End of the denial phase?

We had a credit bubble, the Irish economy was inflated way beyond it’s natural limits by money borrowed on the European wholesale markets and multiplied internally thanks to the joys of fractional reserve banking. That bubble is gone, it is never coming back. That means that we cannot currently sustain an economy at 2006 levels. There are some who want the public (that’s us – via the government) to take on the burden of large scale borrowing, to sustain for a minority, bubble-level incomes and living standards. To those who wish to pursue that option – do you think that massive borrowing worked out well for the private sector? Who will bail out this state, if we can’t meet our debt repayments?

Rather than face the reality of the crash head-on, while workers in private companies take pay and benefit cuts and job losses mount, representatives of those with the best paid and most secure jobs in the country talk the talk of war. Internal civil war. They call for tax rises on families struggling to meet mortgage payments, living in fear of redundancy, to sustain wages at the top of the public sector that would shame all but the most hard nosed.

Faced with losses of such enormity the natural human reaction is disbelief, or to go into denial. Those in the private sector have had no choice but adapt fast, those whose pay and conditions are within the governments gift to determine have thus far managed to dodge dealing with the problem. In the run up to Friday’s day of action, it appears that some Union leaders are beginning to get to grips with reality and are moving on from the denial phase. Peter McLoone of IMPACT appears to comprehend the sheer scale of the existential crises we now face.

In a confidential letter written to IMPACT officials, Mr McLoone said that, in his view, the alternative to pay cuts would involve a significant reduction in public service numbers over the next three to four years.

RTE report

Spending cuts are essential and unavoidable. While they are ‘deflationary’, the economy itself is unsustainably large – massive government borrowing is preventing even steeper declines than we have seen. Some cuts are more deflationary than others. Cuts that effect workers on below average income will directly suck money out of the economy that would otherwise be spent here. But not everyone who benefits from the public purse, is on a low salary – indeed not everyone who benefits is a government employee. Private landlords, as highlighted on Slugger months back (and on Frontline by Fintan O’Toole last night) benefit from high state-funded rental supplement payments. It is unconscionable that we mortgage our children’s future to sustain bubble leveling spending. We need to take the hit in our time, and not pass more problems onto our children. There is a debate to be had, once the blinkers of denial are removed. While spending needs to be cut, we need to make the right choices about what is cut, what taxes are raised and indeed what additional help we need to give to people who are struggling.

Links –
http://www.rte.ie/news/2009/1103/partnership.html
http://www.chrismartenson.com/crashcourse/
http://en.wikipedia.org/wiki/K%C3%BCbler-Ross_model
http://www.ronanlyons.com/2009/10/21/tax-increases-or-spending-cuts-is-irelands-government-too-big/
http://www.sluggerotoole.com/index.php/weblog/comments/should-rent-supplement-be-cut-or-raised/

  • Scaramoosh

    “IRELAND could be plunged into a 1930s-style depression if it cuts too much from the public purse, a leading international economist has warned.

    As Finance Minister Brian Lenihan considers swingeing cuts in public sector pay and pensions in next month’s Budget, David Blanchflower warned last night that Ireland could repeat the mistakes made in the Great Depression if huge cuts in the public purse were made too soon.

    “Moves to cut public spending or public sector wages or employment deep in a recession are a mistake and may turn a recession into a depression,” he told delegates at an economics workshop at UCD’s Geary Institute yesterday.

    “It’s exactly like it was in the ’30s when people cut too soon,” the British-born economist said.

    “Balancing the budget is not what you do in a recession. My advice is to wait until you’re out.””

    (Source:Indy).

    For thirty years, we had the provisionals engaged in an armed struggle, with the stated aim of bringing about a “Socialist Republic”.

    How ironic, it is therefore, that with the conditions for bringing about said Republic never better, the great socialists have failed to capitalise upon it!

  • The UK situation is less different than most people in the UK like to believe. This is pretty much the biggest political judgement call of our lifetimes; so far Ireland and the UK have tried to pump as much money as possible into the economy to keep the ball rolling.

