Can you fix the economy?

Karl Deeter asks:

‘If you had one year to turn the economy around or you would be publicly executed, what policies would you enact?’

Well first, what's the problem?

Oh yeah: soaring unemployment, depression-level falls in aggregate demand, popped construction bubble and poor regulation leading to banks in distress, small and medium enterprises choking for lack of working capital, a government which has just guaranteed the liabilities of the banks in such difficulty in deep year on year budget deficit itself, forcing the government to increase borrowing to finance current expenditure, and widespread dithering, wittering, and gnashing of teeth.

Then Kinsella becomes dictator for a year. Huzzah! A fanfare would be struck up, but, in these straightened times, we can't afford a band, and no one really feels like a parade, so I'd play the fanfare on iTunes on my laptop for a few minutes. A bottle of warm Miller and a stale cupcake with a candle robbed off a two year old's birthday ice cream are probably all the largesse the public will extend to me. Assuming I can't enact anything to get myself out of the death sentence, in answer to Karl's question, here's what I'd do, and pronto.


Let me just focus on the domestic issues, assuming we're too small to really do anything about the international ones, apart from ratifying the Lisbon treaty.

First, I'd listen very, very carefully to Colm McCarthy and An Bord Snip, and enact most or all of their recommendations, now, come what may, apart from one class of projects I'll detail below. The Snippers (why has no one else called them that?) have a range of budget cuts which might help control expenditure if enacted swiftly, bringing the public purse closer to balance. Implementing these measures would make me unpopular.

Second, I'd have an emergency budget after finishing that cupcake and downing that beer, (assuming it wasn't poisoned). I'd cut public sector wages in nominal terms by another 6-8% or so, and increase the level (and scope) of income taxes in order to bring about a fiscal balance in the economy in the next 4 years to 2013. I know this is a bit like a fish demanding to work in a sushi restaurant, but I think it needs to be done. Cutting back on these services would make me deeply, deeply unpopular.

Third, I'd bring in simple property taxes, along the lines suggested by Karl, but I'd grandfather them in over a period of 2 years. I would become deeply, deeply, deeply unpopular. No chance of avoiding that death sentence now.

Fourth, I'd adopt a German-style fiscal rule book to increase transparency. I'd make serious efforts to increase transparency in public life, essentially by doing the opposite of this.

Fifth, I'd borrow to finance critical capital spending programmes which pass technical and economic cost-benefit tests, along the lines the Irish Academy for Engineers have recommended, including the deep water port near Limerick.

So: cut current spending (but don't fire anyone, this is very important to maintain some level of domestic consumption), and increase taxes. Domestic consumption gets hammered in the short run, living standards fall in the first six months to 2001/2 levels, but rise thereafter.

Sixth, I'd change the laws governing regulation of our financial systems, something I've written about in a slightly boring way elsewhere.

Seventh, I'd strip down and reorient Fás and Enterprise Ireland to implement a retraining and enterprise building programme for the next five years.

Eighth, I'd nationalise the two largest banks for the remainder of the year, and begin a private sell off as soon as possible, and start debt-equity swaps for the rest.

Nineth, I'd begin thinking about bringing in foreign diaspora cash. 40 million people in the US call themselves Irish, and Irish people have amassed wealth all over the world. Imagine issuing the equivalent of 'patriot bonds' for Irish people all over the world, paying a decent rate of interest for relatively small sums of cash, say 100-10,000 euros each. These bonds are redeemable and tradeable in the usual way, but if you redeem them here, in Ireland, buying products in Ireland, you get a steep discount off the price of whatever it is you're buying in the shop. The key here is to think about using foreign earned funds to prop up domestic consumption here. There would be all sorts of unexpected positive spillovers--labour intensive tourism would do better, for example, and indigenous businesses (assuming there are any left) would do well too.

Most likely I'd be murdered inside of three or four days.

4 Replies to “Can you fix the economy?”

  1. Maybe not murdered in 3-4 days, but I suspect that execution within a year is looking pretty likely... One might read in your response that it will take more than a year to get the economy sorted, sadly they only gave you 12 months...

    Oh yeah, under-employment is just another form of unemployment (as Sen argued many years ago), and a 6-8% cut in nominal wages, plus whatever the annual inflation is running at would probably be about as harsh on demand as the firing... or ?

  2. Dunno about that Ben, there are a lot of people in Ireland (and I'm one of them) quite happy to take an 8% pay cut if it means I can keep the other 92%!

  3. Granted, it would be nice to have the 92% of the wage, and I would probably do prefer the same if the market gave me a choice between 0% and 92%, but this is not really the case. First off, with unemployment benefits in Ireland, the choice is surely not that stark?

    Also, you are talking about the public sector taking pay cuts, which is only necessary if you want to implement a German style budget balance law (something the Germans look pretty set to violate this year anyway - so why mimick something that is going to fail?). Why not keep that borrowing going and run a deficit in the recession. Presumably you want to run a surplus in the boom as well? Seems logical to run a counter-cyclical budget/fiscal expenditure policy, and not the opposite?

    At the end of the day, and here's a little more controversy, the government is not financially required to run a balanced budget - that went out the window with gold - and with paper money, I would suggest that a budget deficit (surplus) is simply an increase (decrease) in money supply as long as the sovereign government borrows from its central bank. The question is how much of this will lead to inflation and how much will prop up / be soaked up be demand. So what is stopping the governmment from maintaining the demand coming out of the public sector? Only your proposition 4, and if Sen was right all those years ago (1963 paper I think it was) then cutting the wage by 6-8% will have the same effect on demand as laying off 6-8% of the workforce, so why would you do either when you can afford not to?

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