One of the many great things about teaching an economics course is that you get as many ideas from your students as you give them. The other night, one of my students, who is returning to economics out of general interest but who has a wealth of experience in turning companies around, explained what he thought the budget strategy must be in the context of turning a company around from bankruptcy.
He said that the strategy must be one where the Government is getting its house of cards sorted in order to be able to default, not in order to be able to pay its huge debts. This is precisely the opposite of what is being articulated by the State. The State’s central policy, continued today, is that we will get our budget deficit down to zero in order to be able to borrow again and add to the national debt. But for this businessman, the message should be the opposite.
Here is the thinking that underlies his conclusion. A few years ago, he and his team were called into a company that was going nowhere. Initially, they thought the problem was in the profit-and-loss account (P&L), the ongoing day-to-day business.
Looking at the P&L, they went about what they normally did. They found fat and waste and tried to cut it back while at the same time they tried to see which business lines were profitable and which ones could be beefed up in order to generate most revenue. They looked at the day-to-day running of the business and gradually began to turn the ship around.
But there was still a problem. It was an enormous legacy debt, which the previous management had undertaken in better times in order to expand. They had been aware of this huge debt when they first went into the company but knew that they could only deal with creditors once they had cleaned up the P&L. Once they had turned the company around, they set about phase two of the recovery strategy. They called the creditors in and announced that the company would have to default on its legacy debts because it couldn’t carry them.
The importance of getting the P&L right was to prove that the company had a future. Now that they had done that they could cement the future by forcing the old creditors into realising that the new company would sink if it carried all the debt. They defaulted on all the debt. They calculated that if they were going to improve the balance sheet by defaulting they might as well do it spectacularly.
The company is now flying because, after all, you make a balance sheet that is crippled with too much debt better by less debt not more debt and if you can’t service all the legacy debt it just won’t be paid. This is not an issue of choice but an issue of the cruel, hard logic of capitalism.
NOW consider what our Government’s strategy, or at least announced strategy is. We will grind the P&L into shape by balancing our budget in order to borrow yet more and add to the already enormous odious legacy debt. This is precisely the opposite of what a company would be doing.
It will not make the country better off but worse off because more and more future revenue will be going to pay past debts. We will be back to the crazy notion of borrowing from tomorrow not to pay for today but for yesterday and all the sacrifices that we are making now will not buy us any debt relief.
In short, unlike the private company, there is no reward for fixing the P&L.
So even if you are an “austerian” and believe in austerity, you must have an idea as to why you are doing it. There is a horrible feeling that there is no plan in Ireland. We are not imposing austerity in order to reduce our debt burden once and for all but we seem to be imposing austerity in order to lumber our children with yet more debt.
This is why today’s Budget and the last five budgets appear to be the triumph of tactics over strategy.
We have no idea why we are doing it. There is no growth strategy tomorrow, which will be triggered by the “successful” implementation of austerity today.
If this were a corporate restructuring, the P&L tactic would be allied with a related balance sheet tactic.
This is not happening in Ireland. In fact, something much more bizarre is going on. We are supposedly trying to fix the P&L not in order to reduce our overall debt position, but to increase it!
David McWilliams’ new book ‘The Good Room’ is out now
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Countries don’t operate like companies.
Companies mus look after their customers and provide value for money. Governments can just take money from their customers.
The Government will run their company as long as they can the same way because they know nothing else. We are the Harland and Wolfe of nation change.
