Morgan Kelly Shows Weak Grasp of Macroeconomics

Whoops! Careful you don't drop the economy there, mate!

Here’s an ethical question: is it ever right to attack one’s allies? I mean, if they’re doing or saying something desperately stupid, should you point this out? Beyond this, how should one go about it? Should you attack them with all the vitriol such an ignorant position truly deserves? Probably not — but I think I’ll do it anyway.

Whenever anyone has asked me about my opinion of Morgan Kelly, I’ve always responded that I think he’s an excellent economist. I say this not because I actually know how good an economist Morgan Kelly is — instead I say it because he seems to be willing to cut through the layers of bullshit that are daily laid upon us by the Irish media. He’s also a fine writer — but we’ll leave that aside.

His latest Irish Times article, however, shows him to be a shit economist. I’m afraid I have to be as blunt as possible on this because, Morgan Kelly being seen as a trustworthy source on economic issues by many, this makes it all the more important to point out where he seems to have no idea what he’s talking about — and this especially so if his prescriptions are so dangerous as to be poisonous.

Kelly’s article is, for the most part, excellent — that is, until it comes to the economics. Toward the end of the article — and to my unending horror — Kelly advises the Irish government to cut back it’s budget deficit:

So the second strand of national survival is to bring the Government budget immediately into balance.

Now, upon reading this I find myself asking whether Kelly actually understands some of the most simple tenets of macroeconomics. You see, in times of recession and high unemployment government budgets automatically go into deficit. Why? Because tax takes go down and unemployment claims go up. Macroeconomists call these mechanisms ‘automatic stabalisers’ and they are generally recognised as being the force in modern economies that prevent these economies from sliding into major depressions.

A quick aside. The Great Depression was largely caused by aggregate demand falling apart — what that means is that people, being out of work and having no income, couldn’t buy anything. This caused the prices of goods to fall sharply. In response to this fall in both the demand for and prices of goods, many companies simply stopped hiring. This led to unemployment climbing even higher, which led to prices falling even more sharply — and so on. A self-perpetuating spiral resulted. Hence, the depression.

We see something similar — although not nearly as bad — in Ireland at the moment. Shops and services — which make up around 64% of employment in Ireland — are seeing less punters turning up to buy things… and so they’re laying off more staff and, in some cases, closing their doors altogether.

What prevents these unfortunate economic circumstances — this quote-unquote ‘recession’ — from sliding into a full-on depression are the aforementioned ‘automatic stabilisers’. These were not in place in the US during the 1930s and so, the depression. Nowadays, however government spending — through dole checks and the like — opens up to fill the gap left off by private and household spending. This is macroeconomics 101.

Now, can you imagine what would happen if we were to follow Kelly’s advice and try to balance our budget? I’ll tell you what would happen: the fall-off in government spending would cause a depression. It’s as simple as that. Kelly is clear that the prospects of an Irish default would be nasty — well, I can tell you right now, they wouldn’t be nearly as nasty as a 1930s-style depression. (Besides, this would probably cause government debt to grow further — but that’s another day’s macroeconomic lesson…).

Related to this, Kelly doesn’t seem to understand why certain countries are able to maintain large deficits and others are not. Kelly talks about Japan:

Economists have a rule of thumb that once its national debt exceeds its national income, a small economy is in danger of default (large economies, like Japan, can go considerably higher). Ireland is so far into the red zone that marginal changes in the bailout terms can make no difference: we are going to be in the Hudson.

Every reader should be able to see how vague Kelly is being here. Japan can borrow more because it’s a ‘larger economy’. Really? That’s just tripe. It’s clear that Kelly has no idea what he’s talking about.

Japan — whose debt-to-GDP is some 200%; far higher than Ireland’s — can borrow and remain solvent because they issue their own currency. I won’t bore you with the details of this, but if a country is able to maintain its debts in its own currency and it issues this same currency it can pretty much borrow forever. Ireland is not in this situation — we don’t issue our own currency and our debt is denominated in Euros; this is why our debt is unsustainable (ditto for Russia in 1998 and Argentina in 2003 — whose debts were denominated in foreign currency [$]).

