'Cut Deep, Cut Now and Keep on Cutt'n'

Slí Eile02/11/2009

Slí Eile: The cage was truly rattled, today, by David Blanchflower, UK economist, who challenged the home consensus about deflation. Speaking at the third in a series of 'Crisis' conferences today in Dublin he said that he was against pay cuts, cuts in public spending and deflation to right the economy. He is very concerned that as Governments respond to the crisis by cutting off stimulus interventions too early or - worse still - adding fuel to the fire by undertaking sharply deflationary approaches there is a real danger that the economy will be 'pushed over the cliff'.

When pressed by a perplexed audience of sensible mainstream Irish economists to comment on the current Irish fiscal situation, he made it clear that he was not in favour of the deflationary push. This created some concern and reaction including an intervention by John Fitzgerald, the chair of the first session, to provide a stout defence of a rapid 'fiscal adjustment' and the unworkability of a fiscal stimulus in current Irish fiscal situation. This was followed up by a lengthy presentation by Philip Lane in which he gave a very rounded and robust defence of the current strategy and against any let up in adjustment (even arguing for more cuts in addition to the €4bn adjustment envisaged this year and again for each of the coming two years). His background notes for the conference can be downloaded here.

A clear difference opened up on ends and means. The fiscal adjustment at all costs school believes that we must adjust quickly or else the 'markets' will lose confidence and the recovery will be stretched out over 10 years instead of 3 or 5. Everything else follows - peace, jobs, prosperity.... This view is firmly established in Government, the Department of Finance, the ESRI, nearly all the major newspapers, most political parties and most academic economists who comment on these matters in public. Only the odd TU economist, lefty or Nobel economist from America or Britain who doesn't, well ... fully understand the unique Irish situation (and how bad it is and how dependent we are on markets for sovereign debt risks and how screwed up we are because 'public spending exploded' in last few years). We are now on the road to socialist serfdom as spending has rocketed to over 51% of GNP (much of the increase last year was pure cyclical and advance payments into the NPRF).

Brian Nolan wondered if one way of dealing with unemployment is to distribute it more evenly and avoid unhealthy concentrations. Colm McCarthy says that the choice is between a 30% youth unemployment rate (which is what it was in July of this year) for five years or for 10 years (essentially if we don't follow his prescriptions).

It is really unusual and refreshing to hear an 'outsider' such as Joseph Stiglitz last month or David Blanchflower now challenging this consensus view. Not a few people resent the comments by 'outsiders' as ill-informed and not suitable for Irish situation. Specifically, Philip Lane in a clear response to Blanchflower said that the Irish situation was very different:
* small open economy with high import leakage and low fiscal multipliers
* extremely bad debt situation made worse by pro-cyclical policies in the past (and with the result that we must be pro-cyclical now)
* no option of currency devaluation.

For Lane and all mainstream economists the only solution is 'real depreciation' through salary, wage, rent and other cost reductions allied to cuts in public spending (Lane concedes some room for investment programmes but only at the cost of even more cuts elsewhere in public spending).

Blanchflower who has researched and published extensively on unemployment sees the rise in youth unemployment as profoundly worrying and threatening. It has huge implications for social cohesion, health and morale. There is clear evidence that a whole cohort of young people in the UK suffered from 'permanent scars' as a result of a period of unemployment in their late teens or early twenties (citing, e.g., 1958 birth cohort studies in the UK tracked over 50 years). He argued that we needed to throw everything at this problem because the social costs are incalculable. Not only did he support continuing stimulus measures abroad he clearly favoured some type of counter-cyclical measures in Ireland too. He is very concerned about a 'double-dip' or W-shaped recession - building on evidence from previous recessions and the timing of a slow recovery. He was also scathing in his criticism of 'economics' and 'macro-economics' not only in failing to understand and anticipate the crash but also in making the problem worse by adherence to dogma. He was not optimistic about a recovery any time soon and thought that the world might be headed for a fresh recession especially if Government over-react by withdrawing stimulus spending.

Blanchflower also commented on the state of banking (he was an external member of the Bank of England's Monetary Policy Committee up to last June). He stated bluntly that if you 'don't own it' (banking) you cannot effectively get banks to lend (please, sir, lend). There is no evidence, he says, that banks will start lending any time soon to businesses.

Other presentations were by Colm Harmon on the role of education as a medium-term strategy to position us in the global market and John McHale (on pensions). Both papers should be available on the web in the next day or two (see Geary Institute).

In the wrap-up discussions there was some debate about stimulus measures. George Lee, TD tried to pin down the platform including Colm McCarthy on how much they would need to cut to get the deficit down to a required level. In other words, is there a level of cuts that they would not go beyond ? (Lee). McCarthy ducked.

The timing of adjustment also featured with McCarthy, Lane and Fitzgerald warning against any delays ('we don't want to go down the road of the 1980s..'). So, cut deep, cut now and keep on cutting and if a whole generation is lost through unemployment, emigration and despair - that's just the way it is. We can get back to 'sustainable growth' more quickly by restoring competitiveness (read profitability through driving down other costs). Two speakers (Lane and McCarthy) claimed that the public deficit would be as high as 15% (instead of 13% now) were it not for the fiscal adjustment in last April's budget (but the target was to reach 10.75%). Implicitly, and not so implicitly, one had a clear impression that nobody in this assembly believed that the 3% SGP target would be reached by 2013. However, as we cut and cut we delude ourselves with the thought that had we not cut the deficit would have spiralled up and up (someone even mentioned a possible 20% deficit). no evidence, no modelling, no counter-hypothesis was provided to support these assertions.

Again George Lee asked 'must people be crucified to reach some target?' to which McCarthy replied ' how long do we want to be crucified?'

Please, can decent women and men get up, speak out and stand up.

And could we have a more broad-based debate than one dominated by failed economics which simply doesn't care about the impact of its failure on people.

Posted in: EconomicsEconomicsFiscal policyFiscal policy

Tagged with: fiscal stimulusDeflationcrisisPay Cuts



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