Friday, 6 April 2012

Open letter in Irish Times: austerity breeding stagnation

Today's open letter in the Irish Times, signed by many names familiar to PE readers, is available here. Comments?


Martin O'Dea said...

From the perspective of one who despairs at what is happening in this country, and, indeed, in the broader European context, it seems clear that the presentation of logic or the clarity with which the signatories present this arguement every two years or every two weeks really doesn't matter. This is particularly hard to understand and accept. I imagine someone like, say, Brian Hayes responding to the letter.
Firstly, he would not reply to the letter, in as much as you would expect, being an analysis of the content and logic and response to that. Much like trying to have a conversation on the likelihood of a daiety with a religious zealot - his starting position will be that any detractors are wrong. This will stem from the fact (again like the zealot) that the government sort of has to be right in what it is doing. It is the starting point.

How though can you continue with an arguement just to protect your party or religious grouping if evidence keeps stacking up against you. This type of neural functioning where the belief system and the logical analysis intertwine is not helpful. The logic will contort itself to fit into the belief. So, what we get from Mr Hayes will head along the lines of the following:
Things could be worse; we are heading in the right direction; if we stay the course things will turn around; we are seeing some good signs in many areas; we really don't have any option; there is no money; there is no alternative; you people are not being serious; you don't understand our hands are tied by what went before

Unfortunately the general public, with a largely 'believing media, and a distrust of those who present political opposition seem to be somewhat accepting of the line government give.
The lack of logic in all of this is startling though. The government's general position will be that things are not that bad, they will get better and when they do they we will have been shown to be right all along. This of course is the equivalent of going from €1000 down to €100 up to €110 and claiming triumph for a recent 10% increase.

What has occurred in its entirety is ludicrous.

If any government personality would like to discuss the actual economic collapse and the major part austerity has played in this and any means to end this - they should speak up now. Whether it is future political triumphs, social concern or creeping skepticism in the groupthink that motivates them doesn't really matter; it is no longer an abstract intellectual conversation. The strategy is obviously not working. Things are already disastrous.

Anonymous said...

Dan O'Brien, the economics correspondent of the Times, on another page, clearly did not like this letter.
Is he seeking balance to its publication on the Op Ed page or just simply seething?

Paul Hunt said...

This seems to represent the generally loyal, broadly academic - with a few exceptions, largely well-intentioned and almost totally naive opposition to the stance being pursued by Official Ireland.

It's difficult to decide which side is the more deluded. Official Ireland seems to think that this continuous salami-slicing of public expenditure and incremental tax increases will somehow be more than balanced by a surge in exports and we'll be home free before we know it. The deluded opposition to this line seems to think that Keynes can be re-incarnated without any recognition of what has happened since his death.

Neither side is prepared to accept the need for deep-seated, meaningful reforms of democratic governance and economic structures.

And so this 'surreal' debate continues while the domestic economy sinks in to the mire. Of course, those in secure, pensionable employment may take some hits - and have taken some hits - but, in general, they'll be fine. But, as for those less fortunate, they can shift for themselves and make do with the crocodile tears of those well-ensconced.

These shared delusions cannot last indefinitely.

kk-kieran said...

Paul I've read you on here a number of times saying (and i hope im not misrepresenting you) that times have changed, modern governments are too deeply in debt for Keynesian economics to work. Yet a quick google reveals that government debt in say Britain and America, although certainly high, isn't historically unprecedented, in fact in Britain it looks like its more or less at the levels it would have been at when Keynes was developing his theories

But in any case wouldnt a central bank funded stimulus be a win-win( I mean the major risk from that would be inflation which wouldnt be a bad thing for indebted countries, or so im told.

Now of course im aware that for ireland, being in the euro and really and truly bankrupt,the above doesnt necessarily hold true.

Michael Burke said...

The propensity to criticise this letter without engaging is evident in the pages of the Irish Tmes, on IrishEconomy, and elsewhere.

There is no recognition of the fact that the faster-growing industrialised economies like Sweden, Germany and the US all adopted stimulus measures, as did those of the industrialising economies to even greater effect.

The fact that these countries have achieved far stronger growth, and at least no worse outcomes on deficits than Ireland is ignored.

This is is not ignorance. It is a wilful pursuit of a different agenda, other than either growth of deficit-reduction.

Martin O Dea said...