Understanding any of this indicates to any reasonable person that an Irish default is probably inevitable. This is not an ideal situation by any means — but we should get our facts straight, at least. So should Morgan Kelly.

UPDATE: Regarding the point about why certain countries default and others do not — Martin Wolf made this point succinctly in a Financial Times column today. He points out that:

Overindebted countries with their own currencies inflate. But countries that borrow in foreign currencies default. By joining the eurozone, members have moved from the former state to the latter.

Of course, I don’t agree with Wolf’s overarching analysis — conspicuous in it is what remains absent: namely, a discussion of the austerity measures themselves. However, he’s right about currencies that borrow in their own currencies versus those that borrow in foreign currencies. A point I made in the above article.

It should also be noted however, that while while overindebted countries with their own currencies may feel inflationary pressures, this need not mean that they actually inflate. Japan, for example, has high levels of debt but low levels of inflation. The level of inflation is not wholly determined by the debt — it is reliant on a number of other factors; the most important of which being consumers’ willingness and ability to spend (i.e. aggregate demand).

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Told You So…

Still smarter than Fine Gael and Labour...

Haven’t been blogging for a while. Sorry about that. Exams are coming up; essays are due – I’ll get back to all this afterwards.

Anyway, I’ve said a few times now that should the government try to reduce the budget deficit they WILL fail. Why – well, I wrote about it here.

So, the proof is just in. I was right. Everyone in Fine Gael-Labour and Europe were wrong.

THE GAP between tax revenues and Government spending soared in the first three months of the year, according to figures released by the Department of Finance yesterday. The quarterly deficit was the second largest on record, at €7.1 billion.

Will this new evidence encourage them to rethink their tactics? Of course not! Neoclassical economics isn’t an evidence based science… duh!

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Spin or: the Anatomy of an Ideological Argument – Dr. Gurdgiev Vs. Inflation in the Irish Healthcare Sector

A philosophical question: do Fox News lie? “Yes,” I think, would be the instinctive answer to that.

But I don’t think that’s right. What Fox News do, rather, is they ‘slant’ or ‘spin’ the news. They do this generally by conflating fact and opinion. So, one minute you’re getting factual news – X happened in Y on Z – and then suddenly the commentator butts in subtly, but definitively with their opinion. This opinion then leads to an over-arching narrative that might, if we were to be very academic about it, be referred to as an ‘ideological opinion’.

This is in no way benign. Due to the presentational method it encourages viewers to confuse fact for opinion and vice versa. And convinces them to take their ideology to be reality plain and simple.

This observation raises important issues for the entire media. I, for example, certainly have strong opinions – opinions that I air on this blog regularly. But I do try to distinguish between when I’m presenting facts or opinions. Indeed, this often makes me sound less than certain about the issue – and this, in turn, makes for a weaker writing style. But, nevertheless, I think it’s important and necessary to try one’s hardest to be honest and up-front about this. If someone desires a ‘stronger’ more ‘self-assured’ opinion, they can go elsewhere – the tabloids, perhaps, or to Kevin Myers’ column in the Indo (good luck with that, by the way…).

I’m sure that sometimes I might drop my guard and allow my opinion overtake established the facts. But I’m fairly sure that whenever I’m presenting the hardest of facts – say, raw data – I don’t overstep my bounds.

I also have an awful tendency to do a little bit – and sometimes a lot – of preliminary research on what I’m writing. Many journalists don’t do this – and it shows in their copy. Whereas twenty (or sixty) minutes spent on Google with a discerning eye could have made for a much stronger article.

I raise these issues because I recently came across Dr. Constantin Gurdgiev’s blog ‘True Economics’. If you’re Irish you probably know Dr. Gurdgiev – he’s the Trinity macroeconomics professor who often appears on the TV and radio airing his views on economic and political matters. Those in the opinion-forming classes – at least those that are good at their jobs – will also know that he is generally known to be a strongly free-market economist and take his views with the according pinch of salt.

