{"id":19276,"date":"2012-05-04T16:38:37","date_gmt":"2012-05-04T06:38:37","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=19276"},"modified":"2012-05-04T16:38:37","modified_gmt":"2012-05-04T06:38:37","slug":"oh-ireland-if-only-you-were-growing","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=19276","title":{"rendered":"Oh Ireland, if only you were growing"},"content":{"rendered":"

\t\t\t\tI regularly check the data for Ireland to see how she is going, given that the Irish government was the first to impose the austerity solution in early 2009 – that is, three years ago. I read yesterday that “of the countries that were in trouble, I would say Ireland looks as if it’s the best at the moment because Ireland has implemented very heavy austerity programs, but is now beginning to grow again”. That created some cognitive dissonance for me. Was I dreaming when I last looked at the Irish national accounts data? Surely, I hadn’t made a mistake when I concluded that the last two quarters of 2011 recorded negative growth as Irish exports slowed in the wake of the emerging double-dip recession in Britian? When I reviewed the data today, it seems that Ireland is still going backwards and people are becoming poorer. Claims that Ireland’s austerity approach provides a model for other nations to follow because it produces growth cannot be sustained from the data. But if only it were true … Oh Ireland, if only you were growing.
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\nIreland – the model<\/strong><\/p>\n

That comment came from an interview on the US NPR (April 30, 2012) – Austerity Measures Cost Some Politicians Their Jobs<\/a> – with one John Peet, who is the Europe Editor of The Economist Magazine.<\/p>\n

The topic of the segment was the “backlash against austerity measures” in Europe and he was asked whether there was “anybody offering any alternatives to massive budget cuts and tax increases”. He replied:<\/p>\n

\nThere is a lot of feeling out there that given how many economies are in a recession, more cutting of budgets and possibly more tax increases might not be the right answer. But there is very little by way of alternative because those who say we need to have more growth-promoting policies are not actually saying, you know, let’s start spending more money because they realize that the financial markets would react if we went back in that direction. So it’s all fairly vague stuff.\n<\/p><\/blockquote>\n

No it isn’t “fairly vague” at all. It is in fact quite clear what is needed – more aggregate demand. Here are some specific policies that would immediately stimulate growth within the current Eurozone structure.<\/p>\n

The EMU national governments could immediately announce a Job Guarantee<\/a> – a socially-acceptable minimum wage job offer to anybody who would desire to work.<\/p>\n

Then they could announce several major public infrastructure and environmental infrastructure initiatives (after due consideration), and before they did that and just after they announced the Job Guarantee they could announce a means-tested cash handout of some amount to all citizens.<\/p>\n

The ECB would announce that they were backing the measures fully – and would work within current EMU rules to ensure that happened (so the JG wages could start flowing immediately).<\/p>\n

The EU would announce that the ECB would fund a free holiday for 2 weeks for anyone who has been unemployed for longer than three months and their families to various locations – the destinations would be selected according to the scale of the loss of per capita income in that nation since 2008. The ECB would see the funds were allocated.<\/p>\n

The member states would also announce that they were purchasing all properties currently in foreclosure (at the prevailing market prices at the time of the announcement) and would then offer the defaulting occupying mortgagees the opportunity to rent their houses\/apartments back for 5 years with the option to purchase them back again after that period at the prevailing market prices with all rents paid in the meantime being written off the principle. The ECB would see the funds were allocated for this venture.<\/p>\n

The financial markets would have no influence on any of this given the ECB was funding the entire operation via the national central banks.<\/p>\n

Once growth resumed the EU elites would then have time to plan an orderly break-up of the monetary system and return currency sovereignty to the democratic states who would then float their currencies.<\/p>\n

When someone invokes the TINA option when it comes to economic policy you know they either have no imagination, no understanding or are wilfully intent on maintaining some ideological position that precludes alternatives.<\/p>\n

John Peet was then asked where there are “any economists out there who say you could do something different within the parameters that the bond market is going to set”. He replied:<\/p>\n

\nWell, I think the professional economists, what they want to see is much faster implementation of reforms to the labor market, deregulation, liberalization of product markets across Europe to make the European economies more competitive.\n<\/p><\/blockquote>\n

The mainstream economists certainly want these things and that is exactly why they should be disregarded. The fact that their prescriptions were followed previously by various governments is the reason the World is in such a mess as is noted in the quote.<\/p>\n

When I present the demand-side imperative, I don’t want it thought that I ignore the “structural” or supply-side of the issue. There are clearly some supply-side issues that have to be addressed – for example, appropriate taxation increases and regulative impositions for polluting firms; much fuirmer regulation for the financial sector (including outlawing many of the current practices and products); increased aid to those in poverty; and more equitable pensions and tax structures.<\/p>\n

But these issues, while important in improving the efficiency of the economy are not the current cause of the stagnation. The current problem is lack of aggregate demand (spending). That has to be addressed first.<\/p>\n

It is also the case that structural changes are easier to accomplish (given they always involve pain to some) when there is growth.<\/p>\n

John Peet was then asked whether the “German debate on austerity … [was] … shifting at all”, and he replied:<\/p>\n