    This is fine, if it actually gets you out of recession and you can rebalance the books at the appropriately counter-cyclical moment. If it doesn’t, and your economy is still either in recession or only to kept out of it through continued deficit spending, at the point when the money markets/ECB decide you aren’t going to be allowed to throw good money after bad, then you are in deep, deep, shit.

    I want to believe that we are not going to end up in deep, deep, shit, and it’s a real possibility that we won’t. But it’s also a real possibility that we will.

  • Dublin voter

    Classic public sector workers vs private sector workers divide and conquer line from Mack.
    In my view:
    The higher public sector salaries should be cut. Say anything over 65k per annum. The many low-paid public sector workers should not have their pay cut. People on social welfare should not have their incomes cut.
    The super wealthy should be hit and hit hard. I don’t buy the “there’s no pot of gold out there” line. This was said many times down the years and then, lo and behold, golden circles and offshore accounts and tax shelters by the bucketload were exposed. Hitting them hard will not make up the full whack of billions that need to be found. But hit them hard, show you are hitting them hard, and the rest of us will be a lot more willing to take the pain that’s coming.
    Mack says “while workers in private companies take pay and benefit cuts and job losses mount,”. Yes job losses are mounting but figures have been produced which show that most workers in the private sector have not taken pay cuts – some have. Some of the job losses are down to owners, who have been creaming it during the bubble, closing their businesses because profits are down not because they are losing money – they were so used to massive profits that they are unwilling now to continue running the business for smaller profits.
    The key word in the ICTU campaign is FAIRNESS. But the way of the Republic of Ireland is that the owners will not pay their fair share.
    Mack should get a job with the Sunday Indo – oh I forgot, they already have about 15 columnists who can write diatribes against Irish public servants for causing the collapse of the world economy and eating babies by the bucketload on their extended tea breaks, lunch breaks and scandalous sick leave.
    PS: I am a public servant and I AM NOT A BAD PERSON.

  • David

    Dublin voter: why only look for cuts in pay over 65k? Private sector workers on far less have had to feel the pain.

  • John East Belfast

    The ROI has a lower proportionate Public Sector Debt than the UK and indeed many other EU countries which gives the Govt room for borrowing to help fuel the economy to avoid a thirties style slump.

    However the ROI also has one of the highest Private Setor Debts in the EU – its citizens and businesses are highly indebted on a foundation of over valued assets.

    Hence pumping the economy is only feasible if there is light at the end of the tunnel – in the UK’s case the decline in Sterling will help it export its way out of this recession.

    In the ROI there is the danger of throwing good money after bad and putting off the eventual day of reckoning.
    The latter is prices, wages and rents in the ROI need to fall – the NI border will actually help this process.
    The ROI needs to become a cheaper place to do business and live.

    I think a whole generation is going to have to go through 10 to 15 years of pain and many will emigrate.

  • mac,

    Is there any real evidence that the top public salaries are higher than the top private sector?

    I’m not sure cutting public salaries would help much, but perhaps a pay freezes for those earning over a certain sum might help, although I would prefer to raise taxes for high earners, hopefully right across the EU. The real question is can the UK stay out of the Euro without crashing the living standards of all those earning less than 30K?

    Myself if it comes to cuts in benefits and public services I would prefer a tax rise, whether direct or indirect as I believe it would be criminal to crash the living standards of those already on a very low income.

    I agree with Dublin voter, it is very easy to slam those who work in the public sector, but most do a dam fine job, often under great pressure. Plus of course if we are to remain a half civilised society, we can do without the type of bankers who bet the house but we cannot do without say someone who oversees a local authority social services department.

    Finally I am very cautious when politicians and their media gofers start talking about cuts, for this almost always means those who are least able to afford them will be first in line. Take how the UK MPs have squealed over having their expenses cut, but the very same people, both Tory and Blue Labour voted for the abolition incapacity benefit and in the next year are liable to do the same for Attendance Allowance for the disabled.

  • Mack

    Dublin Voter –

    No one said you were a bad person. But a couple of points –

    I have taken a significant cut in my income.

    My job is very far from safe.