So, here’s my problem with Dr. Gurdgiev’s blog. It presents itself as a friendly resource for raw data – and as far as I can see, that data looks good. But then you read a bit of it and you see multiple interjections amidst the data which are, well, I can’t put it otherwise, they’re Dr. Gurdgiev’s opinion.

Now, that should be fine. He provides a disclaimer that the views expressed on the blog are his own opinions and all that. But its the presentational style that irks me. He switches so quickly from analytics to opinion that you’re led to conflate the two. (The more careful reader is also led to think that Dr. Gurdgiev might conflate these two in his own mind, but that’s another day’s discussion…).

What’s worse, sometimes these opinions are complete conjecture – no, worse than that, they are misleading. And were this misleadingness to be acknowledged people would quickly see that the facts and the data that Dr. Gurdgiev puts forward rarely, if ever, lead the argument – instead the facts are often bent into the argument.

Consider the following – pulled pretty much at random:

“Health is a standout in the above chart [charting price inflation]. Down 0.6% mom but up 4.1% yoy. No need to explain why the cost of hospital services rose 11.5% – say ‘Thanks’ to our semi-state insurance company policies and the Budget…”

From this I get the impression – note that it isn’t precisely written, so it’s hard to pin down definitively – but I get the impression that rising health care costs are due to ‘semi-state insurance company policies’ and ‘the Budget’. I’m not helped in my understanding by the fact that Dr. Gurdgiev goes on to compare private and public sector inflation – showing that inflation is greater in the public sector. This seems to imply that what we have here is a classic Thatcherite ‘inefficient, inflationary public sector’ vs. ‘efficient, stable private sector’. Caught up in the flow of Gurdgiev’s argument, I assume that it is the facts themselves that are leading this argument – but they’re not.

In the present case, a quick Google search tells me that this is a far more complex issue than simply semi-states and the recent Budget leading to inflated heath costs. And it most certainly is not some vague battle between the ‘evil’ public and the ‘benevolent’ private sector, for that matter.

First, an OECD report from 2010, delineating the reasons for rising health costs in the Eurozone:

“Factors pushing health spending up — technological change, population expectations and population ageing – will continue to drive cost higher in the future.”

Next, a WHO report published this month, probably in response to the above OECD report:

“Rising health care costs are primarily driven by technological change (accounting for 50-75% of growth in costs) rather than other commonly perceived factors such as an ageing population (accounting for less than 10% of cost growth).”

Quinn blame Big Guv’ment; but I think we can assume that there might be some political jockeying here, right?

Asked why it has imposed two price increases in 12 weeks, a Quinn spokesperson told Irishhealth.com that its January 1 increase had been announced last November, before the Budget measures which had a further effect on its cost base were introduced.

The spokesperson said the Government had since increased the health insurance levy, had increased the cost of private beds in public hospitals and changed age-related tax relief.

The CAI in 2010 (Consumer Association Ireland) pointed the finger in the complete opposite direction than Dr. Gurdgiev, blaming the removal of State subsidies to many sectors as the cause of inflation:

The Government’s decision to abolish State subsidies for dental care last month has led to the potential cost of a visit to the dentist for most people to go through the roof.

And:

The removal of State subsidies for dental and optical care and for medical appliances and equipment caused a major rise in the rate of inflation for these charges in January.

In fairness to Dr. Gurdgiev, Irishhealth.com also point out that the government has been raising charges – but, as we have seen, this is only a very minor part of a much bigger  and more complex problem:

Another key contributor to health cost inflation has been the Government.

In recent years we have had regular increases in A&E and hospital charges, in addition to increases in the drug payments scheme threshold and prescription charges.

Health costs – like energy costs – are rising. And they are, as Dr. Gurdgiev says, rising in an Irish economy that is experiencing broad deflation in most other sectors. But to allude that this is strictly because of ‘semi-state insurance policies’ and ‘the Budget’ and then to conflate this with inflation taking place in the public sector seems to me to be ‘spin’ in the worst sense of the term.

I expect this sort of thing out of Quinn, of course – they are, after all, a private company seeking to alleviate their tax-burden. But I don’t expect this in a blog post from an academic economist who is ostensibly dealing with the calculation of inflation and alluding to its causes.

