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: