July 20, 2015
There was no Irish miracle, just a very big overdraftPosted in Sunday Business Post · 51 comments ·
It could have been 2002 all over again. There was Bertie in the dock running rings around his inquisitors and just up the road, the social partners were at the new-fangled National Economic Dialogue discussing how to divvy up the spoils of the economy. All we needed was Robbie Keane to snatch a last-minute goal against the Germans and we’d be sorted once more!
Forget the football for a minute, because that’s another story, but in the economic world, although most of the bearded ones in Dublin Castle don’t realise it, Bertie Ahern isn’t the only thing that binds social partnership and the banking/credit boom together.
Much as the leftist leaning members of the partnership are loath to admit it, you can’t have social partnership without a banking boom.
The trade unions need another banking/credit/housing boom to have any possibility of resurrecting social partnership – because that’s where the money came from.
Maybe they are clever enough to realise this and don’t want to admit it, or maybe they don’t see the connection, but let me be clear: social partnership was enabled and prolonged by the extravagant tax revenue that stemmed directly from the credit boom.
In short, had the banks not fuelled the housing market by borrowing and then lending billions into the economy, the country wouldn’t have had the Bertie Boom and the attendant tax revenue.
With all this revenue bonanza, Bertie was able to buy off the various social partners and in the process, allow them make up a narrative that in some magical way, social partnership was responsible for the Irish miracle.
It wasn’t. There was no miracle. It was just a very big overdraft.
During the Bertie Boom, banks borrowed from foreigners, this money was then lent to Irish people in order to buy over-priced houses. Lots more was lent to developers to build these houses and speculate on land in order to release more land on to the market when prices had risen sufficiently. The borrowed cash was simply recycled back into the state coffers via stamp duty, Vat and of course, massively-increased income tax receipts associated with practically full employment.
The more people spent the borrowed money, the more indirect and direct tax spilled into the coffers.
King Bertie divvied up the spoils – with the complete support of the social partners – and thus created the illusion of a new economic model when all it was only a large term loan which had to be paid back. That was about it.
Since then, the national narrative has changed to one of heroes and villains. Those who from 2002 to 2007 were calling for more spending have suddenly turned into paragons of prudence. They weren’t.
Today, the rhetoric deployed by the more angelic of the social partners – the ones who have never done anything wrong, ever – is that the bankers were all terrible and in contrast, the partners were beyond reproach.
But social partnership is/was a product of the specific economic dynamics of the Bertie Boom. It can’t be resurrected without another credit/housing boom.
So the lofty aspirations of National Economic Dialogue are hostage to the harsh reality of bank lending. You’d never know it from all the talk this week about a new economic model and the like, but that’s the fact.
So they are discussing how to spend a budget deficit – how to spend borrowed money actually – without appreciating that what they are talking about is the end product not the starting point. The budget deficit or surplus is simply the figure that drops out of the national economy after all the activity is counted.
It is the residual not the kick-starter.
The kick-starter is how is our society going to generate the cash to pay the wages of the partners.
I have rarely been more confident about the Irish private sector. We could be about to enter a golden era for Irish entrepreneurship.
We are in the right part of the world, semi-detached Europeans rather than being continental. The US and Britain, our main trading partners, are doing fine and there is enough mobile cash and capital looking for a home here for us to make a good fist of the next few years. Remember, we are tiny so we only need a tiny bit of the global action to be okay. The country is producing more competitive businesses than at any other period.
The recession and an overvalued exchange rate have forced many small companies to compete vigorously in export markets and this experience has made them exceptionally flexible and able to deliver. The stats bear this out.
But given that the National Economic Dialogue is a product of the government sector, the question is what happens to these guys. Will the private sector provide enough revenue to feed all the mouths?
With the housing boom, there was a large overdraft so we didn’t have to earn the cash, we just borrowed from tomorrow to pay for today. We can’t do that again, surely?
I don’t know where this cash is going to come from. At the moment, we still run a budget deficit and there is no real prospect of billions of extra shekels raining into the state.
The private sector will grind out export revenues from trade, but the notion that there’ll be Bertie-style largesse is not credible.
I know it’s not fashionable to say, but for the left-leaning process of partnership to work, the trade unions need a banker-driven housing boom again. Otherwise, they simply won’t have the revenues to match their rhetoric. The only solution might simply to adjust downwards their expectations of what can be delivered.
Failing that, they could always have Bertie back. Now there’s a thought.