And afterwards, we have a real revenue-raising asset in place.

Use our Savings: The ESRI estimates we will have nearly €50 billion (or nearly 40 percent of our GNP) by next year in Exchequer cash balances and Pension Reserve Fund assets. Not all of this can or should be accessed (billions are tied up in bank recapitalisation while we need to retain liquidity on our balance sheet). Still, can it be argued that we need this entire savings at a time when our economy desperately needs investment capital? Put some of it to work, boost output and, so, reduce long-term debt.

Redirect Pension Fund Contributions: The Government intends to put nearly €4 billion into the Pension Fund between 2012 and 2014. Redirect some, most, all of that into investment now. It doesn’t alter the Exchequer Balance Sheet output, but it will boost inputs (e.g. tax revenue, reduced unemployment costs) meaning lower debt.

Taxation: The ESRI has shown that taxation is less harmful to the economy than spending cuts. Raise taxation, particularly on the ‘savers’ (that is, high-income groups); this will have the least deflationary impact. Some of this money can be diverted into productive investment.

Public Sector Productivity Gains: if there are efficiencies to be had in the public sector (and not the Government’s Transformation Agenda which is just a cover for cutting public services, employment and working conditions), then redirect those savings into investment.

These are five areas in which we can start to access the resources for investment without the Exchequer resorting to the international markets. I’m sure others have more ideas. And with growth comes more resources for investment through increased revenue. This is how we get a virtuous cycle happening.

* * *

This is an outline, that’s all. We could add more policy points. For instance, we need to bury the 2014 Maastricht guideline target. No on believes we can reach it, so why base policy on a fantasy? The Ernst & Young / Oxford Economics report suggests that on current trends (and even with healthy GDP growth) we won’t bring the deficit into Maastricht compliance until 2018 or 2019. While this might be pessimistic, what it urgently shows is that we must get the process right. If we do that, the date will come right. If we don’t get the process right, target dates are meaningless.

Second, we need a new wages-income strategy. Throughout 2009 other EU countries, despite the recession, increased wages – even statutory minimum wages. We must start doing the same on the basis of flat-rate increases to disproportionately benefit the low paid, the ‘spenders’ – in the private and public sectors – with the usual ‘inability to pay’ clause in operation. This will increase demand and Exchequer receipts.

No doubt, there are even more. But for now, let’s recap the three main points:

1) No more spending cuts. Stop adding to deflation. Stop digging.

2) Identify and quantify the investment proposals that are already on the table (and come up with some more). This will boost output, jobs, tax revenue – win, win, win.

3) Go after the various sources for investment. I’ve listed five, there’s no doubt more. The main point is – the money’s there.

This is a simple three-part programme that all progressives – trade unionists, party activists, social and civic organisations, and concerned individuals – can unite behind. We still need to develop this (these are, after all, starting principles) and, as always, there will be better ideas once more people get involved.

But this is a programme that is do-able and sell-able. It provides a clear and common-sense alternative to the Government’s strategy. It can unite a broad front of interests.
And, most importantly, it can win. Let’s take Keynes’ words to heart:

‘ . . . it is a complete mistake to believe that there is a dilemma between schemes for increasing employment and schemes for balancing the Budget,—that we must go slowly and cautiously with the former for fear of injuring the latter. Quite the contrary. There is no possibility of balancing the Budget except by increasing the national income, which is much the same thing as increasing employment.’

Let’s get to work in order to put the economy back to work.


Anonymous said...

Why no mention of Labour's Strategic Investment Bank (SIB). This provides a clear mechanism for raising capital for ind=frastructure investment. Your idea that we cannot borrow risks legitimising the deflationists position.

Michael Taft said...

Thanks Anonymous for that addition. See, there are plenty of ideas that can be worked on. No, it is not my intention to legitimise the deflationists' position. Indeed, the reason why we are in a low-growth, high-debt, double-digit unemployment situation is because deflationary policies have been pursued. However, we could be entering a difficult phase throughout the Eurozone as the Right have regrouped and are now launching deflation on a larger scale - an ideological attack on the public realm. This will create further crisis - in economies and in the sovereign debt markets (at least for the peripheral countries). We should first lay the blame where it lies and present a considered, politically-tactical alternative. My own frustration is that progressives have been labelled as being indifferent to borrowing levels and deficit risks, when in actual fact it is deflationary policies that will drive up debt, keep deficits sluggishly high and add to our interest burden. Were there to be a reflationary change of course, the deficit would fall faster while debt and interest payments would fall as a proportion of GDP. Borrowing would no longer be to subsidise unemployment and falling demand and investment. It would be for productive activities.

Mack said...

Nouriel Roubini on preventing a second crisis

Some interesting points - debt restructuring for households in countries with a large housing bust.

I think 'no cuts' is probably unrealistic (I'm sure you won't let me put you off!) - not only domestically but probably also in Europe (German perception of paying for fiscal irresponsibility of others). But an argument could be made that cuts should be offset with temporary capital spending.

Pretty good post.

Anonymous said...

Can you fix the link under the word "shown" ("The ESRI has shown...")?


Michael Taft said...

Anonymous - can't do it from here but the paper is Working Paper 287, April 2009 and can be accessded on the ESRI website.

Mack - if we could get the capital and other productive spending going, that would be a start. Unfortunately, spending cuts could reduce the positive impact of such investment while at the same time doing nothing for long-term debt (indeed, making it worse). But at least ICTU and IBEC are stating a positive posittion together.

Nat O`Connor said...

The ESRI working paper is here.