Sunday 22 April 2018

If the wheels almost came loose in the noughties, hope hangs on 2020s

I did not much enjoy my one and only trip on a rollercoaster. The wheels on the little car are in the middle, so that it will seem about to fall over the edge, just before it turns sharply. Even though I knew that, on each bend I was convinced it had gone too far this time and we were all done for.

Just like the economy, really. There have been many great ups and downs and sharp changes in direction, but it never entirely left the track. This time, in the middle of the worst downhill ride ever, people are not so sure.

It may be some small consolation that they were not always sure in the past either. In the 1950s, some said that Irish independence had been a mistake.

It was the 1980s -- at least to my recollection -- that the phrase was first coined: "Will the last person to leave, please turn out the lights?" I expected never to hear it again, but it's back.

The despair of the 1950s was followed by the miracle of the 1960s, and the despondency of the 1980s by the even greater miracle of the 1990s. You never know.

But those dates tell a worrying tale. On past patterns, the 2010s are the next horrible decade. Hope must reside in the 2020s.

Of course, economic cycles do not coincide with calendar decades. Human minds tend to apply these convenient shapes, and the exact timing is not important. So, in my little series in August, I looked at the year which began each decade since 1970. The idea was to find patterns; and also to point out what analysts thought in those years, and how that differed from the future which actually transpired.

There are certainly patterns -- or, to be more precise, issues which recur again and again over the 40 years. Of these, the most consistent may be an insistence on living standards higher than the Irish economy can really deliver.


This manifests itself in rapid rises in both wages and public spending financed by borrowing. All countries wrestle with the problem of keeping demand for higher living standards in line with supply of economic output. But Ireland does seem to be one of those countries where the problem is more acute -- albeit by no means the worst, even in Europe.

One plausible explanation is that Ireland is not as rich as its near neighbours, but its population is just as sophisticated. It is difficult to explain, never mind sell, the proposition that we cannot afford the same living standards or public spending as the French, Dutch -- or British -- and must make harder choices.

There is no doubt that the country closed that gap in the past 40 years, but we still tend to delude ourselves about how much it has done so. We have not overtaken any of the EU-15 countries which were richer than us in 1970 -- we just got closer.

Delusion reached levels approaching insanity in the bubble, of course, but it has always been there. Such pressures probably go a long way to explaining the tendency of government policy to reinforce both booms and busts. In this case, there is hard statistical evidence that this "pro-cyclical" pattern is more pronounced in Ireland.

As with the rollercoaster, Irish politicians may have come to believe that they could safely ride these ups and downs. It often seemed to be Bertie Ahern's actual policy, and was certainly succinctly expressed by his finance minister Charlie McCreevy, who said, "When you've got it, you spend it, and when you haven't, you don't".

Nothing could be further from the truth, in terms of wise policy, or closer to the reality of what actually happened. Ironically, the success of the 1990s fiscal correction may have sown the seeds of the present disaster. The experience of Fianna Fail in particular, was that it could always be fixed -- ideally after an election.

The other alarming pattern of the past is the persistence of high unemployment. It came as a bit of a shock to realise it was in double digits for most of those past 40 years. It is true that employment increased dramatically during the period, but so did the labour force. The present 13pc jobless rate is, alas, closer to the median rate since 1970 than were the low levels of the 2000s.

Public sector

It will be an even harder sell to advocate lower living standards for those in work in order to improve the prospects of those without jobs. It should go without saying -- but doesn't -- that the fourth poorest country in the EU-15 (we are) having the highest levels of public sector pay (we do) is a recipe for both fiscal problems and higher unemployment.

Economists look for signs of excess consumption in the balance of payments figures for the country's dealings with the rest of the world. Intriguing, therefore, to see the Central Bank warning 40 years ago that the International Monetary Fund (IMF) might have to come in -- not, as now, because of fears over budget deficits, but because a 10pc payments deficit was draining the country of foreign currency.

There is no balance of payments deficit now, but consumption is about at the level of 2003, and unemployment is again in double digits. The structure of the domestic economy will have to change -- on top of all that fancy knowledge-based exporting -- if we are ever to get spending, output and employment married in any kind of harmony. The astonishing thing, after four decades of what we might call the modern Irish economy, is that there is no beginning of consensus on these matters.

As the social partners' thinktank, the National Economic and Social Council, said in its report last week, there is no common view on the kind of society we should be trying to create. Yet these differences do not correspond to distinctions between the political parties. On the contrary, the images of the three main parties are a lot more blurred than 40 years ago.

Those who do not learn from their mistakes are bound to repeat them. Why did Ireland not learn from the errors of the past four decades so that, each time they were repeated, the consequences were worse than on the previous occasion? The answer to that central question must come, not from economists, but from politicians. It seems no exaggeration to say that our futures depend on them coming up with some answers.

Irish Independent

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