Monday, March 9, 2009

Insanity of our policies

Limbering through crises since the end of 2007 (for its was painfully clear, following the credit markets stalling in July-August 2007, that the near future promises no prospect of continuity of the orgy of credit and debt that we partook in from the beginning of this century) we now have reached that state of nature where the Government is, once again, embarking on an effort to 'do something' about the economy. The latest promise is that of a mini-Budget 2009 by the end of this month.

It reminds one of a famous fable about Albert Einstein's last exam. Upon being told that his final pre-retirement term paper in physics contained the same questions as those posited on the previous year exam, Einstein remarked: "Ah, yes, the questions are the same. The answers, however, have changed".

And so it is with Ireland Inc. The questions, or rather the issues faced by us are painfully the same as we faced before:
  • Public spending that is running at ca 38% (current expenditure) ratio to GNP - the same as in the early 1980s;
  • Businesses insolvencies and personal bankruptcies rising like an unstoppable tide - too great to see it before it breaks over our heads;
  • Financial system that is facing ruin in real terms and a currency that is no longer offering any comfort;
  • Collapsed taxes (some 25% down y-o-y already and counting) drawn out of a folding economy (having contracted ca 4-5% to date, heading for triple that rate in cumulative terms over 2009-2011);
  • Rising tax burdens amidst shrinking economic activity and private sector incomes;
  • A specter of mass emigration (with net outflows of workers out of Ireland recorded in 2008 already) and double-digit unemployment (expected to reach 14% this year);
  • Public sectors war against the rest of society waged to ensure that the privileges - in employment, monopoly power, wages etc - of the few will be protected even at a cost of sacrificing the prosperity of the many;
  • Corruption (this time - primarily of legal nature) led by the interest groups that stand close to the center of power;
  • Elites, incapable of any new thinking, neurotically running for cover of failed ideologies;
  • Academia that is so far removed from reality that its practitioners forget ABCs of their own disciplines (finance and economics) in their desire to embrace the consensus;
  • Desperate electorate that, in a Stockholm Syndrome moment of truth, are begging their captors - the State and its leaders - to 'do something', 'anything', 'to present a plan for the future'; and so on.
The issues are, frighteningly, the same - beyond any doubt, despite repeated assurances by the Government to the contrary - we are now in the §980s Redux scenario. But have the answers changed?

Sadly, not. The menu of economic policy potions on offer from the Government and academe is:
  • Conviction-driven hikes in direct income and consumption taxation (Priority 1);
  • Ideologically motivated (the ideology of public greed) hikes in indirect taxation so desperate in their scope that we are now facing a prospect of a tax on text messages and a clawback of pension deductions (Priority 2);
  • Ambiguous & vague promises of some current expenditure cuts (Priority 3);
  • Empty & often outright senile promises of an NDP stimulus packaged along with a pork train of 'knowledge' economy, 'green' economy and 'social' politics measures (Priority 4).
In other words - continued waste, new waste and taxes is what passes for leadership in Irish political environment: Government and Opposition alike.

Has anyone noticed that having raised VAT in October, we are seeing continued collapse in VAT revenue? Having raised income tax from January on, we are seeing continuous deterioration in the income tax receipts? Having implemented not a single pro-growth policy since the beginning of 2008, we are seeing real costs of living and working in this country remaining stubbornly high and real returns to work depressingly declining?

How long will it take? How many homes will have to be repossessed? How many personal bankruptcies and corporate insolvencies declared? How many of us and our children will have to emigrate out of here before our policy idiocy will lead us to the conclusion that you cannot tax yourself out of a recession?

Some years before his final exam, Einstein remarked that "Insanity is doing the same thing over and over again and expecting different results".

For now our politicians soldier on, with Unions whistling in step, back into the 1980s. Back into the 1980s answers to the 1980s-like problems. Stop cheering them on!


Anonymous said...

So what exactly is preventing government from engaging with people outside of government to get access to fresh ideas and real-world insight?

Are we living through the Irish version of "not invented here" syndrome?

is this really all about protecting egos?


Anonymous said...

Dr Gurdgiev - are you arguing against tax rises or merely in favour of commensurate decreases in public spending? Or is it that you think the entire amount required can be extracted from public spending cuts? David McWilliams seemed to take a similar tack in the SBP arguing in favour of a stimulus programme but failed to explain where the extra money is going to come from if, as the markets would lead one to believe, we will already be stretching our borrowing capacity to the hilt? Obviously if the government had followed counter-cyclical policies we could inject money into the system but that appears to be dealing with what could have been our economic position rather than the reality?

TrueEconomics said...

JK, thanks for the comment. It puzzles me as well.

For instance, I know that Commission on Taxation has as a member one economist who authors solely political pamphlets. No refereed publications on taxation and no experience in working with the subject. How this person got onto such a platform? Well, his/her political interest-representing patron got them on to it.

As a saving grace, there are people working for/with the Commission who are very good technical economists. Does one balance out the other? No, because the incompetent one is at a higher level.

NESC produced last year some Partnership briefing documents that were comprehensively primitive when it came to economic analysis. Did they consult anyone outside their cozy 'economics' and 'policy' teams? I do not know, but I doubt it...

When the international economic policy bodies come to Ireland for high level briefings, amongst people they meet - 90% are either civil servants or social partners. They see 1-2 serious economists, whose views are presented as either an intellectual backing (when the invitees are also contracted advisers to the parties involved) or as some sort of exotic policy birds paraded to show off the token 'diversity of views'.

In my view - poor policy formulation in this country is driven by two things: (a) a culture of consensus - social partnership; and (b) the fact that advising the public sector is a plum job. This job is defended by the incumbents, while the public sector and the government are simply averse to hearing anything that disagrees with their world view.

Hence, the Emperor might have no clothes, but no one around is telling him of that minor detail.

TrueEconomics said...

Jack, your comment raises a central point to the issue. I should probably deal with it in a follow up post, but in the nutshell, we must reduce - dramatically - our public spending. I would suggest cutting 40% of NDP spend (ca €4bn) and cutting current expenditure by at least 12% (ca 5.9bn). This will yield savings of (accounting for redundancy costs, social welfare costs and tax revenue fall-off, etc) ca €8bn. The resulting balance deficit of ca €13-14bn (my estimate) or €9bn (DofF estimate) can be financed by borrowing. The main benefit will come in 2010, when redundancy payments will run flat, but the savings will continue, implying the deficit will fall - under my savings scheme - to ca 4.5% of GDP (as opposed to the already-out-of-date DofF forecast of 9% of GDP.

Anonymous said...

Dr Gurdgiev - Thanks for the great posts. With the benefit of hindsight, it seems that much of the Celtic Tiger economy was built on sand. An illusion that was mainly fuelled on borrowed money. What kind of economic future can we expect when the recession ends?