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Posts Tagged ‘Irish economy’

"MORTGAGES!!! BOOOO!!!"

I never liked horror films. Perhaps I was a timid child, but I never saw the appeal of being scared senseless for enjoyment – what annoyed me were the shocks. You know, when a half-eaten corpse falls out from behind a door or a clown jumps out of the fridge. Uhh!!! Sends shivers down my spine…

Sometimes shocks are welcome though. You know, glass of water to the face after seeing your potential tax-bill next year. Morgan Kelly’s article in the Irish Times today was precisely that – ice cold!

Kelly pretty much says what I’ve been saying for a while now – no, that’s disgracefully arrogant… I’ve been saying pretty much what Morgan Kelly has been saying for a while. Anyway, I don’t see the point of commenting on every aspect of Kelly’s rather dense article (may I suggest, Ms. Kennedy, that in future you give the man a running column or, at least, give him a column a day for a week?). So, I’ll just highlight a few points.

First off, the politics:

“The German and French banks whose solvency is the overriding concern of the ECB get their money back. Senior Irish policymakers get to roll over and have their tummies tickled by their European overlords and be told what good sports they have been. And best of all, apart from some token departures of executives too old and rich to care less, the senior management of the banks that caused this crisis continue to enjoy their richly earned rewards. The only difficulty is that the Government’s open-ended commitment to cover the bank losses far exceeds the fiscal capacity of the Irish State.”

Well, that’s it in a nutshell, really. That’s the politics of this whole mess. The big euro-powers don’t give a damn about the Eurozone – they only care about their currency. Irish policymakers – who should know better, you know, being politicians – don’t notice that the big euro-powers have their own agenda. But then, that doesn’t matter, because half of them have their beady little eyes on a retirement position inside the zone – far away from any constituency that might, by that stage, be crawling through their windows in search of blood. And the bank managers… no, I won’t… Let’s just say…

Policymakers in Ireland consider themselves patriots and, to large extent the media supports them in this delusion. They are warriors against popular opinion – braving the hate and the red-paint in order to implement their clear-sighted plans. But, no, their plans are murky and questionable and their crusade against popular opinion is deeply suspicious – after all, no matter how badly they fuck up, you won’t see them at the end of the dole queue; unless, of course, they’re posing for a photo shoot.

Next up, the budget:

“This €70 billion bill for the banks dwarfs the €15 billion in spending cuts now agonised over, and reduces the necessary cuts in Government spending to an exercise in futility. What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?”

If that doesn’t provoke a ‘well duh!’ moment, then nothing will. The budget is a strawman, built from the sticks of neo-liberal dogma and stuffed with rotten hay. Historically the ‘budget trope’ appeals to a certain cautious and overall admirable middle-class sentiment – the imperative that one should never slip into the red. Since the crash it’s also been wheeled out in more priestly attire, in order to appeal to a sense of guilt: we’ve splurged, we’ve spent – now let’s tighten those belts.

So far, so common sense – but common sense is rarely, if ever, good economic policy. And as the government choke the public sector, the unemployment rate climbs and tax revenue falls we get a sense of the effects rather quickly. Laws of gravity, Mr. Lenihan… Did they not teach you that at Law Scho… oh… right… shit!

And… the response:

“As ordinary people start to realise that this thing is not only happening, it is happening to them, we can see anxiety giving way to the first upwellings of an inchoate rage and despair that will transform Irish politics along the lines of the Tea Party in America. Within five years, both Civil War parties are likely to have been brushed aside by a hard right, anti-Europe, anti-Traveller party that, inconceivable as it now seems, will leave us nostalgic for the, usually, harmless buffoonery of Biffo, Inda, and their chums.”

