Friday, 24 February 2012

'Austerity is working' - not

Tom Healy: In its latest Quarterly Economic Commentary the ESRI QEC authors observe that 'The euro zone economy is slipping into recession due to the impact of both the austerity measures and the effect of policy uncertainty in the euro zone on investment, consumer spending and employment.'

Nothing surprising there. Most commentators expect a flatlining in the EZ economy at best and a new recession at worst - thanks to a combination of factors including coordinated pan-European fiscal austerity. The QEC goes on to say that
'The austerity measures currently being undertaken, and those implemented over the past four years, are having an impact, as evidenced by the improvement in the public finances. However, while these measures correct the public finances they have a dampening effect on economic activity.'

Following €25bn in discretionary fiscal adjustments since 2008 the public sector deficit is still above 10% of GDP, down from 11.8% previously.

Evidence that it is dampening economic activity is the projection by the QEC that private consumer spending will decline in real terms of 1.8% this year and invetment will decline by 3.3%. No hope there for a turnround in the domestic economy any time soon. The QEC projects a further contraction in the domestic economy in 2013. Contrast that with the latest Economic and Fiscal Outlook by the Department of Finance in November which had no volume change in private consumer spending and a 3.2% increase in investment in 2013. It will be argued that the slowdown in internatinal trade explains the downgrading of economic forceasts more generally. But the truth is that the domestic economy is continuing to contract at a faster rate than had been forecasted and all the signals are that fiscal austerity in recent Budgets have driven that decline.

But, the QEC comments as do most economic commentators at least within Ireland that 'there is no other way':
There are very few policy options open to the government to stimulate growth as the traditional instruments of macro policy are either not available (monetary and exchange rate policy) or completely constrained (fiscal policy).

This line is accepted uncritically by most mainstream economic and media commentators. Next month a new economic research institute established under the umbrella of the ICTU will challenge that view and propose an alternative focussed on growth-enhancing strategic investment in much-needed infastructural development.


Paul Hunt said...

@Tom Healy,

You've got right to the heart of the fundamental deficiency in the mainstream economic policy stance in Ireland - "traditional instruments of macro policy are either not available (monetary and exchange rate policy) or completely constrained (fiscal policy)".

Sustainable economic growth only comes from increases in productive, allocative and dynamic efficiencies in the production and delivery of the goods and services which people value - and pay for, either collectively as taxpayers or individually as citizens.

It seems this penny is dropping for some of the EU's leading politicians:

The absence of the signatures of the two dominant Euro Area politcians is signifciant, but they will clamber on board.

It is disheartening that all the centre-left has to offer is the protection of existing inefficiencies and deadweight costs, more taxation and spending by the state and financial repression.

Tom Healy said...

A quote from the past (ESRI - Employment and Unemployment policy for Ireland, page 326, 1984): "Most of all perhaps it is necessary to challenge the simplistic view that all that needs to be done is to unshackle the private sector from State interference and taxes, and this sector will then deliver the jobs. This belief, which is now highly influential, is not supported by the evidence of previous Irish history or by the experience of most OECD countries since the Second World War. On the other hand, there is plenty of evidence of a weak response by private indigenous enterprise to the same environment in which foreign enterprise was able to generate large profits."
Pardon the long quotation.

Paul Hunt said...

This foreign enterprise must have been state-owned and controlled if it was so successful :-)

My focus is on non-labour costs and inefficiencies. I totally disagree with this 'labour theory of costs' espoused by mainsteam economics. Labour cannot, and should not, be expected to adjust as rapidly (in terms of pay and jobs) as capital to changing economic circumstances. That's the re-balaning I want to see and that's why my focus is on non-labour costs.