Danger of irrational exuberance on economic recovery
‘The most important antidote to inequity is to create employment’
Some recent commentaries would at times lead one to believe that our public finances problem has almost been resolved. And that with renewed significant growth the severe unemployment and equity problems that followed the crisis have largely been addressed.
Three years ago the economy of the Republic was still reeling from tumultuous years of economic setback.
Output after 2007 had declined on a scale almost never seen in peacetime anywhere, unemployment had trebled, employment had declined by almost 300,000 and large-scale net emigration had resumed for the first time in almost 25 years.
At times it seemed like the political system could not survive intact in the face of widespread anger and with huge numbers facing large-scale financial problems arising from negative equity, lost jobs and a fear that the euro zone might implode.
Three years on, things look a lot brighter. As some populist commentators fuelled the flames of discontent, most of the Irish population, it seems, got on with dealing with a crisis that was largely of our own making. There is only so long one can lament events and attempt to blame others, be it at a personal or societal level, but ultimately we must move on and try to make good the damage and plan for a better future.
Least affected often complained mostMany of those most affected complained least: the involuntary emigrants, the newly unemployed, the people trapped in negative equity and the young who took the brunt of the pain. Very often it was those least affected who complained the most: those in secure, pensionable jobs and many of the elderly who were largely protected from the effects of the recession.
Last year now appears to have seen a major turning point, with further large employment increases likely this year. A remarkable recovery in employment, then, will have occurred in just three years.
Again, as in 2007, no major forecasting agency predicted this turnaround.
There is no reason why the Republic cannot prosper in years to come and remain one of the high-income countries of the world.
The country has a healthy, stable democracy and a well-established rule of law. The skill levels of the labour force are the same as they were prior to 2008. There is a healthy openness to competition and entrepreneurship.
All democracies are flawed to an extent and economic debates are often fraught and misinformed, Ireland over the last six years being no exception. It is worth remembering therefore that economic policy is exercised in the political market place, and will continue to be so in the years ahead.
Economists may have forgotten their history up to recent times but so also do they often forget that economic policy and politics are inseparable. Having a solution to an economic problem is of little benefit if the political system cannot be assured of delivering on it without risking major instability, thereby exasperating the difficulties.
Huge inequities persist despite the recovery. The most important antidote to such inequities is to create employment which, as mentioned, is now happening on a large scale in the Republic. But there are still very high unemployment levels, more than twice those in the mid-2000s and far above those of Britain and Germany today.
Bringing about major further reductions in unemployment is the great social and economic policy challenge ahead.
There is also a strong intergenerational inequity resulting from the crisis. It is the younger age groups who suffered most. They bought houses at the top of the boom, with most of the older generation having long paid in full for their properties, purchased at times of much lower real prices.
There have also been reduced incomes for those starting out at work and fewer promotional opportunities and longer working lives for the younger sections of the population.
Grey powerA disturbing reflection of this is the exercise electorally of “grey power” in recent years, where as a result payments to over-65s, regardless of their circumstances, have largely been protected while those to other, younger groups have been cut.
I find it extraordinary, for example, that when travelling on public transport children from all backgrounds have to pay but I and others aged over 65, regardless of financial circumstance, do not. And very soon it looks like we will not have to pay GP bills either.
The other problems we face in the years ahead – resolution of the remaining issues of the banking sector, continued restoration of balance to the public finances and maintaining competitiveness – are all largely within our own remit and can be resolved.
But these problems remain writ large and for any lessening of efforts to reduce them we will pay dearly in years to come.
Short-term fluctuationsOne also should not be deflected from the medium- to long-term focus by the short-term fluctuations of financial markets or predictions of imminent doom or boom.
The world is a much, much more complex place than these would lead us to suggest. And with greatly increased global insecurity in recent times one must have contingency plans also for a likely worst- case scenario.
How easily people forget the past, even the immediate past, however. That is the real danger that confronts Ireland in the years ahead.
We still have a huge accumulated debt and continued large borrowing needs to fund day-to-day expenditures. Yet already there is an air of irrational exuberance evident in some commentaries leading up to the budget. Surely one might think we cannot repeat the mistakes of the 1980s and the much more recent past so soon again.
John O’Hagan is professor of economics at Trinity College Dublin. He is co-editor with Carol Newman of The Economy of Ireland (12th Edition, Gill & Macmillan) to be launched on Thursday.