What can I say? Harrowing… But I’d also point out that we have a far more developed hard-left in this country than America does… This is sure to make a difference…

One thing that I can possibly contribute. As far as solutions go, Kelly holds up his arms (from the tone of his article, I’m surprised he doesn’t tear up his passport…). I think we can be a tiny bit more optimistic about this. As I’ve alluded to before, Ireland’s only hope is by joining a coalition of countries in Europe that lobby the larger powers to restructure the entire system along broadly Keynesian lines. Our leverage? Well, guilt for one – drag those Marshall Plan ghosts out of the closet. Let’s hear all about debt-financing being used to construct factories on the charred remains of concentration camps. Oh, and there’s the Euro – we should paint these policies in broad idealistic brush-strokes. Long term policies to stabalise the Eurozone as a whole – that sort of thing.

Hell, if Kelly’s right and attacks on Europe are in the pipeline, then they might as well come from the right side!

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"Well, Humphries, the idea is this: we become the government - then we destroy the government!"

 

I had an interesting experience the other day. I was on the bus coming out of the city centre – my headphones were broken and I was forced to listen to a conversation between two people who were sitting behind me. At first, I was irritated – naturally – but then the topic moved on to the economy and the rest was terribly interesting.

“Why?” you ask, “Is it interesting to hear two rather ill-informed people discuss the economy?” Well, I’ll tell you – because it led me to understand far better how the ‘austerity meme’ operates in this country; and also, it must be said, how it doesn’t. This, I contend, is just as important to understand as is the policymakers discourse on these matters, because, since we thankfully live in a democracy, it is these people who will make up the key voting-block when it comes to economic policy – it will also be these people who advise their friends and colleagues on which economic policies are sound and which are toxic.

Our two interlocutors worked in a bank – and while I’m sure they were both scrupulously honest people, this irony should not be lost on the reader in what follows. They were both in their mid-thirties and, from what I could tell, were both reasonably successful mid-level managers. They were well-educated and intelligent – but I couldn’t help but feel how woefully ignorant they were as to the state of the country at the moment and to potential solutions to its problems. The words ‘tunnel’ and ‘vision’ come to mind.

The discussion began – as it always does – with the healthcare system. We all know the arguments and the counter-arguments, so I won’t go into them here. Needless to say, both these individuals were of the ‘slash-and-burn’ mentality. Since the healthcare system was grotesquely dysfunctional, the only solution was – in one of their own words – to destroy the whole thing and start again (no wonder the idea of a private system might appeal to this voter). The idea that the healthcare system might be underfunded was not even considered.

There was a certain presupposition here – one that carried on for the rest of our journey and, which, I think was the most important element in this conversation – this presupposition was that anything in the public sector was, by definition, corrupt and open to suspicion. This presupposition extended to all public sector workers – including certain politicians that strongly push for privatisation in the healthcare system. It is important to note that this was not party politics – indeed, this was not even politics proper; this spiel considered itself above and beyond politics, with all its inherent rot and corruption – this was nothing less than the anti-establishment, free-market rhetoric popularised by Thatcher and Reagan and disseminated through popular television shows such as ‘Yes, Minister’. The selfish meme.

The irony, of course, is that both these men worked in banks! “How on earth,” I thought, as I sat there, “Can they accuse the public sector of inadequacies and corruption, while completely overlooking this proverbial elephant in the room? I mean, sure, the public sector has a great deal of problems – but destroy the economy it did not.”

This was bizarre – I mean, really surreal. We can’t say that their ignorance was due to inadequate media saturation – after all, the banking sector takes up headlines almost daily and both these men were newspaper readers. So, what was the key here?

Well, I genuinely think it was pure free-market anti-establishmentism. It was the idea that the private sector is somehow a privileged domain of super-charged, super-efficient workers (who probably think themselves entrepreneurs…), while the public sector is full of lazy, greedy slackers. The appeal of this ideology is, well, the same appeal that most ideologies exert – if you adopt them, you rise above the ‘herd’. By positioning yourself thus you can scoff at those that have authority over you – ‘the man’, in common parlance – while looking down at those who work for ‘him’.