I can't abide the phrase 'Elephant in the room' but there is that plus heads in the sand stuff here, also
I think, Michael, the dark arts of inequality promotion and upper echelons self promotion is alive and well but i also believe a lot of economists etc who are cerebrally wedded to austerity have a reference point in the 1980s and how borrowing to invest in a largely unproductive economy only increased cthe difficulties.
The elephants and the sand is about technologcal advance. I know people must cling to some predictability and certainty but the harsh and wonderful reality is that the potential to manipulate our physical environment to better ourselves in many areas of life is of no relation to the world of the 80s. Technology advance will also not await our comfort. For example anyone who has followed asimo (Hondas robots) development over the last decade must see that over the next decade 10s of millions of basic service jobs will no longer require humans. How can we possibly deal with the implications of this when we are not comprehending that financial stimulus is dependent on targeting and on management and oversight; but also on the recipient economy. As an economy that has now much of tech and other infrastructure in place to enjoy, early, the life standard benefits awaiting it is absolutely appalling to come to this point in policy and to allow unemployment and emigration soar.

Put simply if you take a 21year old in 1980 and you really wanted them to work. What could you create as a government for them to do - bear in mind the high start up costs and gradual market entry of the pre-internet and manufacturing age.

Paul Hunt said...


Thank you. I don't think you're misrepresenting my position - and certainly not deliberately as some do. I take your point about some economies applying varying extents of counter-cyclical fiscal policy. The US was able to do it - and should have done more given the decrepit state of much of its public infrastructure - on the back of the dollar as an international reserve currency - even if the Chinese and others are slowly unwinding their US bond holdings. Germany and Sweden, as respective protagonists of the slightly different, historically-based, social market and social democratic models, in company with some other European economies aligned with one or other of these models, were able to pursue employment-sustaining and growth-promoting policies.

But there seems to be a general reluctance to recognise how far Ireland had moved off - and then went totally off - the radar defined by these models.

Among its EU peers, Ireland, probably has:
- a government that exercises the most excessive executive dominance;
- the weakest parliament;
- the most centralised and least accountable system of public administration;
- the least effective and accountable system of local government;
- extremely effective, 'behind-the-scenes' influence of narrow sectional economic interests on the formulation and implementation of public policy to the detriment of the public interest; and
- the least effective competition policy and representation and advocacy of the collective interests of consumers.

We might argue about differences in degree, but there can be no doubt that Ireland is close to the extreme end of the spectra defined by these criteria. Most other advanced ecomomies have more balanced positions along these spectra and the institutions and procedures are in place and working to support the successful implementation of counter-cyclical policies. Ireland doesn't. When we factor in the extent to which so mnay individuals and firms went on an orgy - that was officialy snactioned - of 'privatised Keynesianism' relying on external lending, we might begin to appreciate the scale of the challenge confronting Ireland.

Both the policy stance being pursued by Official Ireland and this more centre-left, Keynesian stance are studiously and determinedly avoiding tackling the nature and scale of this challenge.

I don't worry too much about this naive centre-left stance because it will never secure sufficient poltical traction until some accommodation is secured with centrist liberals. Though it isn't helpful. (A Hollande win in France will merely show the extent to which France is the exception that proves the rule. Francois Mitterand pursued his own idiosyncratic approach from 1981 and inavertently provided the basis for the subsequent centre-right hegemony.)

It is the stance that is being pursued by Official Ireland that really worries me. It is counter-productive and self-defeating. But then we get the really annoying bit. This naive centre-left stance allows Official Ireland to shore up its position and prevail in this 'phoney war' and both sides can cheerfully and oh so conveniently ignore the deep-seated political and economic structural refroms so badly required.

Paul Hunt said...


Tried to respond to your comment. It appeared to be saved and accepted, but it seems to have disappeared in the ether. It doesn't matter. I know my comments aren't very welcome here in the same way as they are unwelcome on other blogs.

Keep the heads in the sand and it will all blow over eventually.

kk kieran said...

As im sure you seen brad delong has been arguing that austerity actually makes the debt arithmetic even worse. Now of course i cant speak to the veracity of his analysis but it sure has the ring of truth. As i recollect Britain's debt situation was actually improving toward the end of the Labour government and has actually got worse, or at least stagnated(depending on whose doing the counting), with the onset of tory austerity and it looks like a similar dynamic is playing out in spain( Quelle suprise, as they say.

I probably cant express this correctly but it looks to me like the problem isnt with Keynesianism or left wing politics(after all the countries that have weathered the euro crisis best appear to be the northern European social democracies) but with an unworkable currency union and the last 30's of neo-liberalism. I mean if we werent in the euro we'd have probably be where iceland is now, not an ideal situation but at least with the prospect of recovery.

More generally FWIW i always read your comments, its interesting to hear an opposing viewpoint.

progressive-economy@tasc said...

@Paul Hunt Apologies if you've had trouble posting comments; this seems to have been an issue on Blogger over the weekend, but should be resolved now - Admin

kk kieran said...

