| 7.4°C Dublin

The incredible shrinking man versus the doctor

I don't know if it's him or me but I generally don't know what the Taoiseach is talking about anymore. I'm assuming he does, or thinks he does. Best to give him the benefit of the doubt.

This is what he said during the week when he was tackled about the banks not loaning to small businesses, something the Government had promised they would do. Apparently that plan, involving a promised €3bn a year to SMEs, "has to be looked at very carefully" because "we have already given credit lines from the banks to ensure, on the basis of their successful recapitalisation, that they'll be in a position to have credit lines to business".

He went on to say, "the issue of the State being further guarantor in respect of loans to business in addition to what security business is already providing is something that has to be very carefully considered". He concluded by saying that the working capital needs of small businesses "are best provided for once the full recapitalisation of the banking system is in place and that's at an advanced stage".

I think what he appears to be saying is that the credit they had promised to small businesses will not now be happening because the banks need more capital before they will be in a position to do this.

We were told, of course, that the reason we needed to save the banks was so they would inject credit into the economy. To counteract the credit crunch. But now Cowen seems to be telling us that the recapitalisation of the banks is the very reason we can't give credit to Irish businesses. So we're killing the economy to save the banks, which was supposed to save the economy with credit, but now that's actually going to kill the economy because there can be no working capital for anyone else because the banks need it all. So we killed the economy to save it, but the thing that was supposed to save it is killing it.

Then again, this kind of backwards thinking is entirely consistent with government policy. The week before last the Taoiseach explained to us that we need to do three things now. Cut back, raise taxes and grow the economy. He presented this as a coherent strategy, despite the fact that the first two essentially rule out the third. It's the equivalent of a doctor saying: "We are going to save the patient's life by killing him."

Much of this rubbish Cowen and his people talk is not actually stupidity on their parts. It is often because they can't admit the truth of what they are doing because it simply wouldn't be palatable to people. The Government's strategy is actually to keep deflating the economy until some magical point of competitiveness kicks in and then we hope that we will piggyback on some international growth through exports. We will become a cheap country and this will be good value again. But in the meantime, hundreds of thousands of people will lose their jobs and have their wages slashed and lose their pensions and any equity they had built up in their homes. But it will all be worth it in the end.

Increasingly it looks as if the growth through shrinkage theory is flawed. Take the idea of responding to what is essentially a demand-led recession by killing demand even further. Is this not simply another version of how we got things so wrong the last time? The experts who now know, with the benefit of hindsight, exactly where everything went wrong in the boom tell us that the big problem then was that our policies were pro-cyclical.

We had an overheated economy and we threw more coal on the fire in the form of tax incentives to buy property in a generally liberal, low-tax, easy-credit climate. We should apparently have been pursuing counter-cyclical strategies; we should have been trying to cool it down. Personally, I would have thought that charging people up to 9 per cent every time they wanted to buy a new house was fairly counter-cyclical to the overheating property market, but then again, that wasn't much good against ultra-low interest rates and banks throwing money at people.

But surely the policy of deliberately deflating this country's economy, to counteract the fact that it is shrinking anyway, and encouraging a homegrown credit crunch on our small and medium businesses to counteract the effects of a worldwide credit crunch, is doing exactly what we did when we were fanning the flames of the boom, but in reverse? Essentially what we are now doing is trying to grow a shrinking economy by shrinking it further. It just makes no sense and you can be guaranteed that when all the same hindsight-led geniuses tell us in a few years where it all went wrong in the great Irish depression of the Noughties and early teens, they will tell us that we should have acted counter-cyclically.

They will say that we all went mad and lost the run of ourselves, and they will ask why no one shouted stop and why no one suggested that the way to grow an economy might be by stimulating it. Already this question is being asked around the world. Ireland is now being held up in many quarters as an horrific example of what austerity can do.

You could point to hundreds of august publications worldwide. But for a change from the FT and the like, let's take the Guardian's recent terrifying but sensible read of it: we tripled unemployment in this country because it was deemed to be a price worth paying to show the financial markets that we were serious about cleaning up our mess; we won plaudits for doing so, and then our economy promptly bombed even further and our bond yields went to record highs. We are now, the Guardian reckons, close to locking ourselves into a permanent depression and deflation, from which the only escape is default.

Dr Peter Bacon was talking about the need to stimulate the economy last week. He summed it up in a nutshell when he told Damien Kiberd on Newstalk: "I have never heard of an economy that has deflated its way to recovery." He suggested a few ideas for stimulating growth to Emmet Oliver in the Irish Independent. He reckoned we should sell off State assets, which are owned by the people, and use the money to save people who need to be saved from negative equity. Those people would then become functioning members of the economy and might even start consuming and transacting and going to the pictures again.

Bacon admits his ideas are a bit unorthodox and you might not find them palatable. But we do know stimulation works -- just ask the car industry, which was brought back from the brink of death in this country by way of a modest stimulus package. Should we introduce scrappage schemes for other big-ticket items like white goods and furniture? More furniture is made in Ireland than cars, and it would also breathe some life into the retail sector in general. Should we cut VAT a bit? If an economist works out the elasticities of it or whatever, they could probably find a level at which you could cut VAT so that it would increase the total VAT take. Similarly, if they abolished stamp duty or cut it to a minimum, they wouldn't lose much given that the total take on residential stamp duty is negligible now, but they would get it back in other ways as people started to buy houses and furnish them and paint them.

Older people might even start trading down and filling up all those beautiful city centre apartments you can't give away, and this would allow young people with families to re-inhabit the suburbs. Communities would be revitalised and local businesses might start taking off again. There must be a hundred ideas out there about how you could, very cheaply, breathe life back into this economy. And let's face it, when you've got nothing to lose, everything's cheap.

But instead, they're going to stick to the plan. Deflate further, so jobs go, then the tax take goes down even though rates of tax go up, and they spend more and more on social welfare -- and that's supposed to help reduce our deficit. It makes no sense to you and me, but in the crazy mixed-up world that Brian Cowen and the rest of them inhabit now, it is a plan, and it is apparently the only plan. Terrifying.

Sunday Independent