Judge ye not (or not yet anyway)
Estimates on the economy are just that. We are in the middle of a process and its outcome will not be clear for some time, writes Stephen Kinsella
Published 17/04/2011 | 05:00
DOCTOR Johnson once wrote: "Even God doesn't plan to judge a man 'til the end of his days. How can I?" Economic punditry forces us to sometimes judge a little too quickly. This column looks at an area where some forbearance needs to be exercised: forecasts of Ireland's growth rate and Ireland's debt dynamics.
Growth rate forecasts are estimates. Treat them as such.
Last week saw the downward revision of the International Monetary Fund's growth forecasts for Ireland from 0.9 per cent to only half of one per cent this year. The revision recognises Ireland's economy is slowing, but it has been jumped on by all and sundry as evidence that Ireland's recovery is necessarily doomed.
The key issue is the ratio of nominal output growth to the cost of debt servicing, given our level of indebtedness. When we grow strongly, we can pay down our debt. When we don't grow as an economy, but our debt does, we are in deep trouble.
The four-year plan, the EU/IMF loan agreements, all of the austerity the public have been asked to absorb, all of it will be for nothing if the economy does not right itself. Doom and gloom scenarios abounded last week as a result. Later, the Central Bank issued a more optimistic forecast; the economy to grow by 0.9 per cent, but who, really, will the international markets believe?
Now, I'm not saying things are rosy. They aren't. But it is important to note that these growth forecasts are just estimates pumped out by imperfect models built on imperfect assumptions. These estimates are subject to change all the time. The domestic part of the economy is starting to see some rebound and, to be fair, the new government is making pro-job noises, at least.
The EU and IMF monitor the performance of the economy and the government on a quarterly basis, checking to ensure that the items agreed in the Memorandum of Understanding by the last government -- such as spending cuts by government departments and public sector reorganisation -- are being implemented. These quarterly reviews are not box-ticking exercises. The EU/IMF reviews can suggest changes to policy as the situation on the ground develops, so there is flexibility and adaptation built into the mechanics of the plan. This plan, however, is scheduled to make Ireland the king of austerity policies worldwide.
The second big bit of news last week was the release of the IMF's fiscal monitoring document. This document shows the scale of cuts to the size of the Irish economy already, and looks forward to yet more cuts. Ireland's dramatic series of cuts to public expenditure, as well as its rapid buildup of debt, soaring unemployment rates, and collapsing price levels, mark us as an outlier on almost every chart produced by the IMF.
Cumulatively, Ireland's bank bailouts are so far the third biggest in history. Ireland's cutbacks and austerity measures are, so far, the most draconian of the advanced nations. The big news here is that we've taken enormous fiscal pain as a nation, with the expectation of more to come.
The medical metaphor is often used when talking about the EU/IMF and various austerity packages by the last government. We must "take our medicine" and "endure the pain", and so on.
The medical metaphor is apt, if harming the patient results in a chance of curing them. But the medical metaphor gives an impression of precision that economic policy making doesn't actually have. Really, the equivalent is surgery using oven gloves, wearing someone else's glasses, with a rusty butter knife, from the next room, while the patient moves around that room on a whim.
Lots of things can go wrong, but unexpected things can go right. That we are still performing drastic surgery on the Irish economy in the form of changes to Nama, cuts in expenditure, stress testing and recapitalising our toxic banks, absorbing insurance companies into toxic banks, considering debt forgiveness for households and privatisation of state assets says a lot about the seriousness of the situation we're in.
That said, we are in the middle of a process, with lots of uncertainty about the outcomes of this process. Not everything is going wrong simultaneously. We're not gods, we don't know everything. It may, quite simply, be too soon to judge.
But watch this space.
Stephen Kinsella lectures in economics at the University of Limerick
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