The inflation of health care prices – as we’ve seen above – is a very complicated issue. It certainly doesn’t boil down to some crass economic distinction between the public and the private sector. To try to force the issue into this theoretical straitjacket is just spin, pure and simple. And it is this type of spin – spin mixed with the rawest of data – that leads me to be suspicious of the economics profession in general and, most particularly, their representatives in the media.

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The CCCTB – Or: Why the Irish Left Should Stop Moaning About Low Corporation Tax

The European Commission has recently proposed that a ‘common consolidated corporation tax base’ (CCCTB) should be established across the Eurozone. The Fine Gael government promptly rejected this, saying that it would implement tax harmonisation ‘through the back door’ – what they essentially mean is that it would undermine Ireland’s low corporate tax regime of 12.5% without explicitly claiming to do so.

Let’s get one thing straight: this is not true. The CCCTB does not seek to take away member states’ rights to set their own corporation tax rate. The purpose of the CCCTB is to centralise the calculation of tax rates in a single European institution. Or as the European Commission itself puts it:

The consolidated taxable profits of the group would be shared out to the individual companies by a simple formula so that each Member State can then tax the profits of the companies in its State at the tax rate that they – each Member State – chooses, (just like today).

So, what’s all the fuss over then? Well, this would greatly undermine multinational corporations’ ability to wash their profits through the Irish tax system – something they’ve engaged in ever since the low corporation tax rate was introduced. The Irish Times puts it subtly:

While not harmonising the tax rate, a CCCTB would certainly make it more difficult for international companies to allocate revenues into Ireland’s low-tax jurisdiction.

This legislation comes as the EU and other international bodies – most notably, the Obama administration, who called out Ireland by name back in ’09 – step-up attempts to close down tax loopholes across the globe. It’s not so surprising that they should seek to do this. Consider this story from last year which shows how Google reduced its effective tax payments to a mere 2.4% of its earnings – while estimates indicate that the US has lost some $60bn in revenue through international tax loopholes. And who are one of the main culprits? You guessed it…

Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.

So, when the EU starts cutting back on this sort of thing the Irish government gets a little uneasy – and understandably so.

Now, here’s the big question: what should we think about it? As a good leftie my first instinct is to denounce such tax dodging by evil corporations. But I realise that things aren’t so simple.

First of all, this isn’t some crass attempt by the government to line their pockets. They’re concerns probably have some merit. There’s every chance that multinationals do tend to keep capital sunk in Ireland because  they’re allowed to get up to this sort of mischief – and while it may have been easy to denounce corporate malfeasance during the boom years, with the current unemployment rate in Ireland what it is, my sympathies currently lie elsewhere.

Secondly, I anticipate that should Ireland ever grow a pair, default on her debt and exit from the ghastly Eurozone, the corporation tax issue is going to be a major determinate. As everyone who lives on this fair island knows, the corporation tax rate is a golden calf among political types. It is seen – not wrongly – as being THE policy measure which brought the multinationals to Ireland and any attempt to undermine it is seen by the political class as secular sacrilege.

So, if the left are serious about getting Ireland out of the Eurozone and out of debt, then they’re going to have to take a step back and question their priorities. They might find themselves allying with the forces of multinational corporate evil in the fight to save this country from the well-meaning but ultimately suffocating Euro-integrationists. Time for some Realpolitik, perhaps?

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The Hidden Burdens of Increased Taxation

Yesterday something rather strange happened on all the major news outlets in Ireland – specifically, these outlets seemed to offer up some evidence that proposed government methods to deal with the current economic catastrophe were actually working. The latest tax revenue figures were above those collected in 2010, making it appear that government attempts to close the budget deficit were actually working.

I’ve written on here before that government attempts to close the budget deficit will likely lead to the budget deficit widening – because, as the state suck money out of the public sector and increase tax-rates, unemployment will rise and overall tax revenues will fall. I stand by this analysis. So what on earth is all this about an increase in revenues?