\nVery little. I mean, one of the problems with this debate is that those who are against too much austerity are also demanding that Germany should do more to expand the economy to push growth across Europe. And a perfectly understandable German response to that is, look, we are doing better than we’ve done for 20 years already. Why should we, you know, do anymore?\n<\/p><\/blockquote>\n

It is a totally misguided German response. The penny doesn’t seem to have dropped that the “German model” of suppressing domestic spending growth (via harsh real wages suppression) and relying on export markets to drive growth overall is unsustainable when the fellow Eurozone countries buy the majority of its exports.<\/p>\n

German growth was driven by the spending growth in other nations (aided by the credit binge) that they now criticise. With Germany refusing to stimulate domestic demand and gaining competitive advantage by suppressing local workers’ prosperity the external deficits now the focus of attention in other nations were inevitable.<\/p>\n

Otherwise, the Eurozone would have entered recession earlier.<\/p>\n

If the nations restored their own currencies, then the Deutschmark would appreciate significantly under current domestic policies (perhaps by around 30-40 per cent). This would increase German unemployment if the Government didn’t act to stimulate demand and firms continued to suppress real wages growth.<\/p>\n

The other nations would see an improvement in their trading positions and domestic demand would increase.<\/p>\n

But even within the fixed exchange rate system, the Germans could improve things by stimulating domestic demand. However, it seems that the nation is completely spellbound with austerity.<\/p>\n

But the imposition of austerity across Europe is also undermining German growth. That was inevitable. Please read my blog – Fiscal austerity – the newest fallacy of composition<\/a> – for more discussion on this point.<\/p>\n

I noted a Bloomberg article yesterday (May 3, 2012) – German Majority Ready to Help Pay Down State’s Debts, Poll Shows<\/a> – which reported the results of a public opinion poll indicating that:<\/p>\n

\n… a majority of German voters said they are prepared to help the state pay down its debt … Fifty-nine percent of respondents said they were ready to accept personal sacrifices so that the federal government, the states and municipalities didn’t have to take out new debts …\n<\/p><\/blockquote>\n

Which tells us something about the German penchant for suffering.<\/p>\n

Finally, John Peet was asked whether there was “any country that seems to be leading the way out of here” and after mentioning Poland and Sweden (both non-Euro nations) he said:<\/p>\n

\n… And of the countries that were in trouble, I would say Ireland looks as if it’s the best at the moment because Ireland has implemented very heavy austerity programs, but is now beginning to grow again. So there are some examples …\n<\/p><\/blockquote>\n

Ireland – as a reality<\/strong><\/p>\n

Ireland? I last considered her in this blog – How’s poor old Ireland, and how does she stand?<\/a> – when the third-quarter 2011 national accounts data came out. It wasn’t looking to be in good shape then.<\/p>\n

I had also thought I noted similar trends in the most recent (December quarter 2011) – National Accounts<\/a> – data for Ireland issued on March 22, 2012 by Ireland’s Central Statistics Office.<\/p>\n

So I went back to the data.<\/p>\n

The CSO opened with the headline – Annual increase of 0.7% in GDP in 2011<\/strong><\/p>\n

Which is the figure the proponents of austerity like Mr Peet are clearly hanging their case on. The real GDP growth of 0.7 per cent in 2011 favourably compares to the contraction of -0.4 per cent in 2010.. So, in that respect the economy did grow a bit in 2011.<\/p>\n

But if you dig more deeply you will see a different picture. First, you will realise that the Irish economy contracted over the last two quarters of 2011 as its exports performance contracted. This gives you an idea of where things are heading rather than using the annual result for 2011.<\/p>\n

Second, you will realise that for the local residents in Ireland things got worse not better over the course of 2011 and all the growth and then some was expropriated by foreigners.<\/p>\n

The Irish data does not provide a compelling case for austerity. This is not a model for other Eurozone nations to follow. In fact, it is likely that the main driver of growth (exports) in Ireland will stall badly in coming quarters given the fact that the UK economy has now recorded a double-dip recession.<\/p>\n

The CSO said in their most recent National Accounts release that:<\/p>\n

\nOn a seasonally adjusted basis, constant price GDP for the fourth quarter of 2011 decreased by 0.2 per cent compared with the previous quarter while GNP declined by 2.2 per cent over the same period.\n<\/p><\/blockquote>\n

The following graph shows quarterly growth rates in real Gross Domestic Product (GDP) and Gross National Product (GNP) from the first quarter 2007 to the December 2011 quarter. The last two quarters for 2011 shows a real GDP declined by -1.1 per cent in the September quarter and by 0.2 per cent in the December quarter. Real GNP declined by 1.9 per cent in the September quarter and 2.2 per cent in the December quarter.<\/p>\n

That is not a model of growth for anyone to follow.<\/p>\n

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First, you need to first understand the difference between GDP and GNP. This is a particularly important point when it comes to understanding the Irish predicament (both before the crisis and now.<\/p>\n

You can gain a thorough understanding of these concepts from this excellent publication from the Australian Bureau of Statistics – Australian National Accounts: Concepts, Sources and Methods, 2000<\/a><\/p>\n

The two concepts are defined as such:<\/p>\n