March 22, 2009
The video shop in Monaghan town is packed with young men. This is where local people come to go online. There are three banks of computers, all busy. The two lads beside me have their CVs out, trying to send them to as many prospective employers as possible. They’ve both been on the dole since Christmas.
Down the road, outside the town, a young professional man, – a father of four – is contemplating the future after being laid off for the first time in 20 years. The day before, in Ashbourne, three SR Technics workers were chatting about their next moves. These men, with years of experience in aircraft maintenance, were coming to terms with the fact that a company, which was profitable with order books out to 2010,was winding down because of an investment decision made in the Gulf.
Last Friday, in Waterford, at the Waterford Crystal souvenir shop, the workers occupying the premises await their fate. Today is the deadline to accept a compensation package from the new owners. Earlier this week Taoiseach Brian Cowen presented shamrock to US President Barack Obama in a Waterford Crystal bowl. Now it is likely that crystal will never again be manufactured here.
This is Ireland. Unemployment is escalating in every town and suburb. Keeping people in employment should be the number one priority of all economic policy now. This does not mean that budgetary squeezing should be postponed indefinitely, but it is not the immediate overarching concern.
At its most basic, in order to keep unemployment low, we have to accept that all the old rules need to be torn up. Ideas such as shareholder value, the primacy of private capital and minimal state intervention need to be thrown out.
If you doubt this reassessment, listen to what Jack Welch – the poster boy for shareholder value – has to say. He is now arguing, like Alan Greenspan, that the markets sometimes don’t right themselves.
Sometimes, you need to drop old ideas and adopt new ones, and have the confidence to admit that you are not infallible. Obama is doing it with the full backing of Fed Chairman Ben Bernanke.
By having the confidence to meet new challenges with new(sometimes old) ideas, the Americans are showing an extraordinary intellectual vibrancy in the face of economic fragility.
We in Ireland have to do the same; if we want to keep unemployment low, we have to make labour cheap and boost demand.
To do this, we must cut income tax and raise property tax as the central aspect of our revenue strategy. The reason is clear: if we tax work now and make it more expensive, there will be fewer jobs to go around. If we tax property now, we will extract real cash out of this most useless and socially divisive of assets.
The secondary objective of economic policy now should be to create inflation, not deflation, because only by creating inflationary expectations can we wriggle out of the liquidity trap we have set for ourselves. Otherwise, deflation and its handmaiden, crippling debt payments, will generate unprecedented levels of unemployment, emigration and social tensions.
If the state does not control this process, the process will control it. It is pretty simple, really. For this intellectual courage and leadership we must turn to the civil service mandarins who run our country. Where is the TK Whitaker of our generation?
Unfortunately and unforgivably, he does not exist. Our politicians should realise that they will take the blame for the inertia of senior mandarins because we are going down the European route, adopting the economics of 26cHerbert Hoovers when we need the imagination of one FDR.
In Obama, the US has its FDR, whereas all we have are the same old platitudes from the same old people, who don’t seem to be able to analyse the pros and cons of our situation.
The first thing we need to do is to think like a country in a monetary union, not the petrified Ireland of the 1980s with a shaky currency and excessive real interest rates to match. What is there not to understand about monetary union? We have given up control over our interest rates and our exchange rate; in return, we have bought the ability to borrow in downturns without exchange rate risk. We will not run out of money unless they kick us out.
Therefore, we have signed up to an economic pact which is based on the idea that, in recessions, the mechanism for easing the downturn is fiscal policy. This is the logic of the EMU, and is also the deal that Germany and France signed up to. (Realising the economic logic of this, the ECB stuck the 3 per cent budget deficit rule into the Maastricht Treaty.)
But this rule is nonsense, and has been broken wholesale. As was the case in Sweden and Finland in the 1990s, and Britain and the US now, the budget deficits will breach 10 per cent of GDP – and go higher. This reaction is not limited to countries.
A company with financing dilemmas raises money through a rights issue, while at the same time sorting out its internal mess. It doesn’t cap the rights issue, the market does. And despite all the talk, there are no real financing constraints on Ireland now. Sorting out our mess begins with the banks. But here, the omens are not good. The man charged with making the next move with our banks, Peter Bacon, has said that the figure for bad loans may be worse than the banks first suggested. Well, fancy that! The banks lied about their balance sheets? They underestimated their own recklessness? Never!
As this column has been warning for some time now, the bad debts of the Irish banks will be at least â‚¬40 billion, and this figure may be conservative. The reason is simple: the main banks went mad between 2005 and 2008, almost doubling their loan books with borrowed money. They lent to everything, particularly property. Now all is in freefall.
Thus, we have to set up a bad bank or asset management company to manage the Irish property portfolio.This is the only way to get monetary policy going again. In the meantime, we should not squeeze the blood out of the economy by raising taxes or cutting sensible spending too much. We need to engage with ideas like work fare, as opposed to welfare. The state should take stakes in businesses like SRTechnics, and these places should be reopened as public private partnerships.
The world has changed dramatically, and we have to change with it. This means abandoning ideas which we regarded as sacred, borrowing in the downturn to pay back in the upswing.