Notes on the Front

Commentary on Irish Political Economy by Michael Taft, researcher for SIPTU

We Must Cut Growth to Increase Growth – Seriously. The Recession Diaries – July 26th

July 26, 2010

What would you say if a Government Minister, discussing Budget 2011, came on to a current affairs programme and said the following

‘To increase economic growth, we intend to cut growth. To promote employment, we’re going to cut employment. And as for emigration – we don’t care if it increases. Indeed, the Government sees some upside.’

If you heard that, you’d probably say, ‘how ‘idiotic’. Or you might say, ‘how so Fianna Fail.’ You’d be right in both cases. And, yes, if that Government Minister were honest with the public, that’s exactly what they’d say; if the ESRI is anything to go by.

In another installment of ‘pieces-of-information-that-never-make-it-into-the-debate’, the ESRI assessed the impact of the Government’s proposed €3 billion contraction in the upcoming budget (taken from full report which won't be available on-line for another couple of weeks):

‘The impact [of the €3 billion contraction] on the wider economy is to reduce the growth rate by approximately one percentage point. In addition, the level of employment is lower and emigration flows higher than in the absence of such a package. These are real costs attached to the programme of fiscal consolidation being pursued by the government.’

So – the Government intends to cut growth and increase unemployment and emigration. What an odd thing to do. The ESRI estimates the domestic economy will contract by -0.5 percent. The Government’s estimate is worse: -0.75 percent. You’d think Government policy would be concerned with giving the economy – consumer spending, investment, employment – some legs. But, no, it intends to put more obstacles in the way of growth.

Indeed, it might be worse. The ESRI, without knowing exactly what the composition of the budget package would be, used the following breakdown: €1 billion cut in capital spending, €1 billion cut in current spending (though not public sector wages and social welfare rates), and €1 billion in increased tax revenue from a combination of income and property taxes.

However, the Government has signaled they intend to increase the ‘cuts’ element of the package. If they do so, GDP could be cut further (by between 0.1 and 0.2 percent according to my calculations). What fun.

Why isn’t this a subject for debate? Why are not Government ministers grilled on this? Why isn’t a fundamental question being asked – how smart is it to cut economic growth when the economy is trying to recover from recession? Why is this debate so surreal?

Or am I being naïve to even ask such questions?

9 responses to “We Must Cut Growth to Increase Growth – Seriously. The Recession Diaries – July 26th”

Maurice

July 26, 2010

I don’t think your being naive at all Michael. Amusing maybe as I have a feeling that you were being Rhetorical.
The simple answer for the question’s you seek may be found with Chomsky’s ideas on the “Manufacturing of Consent”. Where by all forms of corporate owned news media, are businesses subject to commercial competition, for advertising revenue and with the bottom line obviously being profit margins. With this being the case, their editorial bias will naturally lean towards, news reporting that leads to establishing a stable and profitable business model. This is done through distortion by the editor of the types of news, which items and how they are reported. This leaves the media group with a goal of profit before public interest, favouring keeping revenue streams flowing rather journalistic accuracy.
So when you make the salient points that you so regularly do Michael, you fight against an un abashed and little challenged corporate propaganda monster that has honed its skills over many years, and will lead us into that utopian ‘brave new world’.
But you new that anyway Michael? Didn’t You?
Maurice

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Conor McCabe

July 26, 2010

Glad to see Mr. Miyagi took time out from his busy schedule to give you ‘answers for the questions you seek’ there Michael.
Just to say that I keep on getting people telling me that cuts = growth, and not just on the Right either. When it comes to cuts these days, everyone’s a bloody Calvinist.
My favourite chuckle at the moment, though, is when I hear in the morning how we can’t spend our way out of a recession, and then the same person says that evening that increased consumer demand will save us.

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Maurice

July 26, 2010

Conor how mature you must be!
This site represents an alternative view on our current economic situation. I dont have to have to tit 4 tat here with the small minded. The moral high ground is already won.
Do you actually believe your doing Michael a turn by name calling?
Wise up chap. The next person who you put down may actually take your dictate to heart and not return.

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Conor McCabe

July 26, 2010

don’t worry about it Maurice, sure isn’t it all part of a Chomskian media hegemony anyway?

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Maurice

July 27, 2010

It is Conor.
Pitting people against each other, causing confusion, and most importantly pointing out the differences between people instead of our simularities. Is indeed the media’s/governments weapon of choice. Divide et impera.

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Michael Taft

July 27, 2010

Maurice – thanks for your comments. Actually, I wasn’t being entirely rhetorical. My own experience when debating with others is that a progressive perspective is (a) treated as naive, (b) treated as quaint, (c) treated as if you were an ultra-Maoist who wants every to eat dinner in communal barracks, or (d) treated as something you scrape off the bottom of your shoe. Whatever the reaction, you just know that people are anxious to get back to ‘big-boy’ talk – rolling pensioners in the next budget, etc. To what extent this is due to the commercialisation of media as you mention, or to group-think, or to just plain old fashioned ignorance – the answer lies somewhere in that complex.
Conor, yes I come across people who don’t understand a basic axiom of fiscal policy; cutting spending = cutting growth. This the economic equivalent to climate change denial (or even denying photosynthesis). How does one egage with that?
As to spending – the idea that increased consumer spending will create long-term sustainable growth is deeply weird and disturbing. That being said, I believe that consumer spending can play a role. However, some of these pro-spend people attack Government consumption (as you point out), want to cut people’s wages (hmmm) and forget that the reason why we ended up in so much private debt was that capital, after denying real wage increases throughout the world, came up with a groovy idea – give everyone a credit card. That’s called financial innovation. It really is a strange and wonderful world.

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James Conran

August 9, 2010

I guess this depends on the “counterfactual”. Budget cuts will reduce growth compared to what? Is the ESRI saying “in the absence of budget cuts growth would be higher” or is it really saying “in the absence of budget cuts growth would be higher (all other things being equal, i.e. assuming, what we, the ESRI, believe to be false, namely that a lack of budget cuts would not lead to higher interest rates and/or a shut out from international markets for both the Irish state and the Irish banks)”.

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Michael Taft

August 10, 2010

James – the comparison the ESRI uses is to a ‘neutral budget’ – that is, no fiscal adjustment. It is stylisied – both politically and fiscally. In the former, no one that I know of is arguing for a ‘neutral’ budget so it is not a comparison with competing proposals. In the latter, it merely takes the impact using the following model which can be found here: http://www.esri.ie/UserFiles/publications/20090403095300/WP287.pdf
It is useful because we can compare relative impacts from a range of fiscal measures – tax increase and spending cuts. It is also useful in the development of an alternative fiscl strategy as it helps us create a neutral GDP base-line.
From my own calculations (and why the ESRI doesn’t tell us is beyond me), the package they analysed (€1 billion tax increases through property and income tax, €1 billion in capital spending cuts and €1 billion in current spending cuts (though not public sector pay or social welfare) would reduce the GDP by -1.3 percent and GNP by -1.6 percent.
With the Government telling us that there will be more in current spending cuts than tax increases (announced after the ESRI produced their budget impact estimates) the deflationary impact will be larger.
The challenge for those of us who have argued for an alternative strategy, is to use the ESRI model and show that an expansionary investment programme would produce a better result: higher growth, higher employment and a lower deficit.

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BaderErorma

November 28, 2010

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