Monday, 27 February 2012

As 'austerity' isn't working, what's the alternative?

Michael Burke: Tom Healey has made some very good points in debunking the myth that ‘austerity’ is working. In general the EU governments that have embraced the ‘austerity’ model – the transfer of incomes from labour and the poor to capital and the rich – are currently engaged in a game of blame the foreigner. The economic argument is that it is the turmoil in the EU which has caused the respective slowdowns. The British government repeats this mantra endlessly, even though British growth in 2011 was half of that both in the Euro Area and in EU as a whole.

The ESRI repeats this misdirected criticism. As the latest quarterly report shows, the growth rate of GDP was 0.9% in 2011. The Euro Area economy and the EU economy growth rates were significantly higher in 2011, at 1.5% and 1.6% respectively. Irish exports grew by 4.4% in 2011, according to ESRI projections. If they are right, exports will have risen by approximately €7bn last year in real terms. Without that rise GDP would have fallen by 3.5% in 2011. Clearly, the idea that the EU is the cause of the renewed Irish contraction is a fiction.

The actual cause of the renewed downturn is the policy of ‘austerity’. Household spending, government spending and investment (Gross Fixed Capital Formation) all reached new lows in the Q3 2011 national accounts data. The biggest single contributor remains the decline in investment. On an annualised basis investment has fallen by €26bn in the course of the recession (although it actually began before GDP ell). This compares to a decline of €17bn in GDP and €23.4bn in GNP. Declining investment accounts for more than the entire downturn.

For most Irish business this is entirely logical. Their two main customers are either the good or services they supply to government, or to the household sector. If both these sectors are cutting their own spending, why would businesses invest?

But this is not to say there is no capacity to invest, or to repeat the foolish mantra that “there is no money left”. In 2010, even as the economy was contracting by 0.4%, the Gross Operating Surplus (akin to profits) of Irish businesses rose to €71.2bn from €69.4bn in 2009 in nominal terms. Yet investment fell from €25.3bn to €19bn. Clearly there is plenty of money left. In fact, the entire contraction in both the economy and in investment could be made good just by accessing a proportion of those profits.

If the logjam of business’ unwillingness to invest is broken by higher growth, they will then willingly invest on their own account. All that is required is to break the logjam, which means the government taking control of some of those profits to invest them.

These temporary measures could be labelled windfall taxes, solidarity taxes, an ‘all in this together levy’ or whatever. But the money is there, and growing. Businesses are refusing to invest the profits they are generating. Government action is needed to reallocate these corporate savings towards investment. None of this contradicts the impositions of the Troika, as the terms Gross Operating Surplus or profits aren’t even mentioned in all the documents, bilateral arrangements, MoUs etc.

This is an Irish solution to the crisis. A national recovery based on the resources that are in this economy, and not beholden to foreign powers.

6 comments:

Seamus Coffey said...

Hi Michael,

I don't think its right to suggest that firms are accumulating around €70 billion of profits every year that the government could "take control of".

The €71.2 billion figure you use is the Gross Oerating Surplus but it is for the entire economy. Almost half of this is generated by households, government and the financial sector which does not appear to be the sector analysed in the post.

If we look at the Institutional Sector Accounts to get a look at non-financial corporations.

In 2010 the total output of all non-financial firms in Ireland was €222 billion. To create this required €148 billion of intermediate consumption (materials, goods and services).

This gives a gross value added in the NFC sector of around €74 billion.

From this companies paid €35 billion of wages, €2 billion of taxes on production, spent €1 billion on interest, distributed a net amount of €16 billion, repatriated a net €6 billion through FDI and paid €3 billion of Corporation Tax.

This means that in 2010 non-financial corporations in Ireland had gross savings of around €11 billion.

Of this €11 billion, firms used €6 billion of it for investment leaving a net savings amount of €5 billion.

We could tax this but it would not be the windfall the starting figure suggests. From 2002 this net savings figure has been negative six times.

In 2007, investment by non-financial firms was €15.5 billion. By 2010 it had fallen 60% to just €6.3 billion, a fall of €9.2 billion.

However between 2007 and 2010 overall investment in the Irish economy fell 65% from €50.5 billion to €17.4 billion. There is no doubt that investment by firms has fallen but it only accounts for about one quarter of the overall fall in investment.

The main reason why investment has collapsed is because households have stopped buying new houses. Household investment is down 80% since 2006 with a fall from €25.5 billion to €5.1 billion.

