“…all of the adjustments are being done to impress the rating agencies and international capital markets….”

Slí Eile15/02/2010

Slí Eile: So writes Michael Casey, former chief economist with the Central Bank and currently board member of the International Monetary Fund. He then makes the extraordinary claim that (‘The reputations sent up in smoke’)

“..Our Government and the EU Commission have sold out to the rating agencies, none of whom cares about unemployment or emigration.”
Whatever one may think of our Government or parts of the current EU Commission it has to be pointed out that we owe much to the European Union not least because of the excesses and poverty of ambition of our native gombeen classes. (Where would gender equality be, today, were it not for the EU)
Take these statements in conjunction with what another economist, Pat McArdle, wrote recently Irish Times (‘Effective measures are needed to stop the rot from spreading’)
‘With hindsight, we were fortunate to have gone down the road we did. The alternative of job creation schemes or expansionary measures would have been disastrous.’
‘Job creation schemes’ and ‘expansionary measures’. What a terrible vista.
The single-minded focus on correcting Ireland’s fiscal stance, reducing the public sector deficit and competitive devaluation (i.e. cutting wages) is now the only moral narrative in town. Jobs, migration, living standards of the poor – are secondary to the One Policy Target = reduce the fiscal deficit to a much lower level. But, how much lower? At least two interesting facts seem to be emerging in the current debate and debacle over Greece and associated ‘high debt’ countries:
  1. The Stability and Growth Pact targets are dead, long live the SGP
  2. There is a very widely shared consensus that all roads must lead to fiscal rectitude and all roads to poverty reduction, sustainable growth and full employment (if people care about these things) lead from a balanced or near balanced budget – in the long-run.
But, will this single-minded focus on correcting the fiscal deficit work? I think not. If continuing deflation and wage and price devaluation is the only way then we run into at least two constraints:
  • The degree of unemployment and wage reductions needed to ‘clear markets’ and balance the public sector books may be too much for people to take. We still live in a democracy.
  • The world recovery may be a lot slower and lot more jobless in a way that offer little solace to a small open economy stuck with a dysfunctional banking system and a low-tax regime.
In other words, cutting wages and cutting public spending may compound the problem not only through reducing domestic consumer demand and investment but also in undermining social cohesion itself – a necessary ingredient to sustainable social and economic progress in the long-run.

But, suddenly, the spin is turning to the following type of meta-narrative:
“…in the year of 2008 the world economy collapsed and plucky Ireland went down fast as output and tax receipts went into free fall…but while other countries in a similar situation dithered the brace Irish and their unpopular Government took brave (and painful – everything must be painful) decisions ….and hey presto from 2011 onwards Ireland was rewarded with a reducing deficit, increased exports and stabilisation in unemployment…too bad many had to emigrate and other indices of social strife, poverty and ill-health went up for a while…that’s life”
Time will tell. However, missing from the debate up to now:
  • A comprehensive, progressive, convincing, numbers-backed Alternative Economic Strategy
  • A political movement with the backing of more than 40% of the population and with enough electoral backing positioned to implement such a Strategy not in some distant future election but at the next one which has to be within the next 27 months.
Some argue that in the course of the last half-century the left have won many of the cultural wars in Europe but have lost, decisively, the political struggle. However, the time has presented itself for a fundamental re-evaluation of policy because too much is at stake from the very real possibility that unregulated capitalism has wrecked the global eco-system to the unacceptable pain inflicted on the working poor and the unemployed in order to bail out capitalism against itself. If every fiscally troubled country plays competitive devaluation then we are looking at beggar-thy-neighbour.

What can be learned from the fiscal debacle of the noughties?
In a paper presented by Philip Lane at the Statistical and Social Inquiry Society of Ireland, recently (A New Fiscal Framework for Ireland) a case is made for
  1. New Fiscal rules
  2. A Fiscal Policy Council to monitor and manage fiscal adjustments (the never-again agenda)
There is some merit in these suggestions. However, what rules or what monitoring are needed here to rescue an economy and society from itself? Is our political system so decrepit that existing parliamentary and governmental institutions are not up to the task? Moreover, if such machinery were to be put in place (supported by a research department of economists of course!) who would select the membership and what types of conflicting interests would be brought on the board? Would it resemble Bord Snip Nua or the Commission on Taxation in terms of membership and ideological composition? Lane argues that such a Council or set of rules would be political neutral (it would judge on how much of a deficit or surplus is warranted rather than prescribing a level of taxes or spending). However, this is hardly convincing given the unavoidable interaction between the size of the deficit/surplus on the one hand, and the level of spending and taxes on the other (e.g. a popular claim is that cutting spending is a more effective way to cut deficits than raising taxes – a dubious claim not backed by enough case studies I suggest).

Would such a mechanism assess the wider social and economic benefits and costs of spending and taxes as a necessary corollary to judging the appropriate level of borrowing, spending and taxes taking into account, in so far as data permit, the likely monetary and non-monetary value of adjustments to societal assets and liabilities. Reducing current state liabilities through public sector downsizing as advocated by most mainstream economists may very well corrode valuable public assets not to mention social solidarity and cooperation – which are assets in themselves.

Posted in: Fiscal policyBanking and financeEconomics

Tagged with: rating agenciesfiscalrulesstabilityandgrowthpact



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