Lobbyists and interest groups have had a field day advocating that the Government should borrow virtually unlimited amounts of money to "stimulate" the economy. Money was never so cheap, they say. The Europeans will pay. We can send the bill to future generations. The usual suspects for unlimited public spending like lots of subsidies and tax breaks, but "stimulus" sounds so much nicer.
The European Central Bank's task is to ensure that what its stimulus does is efficient rather than unlimited. William McChesney Martin, governor of the US Federal Reserve from 1951 to 1970, defined the art of central banking as "to take away the punch bowl just as the party gets going". Martin chose central banking as a career just ahead of becoming a Presbyterian minister and became known as "the happy Puritan" in economic circles when he got the balance just right. Stimulus is like sincerity in the words of Oscar Wilde, in that "a little stimulus is a dangerous thing and a great deal of it is absolutely fatal". The Finance Minister recently told reporters that he has received more claims for extra public spending next year, alias stimulus, than the entire anticipated Exchequer tax income.
A welcome note of caution at the weekend came from An Taoiseach, speaking in Brussels. Ireland is now a net contributor to the EU. The bigger the EU stimulus the more we pay. Free money from Brussels ended some time ago. The punch bowl is on our tab now - a sobering thought. We have to pay for punch bowls for other countries as well. Our capital spending in the National Development Plan was already above the EU average despite IMF concerns about weak assessment procedures here.
Stimulus must be efficiently designed. We had a full employment economy in Ireland in February last and public expenditure had grown annually since 2016 at by far the fastest rate in the EU. The public expenditure growth rate in Ireland was double that of Germany, the second ranked country in public spending growth. By 2021 public expenditure growth in Ireland was estimated to be 23pc higher than in 2016, 10 points more than the second country, Germany. In the EU-15 countries in this expenditure growth series Sweden was sixth, Finland 11th and Denmark 14th. Ireland's first place is way out of line with our EU competitors. It is remarkable that in the election this year Europe's fastest public expenditure growth country was deemed to be in a regime of austerity by most parties contesting. This utterly mistaken belief has underpinned the stimulus cheerleader movement since Covid.
Stimulus is more effective in a large closed economy with spare capacity than in a small open economy at full employment. Ireland this spring was most definitely in the latter category. To date the rise in unemployment has been heavily concentrated in hospitality and aviation. Sectoral programmes may be far more efficient than large government deficits. Stimulus in the naïve Keynesian model is kick and hope that the deficit may trickle down to target sectors bypassing the sectors which don't need stimulus.
In retailing, the shuttered small shops on Main Street have lost out to online and larger new stores on the outskirts. We cannot freeze the economy of mid-March 2020 and defrost it at some future point. Market economies are dynamic and continuously phasing enterprises in and out in periods of both expansion and contraction.
Stimulus must be flexible. Expenditures must be turned off as soon as the economy recovers. This will be difficult where, as the IMF has shown, the Irish record is to increase capital stimulus in a boom and reduce it in a downturn, with a pro-cyclical record. The Boris Johnson food in pubs and restaurants voucher may make more sense than Dustin extending the Dart to Dingle. The voucher gets closer to a slack part of the economy, takes effect quicker and is easier to shut down. Large capital projects have long lead in times, come on stream when the economy has already recovered and have massive cost overruns thus harming the competitiveness of our exporting economy.
As mentioned in the Dáil on Tuesday this week, projects such as the national children's hospital and the Dunkettle roundabout defy normal value-for-money criteria.
Many parts of the Irish public sector have an edifice complex with a huge bricks and mortar inbuilt bias. The Ministers and Secretaries Act, 1924, transfers responsibility from those directly in charge of projects to the minister of that department. It is some 50 years since Basil Chubb highlighted this avoidance of accountability in his seminal text 'The government and politics of Ireland'. The obvious absurdity of present practice is that from the stimulus perspective the more expensive the children's hospital the better because the stimulus is larger.
Stimulus programmes must not undermine an economy's efficiency. If every spending department is allowed to relabel poorly assessed spending projects as stimulus, then dud projects will have a new lease of life. Ireland has high cost difficulties in sectors such as health and construction. Without reform and improved competitiveness such sectors have no place in a stimulus programme.
Lobbying for stimulus reduces economic efficiency by diverting entrepreneurs from competing in the market to spending too much time in lobbies in Washington, London and Brussels, as well as in Dublin.
In an era of increasing inequality, the income distribution impact of lobbyists for stimulus must be examined. In Ireland a wide range of subsidy seekers support stimulus programmes that add to inequality. Their lobbyists are skilled in the art of An Beal Bocht, or the poor mouth.
The present surge in unemployment has been severe in hospitality and retailing. Both are low wage sectors and inequality has therefore increased. The burden has been borne by younger people in the affected sectors. A recovery programme for young recently unemployed low wage people in Ireland might be built around apprenticeships on the German model. This is an area in which Ireland has traditionally been weak.
Stimulus programmes must be targeted and independently assessed in published studies. They must emphasise the workers and the sectors directly affected by increased unemployment.
Stimulus programmes must be flexible and turned off as the economy recovers. They must not reduce allocative efficiency in the economy by diverting resources from directly productive activity. Stimulus programmes should not further increase inequality. Much of the cheerleading for stimulus in Ireland in recent months ignores all these criteria. The cheerleaders also fail to recognise that Ireland has had since 2016 by far the fastest growth in current government spending and the highest EU ratio of capital spending to national income. Stimulus needs more economics - not less.