    There is less in my pension fund than I have contributed (but at least I have one, I guess).

    If you reread what I wrote, you’ll probably find we agree on at least the core points – E.g. Where you say – The higher public sector salaries should be cut. and I say some cuts are more deflationary than others. Cutting the salaries of high paid workers isn’t deflationary, the bulk of that extra cash is either saved or spent on imported goods. Cutting the salaries of less well paid workers is.

    Government spending at 55% of GDP and salaries and pensions making up 2/3 of that according to Ronan Lyons. You are right, my post was divide and conquer in nature, but not in the manner you suggest. We have a problem with government spending, taxes will go up, the government will continue to borrow, but given the choice between fat cats and less paid workers taking the hit – I know where I’d take aim…

  • Mack

    Mick Hall –

    Is there any real evidence that the top public salaries are higher than the top private sector?

    Not to be flippant, but does it really matter? Take look at Ronan Lyons’ blog entry on spending –
    http://www.ronanlyons.com/2009/10/21/tax-increases-or-spending-cuts-is-irelands-government-too-big/

    Myself if it comes to cuts in benefits and public services I would prefer a tax rise

    I don’t think we face this choice, we can protect wages and as a result easier targets (i.e. services) will be cut.

    Finally I am very cautious when politicians and their media gofers start talking about cuts, for this almost always means those who are least able to afford them will be first in line.

    I think that’s why people, well, the left in particular, needs to snap out of denial and engage in real debate, because if they don’t I suspect that’s exactly what will happen.

  • Itwas SammyMcNally whatdoneit

    In the absence of an agreed (even amongst economists), and robust economic theory to underpin the choice of path out of the current crisis the Unions like everyone else are feee to simply follow their own ideological instincts.

    But what should be absolutely clear is that FF do not have the moral credibility to adminsister whatever harsh medicine may be required – being so closely asosciated both with the mistakes that led to the crisis and the corruption that fed it.

  • Dublin voter

    Re post 7. Cripes … peace, love and understanding has broken out very early on this thread!
    “No one said you were a bad person.” Well, you didn’t Mack and maybe the Sunday Indo doesn’t use those words but I’ve certainly picked up that vibe from them over the last couple of decades (and I still buy the rag! for Declan Lynch and that Sweeney bloke on sport).
    Anyway I’ll be marching on Friday and I’m toying with I AM NOT A BAD PERSON as my banner slogan.

  • george

    JEB,
    The ROI has a lower proportionate Public Sector Debt than the UK and indeed many other EU countries which gives the Govt room for borrowing to help fuel the economy to avoid a thirties style slump.

    True but it’s expensive. At least the borrowing requirements have been sorted for 2009 and part of 2010. It’s steady as she goes.

    However the ROI also has one of the highest Private Sector Debts in the EU – its citizens and businesses are highly indebted on a foundation of over valued assets.

    It’s in the same 200% plus region as the UK and US. However, it has the advantage of a younger population (naturally they’ll be in hoc for a generation but it helps the books).

    Hence pumping the economy is only feasible if there is light at the end of the tunnel – in the UK’s case the decline in Sterling will help it export its way out of this recession.

    Not exactly, the UK has used quantative easing, Ireland is going with NAMA. Two different ways to try and solve similar problems.

    It remains to be seen which one turns out to be more expensive to the taxpayer. What I find incredible is that there has been virtually no talk of the potential cost of quantative easing to the British taxpayer.

    There is talk of deflation etc but no talk of the actual fiscal cost. What is bought up has to eventually sold and there is little or no chance of the same price being achieved.

    In the ROI there is the danger of throwing good money after bad and putting off the eventual day of reckoning.
    The latter is prices, wages and rents in the ROI need to fall – the NI border will actually help this process.

    All of the above are falling like a stone.

    The ROI needs to become a cheaper place to do business and live.

    I think a whole generation is going to have to go through 10 to 15 years of pain and many will emigrate.

    Exactly what I think too. There will be a lost Irish generation, not because of war or poverty, but because of debt.

