Friday, 20 January 2012

Time for Plan B

Nat O'Connor: Austerity policies are not working. I was one of 59 signatories of a letter in today's Irish Times calling for Plan B.

Plan B must include productive investment in infrastructure, education and labour skills. There is some money available to spearhead this, in the remainder of the National Pension Reserve Fund and in cash balances held by the Government. Rather than using this money to further capitalise the banks and/or pay off debt, it would be more effective and more socially just for the Government to boost productive investment. Ireland's economy is operating far below its productive capacity and capital spending as a proportion of GDP is now the lowest in Europe. Therefore there is ample absorptive capacity to increase investment in areas such as the provision of next generation broadband infrastructure, retraining etc., as well as other areas that will boost employment in the short term and increase productive and innovative capacity in the medium and long term.

The private sector is not currently investing, therefore the State needs to get the ball rolling. This can be funded from part of the €15 billion or more the Government currently holds in cash and assets, as well as from tax increases on wealth and higher incomes. The Government's announcement that it is looking at the Anglo promissory notes is very welcome, and could also release some money for investment that is currently earmarked as part of the €3.1 billion to be paid on promissory notes this year.


Paul Hunt said...

What I would like to know is, of the 59 signatories to this letter advocating a radical change in economic and fiscal policy, how many
(1) were aware that much of the taxation receipts - and the public expenditure they supported - was based on irrationally inflated projections and expectations and unsustainable and highlighted this at the time in the same manner as they are now calling for a radical change in policy? or
(2) were unaware of - or ignored - (1) and publicly demanded even more public spending or a different allocation of this spending? and
(3) were aware of the excessive costs the sheltered sectors were imposing on the economy (and continue to impose) - largely caused by the capture of rent and monopoly profits in the private sectors and inefficient financing of investment in the public and semi-state sectors - (and which drove and continue to drive pay demands) and highlighted this at the time (and subsequently) in the same manner as they are now calling for a radical change in policy?

I would be greatly cheered if I am wrong - and I look forward to being proved wrong, but I suspect the answers would be (1) hardly any, (2) many and (3) hardly any.

And that is why this call for a radical change in policy has zero credibility.

Nat O`Connor said...

@Paul Hunt

In this case, be cheered, because you are totally wrong.

I'm not going to engage in a discussion of named individuals, but I know that many of the signatories have been critical of poverty, inequality and other social problems in Ireland for decades. Likewise, many of them were critics of the hubris of the boom and warned of the unsustainable economics that underpinned it.

It is cynical and disingenuous to blame them or me for (1) the instability in the tax system engendered by reckless national economic policy, (2) the injustice of the distribution of public spending even when there was plenty, and (3) the power of vested interests in Ireland.

(1) Many of the signatories have been campaigning for decades for an alternative economic system and way of life that is more environmentally conscious, gender equal and socially just. Yes, we called for a different economic policy then and we do so now.

(2) At a time when the tide was meant to be lifting all boats, many of the signatories were working directly with and highlighting the injustice facing people in Ireland who are homeless, living with AIDS, suffering racism, living in poverty and/or otherwise socially excluded. Yes, even if the largesse of the boom was temporary, we pointed out that the distribution of its benefits left many people behind.

(3) Many of the signatories have been speaking for decades about power and powerlessness, about vested interests, patriarchy and political inequality in Ireland. Yes, I imagine we were not fully aware of the full extent to which the bubble would burst. And we certainly did not anticipate that successive governments would disproportionately shelter the wealthy while inflicting misery on those with less power. So what’s your point?

Plan B is only radical in an Irish context. It is vanilla-flavoured European social democracy with a Keynesian analysis that recognises that mathematically, as well as morally, the Government can only improve the economy and the deficit by engaging in productive investment and boosting aggregate demand. It is a viable alternative to the current austerity policies.

BTW, I miscounted, there are 60 signatories, which is nicer rounded number.

Paul Hunt said...

