I did an interview for the Economics Rockstar podcast, thanks to Frank Conway for the chance to have the chat.
The simplest way to tell the story is not always the right one. Forget the debate over lowering wages – our capital spending needs to rise.
Ireland is a small open economy that sells lots of stuff to the rest of the world. The central fact of our economy is its size and its openness to the vagaries of the world economy. A simple rule to sell lots of stuff to the rest of the world might be to produce that stuff more cheaply than elsewhere. This is the central plank of competitiveness and the sort of thing we teach undergraduates in economics. Countries should specialise to a degree that gives them an advantage, and then control costs like rent on capital and wages for labour. The argument goes that if rents or wages go too high, prices will rise, and competitiveness will be lost, harming growth and living standards in the future. But it’s usually pretty hard to control rents, so really we’re talking about wage control, unions being bad things, and so forth.
This view is simplistic and incorrect, but for some reason it has found its way into the reporting of the National Competitiveness Council’s recent report. Perhaps this has happened because of the recent sabre-rattling of the public sector unions on pay, or the change in Ireland’s position from black sheep to best boys in class in the eurozone, or simply because it’s the easiest way to tell the story, keep wages low.
It is very hard to feel sorry for central bankers. Well-paid, hyper-educated, unelected technocrats with enormous power rarely inspire public sympathy.
Nominal interest rates are as close to zero as possible. Real interest rates, which take account of inflation, are negative. eurozone inflation, at minus 0.1 per cent, is once again below the worst-case scenario in the ECB’s most recent stress tests for Europe’s banks. A tiny economy like Ireland can sell a 100-year bond and pay just north of 2 per cent on it. For 100 years! Think about what that implies.
The developed world, and particularly Europe and the US, is in dire need of large-scale infrastructural investment, at the very time that real interest rates on long-term debt are nearly zero. Yet, maddeningly, at the very moment that building lots of stuff is the right thing to do, Europe’s policy-makers are doing the opposite.
It’s not been a great week to be part of the global elite, the 10 per cent of every society who own the means of production and get paid most of the rents, the people who live from inherited wealth, and those who have attained that wealth through innovation and industry.
I’m sure there’s a tiny lake of tiny tears being cried by tiny violinists playing even tinier violins for the rich and famous who have had their attempts to avoid taxes and unwelcome scrutiny foiled by the Panama papers leak. The decision to halt Pfizer’s $160 billion merger with Allergan has also dammed the river of fees that mergers and acquisitions specialists were looking forward to.
On the face of it, almost nothing has changed, except those in the other 90 per cent get a sense, I think, of the sheer scale of these morally ambiguous corporate endeavours, the industrial quantities of shell companies created by the Panamanian law firm Mossack Fonseca — only the fourth largest in its industry — and the merger of pharmaceutical companies whose combined turnover is larger than the gross domestic product of the poorest 80 countries in the world.
Every few years the International Monetary Fund publishes a mea culpa, examining its failures to implement reforms across the globe. Each of the IMF’s “ex post evaluations” is the equivalent of the parade of apologies that Ireland’s bankers and regulators treated us to during our own banking inquiry. Perhaps the apologies were well meant, but as they carried no consequences for those apologising, they sort of fall flat.
Remember why countries call the IMF in the first place. They have had a fiscal or monetary crisis, lost access to private sovereign debt markets, are in a serious bind, and are in need of injections of cash, confidence, advice, and political cover for the implementation of very unpopular structural reforms.
It was a media circus. The year was 1966. The announcement was totally unexpected. The new Minister of Education’s announcement in September of free second level education and free school transport caught everyone by surprise.
Donogh O’Malley announced his government’s new policy at a seminar hosted by the National Union of Journalists, so he was pretty sure he’d get column inches.
