Tuesday 25 October 2016

Sugar-coated storytelling dressed up as an economic forecast

Published 29/04/2015 | 02:30

A table showing labour productivity growth projections based on the Government's Spring Economic Statement
A table showing labour productivity growth projections based on the Government's Spring Economic Statement

Today, this column is going to be uncharacteristically blunt. This grumpiness is because much of yesterday was spent reading the 62-page economic document that the Government unveiled as part of its new 'Spring Economic Bulletin.'

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These are hours I will never get back, so you will forgive my tetchiness when I tell you that this document purports to forecast the economy's growth path over the coming years without telling us how or why the economy is likely to achieve these growth rates. As a result, its more a work of creative fiction than economics.

What's more, not only does it tell us nothing about the how or the why, it's pretty ambiguous on the what.

By the "what", I mean, what type of growth are we talking about?

There are two types of growth. Yesterday's voluminous Government public relations document doesn't distinguish between "good" and "bad" growth.

Good growth is growth that is shared among the citizens in the guise of higher wages. Bad growth is growth that is recorded by all of us working harder and spending longer hours at our desks or workstations or whatever, without any increase in wages. This implies that all the fruits of this type of growth don't go to workers but to landlords and - to use that Marxist expression - to the owners of capital.

Typically, these are the already rich.

You will know that I am no Marxist, but I am concerned about who gets what.

So standing back, you will have heard lots of coverage and spin yesterday morning in the Dáil and elsewhere, but as far as I can tell, the what, why or how questions have not been answered.

They haven't even been asked!

The Government claims that there is going to be growth for the next few years, which is great. But what does it mean for those of us trying to plan our lives in this economy?

In order to work out what its assumptions are and why they matter, let's go back to first principles in economics.

Question: What do you think makes an economy rich, what makes wages rise and incomes rise?

Answer: The productivity of labour added to growth in the amount of time spent working makes us rich.

Growth with productivity is good; growth without productivity is bad.

In all these big public relations reports issued yesterday as part of the 'Spring Forecast', the devil is in the detail. Yesterday, the Government claimed the economy is going to grow at 4pc, but if we dig a little deeper, it doesn't explain how. Where's the devil?

The Government doesn't explain if this is good or bad growth. Maybe it doesn't care? But that doesn't mean we shouldn't care too.

Hidden deep in the entrails of the report are a few clues. On page 9 is a small table in which some detail begins to emerge. Table 5 shows us that labour productivity growth is going to fall from 3pc this year to 1.2pc by 2017 and remain at 1.2pc until 2020.

Look at the table. We have reproduced it for you here.

This is very important because it tells us that the Government is talking about an economy that grows without productivity. Therefore, wages are to be paid without productivity. This means that wage rises either must remain low/unchanged or profits have to fall significantly.

A 4pc growth rate without large increases in productivity implies your wages may well be falling as the economy grows or, at best, your wages will be static. On the other hand, wages may rise, but if that happens then profits made by business and corporations have to fall.

Try to sell that inconsistency to IBEC!

Before we continue, let me explain this productivity conundrum.

Think about the difference between 10 men digging a ditch with spoons and one man digging the ditch with a JCB. The lads with the spoons have to toil away to dig a ditch. In contrast, the lad with the JCB just has to pull a lever or two and the job is done.

The cost of the job is €150. The lad with the JCB gets paid €100 a day and there is €50 profit for the guy who owns the JCB. The guy who owns the JCB has to pay €10 interest on the loan he took out to buy the JCB, so his profit is €40.

Now think about the lads with the spoons. They are paid €10 each a day. And the gaffer who is running the job gets €50 profit less the €10 it cost to buy the 10 spoons. If the lads want more wages but their productivity doesn't go up, either the price of spoons has to fall or the gaffer's profits have to fall.

For the workers, both are doing the same job, but in one case the worker earns a decent crust; in the other the workers earn subsistence wages.

The difference between the two sets of workers is capital; in this case, the JCB.

The JCB drives up the productivity of the lad who drives it. Without this productivity, he would get paid €10 a day but he doesn't because he can do loads of jobs that day and make yet more profit for his employer.

So you see how productivity is the difference between good growth and bad growth.

If you forecast an economy to grow without productivity, then you must be implying that the growth of the economy comes from more people working at lower wages than before. Or maybe, more worryingly, the growth, if it comes without productivity, comes from more credit being injected into the economy to temporarily boost the growth rate.

This borrowing from tomorrow for today's growth merely gives the bill for today's good times to the taxpayers of tomorrow.

So growth without productivity - which is what the Government unveiled yesterday - means more immigration and/or more personal borrowing, taking money from your kids to finance your partying.

The Government's shiny new 'Spring Economic Bulletin' looks great but reveals absolutely no thinking regarding the type of growth we want to have in this country, the way in which we might achieve this recipe and what has to be done in terms of investment and education today to attain these goals tomorrow.

The 'Spring Economic Bulletin' is sugar-coated storytelling, dressed up with the aid of pseudo-scientific charts and graphs as economic analysis. It is not economics. Rather, it belongs to the teenage fantasy genre of creative fiction.

Irish Independent

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