Tuesday 17 September 2019

Stephen Kinsella: Our so-called economic truths are often based on faith, not evidence

We all carry unexamined truths around with us; they are the sometimes subtle assumptions held as self-evident, to the extent we defend without necessarily asking why we believe them in the first place. At the national level, some policies are sustained almost entirely by faith, rather than evidence, because of these truths.

I think it's worth assessing two of them today, namely our commitment to export-led growth at all costs, and the exit of the EU/IMF bailout. Let's look at what our leaders claim as significant, and we can get a sense that, no matter what, some truths are self-evident.

Ireland, like all countries, has a set of policy truths it must hold to, no matter who is in power. The United States, for example, must be militarily supreme – no matter who is in office – and the United Kingdom must hold its financial sector above all other policy concerns.

Since the time of TK Whitaker and Sean Lemass, Ireland's goal for development has been based on the assumption that a small open economy can trade its way to prosperity by attracting outside investment and expertise. From this unexamined truth springs light-touch regulation, dodgy corporate taxation practices, knee-bending to big business, and a host of other effects, some positive – like the hundreds of thousands of jobs created by foreign investors over the decades – and some negative.

We live through the myth of the plucky little go-getters, and push policies saying we're the best place to do business along with sundry soundbites. The unexamined truth of foreign direct investment's inherent goodness is a truth no Irish government can afford to address. There is a sort of theological commitment by government to court the international investor at all costs, to keep corporation tax low, and to be 'business friendly'.

Witness the Taoiseach's performance with billionaire Elon Musk at last week's Web Summit. When Musk mentioned he hadn't been to Ireland since he was seven years old, the Taoiseach simply said "Keep coming back, we need you," and continued, "if you want to come to Europe, we can compete with the best, so if you're going to do that, give us a chance and we'll give you a fair hearing and our workers will not let you down, believe you me."

I'm not saying the Taoiseach shouldn't tout for business but it's worth asking why this is unquestionably a good thing. Is it just the need for new jobs? Does he do the same thing with domestic business people?

On December 5, 2011, Enda Kenny announced "I want to be a Taoiseach who retrieves Ireland's economic sovereignty", a phrase he reiterated at the historic Beal na Blath in August 2012, pledging the Government "will not rest, until Ireland has reclaimed and restored its economic sovereignty". Public Spending Minister Brendan Howlin referred to it in his Budget speech, saying: "This Budget and estimates sets out. . . to restore Ireland's economic sovereignty."

The Government has a commitment to something called 'sovereignty', which is poorly defined, but in practice probably means self-determination in fiscal policy – they want to be able to spend and tax at will again. Since 1973, Ireland's practical sovereignty in this area has been progressively eroded by its membership of the EU.

Today Ireland is subject to the strictures of the EU's excessive deficit procedure regime because of our continuing macroeconomic imbalances, so a large amount of political wiggle room won't be coming back. There won't be another Charlie McCreevy "when I have it, I spend it" moment.

The fiscal compact, and the European semester, which determines the cycle of fiscal policy co-ordination within the EU, means our spending and taxation matters will be monitored closely from now on.

Finance Minister Michael Noonan is considering whether Ireland should take a precautionary credit line from international creditors. The criteria for accepting any loan facility should be fairly economic and automatic: how much will it cost in terms of extra austerity or oversight, and for how long, and what alternatives exist? If the benefits outweigh the costs, go for it. If not, don't.

Were I advising the minister, I would argue not to go for any precautionary credit line. Mr Noonan wants to minimise any risk premium attaching to Irish sovereign debt post-bailout, and given the €25bn wall of cash he has available to fund the State, combined with the clear appetite for European sovereign debt by big banks in particular, it makes sense to me at least to sue for relatively less austerity in the coming years.

The discussion on the precautionary credit line is entirely political. The economics are pretty trivial. There are the worries over any further loss of sovereignty, and worries over the corporation tax rate being brought up by national parliaments, which will have to ratify any credit line. So, potentially for the wrong reason, the credit line is not passing the political sniff test at the moment.

Export-led growth and economic sovereignty. Two truths which, when examined, turn out to have theological underpinnings bringing costs and benefits to our tiny, battered, open economy.

Dr Stephen Kinsella is senior lecturer in economics, University of Limerick

Irish Independent

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