Oh ok i see your comment now paul, well once my schedule allows I definitely intend to read that essay you have in DRB and no doubt I'ill learn more. Im reading "Luck and the Irish" at the moment, he has an apt line about Fianna Fail being able to spend their way out of a recession.

Now while I agree with you that Irish governance is in a bad way, Im unsure about the importance your according it. People often use the analogy about ER doctors counselling Heart attack patients about their diet and exercise habits I mean the points you offer could pretty well serve as a description of China(afaik anyway) , yet the Chinese were able to take massive and effective action. Italy and Spain are both countries that have pretty low standards for public life but surely we can agree that if it wasnt for the euro they both continue muddling their way through.
From what i read fiscal stimulus in a small open country would be peeing into the wind, so we can probably agree on that.
Im baffled though about how you think that the left is shoring up official ireland, the irish left(properly defined) is very small and uninfluencial and im m sure that most of them would agree with you about the need for democratic reform, for instance Vincent Browne is always on about it .

kk-kieran said...

Spend their way out of a boom that should have read, im just after waking up :)

Paul Hunt said...


My beef with the Left is this apparent naive belief in (1) the ability to restore the Keynesianism that obtained up to the early '70s without any recognition of what has happened since, (2) the omniscience and omnipotence of the 'state' and (3) the inability of genuinely competitive markets, in almost all circumstances, to generate economically and socially useful outcomes.

In Ireland the 'shoring up' is in terms of providing a 'straw man' that Official Ireland can easily demolish.

You may find a recent comment on another blog of some use:

kk-kieran said...

Hi paul sorry i really dont have the time(or to be fair the competence) to be doing this at the moment.

Am it all depends on what your talking about , the professional and managerial class seem to be absurdly cosseted in this country and contrary to expectations the troika have done anything to change the situation.

However if we're talking about people working for median wages in the public sector(or indeed people on welfare) well yes the rates probably are higher than in comparable countries. Maybe they'ill have to come down, like ii say im not an expert. although if i understand the point being argued on this website and by others such as Michael Taft, further pay cuts have the potential to be self defeating to the extent that they gut domestic demand. A central bank report read about in the sbp said that people are underestimating the importance of domestic demand and that we cant expect to export our way to recovery. And how would our personal debt crisis fair if rates of pay were cut to sharply? it wouldnt be pretty i think.

in the blogs i read i hear alot about the "stickiness" of wages( has the Irish experience been different? I mean labour markets dont get more "flexible" than america.

kk-kieran said...

**my question about wages was inspired by your comment on irish economy!

kk-kieran said...
This comment has been removed by a blog administrator.
Paul Hunt said...


It's a question of sequencing. My focus is on broadly maintaining nominal pay levels - at least down through the ranks - in the sheltered sectors but cutting the non-labour costs - monopoly profits, excessive costs arising from anti-competitive practices or inefficient structures and financing and rent-seeking.

Increased disposable incomes will allow those who are forced to de-leverage to do so more rapidly and to allow those who are sufficiently fortunate not to be in that position to spend more - thereby boosting economic activity. There are other beneficial knock-on effects as well, but the forces of resistance to any changes of this nature - particularly on the left - are powerful and well-embedded.

Paul Hunt said...


Just to elaborate a little on my last comment as someone else has queried my reluctance to tackle excessive wage costs and this was my response:
"This is for three reasons. First, it is an issue of sequencing. I would prefer to maintain nominal wages, strip out excessive non-labour costs, reduce final prices and Increase real disposable incomes. Households and businesses which are forced to deleverage could do so more quickly; those which are in the fortunate position of not being required to do this would be able, resp., to spend and invest more - boosting economic activity. And even if the unit wage cost is high, it makes far more sense to try to bring up the marginal value of output than to drive down the unit wage cost, because this invariably drives down the marginal value of output even further.

Secondly, though we will always have 'lead-swingers' and 'job's worths', the vast majority of the people delivering public services on the 'front-line' continue to do wonderful work - often beyond the call of duty. In combination with considerable community and voluntary effort, this provides the 'glue' that holds society together. It isn't sensible, moral or pragmatic to put these people first in the firing line.

Thirdly, there is a question of balance. The rent-seeking, anti-competitive practices and monopoly profit gouging that goes on in the private sheltered sectors are as odious as, if not more odious than, anything that goes on in the semi-state and public sectors. But because the latter are more in the 'public domain' they are more in the line of fire. I just have a preference for seeking to afflict the unjustifiably comfortable equally across the board - and it is more politically pragmatic, so I tend to back off, initially, on labour costs."