Tom McDonnell: It is impossible to know in advance with one hundred per cent certainty what the best economic strategies for Ireland are. Despite this, the decisions themselves must of course be made in advance of the outcomes. So what is the rational thing to do?
The rational thing to do is to weigh the potential outcomes and then choose the best action as judged by the likely consequences. We cannot expect, and we do not require, certain knowledge of the consequences. Our powers of forecasting and prediction are fallible in the extreme. We are not immune to unintended consequences. The Government’s obligation as responsible decision-makers is thus simply to objectively consider all of the options based on existing evidence and then make a judgement informed by reasoned expectations.
Progress and improvement in the status quo, whether on an individual or a national level, requires constant questioning; investigation; self reflection and judgement. Yet the TINA (There Is No Alternative) mantra that is being promulgated by the Government and by elements of the mainstream media dogmatically rejects even the consideration of alternative strategies. As such TINA is an attack on rationality and the decision-making process itself. This is particularly ironic because economics is supposed to be the science of decision-making subject to constraint. The sheer paternalism and anti-intellectualism of TINA is simply staggering. The philosopher kings have spoken and we are to acquiesce. There will be no consideration of alternative strategies.
Yet the advisors and decision-makers in Government cannot know with certitude what the actual consequences of their chosen actions will be, particularly in a complex system like the macroeconomy. So where does the justification for the claim that there is no alternative come from? Perhaps their record of economic management and forecasting is so impressive that we should simply trust that they know what they are doing? These, of course, are the people that felt it was a good idea to construct budgets whose very sustainability was dependent on the bizarre assumption that a particular asset price would continue to rise indefinitely. Are we now to assume that these people have suddenly gained such an understanding of the probabilistic outcomes of each competing strategy that their judgement is infallible?
What was the argument for the light touch regulation and Thatcherite individualism of the last decade? Was that strategy chosen based on a probabilistic analysis of what was in the interest of the citizens of Ireland? Or was it simply a dogmatic implementation of a laissez-faire economic ideology?
Similarly, what are the intellectual underpinnings for the current Government strategies? Were the current strategies chosen based on a thorough analysis of the likely outcomes of a set of competing alternatives? Or are the current strategies the result of groupthink?
Where are the economists in this decision-making process? There needs to be a full debate within the economics profession in Ireland. What does economic theory suggest, and what does historical experience suggest? Everything should be considered and weighed on its merits, and we must accept that there is probably no best alternative. Choices have to be made and that implies sacrifices. Nonetheless, the goal should be to minimise the hardship.
The economy is broken and appears to be in a vicious cycle of decline. Revenue continues to fall and unemployment continues to rise. Intervention of some kind is required. One suggestion is that a stimulus through Government investment is the best way to intervene. The arguments against investment are, of course, that we simply cannot afford it, and that even if we could it wouldn’t work. The crowding-out argument suggests that no permanent increase in employment can be obtained through state spending on capital projects, and that the only effects of stimulus will be inflation and market distortion. But the crowding-out of private investment is only likely when the economy is already close to full employment, and so this argument is not relevant in the present context.
Identifying the best strategy comes down to correctly analysing whether there is something preventing the proper workings of the economic system, or whether the system will naturally be able to correct itself on its own after a period of time. If the former is true, then we can expect either economic stagnation or for the vicious cycle of decline to continue, but if the latter is true then we may reasonably expect a return to potential output.
The cost to the budget cannot easily be dismissed. However, if it can be shown that a strategy of temporary Government investment can boost economic growth and employment, then investment can lead to a smaller budget deficit as a proportion of nominal GDP. The success of such a strategy will depend on the value of the multiplier. What is important is that a scatter gun approach to investment must be avoided. Investment must be made on a case-by-case analysis of the probabilistic outcomes. Such an analysis can identify where the largest multipliers are likely to be found.
It is time to move away from unquestioning acceptance of the current strategy. A national debate is needed and the economics profession needs to take a lead role. The likely consequences of all the various strategies need to be analysed, and the results of these analyses need to be articulated and widely disseminated at all levels. The TINA mantra can no longer be tolerated.
Tom McDonnell is senior economist at the NERI and is responsible for among other things, NERI's analysis of the Republic of Ireland economy including risks, trends and forecasts. He specialises in economic growth theory, the economics of innovation, the Irish and European economies, and fiscal policy. He previously worked as an economist at TASC and before that was a lecturer in economics at NUI Galway and at DCU. He has also taught at Maynooth University.
Tom obtained his PhD in economics from NUI Galway.