December 19, 2011
This can’t go on. The figures from our economy released in the past few days reveal that the medicine is killing the patient and killing it quickly. From July to September, we saw the biggest fall in the number of people employed in two years.
Some 46,000 fewer people we employed in this country compared with the same figure last year and a further 30,000 left the labour force. These figures are particularly worrying because they show significant numbers of people simply giving up looking for work, because they can’t see the point. When people give up hope, we enter a new phase of the crisis.
Tax revenue is obviously falling behind target and will continue to do so because if the number of people working drops, income tax and spending receipts drop. This means more expenditure cuts to hit budget targets.
Last Friday we saw that GDP fell in the third quarter by nearly 2 per cent and consumer spending for the year was down almost 4 per cent. These are called ‘lagging indicators’. They tell us what has already happened. There are other indicators, ‘leading indicators’, which tell us what is happening now and what is likely to happen. One of the best of these is monetary data. October saw the largest monthly falls in both money supply and domestic credit since the recession started three years ago. When there is less and less money around, it is impossible to hit budget targets because you are trying to extract more out of less. Put simply, things in this economy are getting worse, much worse.
Austerity is doing what it says on the tin: making the economy contract. The deal signed up to with the eurozone last weekend recommends more of this nonsense. But on the bright side, the country is now beginning to look like many others in the last months of a crisis, when the population realises that the game is up.
We all know that this can’t go on. Indeed, the great American economist, Herbert Stein, put it succinctly when he concluded that “when things can’t go on forever, they stop”. And the interesting thing about economic history is that when things stop, the rebound can be very quick and very robust, and the new economy that replaces the old one can look like an entirely different beast from anything that went before.
We have ample evidence from around the world that once a self-defeating policy is abandoned, like our euro commitment, a new dawn normally emerges. We saw this in the Scandinavian countries of the early 1990s that abandoned their currency pegs and allowed their currencies to devalue hugely.
Similarly, if we examine the experience of the Asian tigers in 1997, the British economy after the 1992 devaluation, Brazil after the 1998 devaluation or indeed Ireland after the 1993 devaluation. In all cases an old policy – which was practically an article of faith
- was abandoned and, rather than the chaos suggested by the mainstream if the policy were abandoned, the opposite occurred. In all cases the economies grew rapidly.
The reason for this is that economies grow because of the human capital of the societies. This has nothing to do with the exchange rate or the currency. A currency is only the price that a country trades at – an overvalued currency makes the country seize up, an undervalued makes it grow. If you deviate from that ‘golden rule’, you will find that the currency arrangement has feet of clay.
If a country is weak, it should have a weak currency because this allows it to compete. The currency regime can only work if it reflects what is happening in the economy. If a weak economy like Ireland has a strong currency like the euro, the economy gets weaker. Savers are rewarded, but risk-takers punished. Eventually the economy shrinks and
deflation sets in.
Then the argument becomes a battle between those whose living standards are protected and artificially boosted by the overvalued currency – savers, those on government salaries and the already well-off – against those whose prospects are stifled by the strong currency and deflation – borrowers, the young who have no savings, entrepreneurs and exporters.
But the real value in an economy is not whatever currency arrangement you are in, but what the people are doing and whether the people are given a chance to flourish economically.
Companies are created when good ideas are executed by good people who dream of something different. Now, with technology so cheap, it has never been easier to dream and conceive of ideas, and the difference is in the execution.
However, if you allow your people to dream and stop worrying, they cando amazing things. If you make your country competitive overnight, rather than by pummelling the population with years of grinding wage and price falls, the economy can bounce. We see these rebounds all over the world. One economy more than any other exemplifies the idea that countries can turn themselves around in a crisis. It is another small export-orientated country with a huge diaspora. It also has considerable direct foreign investment from US multinationals and a well-educated, small, mobile population. That country is Israel. I am writing today from a small cafe in Jerusalem on the Shabbat. This is a secular little place in an increasingly religious city. It, like the Israeli economy, is buzzing. The economy has transformed itself in the past ten years based on enormous entrepreneurial effort to build
small export companies.
Today there are more Israeli companies listed on the high-tech stock exchange Nasdaq than all companies from the entire continent of Europe. It has the highest density of start-up companies in the world. Venture capital investments – the lifeblood of start-up companies – are 30 times greater than the entire continent of Europe. To put this into perspective, more venture capital money flowed into Israel – a country of seven million people – last year than flowed into Germany and France combined.
Israel spends nearly four times as much as Ireland on civilian (not military) R&D. Today, this tiny country, with all its problems, accounts for 31 per cent of total world venture capital. Money flows to where opportunity is. That is the rule. When I hear people saying multinationals would pull out of Ireland if we changed our currency because they would be uncertain about the future, I ask myself how can you explain the fact that every multinational is here in Israel – a country that has changed its currency, fought wars and
where everything is uncertain?
There is no reason why Ireland could not replicate and even surpass this performance. We have the multinationals, we have the trading links, we have the workforce, the rest of Europe is lagging miles behind in this field and, more than anything else, we have the crisis. The crisis is an opportunity to rethink the country, to re-imagine it with a competitive exchange rate and a business environment that rewards entrepreneurship. Why can’t we copy Israel in high-tech? There is no reason at all.
Looking at the economic numbers in Ireland, it is clear that this can’t go on. We are heading to a depression, our people are leaving and many that are staying have given up hope. Something has to give. It is time for all of us to ignore the scaremongering and see that there is life after the crisis. If Israel with all its problems can turn itself around, Ireland can too.