Well, it would seem that when government’s apply harsh measures to close budget deficits during major downturns at first they tend to appear to succeed. Think about it for a moment. Last year tax revenues were low as a result of poor economic performance and high unemployment. This year the economic situation hasn’t changed all that much – economic performance is still poor and unemployment still around the same as it was a year ago.

Now, say you raise taxes in this environment. As stated, it hasn’t changed much since last year – so, if you raise taxes you’ll likely see a sharp rise in revenues. This, however, will then begin to feed back into the economy as a whole. People will have even less money than before, so they will spend and invest less.

Soon we’ll see the economy take another downturn – and this might be quite sharp. Then we’ll see revenues fall – probably next year – and politicians scratching their heads wondering why the deficit is yawning ever further open.

On a more anecdotal note, I spent some time at one of the major election counting centres on the day of the election tally. This is a fascinating place to hang out and I’d advise anyone interested in how the country is run to try to attend these events. There they will meet a lot of people who are important to the running of the country – press representatives, campaign managers and politicians themselves – but they will meet them in a relaxed and informal environment where they are likely to speak more freely than they usually might.

Whenever I brought up the economic situation at this gathering the response was disturbing. I got a keen impression that none of these people had any idea what they were talking about. When asked what needed to be done about the economy they’d usually respond with some soundbite or other – “Burn the bondholders” etc. – but when I pressed them on the issue, pointing out how deficit reduction will prove disastrous (and giving the example of the UK while saying that the consequences for Ireland would be much worse) I got nonchalant and ignorant responses like “Sure, we’re Ireland… we’ll be grand!”.

I must admit, it was actually quite scary. These politicians and their teams lived in an echo chamber – and when I see the headlines of the Irish Times today, I hear nothing but the same echoes that I heard on election day.

The politicians in this country are directionless – running around like headless chickens. They are then confronted by dire ‘insiders’ who tell them how bad the catastrophe is. Scared and confused, their ears are open but their minds are uncritical. Little do they know that these ‘insiders’ have vested interests in the advice they give (you think Eurocrats and banking types don’t have an agenda?..) – not to mention that this advice is dangerous and completely out of sync with where Ireland is at the moment.

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Rip-off Ireland 2.0

 

Coming soon to a town near you?

 

Looks like there are even more similarities between Ireland and Wisconsin than I thought. Their moron governor apparently wants to flog off a load of government assets to private bidders. Well, Enda Kenny and his economically illiterate party have proposed to do precisely the same thing when they get into government.

From their ghastly budget manifesto:

The [so-called 'job promoting'] investments [that Fine Gael propose to save the world] will be financed by both public and private pension funds and the proceeds of the sale of state assets.

The manifesto goes on to say that it has been agreed with the IMF that the proceeds from the sale of these assets will be available for a FG government to use to fund job-growth. Hurrah!

The people of this country know well what happens when state assets are sold to the highest bidder: household expenditure increases; costs appear that weren’t there previously. If any more evidence were needed Yves Smith has done an interesting post on this today. She sums up the situation rather nicely:

[It] is tantamount to selling the family china only to have to rent it back in order to eat dinner.

Yes, while the FG led government pursues a jobs program that will probably prove pointless and ineffective costs will rise once more for Ireland’s already broke citizen. Get ready for rip-off Ireland 2.0 – this time you won’t have a job!

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How I Learned to Stop Worrying and Love the Deficit

'We've got to attack it now... the deficit is getting huuuge!!!'

‘Underbalancing the budget in a depression is not primarily a deliberate policy but a practical neccesity. I would venture the statement that, with few exceptions, a budget has never been balanced in a depression’

- Gunnar Myrdal, Economist, Social Scientist and Nobel-Prize Winner

Fine Gael say that they’re going to balance the budget. They’re not – because they can’t. And if they try, they will destroy the economy.

When a depression – or even a recession – hits, the budget automatically goes into deficit as tax revenues drop and social welfare payments rise. These are referred to by economists as ‘automatic stabilisers’ – and its a good thing they function. If they didn’t – and they certainly functioned less efficiently in, say, the 1930s – the effects would be catastrophic. Aggregate demand – that is, spending in the total economy – would plummet, prices would spiral downwards and businesses, especially small businesses, would close their doors.