No intention to impugn the integrity, public spiritedness or upstandingness of you or your co-signatories. Simply highlighting the apparent disjunction between the mindset being exhibited and the economic and political reality being confronted by parliaments, thier elected governments and their appointed policy designers and regulators.

Over the last 20 years governments in many developed economies entered in to a Faustian pact with the capitalist elites that allowed the latter to indulge their greed beyond excess on condition they provided the credit to compensate the masses for the wage repression being imposed on them. For a long time it worked, but demcoratic governance and regulation were completely suborned. And when inevitably unshackled capitalism began to wreak havoc suborned and woefully unprepared and under-resourced governments were forced to put their citizens in the firing line.

The Irish capitalist elites knew enough to take advantage of this general suborning of governance and regulation in developed economies, but they lacked imagination and were able to engineer only a plain vanilla property bubble to satiate their greed - but the extent of this bubble and the impact of its blow-out were proportionaly greater than the luncacy and damage in most other advanced economies.

Irish governing politcians, with an eye on electoral advantage - rememeber Bertie's Inchydoney moment - extended the trough to feed groups and interests that would normally be critical and opposed. And all the time the various powerful vested interests - both on the right and the left (very notional labels in the Irish context) - were gorging themselves at the trough.

What we are seeing, in particular in the central and northern EU states, is parliaments increasingly asserting their authority over governments to shackle capitalism in the interests of voters. The debate is also beginning in Britain where both main parties are vying in thier attempts to convince voters that they can shackle the beast - although Labour cannot bring itslef to admit the extent to ehich it was suborned while in government and the Tories cannot admit the extent to which they cheered on this suborning. But most major parties throughput Europe, irrespective of political complexion, recognise that a resort to Keynesian demand boosting is neither possible nor desirable.

It will be a long haul to re-impose effective democratic governance of capitalism and to repair economies greviously damaged by the destruction its excesses have wreaked.

So, let me say it once again, a call for 'vanilla-flavoured European social democracy' has zero credibility.

Ireland is so far behind the curve in terms of understanding what is required that it is both frightening and tragic.

Paul Hunt said...

@Nat O'Connor,

I realise that the case I advance on this blog strikes at the core of the general thrust of posts, but the intent is to encourage engagement with a view to securing some common ground that might expand popular support for more appropriate public policies than are currently being implemented.

Focusing on these darned promissory notes/the liquidity support they have secured and demanding a restoration of Kenynesian-inspired social democratic interventions just won't cut it. It may secure some increased popular support for the progressive-left, but it is nothing but snake oil.

You have kindly offered me the opportunity to post here on structural reform issues. As a way of working up to this, I have set out the essence of my argument about the inefficiency of public and semi-state investment financing - and the burden this is imposing on citizens and the economy - in comments in the previous thread, but it appears there is no interest - or, perhaps, an unwillingness to acknowledge the factual basis of my assertions. Too many sacred cows might have to be slain.

This is not very encouraging, but, equally, it is not very surprising.

I also recognise that major structural reforms are required in the private sheltered sectors - and ones that are likely to generate much greater benefits for the majority of citizens than any reforms in the public or semi-state sectors. This is an area where I have much less expertise but there are numerous economic policy insights that are relevant.

However, to make any progress in this area - and to overcome the self-serving, disingenuous opposition of the right - it will be necessary for the progressive-left to cease equating the functioning of capitalism with the use of markets. Capitalists will establish and use markets as efficient means of processing enormous amounts of economic information and of generating transparent price discovery when it is convenient and profitable for them to do so. On other occasions, and in particular when policy makers and regulators seek to expand the use of genuinely competitive markets so as to curtail their market power, they will seek to rig, distort and subvert these markets to protect or enhance their market power.

It is always possible to recognise when markets have the potential to generate benefits for the economy and citizens - and to curtail the abuse of market power - because capitalists will strain every sinew to prevent their emergence or to supress or distort their proper functioning.

However, it appears that the progressive-left (not only in Ireland, but generally throughout the EU) seems determined to avoid consideration of efficient financing of state-sponsored investment in a time of fiscal constraint and to persist in equating the effective functioning of markets with the nefarious activities of capitalists.

