Thursday 17 October 2019

We told you so and now even the IMF realises we were right

Ireland cannot continue to sacrifice everything, even people's lives, in order to balance the books, writes Brendan O'Connor

YOUNGER readers won't believe this but there used to be a time when the IMF was the bogeyman in this country. If we didn't behave ourselves, the IMF would come and there would be no pussyfooting around. They would slash public sector wages in half and double taxes and get our house in order in jig time. This was before we learnt to live quite casually with the fact that we are no longer an independent country and that we are subject to something called the troika, one third of which is the IMF.

That would have been unthinkable back in the day, that we would not be governing ourselves. Back then, it was regarded as the ultimate shame if the IMF had to come to a country. It was something that happened to banana republics in South America and basket cases in Africa. The IMF had come to the UK once but that was an aberration, apparently. It really wasn't something that could ever happen in so-called developed countries.

Little did we think that we would look back and wish that we had invited in the IMF, that they were in charge. Little did we think that the IMF would turn out to be the most reasonable foreign ruler a country could hope to have. But we didn't manage to get just the IMF in. Instead we got saddled with EU zealots as well, and despite the IMF's increasing best efforts, we are still being slowly ground into the dust.

While the IMF used to have the name of being all about making people balance the books fast, it has become an increasingly pragmatic and realistic institution in the last few years. It has tended to be the most sceptical of the big international institutions when it comes to austerity at all costs, and it has been the one that has cautioned most about the need for growth as well. This surprises some people because the IMF is regarded as a right-wing organisation stuffed with Yankee capitalists (the worst kind). But then again dismay about austerity has not been limited to the left. It has been, as Fr Jack would say, an ecumenical matter. Only the other day I found myself in heartfelt agreement with a press release that arrived in my email from Joan Collins TD. In terms of economists, there has been agreement from across the left-right spectrum that austerity unchecked could be as, if not more, dangerous than capitalism unchecked was.

The IMF took its distaste for austerity a step or two forward last week. Christine Lagarde has now upset a lot of people, and attracted much criticism internationally, by coming out and saying straight that Greece and Spain should be given more time to balance their budgets. Her point seems to be that when there are so many countries engaged in austerity, it doesn't make sense for them all to do it so quickly at the same time.

The idea of austerity was partially that the countries indulging in it would avail of export-led growth. But with the whole world now in the doldrums, that's not happening.

Of course, Lagarde's increasingly trenchant opposition to 'austerity now' is based on the fact that the IMF admitted last week that it was staggeringly wrong about austerity. In its latest World Economic Outlook, subtitled, Coping with High Debt and Sluggish Growth, the IMF couches its spectacular mistake about austerity in muted jargon -- "Activity has disappointed in a number of economies undertaking fiscal consolidation", it says, "Negative short-term effects of fiscal cutbacks have been larger than expected".

A minor accounting error, you might think. But what is, in fact, the case is that advocates of austerity understated hugely the effects of austerity on an economy. In fact, the effects of austerity are, in some cases, more than three times what they were thought to be. In other words, austerity measures have been devastating economies three times more than anyone thought. In other words, austerity has finally been hugely discredited by the very people who brought you austerity. This massive error in judgement, one that is ruining the Irish economy and those of many other countries, has slightly been brushed under the carpet. But it is there in the figures.

The figures are quite simple. The IMF, and other proponents of austerity, thought that for every one euro cut in government spending, 50 cent would be wiped from a country's output. This "multiplier" of 0.5 was based on previous studies. Now the IMF admits that since the beginning of what it calls "The Great Recession", the "multiplier" has actually been 0.9 to 1.7 per cent.

In other words, for every one euro cut from government spending, a country's output could fall by up to €1.70. This is staggering. They were all wrong and we were right. What we saw going on around this country -- the wasteland that we saw austerity create -- was real, even though they tried to tell us it was not.

This dawning realisation of the massive mistake that austerity has been is suddenly now dawning all over. In the IMF's other big document last week, A Progress Report on Fiscal Adjustment, the IMF addresses the fact that unemployment is now becoming a more urgent issue in countries like Ireland than balancing the books is.

As unemployment keeps rising here to levels no one expected, despite a massive outflow of young people, and as unemployment hits a staggering 25 per cent in Greece, the IMF now concedes that, "for economies in which unemployment has risen sharply in the wake of the crisis, the immediate priority is to restore labour demand" and suggests we should be pursuing "fiscal consolidation in the most growth-friendly manner possible".

So the good news for Ireland is that everyone is now admitting that the approach up to now has been wrong, and that making balancing the books at all costs the priority over everything else is not the right approach. We cannot continue sacrificing everything -- by which I mean people's lives, the real lives of real people -- to balance the books. Indeed, as anyone with any vague knowledge of economic cycles will tell you, the idea of deliberately tightening things even more when things are already tighter than they've ever been is economic suicide.

It is akin to that great crime committed in this country in the good years -- "pro-cyclical economic policies". While we probably were guilty in this country during the boom of fanning the flames of what was already an inferno, why make the same mistake in reverse now? Why pour water on top of the dying embers of our economy? But that is exactly what we are doing.

Logical economics is that governments be allowed to run a deficit in bad times to iron out downturns, and then, when things are good, you run a surplus (which, in fairness, we generally did in this country in the good times). To decide now, when things are worse than any of us have ever seen things, that we have to balance the books immediately, is madness. Most eminent economists knew this all along. We all kind of knew it really. Now that Christine Lagarde and the IMF have fully accepted it, it is really only our German friends still pushing the economic-suicide path.

Look, we all know we have to pay our debts. We all know we can't keep running the country indefinitely on borrowed money. But armed with the IMF's new information and new outlook, should our boys, when they meet the troika in Dublin next week, not be looking them squarely in the eye to say: "OK. Now that we've all accepted that the path thus far was catastrophically wrong, now that we accept that you got the numbers wrong, that the approach didn't work, let's talk about the wisdom of causing untold pain to a people already teetering on the edge by taking €3.5bn more out of this economy in December."

Sunday Independent

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