To a certain extent this is already occurring in Ireland – with deflation dragging local economies into the pit. But this would only be the beginning if Fine Gael tried to suck even more money out of the economy by reducing spending.

In order for the deficit to fall, the economy needs to return to growth. In a recent post over at New Deal 2.0, my friend Marshall Auerback has highlighted this succinctly:

The bottom line is that growth is needed for the deficit to fall. Growth comes with spending. If the private sector doesn’t want to spend in sufficient volumes to promote growth, then the public sector has to. Otherwise you get stagnation and large deficits.

Fine Gael’s policies, however, will do precisely the opposite (as will Labour’s – as far as I can see). In their recent economic manifesto they’ve pledged to slash the budget while keeping most of what I referred to above as ‘automatic stabilisers’ in place. Should they pursue these policies, they will not see the budget deficit contract – in fact, they will probably see it widen.

They will then – if they are to stick to their current ideology – be faced with two options:

(1) They will have to give up on their election promises, increase taxes and decrease welfare payments and the like.

(2) Watch the budget deficit grow ever larger.

If they pursue the former, they will wreck the economy – and probably turn the electorate against them. If they pursue the latter – which I assume they will – they will have demolished their entire election manifesto, and will have shown themselves to be as ineffective and impotent as the present government.

Of course, there is a third alternative: to increase the deficit by instating a proper jobs program, as they did in Argentina after the default. This would quickly restore Ireland to prosperity and would, I think, go down very well with the electorate.

It would not, however, go down well with Europe. And Fine Gael have shown themselves remarkably weak when faced with European opposition on these issues. Recall that recently they said that they would give up fiscal sovereignty if Europe shaves a few pennies off the debt-burden – this would be a very dangerous policy maneuver as it would force the deficit to close, with all the nasty things happening that are highlighted above.

Neither Fine Gael nor Labour have any real vision for the economic future of this country. And because of this they will likely go down like a lead balloon once they get into power – and then who will the electorate have to turn to but the so-called ‘economic illiterates‘ on the far-left?

Obsessing over the deficit is nonsensical and ridiculous. Everyone who knows anything about economics knows this – they know that these policies are thinly veiled measures to float the Eurozone at the expense of this country, they know that the EU are trying to turn us into some sort of debt-slave, as the IMF have done to so many Third World countries in the past.

It’s time to forget about the deficit – and stop listening to Europe regarding these matters. In an interview I did with David McWilliams the other day on unemployment he summarised this succinctly. ‘It’s only money,’ he said, ‘And the world is full of money.’ No doubt.

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Betrayal or For the Love of God, No!

The First Dail: Rolling in their Graves - All of Them!

Disaster! We’re in for a disaster! The other day I overheard a guy in the pub, who looked like he’d been in there for most of the day, say that Ireland is completely fucked – he was right.

The other day Fine Gael announced that they are “seriously considering” taking an extremely dodgy EU measure called a ‘debt brake’. This would involve writing a clause into our constitution that would bar budget deficits beyond a certain level and place serious pressure on governments to cut spending… sorry, did you miss that? Yes, that’s right: writing a clause into our constitution! A clause that essentially gives up our fiscal sovereignty!

I don’t even know where to start on this… It’s absolute and total madness! First of all, the constitution is NOT in place to be used to implement European governed fiscal austerity – its in place to protect the citizens of this country from government abuse and the like. Writing a clause into the constitution in order to appease of European masters is not only a disgusting impingement of sovereignty – its also extremely dangerous.

Why? Okay, here’s my take on it. Governments across the world are currently obsessed with austerity. They seem to think that by slashing spending some mythical entrepreneur will step in and magically create jobs. This is nonsense of the highest order. Indeed, it can be seen to be a massive failure, for example, in Britain – which now faces stagflation due, in large part, to the Tory cuts.

At some point governments are going to realise this and the discourse on austerity is going to change – well, that or the streets will burn; that’s up to the politicians, I guess.

