Deflationary policies have little chance of succeeding
OPINION:Assuming that Ireland will recover by increasing exports is a high-risk strategy, writes DAVID BEGG
NOBEL PRIZE-winning economist Joseph Stiglitz gave an interview
to the BBC this week in which he argued that the $780 billion stimulus package implemented in the US was not adequate and he called for a second such initiative.
It is interesting to note that most countries have been trying to respond to the recession by stimulating their economies.
When the private sector contracts the normal reaction is to expand the public sector to maintain demand. In Ireland the policy response has been to invest hugely in rescuing the banking sector but otherwise to act in a pro-cyclical way by deflating the economy through cutting public services and demanding cuts in social welfare, the national minimum wage and wages generally in the public and private sectors.
It is a policy predicated on Ireland being able to recover by increasing its exports when and if the stimulus packages of our trading partners begin to take effect.
It seems to me that this is a very high-risk strategy for a number of reasons.
In the first case these policies will hit personal consumption in the economy which in recent years amounted to about 60 per cent of GNP. It grew at a rate of 9 per cent per annum between 2005 and 2007 but by the first quarter of 2009 it has already fallen by 10 per cent.
In the second case our openness to trade leaves us very vulnerable to global economic conditions. According to the World Bank the dollar value of exports in the 48 countries for which final data for May are available was about one-third lower than in May 2008.
An economic historian at the University of California, Barry Eichengreen, estimates that trade in this crisis has contracted by more than it had at a comparable stage of the Great Depression.
The point is that we know that pro-cyclical deflationary policies will drive down the domestic demand side of the economy and increase unemployment but there is no evidence to suggest any immediate boost to exports which would counterbalance this.
But what about the prospects of benefiting from a recovery in world trade by improving competitiveness? There is much talk about mythical “green shoots”.
If Stiglitz is right, then America is a long way from being out of the woods. Moreover,
it is necessary to understand that there are two major causes for the collapse in world trade.
One is the implosion of the global financial system. If it is the brain of the global market, then the whole system is still in intensive care. The other is the imbalances in trade, savings and currency reserves that globalisation has built up between East and West.
In reality we are in a space where Europe is depending on America to create the recovery and America is waiting on China to redress the imbalances by fostering domestic demand in its own economy.
Consider, for a moment: how realistic a prospect is this?
Chinese policy is to peg its currency against the US dollar, allowing a microscopic rise in the value of the renminbi over time. To change that policy, and allow a massive fall of the dollar against the renminbi, would be a massive act of self-sacrifice by China and a massive signal that it intends to move away from an export-led strategy towards developing its home markets.
Many academic discussions of the imbalances tend to assume that the US, or the IMF, would in some way dictate to China the course of rebalancing.
It is now clear that the dictating will be done in the other direction. China has already unleashed the world’s biggest state spending programme in response to the crisis, pitching 15 per cent of its GDP into a stimulus package in November 2008.
But creating a mass consumer market in China to buy the goods that were once exported to the US and Europe would involve turning Chinese workers from the low-paid wage slaves of the world into the consumer spenders of the world. It seems to me to be a big ask which at best is unlikely to resuscitate global trade any time soon. So when economists make demands for sacrifices by ordinary mortals they need to be interrogated as to the practicality of what they propose.
A very formidable deflationary coalition has been assembled in support of current policy. This was in evidence at the MacGill Summer School – an irony given Patrick MacGill’s commitment to working people – and it includes many of the State agencies like the ESRI and IDA.
But, I believe anyway, there is a growing chasm of scepticism between the elite and the population at large concerning the efficacy of the policy prescription. We must ask ourselves whether any country has ever deflated its way out of a recession or whether pro-cyclical fiscal policies, having accelerated our descent into crisis, can be our salvation now.
And finally, there is the moral consideration for the hardship these measures will inflict. Colm McCarthy said he had to leave his conscience outside the door in compiling his report. Surely that is not an option for politics. Is there not a case for a threshold of decency beyond which we will not go? We must all try to act responsibly but in solidarity with one another.
David Begg is general secretary of the Irish Congress of Trade Unions and a member of The Irish Times Trust