    Dublin Voter,
    why won’t they march on a Saturday to try get the support of private sector workers?

  • Mack

    This article on Japan might be relevant – I don’t think we’d be able to borrow for as long as they have thus far. But if we borrow too much we’ll wind up in debt trap from which we won’t be able to escape. While borrowing less may be deflationary, it would leave a smaller absolute debt and a more competitive economy capable of fast growth in it’s wake. Borrowing for unproductive purposes may keep the economy larger now, but leave us with a huge public debt and a moribund economy incapable of servicing it.

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6480289/It-is-Japan-we-should-be-worrying-about-not-America.html

  • Framer

    To alleviate the numbers of people consigned to the dole queue, particularly the young, the state should use one of its few current assets – public sector jobs.

    Any vacancy over a certain wage should be split and the two halves offered to new recruits.

  • Bemused

    Dublin voter and his ilk are a vile bunch of jealous inadequates who peddle nothing but the politics of envy and laziness. I work harder than anyone else I know (and certainly harder than any public sector whinger), and have done all my working life and in the insecurity of self-employment. I earn substantial sums because I have the balls and stomach to work hours and bear pressure that would have you jokers wetting your pants and whimpering for your mummies. You want to earn more money? Work harder. Don’t have the stomach to work harder? Get another job. Don’t have the balls to get another job? Fuck up.

    You’re not a bad person – you’re just a pathetic person.

  • The Raven

    Bemused, you aren’t one of the several large scale developers up here on the North Coast that nicely managed to earn substantial sums, run down their companies, lay everyone off, and yet maintain their own private helicopter by any chance…?

    Or are you “in the financial world”, where “most executives expect their bonuses to match or exceed last year’s, with 1 in 10 predicting their best-ever payout.”

    I mean, such people must be blood-sucking leeches, must they not? Or would that just be a sweeping generalisation, much like calling Dublin voter “and his ilk” a “public sector whinger”….?

    Am I not correct in thinking, as I thought I had read on an earlier similar thread, that certainly in the North, no politician – either this year or last year – has asked for or demanded a public sector pay freeze, cap or reduction…? Where does the blame *really* lie?

  • Dave

    The simple reality is that these problems were created by macroeconomic and monetary policy, and can’t be controlled by the state since the state only retains sovereignty over its fiscal policy. The root cause of inflation is excessive growth in the supply of money. However, this is censored from the media because control of macroeconomic and monetary policy has been deleted from the Irish state as a democratic policy option and debate about it, apart from being redundant, simply serves to draw attention to the reckless actions of those who hold sovereignty over Ireland’s macroeconomic and monetary policy and the ruinous consequences of transferring that sovereignty to them. Since we are linking to crash-courses in economics, here is one on monetary policy:

    [i]Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy.

    Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates in order to combat inflation.[/i]

    That money supply increased by 1.69 trillion euros in since Ireland integrated with the EU’s eurozone. Prior to that disastrous surrender of control over Ireland’s macroeconomic and monetary policy to the EU, the external debt stood at 11 billion punts. That excessive growth in the supply of money caused inflation is all areas of the Irish economy, and also caused the bubbles in all areas of the Irish economy as too much money chased too few investment opportunities. Indeed, while the supply of money was massively increased under EU rule, the economic growth rates expressed as a percentage of GDP actually fell to half the level they were before the increase in money supply. Ireland’s economy grew faster when it retained sovereignty over its macroeconomic and monetary policy and kept its external debt to a minimum.

    The hard reality is that the borrowing did not create a Celtic Tiger economic boom but simply served to mask the collapse of the actual Celtic Tiger that occurred prior to eurozone integration. Ireland’s exports – which were at the root of the boom – stagnated after joining the eurozone and are now half the level in real terms than they were before. Now wouldn’t you expect cash injections of circa 200 billion euro a year into the Irish economy during the bogus eurozone boom to cause the rise in the rate of GDP growth to accelerate way past the level that growth was before the borrowing? Well, it didn’t happen. The opposite occurred: GDP growth fell to half the level it was prior to the growth in the money supply:

    Year GDP

    1999 10.7
    2000 9.2
    2001 6.2
    2002 6.1
    2003 4.4
    2004 4.5
    2005 5.5
    2006 5.7
    2007 6.0
    2008 -3.0
    2009 (forecast) -8.3

    While that increase in money supply did not help the Irish economy, the repayment of it will cause economic penury as the wealth that flowed into the country must all flow back out of it (with a surplus in interest). Sadly, this increase in money supply was not targeted at wealth creation enterprises in Ireland under EU rule was simply supplied on the promise (and supposed ability) of the borrower to repay it. That means that most of this wealth have vanished in bubbles that it created and that have now burst. Since it did not go into wealth creation, Ireland cannot generate the wealth that it now needs to repay this debt. Trying to solve problems created by macroeconomic and monetary policies with fiscal policy would be comical by itself if that wasn’t the tragic reality.

    Ireland really is bankrupt, and it really doesn’t know it yet. At the end of the day, it really doesn’t matter if these public sector workers are in denial because reality is a-comin’ their way faster than they think.

  • Dublin voter

    Re post 14 from Bemused. And there I was earlier saying that peace, love and understanding had broken out on the thread!
    Bemused, I’m not a pathetic person or a jealous inadequate. I’m quite happy actually and proud of the value-for-money service I provide. I’m not looking for more money for what I do.
    I’ll be demonstrating on Friday mainly out of annoyance at the unremitting media attacks on public servants over the past few months (your post 14 is a good example).
    Someone else asked why the demo isn’t on a Saturday to enable private sector workers to join in. Afaik, it’s a demo for all union members – public sector and private sector. Unions are telling their members to take part if they can – take annual leave or if they aren’t working that afternoon anyway. I assume anyone who walks off the job to go on the demo will be docked pay – that’s what will happen in my case.
    Looking forward to seeing you at the counter-demo Bemused. I’ll have some leaflets on a very good anger management course for you.

  • Dave

    You seem on top of this, can I ask you this, are the massive sums the UK government gave to the banks as guarantees, etc, included in the government deficit and if not why are they suddenly so indebted, OK they all but privatised a number of Banks, but eventually if things go well the taxpayer should get a return on that.

    If these massive bank guarantee sums are being included, surly that is doggy accounting designed to panic the public into accepting the crashing of the welfare state.

    What I am having difficulty getting my head around is whilst there is a debate on this subject in Germany France and Holland it is nowhere near as doom ladened as in the UK and Ireland.

  • Mack

    Mick –

    In Ireland at least those figures are off-balance sheet (e.g. the SPV set up to manage NAMA keeps the NAMA debt off the government books). We really are f**ked, you need to add them together to get the full picture. I think in Ireland excluding NAMA we will have a debt-to-gdp ratio of around 80% by 2013 if you accept the governments numbers add your best guess for the true cost of NAMA onto this. Btw, we’re down another additional €2bn in revenues this year, already – and who knows what will happend to the economy growth wise – a resurgent Germany and high Euro interests or another sharp turn downwards globally could really land us in the s**t.

  • Mack
  • Mack

    http://www.davidmcwilliams.ie/2009/11/04/we-need-creative-ideas-to-pay-for-ageing-population

    David McWilliams latest article might also be relevant – Irish bank recapitalisations have come via the National Pensions Reserve fund – and thus don’t appear as part of our national debt – they do however create a larger short fall in the funds available to pay public sector and state pensions that will have to be made up with higher taxes on our children. Aren’t we just great parents?

  • Mack
    thanks for the info, although I am not sure if thanks is the right word 😉

    Mick

  • greagoir o frainclin

    Recovery for Eire not expected till 2011.

    The UK seems to be lingering in this recession too, while the major countries in the Euro-zone ie Germany, France have recovered as well as Japan and the USA across the globe.

    Thanks to the Euro it saved our hides here in Eire, acting as a cushion. If the UK were in the Euro-zone perhaps they would be out of the recession by now as well.

    Full steam ahead for the Lisbon Treaty!

  • Melly Scheneieder

    great post, thanks dave