Anyway, something even worse is in store for Ireland if she continues down the austerity path. As spending cuts eat into employment and incomes, this will reverberate through the private sector – eventually leading to lower government tax revenues and lower GDP. Our debt to the EU/IMF will, on the other hand, remain the same. Thus, the debt to GDP ratio will yawn open – and at the same time payments will become harder and harder as the tax base shrinks. This is something very similar to what the economist Irving Fisher called a ‘debt deflation’ crisis.

Eventually, the Irish people will realise that something is up – and I’m hoping this will coincide with the discourse on austerity changing. Then we might be able to talk about real solutions – solutions like pulling out of the euro, defaulting on the debt and engaging in fierce deficit spending (what is colloquially known as ‘pulling an Argentina‘).

Now consider that the EU will have its slimy tentacles in our constitution. How much of a ‘brake’ do you think this will put on reform? Think about it. This country is downright servile when it comes to legality. The mere mention that something might be in conflict with the current legal code or is unconstitutional is enough to have most politicians down on one knee. The constitution is a temple unto itself – the pride of anyone who even vaguely refers to themselves as a nationalist… but now it’s being cynically manipulated to shave a few percentage points off our interest payments.

This is disgusting – comparable to selling your ass to pay off your credit card bills. But beyond that, it’s downright dangerous. So much for the Free State! What can I say? Fuck you, Europe – seriously, F-u-c-k you!

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The Irish Media and Economic Illiteracy: The Argentine Default, a Case Study in Economic Ignorance

Yesterday I came across something in the paper that, while it didn’t shock me, sort of irked me. It was a piece arguing that Gerry Adams is economically illiterate. Now, I don’t know if Gerry Adams is economically illiterate or not – or, should I say, I don’t know if Gerry Adams is any more economically illiterate than the rest of our political leaders (didn’t Sinn Fein vote for NAMA?); but the argument put forward in this article was a little more nuanced than that – not much, but a little.

It basically said that Adams doesn’t understand economics and wants us to go down the path that Argentina did in 2002 – that is, default on our debt, revert to the Punt and undertake fiscal stimulus.

Look, if you have problems with this argument, that’s fine – I have problems with that argument. But its something that many international economists see as a very real option for Ireland.

The argument goes something like this: spending cuts are going to further savage employment and incomes; the debts will then become an ever increasing burden relative to GDP; with GDP falling and relative debts rising, diminishing tax revenues will prove increasingly insufficient to finance the debt – there’s even a chance that the debt burden to GDP ratio will become so great that Ireland becomes completely unable to meet repayments… making us debt-slaves of the EU/IMF.

It follows from this that we should copy Argentina and default on our debt as soon as possible – hell, it might even be an inevitability anyway.

Supporters of this argument point out that Argentina was, in fact, a massive success story. Have a look at the chart below and you’ll see the real growth rate of Argentine GDP. Note the massive drop up coming up to and during the default (which took place in 2002) – but almost straight away GDP growth bounced back (I’ll go into why this happened in a later article).

The unemployment rate tells a similar story. They had a huge peak around the time of the default and then a sharp decline.

Or we could look at the poverty – once again, same deal.

I dunno about you, but I’m having a hard time finding the failure in this model… Apart from making themselves rather unpopular with the international financial institutions for a number of years, the Argentine default seems to be a wholesale success story. Indeed, the charts above don’t even show how, after years of corrupt dictatorial rule following the IMF line, Argentina had been going through crisis after crisis until the Kirchner presidency, when the economy finally stabalised.

So, I emailed the writer of the article in question and pointed out that many international economists and financiers – some of whom I’ve discussed this with in depth – consider Argentina to be a success story. I also pointed out that many of these economists see the Argentine strategy – or some variant thereof – as a real possibility for Ireland. He didn’t respond (although if he does, I’ll update this post accordingly – I don’t want to name who the writer is until I’ve given him a chance to respond… ain’t I such a nice and civil guy?; the journalist in question certainly didn’t give Gerry Adams the same courtesy, after all! For now, I’ll just say that the writer in question is a very respected Irish journalist).