There is no austerity policy in Ireland. There is a “look after our backers policy, by applying austerity on the rest” policy. The EU practices this, and it is practiced at national level also. If we had honest, and transparent austerity, the budget would get fixed. Instead you have a policy framework to suck money out of some people, in order to preserve money for nothing policies for others. The entire institutional state needs to be declared bankrupt, and then restart from begining. In any case, Noonan’s budget will make it absolutely certain that there will be a second bailout.… Read more »
My advice to everybody is to live very frugally, because the current economic policies are extremely reckless and dangerous to people who depend on working to pay their bills, and survive. The current economic policies are designed to accomodate a set of delusions about the effectiveness of the institutional state. These policies declare a crazy set of assumptions about it’s functional intelligence and moral righteousness which are deeply flawed, and highly self-serving to those who are part of the state system. The state is actually on a slow path to bankruptcy. And it is up to each one of you… Read more »
Hi David, You quote a student who analyzed the Irish Government’s problem thus: ”the strategy must be one where the Government is getting its house of cards sorted in order to be able to default, not in order to be able to pay its huge debts.” Your student from the business world then offers a solution based on his business consulting experience: “They called the creditors in and announced that the company would have to default on its legacy debts because it couldn’t carry them.” In a similar corporate challenge some years ago I managed a company turn-around very differently.… Read more »
But aren’t ‘creditors’ businesses too?? What if the business the student was talking about had debtors in its P&L that decided, “hey guess what we’re not paying.” David always says that my spending is his savings and vice versa. That recessions happen when everyone is saving and not spending. So what would happen if everyone defaulted and that knock on effect???? Well, there is one business I know about designed around credit default –> The Credit Card business and it has severe & penal interest rates for its “good” creditors. This country has moved beyond an economic crisis, because people… Read more »
CAC Collective Action Clause in negotiating any foreign soverign debt ruled into a Loan contract has a premium cost and its unlikely Ireland has one with its creditors. On 15th December, 2012 Argentina must decide either a) Pay Up b) Default c) circumnavigate the original loans and conditions and do a settlement . Some time ago Argentina did a deal with 93% of its creditors to a settlement however 7% refused and were successful in a court case to seek full payment from the countries next schedule payment .Tehy have no CAC clause. Currently the country is trying to avoid… Read more »
Having studied the way our government has presented the recent budgets I can only conclude that the philisophy behind them is not too far from what the Republicans in the States believe in. The concept of the social contract is dead. The next move is for one of our conservative political parties to set up a tea party with the aim of completly destroyin our society and concentrating solely on an developing an economy.
This Government is as bad as the colonial masters of the past. Labour is gone with the Greens. And Fine Gaels are side by side with Fianna Fail. FAMILLY HOMES DON’T GENERATE INCOME, SO THE PROPERTY TAX IS THE MOST UNFAIR AND CRIMINAL TAX. People in Ireland should organise soon a protest in every town and city, at the same time and date, and show this corrupt Government to reverse it or to get out!!! . Yesterday I mentioned the honesty of Roisin Shortall by resigning from this corrupt Government, and for not taking the Severance Payment she was entitle… Read more »
I’ve been saying this for 4 years. There’s no real plan, but simply a way to get “back to the markets”. (How many of you can hear Noonan’s drawl just there?) This is the result of electing right wing school teachers. For me, the right wing part is fine. The problem is the school teacher part. Most of our politicians have no experience of running anything, not even a school. Their idea of fiscal responsibility is keeping to the budget they’ve been given, having little consideration for the component parts that make up the actual cost. Business budgets are developed… Read more »
Interesting idea. My younger brother used it, on me. I lent him some money that he quickly spent. Some time later, when I inquired about its whereabouts, he ‘announced that the company would have to default on his legacy debts because he couldn’t carry them’. He ‘calculated that if he was going to improve his balance sheet by defaulting he might as well do it spectacularly’. He defaulted on our mother as well. The nature of our relationship has changed, as might be anticipated. Our mother still loves him, although he defaulted on her too. Brothers must be different I… Read more »
I’m pretty ancient (78) therefore I remember well how businesses were run in my youth. The difference between then and now was that the very last thing you did was to borrow money, especially from banks. I remember one plumbing company founded by the owners grandparents, they had £1 million in the bank, £1 million out in loans and unpaid (yet) bills to plumbers and the last £1 million in unsold stock. One thing they didn’t do was grow (why did they or indeed, anyone need to?) Because of family fall-outs the business was sold to a finance business. They… Read more »
Good article The government hails the budget as ‘heroic’. They are sharing the glory when they roll out the ‘we are in this together’ mantra … generous to a fault of them to share the pride. They will be pinning medals on us on O’Connell Street next for being the best boy in class We are all heroes now is the message and presumably in fifty years time the incumbent version of the wolfe tones will be penning ballads about our collective courage and bravery Maybe this is our very own ‘1916’ moment. It’s just that we don’t know it… Read more »
David this Government doesn’t have an strategy, because they are doing what to do by their masters, and they don’t have the guts to fight for us. They are a bunch of well polished cowards, who are ready to screw the people of this Country, to get their pensions and privileges at any cost. And the electorate, that gave them a mandate, can only be excused, because most of them at the time, were so worried with day to day familly crisis , and believed all their lies. . Compare this bunch of eejits, to the Government that lead Iceland… Read more »
If the house of cards isn’t sorted there’s little point in restructuring our debt as more debt will be build up requiring more restructuring and on and on.
