Notes on the Front

Labour is quickly approaching a crossroads. It is seemingly torn in two directions: a new stimulus strategy that prioritises rising unemployment and declining economic activity; or an accommodation with the orthodoxy, compromising within parameters laid down by the deflationists (or just as worse, paralysed at the crossroads unable to choose). The Labour Party conference provided evidence it was looking in both directions and that’s the problem: soon it will have to choose. And the hope of a progressive economic alternative lies in the balance.

Eamon Gilmore’s Party Leader’s address was an example of this. His premise was firmly set in a progressive critique:

‘And what makes Labour's economic policy different can be summed up in a single four letter word: JOBS . . . That's the problem in the public finances. The cost of job losses and the taxes lost because people are no longer spending. The problem in the public finances was caused by the downturn in the economy, not the other way around . . . the public finances can only be restored to order by getting people back to work. We are not going to solve the economic crisis unless we put jobs at the heart of everything we do.’

Eamon is right. Any critique of the fiscal deficit, the collapse in tax revenues, the dramatic decline in our GDP – all must start with jobs and consumption. This makes it all the more disappointing that, in a week when Fine Gael launched its 100,000 job stimulus plan and Sinn Fein produced a range of employment retention / creation measures, Labour failed to intervene with a job creation policy framework. It’s not that Labour doesn’t have the material. Eamon listed a number of past proposals and unveiled two new ones:

• A Graduate Work Placement Scheme that would place new graduates into temporary work places. 
• An employers’ PRSI cut for eighteen months when a new job is created and filled by someone who has been unemployed.

These are not so much policies as ideas. The details have yet to be worked out – the operation, the costs, the target number of jobs created. And in the case of the PRSI cut, it may not be a good idea since the deadweight costs may be quite high (i.e. cuts in PRSI may benefit jobs that would have been created without the subsidy). One OECD study suggested that up to 60 percent of jobs so subsidised would have been created anyway. In any event, during a recession where employers are cutting output and jobs, a PRSI-cut to create employment may have few takers.

Still, even without a framework or a narrative, at least this analysis looks in the right direction. But, looking in the other direction, Eamon stated:

‘Getting people back to work, and restoring the confidence to buy among consumers is key to solving the crisis in our public finances. But that crisis is now so bad, and so urgent, that it can not wait for the new jobs and the new spending.’

One can empathise with this, to a point. Fianna Fail’s procrastination and paralysis has hurtled the fiscal deficit into the stratosphere. The whole point of a stimulus is that it should be ‘timely and temporary’. However, even were a stimulus programme – even on the grandest scale – introduced tonight it would certainly be late and it would be temporary only if you stretch the meaning of that word. Nonetheless, Eamon warned against panic:

‘What we need is a plan for the public finances, not just another set of panic measures. Too much harsh medicine (tax increases, spending cuts) all at once could end up killing the patient. Sending the country further into a downward spiral of job losses, followed by cuts, followed by more jobs losses, followed by more cuts.’

Absolutely. But then:

‘Do taxes have to increase? Yes, they do . . . No-body likes that, but there is no choice – that is where Fianna Fáil has brought us. The gap cannot be sustained. . . But when we pay more tax, and deep down we all know we have to, then it must be progressive and on the taxpayer's terms.’

Labour is demanding a new tax rate of 48 percent for incomes above €100,000 and an end to tax exile (or more appropriately, tax fugitive) status. These are standard demands championed by ICTU and other groups. But the key element here is Labour’s acceptance that taxes will have to increase. The Finance Spokesperson, Joan Burton, TD outlined Labour’s current thinking:

‘Let us see a set of measures that incorporate three elements. Higher Incomes: considerably more (taxes). Middle Incomes: definitely more. Lower incomes: a reasonable contribution that does not destroy the purchasing power of the poorest and the elderly. . . Do not underestimate this party's commitment to and willingness to implement sound public finances based on a balanced mix of spending controls and fair taxes.’

So the principle has been accepted – general tax increases, even for those on low incomes. It will be made palatable if those higher up the chain pay more. Never mind that tax increases on low and average income groups will depress economic activity even further which, in itself, will worsen the fiscal deficit; Labour was glancing down another road.

It wasn’t always so: only a few months ago Joan rightly declared:

‘Today a massive public stimulus is all that stands between the nation and economic calamity. . . To get a depressed economy moving, you must have a stimulus, a new deal for new jobs. . . .A stimulus package is necessary for one simple reason. When demand slumps, when deflation is a greater menace than inflation, when consumer and corporate confidence has collapsed, fiscal conservatism makes little sense.’

And Eamon, in his address at Labour’s November Conference – the speech which prefigured Labour’s spectacular rise in the polls, quoted Paul Krugman approvingly (“Government will have to provide economic stimulus in the form of higher spending and greater aid to those in distress") and went on to state:

‘That is the very opposite to what the conservative commentators are recommending. Labour stood alone, to argue for Government intervention . . . to get the real economy moving, to get people back working . . . . Because the crisis in the public finances has been caused by a downturn in the wider economy, not the other way around. The key to getting out of this economic crisis is not how much the Government can cut, but what it can create. That is why Labour, alone among all the political parties, wants a stimulus plan for the Irish economy. That is what a Labour government is doing in Britain. What the European Commission has called for. What President-Elect Obama intends to do in the US. That is what we need to do here.’

This urgency, this analysis, this vision was missing at the recent Labour Conference. One could argue that the deterioration in the budget has now superseded any strategies for stimulus but I’m not so sure. With the economy collapsing by 7.5 percent in one quarter (an annualised rate of 30 percent), the imperative to invest in the economy becomes even more urgent, if only to set a floor on this collapse. Without such a floor the economy will be in freefall and no amount of fair taxes or spending controls will fundamentally alter the deficit dynamic.

That being said, while the arguments for a stimulus become every stronger, we must work harder and more creatively to construct such a programme in these dark days. For there is no doubt the vultures are circling: deflation, job losses, deficit, borrowing costs. But i we throw in the towel, accept the consensus of the orthodoxy, we will all be jumping out of the plane without a parachute. Some will survive, many won’t and the rest will be nursing injuries for a long time to come if not permanently.

Labour knows which road to go down. It knows it must turn Left. Yes, it will be confronting an entrenched and powerful consensus. They will be attacked from both sides of the road – from vested interests, newspaper groups (the Independent will go apoplectic), the right-wing parties. It will take courage, fortitude, imagination and, yes, a little bit of defiance to lead people along that road. But Labour can do it. What they said before remains relevant now and tomorrow – even more so.

The decision Labour makes will not only affect its ability to lead, affect its ability to offer real change in an alternative government, it will affect the very future of a progressive economic analysis.

We can only hope Labour follows its instincts.