Next, the conversation turned to the social-welfare system. This was even more interesting. The more intelligent and better read of the two – but also the more ignorant – was of the opinion that policymakers should take all the people that are just doing nothing in the dank, dark bureaucracies and put them all to work on the important task of means-testing. So, that’s more red-tape then, right? Well, that’s the funny thing, when it came to doling out the dole the ideology of efficiency took a dive. This guy didn’t really care at all whether the public sector was efficient or not – on the one hand, he didn’t want to allow it to get any bigger, because it was ‘a mess’, on the other hand, he favoured messing it up in order to ensure that the unworthy don’t get undeserved payments. Here it was in a nutshell – the Thatcher ideology; use government to ruin government, then point out the inefficiencies of government. It’s a sort of anarchism – but strangely, it’s an anarchism that many subscribe to. It’s an anarchism that’s very much mainstream among champions of business. It’s an anarchism that trickles all the way down from Friedrich von Hayek and Ayn Rand, right down to a mid-level bank manager on the top floor of the bus!

Well, his friend disagreed with him on this one – you see his friend had been unemployed for a few months and so had found himself on the dole. His friend – who, up until this point seemed to be the less-informed of the two (not taking into account quality of information, of course) – said that it would probably be better if the government put those people to work on trying to find unemployed people jobs. “Well, that,” I thought, “Is certainly a more reasonable idea.” But then I realised that the entire conversation was floated on another presupposition – this one far stranger. Namely, that there were jobs out there and that anyone mooching off the dole was just a lazy bastard – probably on smack, or something.

This was the crux of the issue. Once again, the front-page – stating the near 15% unemployment – was glossed over and the newspaper ruffled through until the reader fell upon the opinion columns. Someone I spoke to about this conversation, who has been on-and-off welfare for the past year, summed this up pertinently, “I’ve been working for the past twenty years, non-stop – and in all that time I’ve been paying taxes. Why should I have to be scrutinised by the government when I go to collect the dole payment that I’m entitled to?”Damn right!

As this bank-manager rolled his opinions out for all to see, something tells me that many other people on the top-floor of that packed bus were thinking the same thing – after all, an average of one-in-ten of them would have been regular workers that were now unemployed.

There is a manner of speaking in this country that is at once strange, ignorant and disturbing. It is an ideology that – like all ideologies – is immune to facts. It scans the newspapers and picks up on certain details while shedding others. Ultimately, if it continues to have the upper-hand, it will be the death of this country.

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The IMF released their latest ‘World Economic Outlook’ (WEO) last week. The WEO is a twice yearly publication in which IMF economists try to predict near and medium term economic developments – the WEO also, quite notably, failed to see exploding house-prices in certain advanced economies as the hazardous bubble which, of course, it turned out to be. Perhaps such obvious oversight disqualifies the current WEO any serious consideration from the outset, but… actually, I’m not going to add a ‘but’ to that statement, there’s every chance that this oversight does disqualify the current WEO from serious consideration. But let’s give them a run for their money – why not? I saw a few plastic Christmas trees in the foyer of a shopping center today which temporarily took my mind off the ‘To Let’ signs that I have become so accustomed to. So, in the festive spirit I offer the IMF my gift, er, this Christmas.

The rest of this article is indebted to (that is: nicked from) this wonderful paper by Mark Weisbrot and Juan Montecino over at CEPR.

So, those notorious optimists at the IMF must be locking up the happy pills these days, because they now predict that world economic growth is set to slowdown from a modest 4.8% in 2010 to a dismal 4.2% in 2011. They attribute this – and I quote – to “low consumer confidence and reduced household income”… shock! People have less money than before! And they’re buying less crap! Thank the Good Lord for IMF reports, eh? Otherwise we’d all be in the dark.

Yet, despite all this, the IMF still seems to be pushing the fiscally austere credo. Weisbrot and Montecino point out that in 2008/09 31 out of 41 IMF patron countries were pursuing what they refer to – rather innocuously – as ‘pro-fiscal or monetary policy’. That’s neo-liberal policy to you and me.

The authors sum this policy up as:

“[A]ttempting to recover [from the crisis] by means of an internal devaluation.”