I also took the liberty of emailing some of the economists and financiers that I was talking about – one of whom was involved in advising the Argentine government on elements of its fiscal stimulus, namely their highly succesful ‘Jefes’ job program, during the crisis years. I’ve got plenty of material on this and, if I weren’t so busy today I’d be on here banging out comparative articles on Ireland’s and Argentina’s crisis situations. Coming soon, I promise. And in the meantime beware of journalists playing economics experts – but then, you knew that already, didn’t you?

UPDATE: Since the journalist in question didn’t seem to think that my criticisms merited a response – or, I suspect, could not come up with a response due to his own ‘economic illiteracy’ – I will now reveal that the person in question is Sam Smyth; whose trashy piece on Gerry Adams can be found here.

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We Suck Young Blood

Our veins are thin
Our rivers poisoned
We want the sweet meat
We want the young blood

Some time ago I did a rather bleak piece on the employment prospects for the Irish kiddies of my generation. There I argued that these kiddies’ plans – that is, to emigrate – might be more complicated and difficult than they think. Why? Because English speaking countries across the world are, like Ireland, experiencing high-levels of youth unemployment.

So, since I wrote this have things got better? Well, no – au contraire. Today The Guardian reports that youth unemployment in the UK is rising to extremely high levels.

The total number of adults under 25 who are out of work moved close to the 1 million mark in the three months to November, rising by 32,000 to 951,000. This pushed the youth unemployment rate up to 20.3%, which is also the highest level since records began in 1992.

The Guardian points out that this is despite the supposed ‘recovery from recession‘ that has taken place in Britain.

These figures are, of course, extremely important for Irish yoof – as the Brits are not only our immediate competitors for English-speaking jobs in Euroland, but also because, for many, Britain is the first choice of country to migrate to. Now, if the youth unemployment rate really is rising in Britain, doesn’t that mean that it will be harder for Irish peeps to find gainful employment there?

The problem of youth unemployment is one that is (still) reaching across the Anglo-Saxon world. And yet at the very same time, governments – the Irish government included – are raising the retirement age.

Think about that for a moment. Young people can’t get jobs – presumably because the available jobs are occupied by older people – and governments are forcing these older people to stay in these jobs for longer. Is this madness? I should think so.

How on earth can these governments see it as a good idea to raise the retirement age, when young people can’t find jobs? I’ll tell you why: because these governments are incompetent ideologues, who cling to the idea that cuts and austerity are they way forward – even as these policies continue daily to sink us ever further into the Dark Ages.

In fact there are far better ways to keep unemployment down – youth unemployment included – while we try to increase the number of jobs.

First of all – and most obviously – DON’T RAISE THE GODDAMN RETIREMENT AGE; thems jobs should be ours…

Secondly, we could try a job-sharing program – as has been implemented in Germany. Note that, despite major loses to GDP, the Germans have managed to keep unemployment at a cool 6.7%.

So, why won’t our governments – and those of Anglo-Saxon neighbours – pursue such policies? Simple: ideology. As Dean Baker points out, pundits are inherently against these ideas – but not for any rational reasons; no, they’re against these ideas because their heads are filled with ideological sludge. They still think ‘austerity’ programs are going to lead to economic expansion – and that this expansion will lead to a decline in unemployment.

But austerity programs won’t lead to a decrease in unemployment – and the recent evidence attests to this. As the public sector sheds jobs, general unemployment will increase – and with it youth unemployment.

All this seems so obvious. But our beloved leaders simply don’t want to recognise it, because it rankles with their distorted view of the world – a view that has led to this current recession-cum-depression-cum-unemploymentfest.

As the old are forced to work the jobs that should be going to the young for longer, the fossils that are currently in government and writing eco-nonsense in various newspapers themselves look far past their retirement date. And perhaps that’s ultimately what these policies are about – to keep these failures employed long past their sell-by-date. All I can say is: if you choose to vote for any of the parties currently pushing for austerity, you’re voting to keep yourself and your peers in the dole queue.

UPDATE: Global youth unemployment levels reaching ‘dangerous levels’.

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