Saturday 20 December 2014

We can't demand our money back when it never existed

Published 17/07/2014 | 02:30

Stephen Byrne's illustration
Stephen Byrne's illustration

MOST of an average person's health costs are incurred in the last two years of their life, according to the statistics. It follows that more full medical cards for the over-70s is a valuable concession - and an expensive one.

That is a reason both for favouring such concessions and opposing them.

A really hard-hearted economist (and there are some) might think that spending all that money in the last two years of life means it is largely wasted. Quite apart from the accusation of ageism, most would simply say that less public spending in this area leaves room for more somewhere else, with possibly greater public benefits.

Those were the arguments which swung around last week's vague commitment to such a scheme. But there was another one which really should have little part in the debate at all but which turns up regularly elsewhere as well.

This is the demand that losses incurred since 2008 should be restored. In the case of the over-70s, it was the abolition of full medical cards. The Government promise, such as it was, was welcomed as a step towards a full reversal of post-2008 decisions.

Reversal is in vogue, from working conditions in Dublin Bus to the salaries of new hospital consultants. Such demands imply a worrying lack of understanding of where we are, where we have been, and where we might be going.

The unpalatable fact is that the value of economic output (GDP) is still some €20bn less than it was in 2007. One can take some consolation from its having grown by about €10bn over the past two years, but it is obvious that not everyone can yet have everything restored to 2007 levels. Perhaps, as the new tanaiste said, everyone can have some improvement on last year, but even that is a big perhaps. Besides, improvement is not the demand politicians faced on the doorsteps during the recent elections.

More typical is the comment of one voter to one canvasser; "I want my money back!" We have all done a poor job in explaining to people like him that, in a very real sense, the money never existed in the first place. It cannot come back; it has to be earned afresh.

It is the case that economies are dynamic things, not just arithmetical constructs where one adds and subtracts. But nor are they magical devices, where conjuring up demand with borrowed or printed money can result in solid growth.

Two arguments are in danger of getting mixed up. One, which is exercising many great minds, is whether these conjuring tricks should be used to avoid deflation and compensate for the 
inevitable reduction in public and private debt. It is an important argument, and one that is certainly not on the side of the fiscal fundamentalists who say everything has to be done with real adjustments.

The other argument, frequently heard in Ireland, is that stimulus from borrowing more than is currently planned will deliver the goods. Timed correctly, and done properly, such a programme could assist an existing recovery and improve potential growth in the future, but the impact is limited and it cannot meet the kind of expectations we are talking about.

Mixing the two things up and thinking they can meet unrealistic expectations is a dangerous course to take. We have had enough of that already.

As much post-crash analysis showed, financial crises occur regularly and just about everyone has them at some time. But there is an obvious distinction between countries which have them rarely - such as Finland and Sweden in the 1980s - and those where they occur regularly, and loom even more regularly, such as Greece and, infamously, 
Argentina, whose World Cup woes may soon be followed by yet another debt default.

Ireland's place in this spectrum is a worry. There is a real sense that 1982 and 2008 were not two completely different events but two manifestations of the same thing. They were driven by an irrational demand for a standard of living and a level of public spending beyond what the economy could supply, and a weak political system which could find no way to resist such demands.

While this may be a problem for developed economies in general, it is a perennial crisis for some. The question we ought to ask is whether Ireland is one of those, and if so why and what is to be done about it.

Greeks and Argentinians can hardly fail to ask, "Why us?" but struggle to find the answer. In Ireland, the question is not asked. The post-crash slogan, "We are not Greece" was more than just a device for the pressures of the time. It reflected a belief that we should be numbered among the more fortunate nations where such crises are the exception rather than the rule.

If that belief is wrong - if there is some deeper malaise - the country is going to get into trouble again, maybe quite soon. The mauling of the government at the European and local elections, and the panicky response of the re-worked coalition, could well be the start of the next crisis, rather than part of the end of the last one.

It is peddling delusions to suggest that economic recovery means the end of really difficult choices - so difficult that the peddlers of delusion on the other side can be relied upon to call it "austerity". It is not clear if the country can avoid debt restructuring even if hard choices are made; it is very clear that it will run into another debt crisis if they are not.

There is no consensus on any realistic set of policies which could avoid such disaster. What further reforms are needed for public spending growth to be kept at affordable levels without the public services continuing to fall apart?

How is tax revenue to increase, as it must, while marginal rates fall, at least for some? How and when will we return to even minimal levels of public investment?

If there is a difference between stable countries and the serially unstable, it seems to be that the former frame their politics around economic realities and the latter consistently refuse to accept reality.

Ireland is not fully in either camp but the next few years will tell in which direction it intends to move.

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