Tuesday, 20 July 2010

Guest post by Michael O'Sullivan: Who's fooling whom?

Michael O'Sullivan: Government ministers are now talking of an economic recovery. While this is what most people will want to hear, it will at the same time jar with the many experiencing unemployment, heightened job insecurity and rising mortgage payments to name but a few of our economic problems.

It is true that economic data suggest that output in our economy is beginning to recover from the steepest drop that any developed world economy has suffered since the Great Depression and this is very welcome.

What is not true however is that we in Ireland are going to experience a normal economic recovery along the lines of text book business cycles. The danger is not only that our politicians would try to convince us that this is the case, but that they fall for the same confidence trick themselves.

The apparent rationale behind 'talking up the recovery' is that by creating a sense of confidence, consumer and investment spending will follow. This 'if you say it, they will come' approach to economics is absent from most good economics textbooks, and utterly misplaced in an economy where the banking system is broken, government finances labouring under the burden of the banking sector bailout and where there has always been a puzzling lack of commitment by Irish savers to Irish entrepreneurs and industry.

Instead of talking about recovery, our policymakers and politicians should talk of repair, reform and restructuring. Addressing the policy making errors of the past and preparing for a dramatically changing world economy would be the ideal way forward.

Ireland's economy is in many ways an adolescent one. It is not yet fully developed, especially in terms of having a set of robust domestic sectors that can drive growth independent of the global economy.

As such the lesson from the catastrophe of our economic collapse is that we need to reform policy making in Ireland, build new institutions to replace the 19th and 20th century ones that we have in place, resist the temptation to talk about fashionable economic trends like the green economy and focus instead on developing domestic industry and services. What would be even more desirable would be a core set of values that could act as a guide to how society, public life and the economy should interact.

Instead, I suspect most of our leaders will find it easier to close their eyes, avoid the lessons that the financial crisis holds for us and mumble the 'recovery' mantra.

In economic terms the danger of this is huge because absent a magical pickup in household demand (which has rarely occurred in the context of such high borrowing levels) the result will be deflation and ongoing depression.

This is not scaremongering but a warning that the Irish economy needs radical surgery. Even in the large economies of the world the debate leans towards the need for government spending to continue to stimulate growth. The state of our finances means we don't have this luxury, but it also implies that structural reform is the only way we can really recover.

Talking up a recovery is not a strategy. The recent downgrading of the NAMA business plan and the Moody's government debt downgrade should be a warning that things are not as rosy as our politicians suggest. The great risk is that they continue to look the other way.
Michael O'Sullivan is the author of Ireland and the Global Question, and co-editor of What Did We Do Right? Global Perspectives on Ireland's Miracle, recently published by Blackhall Publishing

1 comment:

David Jacobson said...

I agree with so much of what Michael O'Sullivan has written here, that it seems churlish to quibble with one small point. I particularly like his juxtaposing of the government's "recovery" with the real need for "repair, reform and restructuring". To do this, as he correctly says, requires among other things the "building of new institutions".

The one small point relates to his rejection of "green economy". It seems to me that the very development of indigenous industry and services he calls for might be assisted, in its international competitiveness, by having sustainablity - in all its senses - as part of the "core set of values".