Curing the fiscal crisis could kill off the real recovery
The Government is focusing all of its energies on only part of the problem, writes Anthony Cronin
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'ANNUAL income twenty pounds. Annual expenditure nineteen and six. Result, happiness. Annual income twenty pounds. Annual expenditure twenty ought and sixpence. Result, misery."
That, you may remember, was Mr Micawber's philosophy of life. It appears to be the Government's also. They are well aware that there is a fiscal or financial or, in plain terms, a book-keeping crisis.
But they seem far less aware that we have a second crisis, the grim realities of which affect people more immediately, and more deeply -- that is, an economic crisis.
The Government is concentrating all its energies on a solution to the first crisis, the fiscal one, but at times it seems either confused between the two, or completely oblivious of the second.
They were locked away in debate with the so-called social partners for 10 days or so about a series of measures which may, or may not, improve the look of the books this year, while outside, the economy was falling to pieces.
Shops, manufacturing, businesses of all kinds were closing their doors. People were losing their jobs and some were looking forward with understandable dread to losing their houses as well.
It is, apparently, easy to confuse fiscal problems with economic ones. But by the grimmest and most cruel of ironies, the measures taken to cure the fiscal crisis may finally have the effect of killing off the economy, decreasing the level of economic activity still more sharply.
Every move which seems to offer alleviation of the one is a blow struck at the other. Every euro taken out of the economy -- 'saved', if you like -- is a euro less in circulation. Every person employed in the economy is creating activity around him or herself. Not only may such a person be supporting dependents, but they are stimulating economic activity with every cent they spend. This is the 'multiplier effect' which the great British economist JM Keynes was the first to observe in the Thirties. He said the multiplier could, in certain conditions, be as much as nine to one.
And in India and other places, you can almost see this happening under your eyes. In the case of a small, developed, woefully open economy such as ours, it is likely to be much less. If people go North to do their shopping in Newry, they are reducing their own multiplier here to whatever extent.
When I was an economics student in UCD in the Forties, Keynes haad still not been admitted to the canon there, and you risked the disapproval of examiners by citing hisworks or even mentioning his name. In the Department of Finance, this still seems to be the case.
To all appearances, the department, which clearly influences Cowen and Lenihan, still clings with some ferocity to the older orthodoxy. And one imagines that any attempt to suggest a different view of things might be met with the same response as I encountered in UCD all those years ago.
A strange thing about the multiplier effect is that it is greater in the case of a comparatively poor person than it is in the case of a comparatively rich one. The rich are accustomed to looking proudly on their chauffeur and gardener, because to employ such persons creates employment, and, of course, a rich person of enterprise and capacity may create a business. But, generally speaking, the poor man's euro has a more immediate and far-reaching effect. This is a strong argument for taxing the rich and distributing the money by one means or another in a time of recession.
The Government might also reflect on this. First, no government has ever succeeded in straightening out the books and significantly reducing its debts unless the economy has been somehow booted into life. But even supposing they could, what then? Mr Cowen says that if we get the books in order we will be well placed to take advantage of the recovery when it comes. But if he does succeed in having the books in order when the first of those eagerly anticipated green shoots is seen, what if there is no economy left? If the young have all emigrated and the rest have had the skills, the enterprise and even the hope knocked out of them?
Second, when economies are on the rise, quite wondrous things can happen. Quite staggering deficits can be cleared in an amazingly short time. Clinton succeeded in balancing the US budget in his first term of office, even though he had inherited the largest debt in American history from the era of the vaunted Reaganomics. When Charlie set about the task with cheer and determination in
1987, he managed it in a remarkably short time, though at some cost -- which was urgent and necessary because of the huge interest rates we were paying on our debt.
The net result of the decision taken after all that intense confabulation with the social partners was a saving of €1.5bn. Nobody cheered. But when Cowen stated the Government's determination to achieve further cuts ranging from €2bn to €4bn per annum in the five years ahead, everybody gazed in dismay. They could see a future which consisted entirely of unending hardship for no result which gives anyone any joy.
But the statement could also be seen as evidence of the disconnect between the economics of our rulers and those of the real world.
That is not how the economics of the real world unfold. In the real world the economic picture can be unimaginably different from one year to the next. Budget deficits can vanish out of actuality as quickly as the snows of yesteryear.
And the important thing for our Government is the distinction between the financial crisis and the crisis in the economy. And that most attempts to alleviate the financial crisis will only further undermine further the economy. Improvements in the economy, on the other hand, will in themselves be alleviations of the financial crisis and will, of themselves, perhaps go a surprisingly long way towards nullifying the debt which was incurred to produce them. Most governments, including the new administration in the United States, seem to realise this. Why is ours still clinging to an opposite viewpoint?
This country is bulging with enterprise, with ingenuity, with skill and with willingness. Money must be left in the economy, or introduced into the economy, or perhaps, in the case of the disgracefully run banks, commanded into the economy in sufficient quantities to enable them to find outlets.
We must not wait to greet the green shoots until our books are faultlessly balanced. We must sow them and nurture them, wherever and however we can.