Plain English: kicking the domestic economy back into the early 19th century. Or:

“This means that the economy must contract and unemployment must rise sufficiently in order to push down wages and other costs to the point where there is a significant real devaluation, while keeping the nominal exchange rate fixed.”

What the authors mean by ‘real devaluation’ is, well, let’s leave it up to the wonders of the English language to sort this out.

Devaluation: -noun “a reduction of a value, status, etc.”

Now replace the word ‘real’ with the word ‘employee’, ‘worker’ or ‘citizen’ and you’ll get a fair idea of what’s going on here. Yes, that’s right. Devaluation is coming – to your pay-check, to your health care system, to your social welfare payment.

The idea is well-known – but little elaborated. Cut, cut, cut – grow, grow, grow. Is this economics? Or gardening? Frankly, I don’t know what it is anymore – but, hey, it’s popular.

Anyway, Weisbrot and Montecino don’t buy it. They claim that these policies are going to cave in on themselves. If the economies are, in the IMF’s own words, suffering from “low consumer confidence and reduced household income” then surely the problem is effective demand? And if effective demand isn’t bolstered by increased government spending then surely people will buy less stuff, more businesses will close and more ‘To Let’ signs will spring up in the shopping-center foyers – ruining my Christmas spirit and encouraging me to slag off IMF papers rather than engaging with them!

Take the previous IMF predictions on the Irish economy. As the authors say:

“Although Ireland had positive growth for the first half of 2010, the IMF projects negative 0.3 percent growth for the year. For 2011, the IMF projects growth of 2.3 percent, but this is difficult to believe given the massive fiscal consolidation taking place. It is worth noting that when Ireland began its budget cuts at the end of 2008, the IMF projected 1 percent growth for 2009; the actual result was negative 10 percent.”

Woah! -10% rather than +1%! Something stinks all right and I think that it might be the IMF’s rotten economic ideology!

The problem – as I’ve said before – is a mixture of the dilapidated state of consumer spending within national economies together with the resultant decline in imports from foreign markets. People inside the borders aren’t spending enough – and, consequently, those abroad aren’t buying enough. As I’ve pointed out before, this is particularly problematic for Ireland – being at once ruined in terms of domestic demand and heavily reliant on shrinking international exports.

The solution? Being rather tired of my own voice at this point – and sick of typing – I offer the authors’ sagely advice:

“[I]t would be possible to finance a fiscal stimulus without adding to net debt, if the European Central Bank were to agree to such a program. This is true for the entire Eurozone, and for the United States – which together with the Eurozone and Japan, makes up more than half of the global economy.”

But we in Ireland haven’t been offered this option by our brothers in the EU. Instead, we stare down the dark barrel of IMF austerity.

The reaper cometh!

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The CEPR in Washington have released video of an extremely interesting conference, entitled ‘What Are Global Trends?’, that took place on October 9th. The speakers were Petya Koeva Brooks of the IMF and Mark Weisbrot of the CEPR. The conference centers around many of the key issues facing the PIIGS (Portugal, Ireland, Italy, Greece and Spain). I’m inclined to let the speakers do their own speaking – but I urge people to listen to Wesibrot’s presentation rather than that of the IMF economist’s.

Not to go into specifics about any of the countries themselves (he discusses Ireland around at around the 15 minute mark – urging central banks to pursue expansionary fiscal policy [increased spending]), but a few general points Weisbrot makes should be highlighted.

(1) Domestic demand is extremely weak in the advanced countries. This is particularly important for Ireland as we are (supposed to be) an export driven economy. These countries are the ones we rely on to – well – buy our stuff.

(2) This ties into the next point. The stimulus package in the US, even though it seemed to many to be very large, only makes up for 1/8 of the demand that has fallen off due to the financial crisis, the housing bubble, the ensuing recession etc.

