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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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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Keynesian Acoustics

Deficits, deficits, deficits. The world economy has gone hollow – and daily do we hear the echo… ‘deficits’.

Deficits are bad, we’re told. Common sense is appealed to – you don’t want to spend yourself into the red, apparently… as long as banks and financial speculators aren’t making a killing off you, anyway. When you suggest – gently at first, as if you’re trying to charm a woman – that maybe, under certain circumstances, deficits aren’t so bad, you’ll usually get a pre-programmed response: your interlocutor’s facial expression will turn to shock… you might even, if the person’s economic sensibilities are particularly easily offended, walk away with a big red glove-mark on your face.

Just the other day I had this rather pointless argument with a person in the comments section of YouTube – exciting, huh?, I’ll bet you’re jealous. For many people the argument simply doesn’t compute – “You want more debt to solve a debt crisis!?,” they exclaim. Even when you try you begin to realise that their mind simply works in a different manner to yours.

Aggregate demand, they assume, is a given. You point to deflation – no dice… “is deflation even a real word?,” they ask, “perhaps,” they suggest, “you’re referring to INflation” – which your debt-fueled mania will apparently cause. So, you try another tack: employment. You point out that productivity and employment are linked – you point out that when there’s a serious economic downturn, unemployment may be producing a serious drag effect on productivity. Nope… that’s a tautology, apparently. So, you give up.

It’s no surprise that this ‘common sense’ view of the world is so prevalent and so deeply ingrained these days. Dean Baker points out, in the US Senator Alan Simpson and Erskine Bowles, of the Deficit Commision, will delay their budget cuts until 2012. But there is every reason to suppose that unemployment will be around the same then as it is now.

As Baker points out, Simpson and Bowles are less likely to consider the rather more obvious means by which they could cut their budget: namely, a restructuring of the healthcare system and a Financial Speculation Tax (FST) on the Wall Street fatcats – you know, tax the shit out of the bastards that ruined the country…

Simpson’s and Bowle’s evasions are a specifically American malady… Ireland suffers from an altogether different sickness. And that sickness is the current EU and her institutions. The EU needs to be extending massive debts to the Eurozone countries in the most trouble – the so-called PIIGS – through the ECB. This debt could then be used to fill the deficit gap and create public works projects to push employment levels and get the economy moving.

“But wait!!!” shrieks my YouTube interlocutor, “You’re just passing the debt off – you’re not clearing it.” That’s true, but there’s a few things to be remembered here:

(1) The ECB is far better equipped to handle a large debt burden than any small sovereign EU nation.

(2) The current budget cuts are going to destroy the Irish economy. And once Ireland is in a smoldering heap, the anti-EU feeling might well go toward breaking up the single currency. This would be bad news for the other Eurozone countries, as faith would be lost in the Euro as a currency. Translation: The EU needs to consider its own long-term policy goals when it pushes austerity measure on the PIIGS.

(3) This is the single most important point – and I’ll let Dean Baker make it:

“There is no reason that the Fed can’t just buy this debt (as it is largely doing) and hold it indefinitely if need be, the Fed can use other tools at its disposal to ensure that this expansion of the monetary base does not lead to inflation. This creates no interest burden for the country, since the Fed refunds its interest earnings to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country’s net interest burden.”

Well, the ECB could do something very similar. This is because the ECB is a central bank – and when a central bank owns the debt, the interest comes back to said central bank, so the debt can be held indefinitely… magic, right? The risk of inflation is negligible – indeed, the PIIGS currently are threatened by significant deflation.

But Ireland needs the ECB to do this – and I believe that the ECB has a responsibility to do it.

When we moved to the Euro, we gave up our national central bank. This means that we’re unable to produce credit on our own – essentially we don’t have an institution in this country any more that can print money. So, we rely on the ECB.

There are solutions to this crisis. But these solutions need to echo throughout the Irish and European media – they need to drown out the voices preaching austerity.

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