Tell me: Are we out of recession yet and what can be done?

Tom O'Connor01/04/2011

Tom O'Connor: The banking crisis is topical. Unemployment isn't and hasn't been in the last three years. This blindness towards unemployment and monopolisation of everybody's efforts solely on the banks, needs to stop. Human misery, suicide, emigration and economic recession should not be displaced from the top of the agenda by anything. Unemployment should and can be dealt with in advance of a banking solution. Last week's Quarterly National Income figures demonstrate that Unemployment cannot wait. It has been waiting since 2008 until the banking mess has resolved.

A plan and a concrete investment strategy funded from our own unborrowed resources within the NPRF and NTMA needs to happen mow. What is happening now and in the last two years is that governments, most economists and the media have all but ignored unemployment, given the urgent necessity to fix the banks. Can I suggest that unemployment is even more urgent? It should have been, and should now be, dealt with, even before this banking crisis is resolved.

Most people will not read last week's CSO figures on economic growth which are designed to tell us whether or not we are still in recession. However, people in pubs, shops, clubs and workplaces really do want to know whether we are or not. They are hanging on for dear life and their children are emigrating. Will there be an improvement? If not, they want to know why not, and what is the Government going to do about it?

Let’s look at the figures: Based on the whole of 2010, they tell us we are still in recession because both measures of economic growth fell. GDP fell by 1% and GNP by 2%. This is bad news. But, policy makers will say that we are either out of recession or coming out of recession. Why? Because they will say that GNP grew by somewhere between 0 and 2% in each of the last three quarters of 2010.

People will say, however, that they can still really feel the recession and it’s not getting any better. The truth is that we are not out of recession! This indeed is also borne out by the figures for GDP, which fell by 1.6% in the last quarter of 2010. Ah, but policy makers will say that GNP is a better measure for Ireland, so that doesn’t matter!

They would be very wrong. During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!

Nonetheless, much of the GNP increase has been fuelled by real exports which in gross terms rose by 13.6 billion from 2009-2010 and when imports are subtracted grew by 5.7 billion. This growth arose from the multinational sector in the main, which accounts for up to 90% of Irish exports. However, the jobs dividend from this growth will be very little. Why?

Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals' employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.

But hold on, there are 2 million people needing jobs! There are 444,000 people on the live register of unemployment. The figures tell us the continuingly depressing story of the demise of these people. We knew already that 150,000 have lost their jobs in construction or construction-related work.

The big drivers in creating Irish jobs have always been based on what people produce domestically. However, the figures tell us that all domestic output fell, apart from business output which rose, and which is strongly influenced by multinationals. For example: the value of building and construction to the Irish economy fell from 8.4 billion to 5.7 billion from 2009 to 2010; the value of agriculture and fishing has fallen by 227 million; the distribution, transport and communication sectors fell by 336 million; the value of other services fell by 2 billion. Incidentally, in 2007 the value of construction output stood at 13.6 billion compared to 5.7 billion at the end of 2010.

Taking all the above into consideration, the clear message is that the loss in jobs in the Irish economy, which is reflected in the fall of GDP in 2010 and particularly in the fourth quarter of 2010, is indicative of a deep recession. Apart from multinationals, Ireland is haemorrhaging jobs out of its economy and driving up emigration.

Examining the expenditure economic growth figures, the overall demand in the economy has fallen by 7.9 billion. The fact that multinational net exports grew by 5.7 billion makes little difference as it produces few extra jobs. It does nothing to improve the catastrophic effects of the loss of jobs in the sectors of the Irish economy mentioned above which actually do provide jobs, and which have all fallen.

The current GNP figures only statistically mask this huge problem which is obvious from the fall in GDP of almost one billion in the last quarter of 2010 alone. The masking of this by a statistical increase of over 2 billion in GNP terms, based on lower repatriation of multinational profits, shows that the GDP figures are giving the correct picture.

Last year I warned against trusting the predictions of a strong economic recovery at the end of last year and the dangers of growing unemployment and emigration. Unemployment has increased to 444,000 at present, and emigration is running at 80,000 a year. The reasons are obvious from the above. Unemployment and recession will not be solved by any government which lies to the population by quoting GNP figures. They mislead the people by promising that the economy is out of recession; that it has ‘turned the corner’; or that unemployment will drop significantly going forward.

As I have stated since June 2008, the government needs a sustained set of stimulus packages to provide job beneficial growth. It needs three stimulus packages worth 8 billion over two years and includes: A state development bank to lend money to viable businesses coming from the un-borrowed cash reserves of the government at the National Treasury Management Agency and at the National Pension Reserve Fund. This is crying out to happen as money invested by businesses fell by a staggering 27% in 2010 according to the current figures. This needs to prioritise indigenous business by investing 3 billion in social partner-vetted business growth and new ventures.

A further 2 billion needs to be invested in hundreds of new schools, primary care health centres and mental health facilities; finally, 100,000 houses need to be bought by the state at never-to-be-repeated bargain basement prices which would cost 3 billion in net terms. Through low cost affordable housing and social housing with reasonable rents, thousands can be taken out of unemployment traps and the black economy, and with economic stimulation, be brought in to taxpaying real jobs, also taking them off social welfare.

This piece is written from an ideological position that the economic consensus that operating up to now, called variously by terms such as total free market philosophy, has failed. In the words of a book by Paul Krugman, Nobel Prize Winner for Economics in 2008, “A Country is not a Company”. Each business leads its own business only; the government needs to lead overall. The current debacle will continue to fail as long as there is a failure by the state to lead economic development. The direction of change at this point should be firmly rooted in a new and lean Keynesian economic model.

Posted in: Fiscal policyFiscal policyFiscal policyFiscal policy

Tagged with: GDPstimulusGNPjobs

Dr Tom O'Connor     @justeconomics

O'Connor, Tom

Tom O’Connor is a lecturer in economics, public policy and health/social care at Cork Institute of Technology.



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