(3) This could lead to another recession. This will make things much worse because it will have a cumulative effect on the world economy. What that means is that if (and, I would say, when) another recession occurs this will produce drag on the world economy that will reinforce the drag already in place. This won’t be a 1 (recession) + 1 (recession) = 2 (recessions) – more like: 1 + 1 = 3. As already noted, the Irish economy relies heavily on the economies of the advanced countries for it’s exports (I did a post based on this a while back).

(4) Weisbrot doesn’t blame the IMF economists for policies that are exacerbating these problems – he blames their ‘directors’; the big-wigs at the US treasury and in the EU, who have more a few dogs in various political fights.

So, what, as they say, is to be done? Well, first of all, as Weisbrot points out (with a fancy graph that I can’t pull out of this .pdf – see p 13), increased debt in the short-term for stimulus spending does not mean increased debt in the long-run. Why? Because stimulus spending leads to expanded economic growth (GDP growth) and as the economy (GDP) expands the ratio between GDP and public debt contracts. In other words, even though the debt increases with further government spending the economy increases too and overtakes the aforementioned debt increase. Magic! (There’s also an issue with net interest, central banks and the like – but we won’t go into it, it’s really boring. Listen to Weisbrot at about the 21 minute mark if you’re interested).

But the PIIGS don’t have a central bank to crank out the debt. So, it’s on the shoulders of the ECB to extend this spending to us. And it’s on the shoulders of the powerful Eurozone countries to put pressure on the ECB to do this.

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In 1919, just after WWI, the great British economist John Maynard Keynes published a book entitled ‘The Economic Consequences of Peace’. The book was a response to the proposed reparations that were being imposed on post-war Germany. The general opinion in the Allied countries at the time – one, no doubt, fueled by the hangover effects of the greatest wartime propaganda campaign the world had, at that point, ever seen – was that Germany should bleed. No quarter should be given; the German economy should be cut down like those British and French men that were cut down by German machine-gun fire as they poured over the trenches.

Keynes argued that these reparations would be the beginning of the end for Europe. He argued – as any salient macroeconomist would – that reparations shouldn’t be seen as a zero-sum game. If the British and the French plundered Germany they would destroy her economy – this would then have long term consequences for the European economy as a whole. This was not even to mention the political consequences that would result from these reparations – consequences attested to today by the greatest disaster European man has ever known.

Fast-forward to today and a new nationalism is on the rise. The German people, this time in the position of the aggressor. Because they are Europe’s main creditor nation, the German’s see themselves as the arbiters of European fiscal policy. It is the Germans that hold the sway at meetings that try to deal with the debt crises arising in the so called PIIGS (Portugal, Ireland, Italy, Greece and Spain). The Germans – riled by crass nationalism – see themselves as the unwitting victim of these ignoble countries who expanded their national debt too far, too fast. “It’s unfair,” say the Germans, “That we should have to support these economies.”

Yet, this is no zero-sum game either. Indeed, where is that European spirit gone now that it is invoked as anything but a friendly ghost? Why is it that the Germans – and the other countries that support their general stance – fail to note that perhaps what is good for the PIIGS is good for the whole of Europe? Well, it would seem that there is a new specter haunting Europe – the specter of crass fiscal nationalism. “To each European according to his central bank; to each Irishman according to his failed national banking system,” they cry.

After WW2, Germany was once again in ruins. Of course, the international community could again have said, “Well, it’s their fault, isn’t it? They geared their entire economy toward war and conquest – indeed, they even tried to eradicate certain elements in their population. They are not just an irresponsible, but an evil people!” The international community had every right to take this stance – but they didn’t. They had learnt their lesson the hard way. As the smoke from the bombs and the tank fire cleared across Europe many began to realise that Keynes had been right in 1919. An economically strong Germany benefits the whole of Europe. Shortly after huge debts were extended to Germany to rebuild her frayed economy under the Marshall Plan. This ushered in a new age for Europe; an age of prosperity and cooperative national expansion.