Almost no one in his government had heard of this proposal before it was announced in the media. Certainly not the secretary general of the Department of Finance, Dr T K Whittaker, who wrote a stinging letter to then Taoiseach Seán Lemass warning:
“…if substantial commitments are to be announced by individual Ministers without the consent of the Department of Finance or the approval of the Government, we shall have a situation which is the negation of planning. It will become increasingly futile to be drawing up 5- or 7-year programmes, and even the financial and economic policy of the Government in the short term will be seen to bar no relation to what the country can afford”.
The phrase ‘cutting off the nose to spite the face’ supposedly comes from a period when women would disfigure themselves and their children in order to stop being carried off by marauders. The phrase has evolved to now mean harming one aspect of yourself at the expense of the rest of you.
Every time you read a piece about the likelihood of Britain voting to leave the European Union, that idiom gets tossed around. Hurting yourself to punish someone else. Injuring yourself in the act of revenge. It evokes images of pain, of needless suffering, of a desperate action forced on someone by someone else.
If you’re on a tracker mortgage, send the European Central Bank President Mario Draghi flowers. He’s made your life a little easier. If you sell your stuff abroad, send Mario a gift card or a free sample. If you work in the management of a bank, fall to your knees and pray to His image, for Mario is your salvation.
When all the little economists are being tucked into their beds at night, to ward off bad dreams, their elders tell them a fairytale. When economies experience downturns, so the tale goes, governments have two magic spells to make the bad downturn go away.
The first spell is fiscal policy, using taxes and borrowed money to buy more stuff, build more stuff and encourage the economy into motion again.
The second spell is monetary policy, increasing credit being pumped into the system by reducing the interest rate, or buying up dodgy stuff to increase asset valuations, shove liquidity into the system, and improve banks’ balance sheets.
Dear Minister of Finance:
First, congratulations on a hugely significant day in your political career for both you and your family on becoming Ireland’s 27th Minister for Finance and a member of the 32nd Dáil. Whatever happens, you will play a large part in the history of the country. The Ministry of Finance is the most prestigious one, the one with the history, and the one which, if everything goes wrong again, gets the blame.
History is on your shoulder now. You can be a Ruairí Quinn, who left office in June 1997 with the books balanced and the economy singing; or a George Colley, who managed during his tenure of the office you now hold from 1977 to 1981 of spending far too much, taxing far too little, and leaving the state half an inch from penury before the doors of Merrion Street closed swiftly behind him. You’ll need sound policies and a good dose of luck.
Analysis of their manifestos shows that, in policy terms, Fianna Fáil and Fine Gael could not be closer
My grandmother Elizabeth (Lily) Kinsella left school the year after the Constitution was signed – about twenty-two Dáils ago.
She was a working mother decades before the phrase had cultural currency. Lily ran several businesses, she was busier than almost everyone else around her, and she loved it. Like many citizens, Lily can’t believe what’s happened to the country since she retired, as she remembers a country where the average person had a lot less than the average person has today.
Expressed in today’s US dollars, in 1950, GDP per person was $685 – today, GDP per person is over $50,000. Ireland is a much, much richer place than it was the year my father was born. People like Lily did a lot to increase Ireland’s wealth over this period.
Some call economics the science of self interest. When he was six, my son Cillian wrote Valentine’s Day cards to the person he loved the most: himself. My wife Elke and I thought that perhaps he didn’t really understand the premise of the cards, and sat him down, using our best patient-parent voices to get the kid to see the truth of things.
Government parties are at it again – making spending pledges on uncertain growth
All electoral promises are fictions a party writes from a need to appeal to the classes most likely to vote for it. The electorate hates the universal social charge, because it is such a good tax. So parties are queuing up to kill it.
Even Ibec’s excellent idea to turn the USC into a pension pot has seemingly fallen on deaf ears. Yet Ireland is not a high tax economy overall; it is more accurately described as a high income tax country.
Most of the parties want to cut tax and hike spending on ‘fiscal space’ that could quickly vanish
I’m going to reduce almost every party’s economic plan to one sentence for you, then explore the details.
Ready? For almost every party, the plan is: taxes down, current spending up, capital spending up.