it was the sixties generation that banjaxed ireland, they are now the sixty somethings, they were the the top dogs in the banks, the professions and public service that made the decisions that ruined ireland. They were also as david mcwilliams pointed out the luckiest generation to live in ireland. The previous generation may have run an austere and dull country but at least it was solvent and independent and was master of its own destiny. Maybe it was growing up in the sixties and the liberal ideas then, they thought rules and systems didn’t matter. Of course this is… Read more »
i am guessing the austerian word is a none to subtle swipe at the Austrian school. well lets try to add up what decades of your Keynesian economics has given us. lets look at the streets to see the effects shall we…oh wait no need i see the Keynes approach to solving the issues which Keynes created is in full swing..jesus i mean what could go wrong. here is one thing, in 6 months we will get the story that the taxes didnt bring in what they expected. wow i mean seriously who would have thunk it…and their solution…you guessed… Read more »
Ireland is Bankrupt! Our Debt will continue to increase! This budget will throw countless thousands of families over the edge! Next Year, revenues will resume at pace, a downward trajectory. The Financial Institutions will accelerate the transfer of private assets to the banks! Social effects will become more pronounced! Government will become totally ineffective! The privatisation of State assets will continue with zero benefit! UNLESS THE IRISH PEOPLE WAKE UP! The ESM is a travesty of monumental proportions We now have the ESB and Bord Gais borrowing in the markets on behalf of the state Europe as it is, does… Read more »
There is no tolerance for Austrian economics in Ireland. Merkel’s underlings might be suggesting it as part of the improvement process. But the gombeens running the state system here, will not tolerate it because it does not fit their requirements. You cannot have economic policy based on objective principle, when the political system is rotten with participants whose goal is to have the state system as subjective and as powerful as possible. Therefore we have a superficial version, a good room version of policy that looks slightly Austrian. With Kenny appearing on magazines and getting awards. And they run the… Read more »
Pearse Doherty’s inspiring end to his floor speech on the budget speaks of Rosa Parks “1955 Rosa Parks refused to give up her seat on a bus in Montgomery, Alabama. As a woman and as an African American she had been taught to accept her lot in life; to accept second class citizenship; to accept that there were no alternatives. But one day she decided that enough was enough. She refused to give up her seat to a white passenger. When she was interviewed afterwards she said ‘The time had just come when I had been pushed as far as… Read more »
Where do we go from here.
This government has proved that it does not have the best interest of the low to middle class family’s and as these groups are in the majority the time has come to change the government , because anything would better that the last and the present shower if self serving tossers.
a href=”http://laroucheirishbrigade.wordpress.com/2012/12/05/mary-lou-mcdonald-on-the-budget-this-government-does-not-do-fairness/”>Mary Lou McDonald on the Budget: This government does not do fairness
“This is the sixth successive austerity budget, the sixth occasion on which government ministers announce a vicious attack on the living standards of low and middle income people and their families.
This Labour/Fine Gael government shares the same perverse instincts as the last Fianna Fáil lead administration; Shares the same unshakable belief that punishing struggling families is somehow fair.”
No “meekness” there, just truth.
Mary Lou McDonald on the Budget: This government does not do fairness
The country is spending 13 billion a year more than it earns. 5 years of that and the running costs of this country creates a bigger debt than the bank rescue ever did. The bank rescue is probably over, the 13 billion a year is stacking up merrily. The legacy debt in this country is not just the the bank rescue but the commitment to ridiculous wages and pensions given to our civil service in previous years. Its personified in the ridiculous Croke park agreement where the government signed up to commitments it cant fund´without borrowing. Only when we repudiate… Read more »
Finally one nice article David.
Just not sure you are still on the right path as every few articles you are changing sides :)
This one is spot on, no doubt!!!!!
There is a lot of talk here in favour of one or another economic or political system. Some contributors are now getting hung up on it and annoyed by the contrary views of other contributors. The truth is like a football system whether you play 442 or 451 doesn’t matter if you have bad players. We do not have the right people in the Dail or in permanent government regardless of their economic or political beliefs. They do not have the skill sets or confidence even though as in Fine Gaels case they mask that insecurity with arrogance. They do… Read more »
These conversations about economics, deficits and austerity confuse me. Money is an abstract representation of “stuff” and “what people do” to facilitate exchange, accumulation and investment in making more better stuff or doing new useful things. The world is (for now) a closed system and its economy is therefore by definition exactly in balance. There are two big problems 1) extreme local variations in the economic balance and 2) Systematic problems restricting the flows of money, leading to people doing less things and making less useful stuff, thus decreasing the pool. These 2 big problems can be solved by designing… Read more »
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