Today the situation is different. European brotherhood is nothing but a ghost, only to be summoned up when key European leaders meet for fancy dinners. And while Germany’s Merkel puts on an austere face, the Irish politicians and economists curl up in a ball to receive their telling-off – readying their tuxedos for their next meal in Brussels, where praise of fraternal intra-European relations will be sung to the rafters.

Meanwhile, the anti-EU lobby – made up of a queer hotch-potch of shady business interests, nationalists, socialists and traditionalists – have seen all their worst fears realised. The EU is not now based on all-for-one and one-for-all – it’s still based on crass nationalism and one-sided bias. The propaganda may have changed, but the nationalist sentiments remain – threatening, no less, to once again destroy Europe.

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It’s commonplace populist wisdom: the rich live in their own little world. Of course, in the past few decades this truism has become all the more true. With the rise of the gated community and the reemergence of certain ideologies, the presuppositions of which rest on images of society as it existed two centuries ago (you know what I’m talking about), the rich seem more distance, both physically and intellectually, than they have for a long time.

Well, this can produce problems – fairly substantial problems. Of course, there’s the move away from productive investment and into asset speculation, for one. But there’s also the disconnect that occurs – well – with reality. When the well-off move strictly in their own circles, they don’t tend to get much of a glimpse of the world outside. Sure, they may, for example, notice that the homeless problem in the city center is getting much worse (who hasn’t noticed this?), but they don’t see the problems that many other people face. The chronically unemployed, after all, don’t approach us on our lunch breaks, begging for a handout.

This cognitive fog isn’t restricted to the upper-upper classes either. The upper-middle class – who seem to have dodged the harshest effects of the current recession – sometimes seem completely oblivious to what is going on in this country.

A friend of mine told me a disturbing anecdote about this the other day. He was browsing a certain popular Irish message board and he came across a conversation between a bunch of upper-middle class college students and a single mother. The single mother was complaining that her social welfare payments weren’t enough to cover her food costs. The college kids couldn’t believe it – hunger? in Ireland? never!

After a while the college kids accepted that this woman was actually telling the truth – and they proceeded to give her some advice. Why not cut off her NTL and Broadband subscriptions (and sit around all day gawking at static, presumably)? Why not buy clothing from charity shops (and cause such damage to her childrens’ self-esteem that thei educational opportunities are ruined)? The list went on. So oblivious to the realities of life were these kids that I genuinely expected one of them to suggest that, I don’t know, the poor woman should pick up a six-pack from the off-license instead of going out to Club 92 this Friday night.

There is a disconnect in this country – a disconnect that often means that unemployment numbers quickly become nothing more than a dinner table talking-point for members of the chattering classes. What’s more, this is likely the milieu from which we will pull our next generation of economists. Economists that will tell us that class doesn’t matter and that welfare payments cause unemployment. Chalkboard economics – in short – from behind the perspex.

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Krugman has an interesting piece that deals with Ireland’s approach to it’s financial meltdown and ensuing economic catastrophe.

Well, there’s plenty to be said for the piece.  But I thought Kruman’s conclusion was particularly interesting:

So the Irish are back to waiting for their reward for suffering.

Something tells me that we’ll be waiting for a rather long-time.

The problem we had when it came to fiscal austerity, I think, can broadly be traced back to the Celtic Tiger years. Back then Ireland began to model itself in the image that it was given by the international business press. We were their darling – and we loved it.

At home, of course, there were often doubts. Only fools couldn’t see the coming housing crash. I’m not bragging when I say that at seventeen years old, with no economic training and only having read a very small amount on the history of property bubbles I was able to say in 2004 that there was a bubble.

There were other worries too. It was clear that levels of corruption were rising, but we paid no heed. ‘The Economist’ said we were the next big thing – so we were the next big thing.

But dwelling on the past seems a bit silly at this stage. The point is that we have yet to drop this habit. Like a jilted lover we continue to try to curry the favours of the international business press and yet it seems to be making things worse.

Let’s face it – we’re narcissists. Like Narcissus – the Greek boy who fell in love with his own reflection – we sit by the pond staring in, as our body slowly withers away.

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