There is no doubt that there is a stalling of investment in Ireland, both public and private, but investment is generally funded with borrowed rather than existing resources. There might be a large Gross Operating Surplus of €38 billion in Irish firms but more than 85% of that is already being accounted for.

Paul Hunt said...

@Seamus Coffey,

Now that wasn't very nice. Playing the wicked fairy godmother and making the crock of gold that Michael had discovered vanish in a puff. Shame on you. That crock of gold could have saved us all from perdition and would have avoided putting in the hard graft restructuring and rejuvenating the sheltered sectors of the economy. You really should be more gentle when you shatter cherished illusions.

Michael Burke said...

Firstly, sincere apologies for the extreme delay in responding to these comments. It's not helpful to the debate, but was unavoidable.

Seamus, you point to the fact savings of the NFC sector have been negative in 6 years since 2002. They're supposed to be.

In the words of Gavyn Davies, net borrowing by the NFC is the mark of a normally functioning market economy. The corporate sector should be a net borrower (for investment) from the household sector. Clearly persistent saving by the corporate sector is not 'normal' and if both these two are net savers the government is forced to become a net borrower (excl to overseas sector), hence the public deficit.

More accurately, it's entirely normal in an investment-led slump where first there is no borrowing and then profits are hoarded while the investment strike continues.

Only if the level of Gross Operating Surplus (profits) is taken as sacrosant is there any difficulty in increasing aggregate demand (including breaking an investment strike).

It could be done by:

a. Increasing the compensation of employees (CoE) and so reduce profits

b. Increasng the taxation of the highest element of CoE, extremely high pay, excessive professional fees and bonuses

c. Taxing the 'distribution' of profits via dividends, capital gains, etc.

d. taxing the repatriation of profits

e.Increasing the rate of corporate taxation

f. applying a levy to all uninvested profits, etc., etc.

Also, not sure why we're only considering the non-financial sector. The profits of the financial sector were about €17bn in 2010, on which it paid no taxes and from which is paid out about €6bn.

That could be altered too, unless we regard not only all the decisions of the private sector as Holy Writ, and all government taxation of the corporate sector as cast in stone.

If either or both those things are not true then Ireland does indeed have own resources to combat the crisis.

Paul Hunt said...

@Michael,

What you are proposing doesn't fall far short of total state control and direction of the private sectors in the economy - along the lines of "if you don't do what we want you to do, we'll take most of your profit off you and apply it ourselves".

Even if one were to ignore the huge body of theory and practice that says this won't work and would be counter-productive and the constitutional protections of property rights and liberty, I can't see how this would secure sufficient democratic support or legitimacy.

Your'e perfectly free to advance it, but please tell this proposal hasn't secured some traction on the 'progressive-left' in Ireland, as I would despair of it even more than I do now.

RosencrantzisDead said...

@Paul Hunt,

I fail to see how imposing taxes amounts to 'total state control'. The proposals are not exactly different than forcing developers to set aside chunks of residential development for social-affordable housing, which we have been doing for th past 12 years or so.

The Constitutional protection of property has always been subject to 'common good'. Despite what many think, the Courts have upheld government intervention into property rights for the sake of the common good. Thus, the property right card is overplayed.

Also, could you please refrain fromm 'concern trolling' about the 'progressive left'? I know that I, and a few others, find these remarks tiresome and rather disingenuous.

Paul Hunt said...

I'm sorry you find it irksome, but it, most certainly, is not disingenuous. Thos who fail to learn from history...

The najor social and economic advances in the last century occurred when liberals and social democrats (Europe) or progressives (US) combined. Liberals, such as Keynes and Beveridge, provided the intellectual sinews for the post war settlement in both the US and Europe - and it was European liberals who established the basis for the German social market economy which had resonance otuside of Germany and was amenable to social democratic modifciations as governments changed.

But, since the breakdown of the post-war settlement, liberals and social democrats (or progressives) seem to have lived in a state of mutual mistrust and animosity. It's difficult to see this in Ireland with its quaint, tribal disposition of political parties, but it may be clearly seen in toher countries with two broad political blocs competing over the role of markets and the private sector and the boundaries of the state.

If the left continues as it is it will be a busted flush - both intellectually and politically. Even if it isn't clearly defined in Ireland, a liberal-cntre does exist. It clealry exists in most other EU member-states. For some it has been ensnared by the lures and wiles of the Neo-cons, but, equally, it has been repelled by the natics of the left.

Ideological purity may be comforting - and, in Ireland, populist nationalism may be intoxicating - but engagement with liberalism is the only way forward.