Sadly, given this apparent determination no effective engagement is possible.

Nat O`Connor said...

@ Paul Hunt

You refer to an “apparent disjunction between the mindset being exhibited” [in the Plan B letter] and “economic and political reality”.

Reality, as you describe it, is the greed of “capitalist elites” and the problems of “unshackled capitalism”, including the extending by successive governments of a “trough” to “various powerful vested interests” in the public and private sectors.

Your preferred solution is “a long haul to re-impose effective democratic governance of capitalism and to repair economies”.

So far, so good. There is little in the letter that at odds with that.

However, you argue that a mainstream European social democratic approach “has zero credibility” because you are convinced of “the inefficiency of public and semi-state investment financing” and in particular you complain that “the progressive-left ... seems determined to avoid consideration of efficient financing of state-sponsored investment in a time of fiscal constraint and to persist in equating the effective functioning of markets with the nefarious activities of capitalists”.

Let’s pause at this point and look again at the letter.

At no point do we equate “the functioning of capitalism with the use of markets”. You draw this inference, but it is not in the text. I’m sure that some of the signatories do indeed prefer state-led economic activity, but I am willing to bet that the majority are in favour of the mainstream European social democratic approach: which is a mixed economy, with well-regulated markets and a balance of public and private activity.

The requirement for productive investment in the Irish economy is not about state versus market.

As for “consideration of efficient financing of state-sponsored investment”. Well, yes, any state-sponsored investment must be efficient and well-regulated. Structural reforms are necessary, as indeed they are in the private sector. Reform and better regulation is needed across the board.

Let us put aside your desire to be an iconoclast against an anti-market state-centred dogma that I do not profess. Instead, let’s look at the numbers.

If we look at Eurostat’s figures in relation to gross fixed capital formation – a.k.a. productive investment – Ireland is the lowest in the EU27. Our gross fixed capital formation was 11.5 per cent of GDP in 2010, and is forecast to be 10.1 in 2011 and 2012. The EU27 average figures are 18.6, 18.7 and 18.8 per cent respectively. The next lowest figure to Ireland is the UK, on 14.9 per cent in 2010, and forecasts of 14.5 and 14.6 for 2011 and 2012.

There is a strong case for increased productive investment in Ireland, whether one chooses to call it Keynesianism, social democracy or just mathematics. Earlier this month, the European Commission is cited as criticising Ireland for frontloading capital cuts.

In this context, we suggest that instead of using €3.1 billion of Irish taxpayers’ money in 2012 to pay promissory notes, it should be used for productive investment. Likewise, redistribution of income through tax changes will boost demand in the economy, as people on lower incomes will spend rather than save. On this basis, we are mathematically correct to suggest that “Kenynesian-inspired social democratic interventions” are possible and desirable, however we label them.

However, this does not exclude reform and better regulation, it does not exclude an important role for the private sector (which would inevitably be involved in implementing investment in areas like broadband) and it does not exclude further private market involvement (such as increased productive investment, in Ireland, by Irish pension funds).

Paul Hunt said...

@Nat O'Connor,

No desire to be an 'iconoclast'. Indeed, 'anti-market state state-centred dogma' is a strange icon; surely it's those who hold this sacred who break icons? And, although you may claim not to profess this dogma, this blog, unfortunately, is steeped in it.

And I just don't understand this mathematically feasible, but totally economically and politically infeasible Keynesianism. Standard Keynes does not apply, I'm afraid, because, during the good times, many governments broke the first rule by concealing structural deficits with the proceeds from bubbles.

But it is the three 'double negatives' in your final paragraph that really give the game away - 'does not exclude' three times. Structural reforms that focus on non labour costs are the single best available means of increasing real disposable incomes and boosting the domestic economy. But the implications are obviously far too firghtening. And the two examples are the coup de grace. Conceding 'Implementing investment in areas like broadband' because the state is neither willing nor able to reclaim its previous level of ownership and control is good, but the financial repression explicit in the second goes one better.