The response to the Irish economic crisis

There has been some analysis coming out of various websites criticising the government’s response to the economic collapse from a centre-left position. Socialism or Barbarism considers that these are themselves inadequate and grounded on ideological fallacies. We attempt to offer a more thorough analysis from both a traditional Keynesian and a Marxist perspective.

Beginning with the Crisis Itself

The crisis in Ireland resulted from a collapse in the property bubble which had developed through an unprecedented boom over the last few years. The era of the Celtic Tiger in which expansion was achieved primarily through FDI-led growth attracted by low taxation should have come to an end much earlier but was extended due to the historically-low interest rates dictated by the European Central Bank (ECB) who were more concerned with stoking up growth in the largely stagnant central European economies than cooling down the rapidly overheating Irish economy.

Historically-low interest rates and the ready availability of credit pushed by ever-hungry banks competing for a chunk of the high return property boom further exacerbated the self-perpetuating expansion. At some point, reality was always going to bite home as demand for new houses become insufficient to meet ever growing and ever more expensive supply. However, these limits were being extended through the availability of 100% (and higher) mortgages and interest-only repayment options which offered mechanisms to bypass any semblance of balance.

Looking on it now the collapse across the banking sector which spread outwards from the USA and froze the inter-bank lending markets probably was a good thing as it restricted the extent to which the Irish property market could have boomed under its own constraints. As with all things, the longer the boom the greater the inevitable correction. If the US credit markets hadn't froze up who know's how much the bank's exposure might have become.

In any case, when the house of cards collapsed it exposed a whole range of corrupt practices. Equally, however, the collapse exposed in reality and not just in theory the extent to which public finances themselves were dependent on fiscal receipts from boom sectors: cue the massive cutbacks anticipated by An Bord Snip and two emergency budgets.

At the same time the general public were left scratching their heads wondering where did the money go so quickly? The answer to that is that the money was all borrowed and now banks were hurriedly rebuilding their capital base as fast as possible so it’s simply disappeared via deleveraging: cue the complaints that banks aren’t lending enough.

The Government’s right-wing response

The response of the Dublin Government has been abysmal but entirely unexpected. First of all, they knew that state fiscal receipts were hugely dependent on boom sectors yet did nothing to put the breaks on growth. It would have been very easy to informally encourage banks to be more careful in terms of lending – but that would have gone down badly with Fianna Fáil’s property developer friends not to mention the bankers who were seeing ever higher returns on ever more risky investments.

The Government’s response has been to steadfastly underpin the banking sector (regardless of whether it is financially feasible in the context of an absolute rout in property values) and to attempt to straighten out their own current expenditure budget. The impact of this will be to further reduce consumption in the domestic economy and the reality is that the scale of losses which may accrue through the bailout, NAMA losses and the consequent losses through forced nationalisation (analysed by ourselves previously) will make these all too painful economic cuts seem irrelevant.

The left-wing response of the opposition

All left-wing parties have made great show of their opposition to the cutbacks and have given support to the bank bailout only after extracting maximal political point-scoring opportunities from it. In terms of specifics, however, they have been rather more reticent.

The main responses have been from Fine Gael and Labour with Sinn Féin throwing its hat in for fun. Fine Gael’s response has been to focus on the incompetence of this Government (as opposed to itself) in running the system. They blame the government, rightfully, for overseeing dreadful regulation but fail to identify anything further wrong with the system. Their only fundamental criticism is that public sector spending was allowed to balloon and become inefficient – again the criticism is of the other party’s management rather than anything more substantive. Theirs is a position of fundamental opportunism. Cuts are to be opposed both because they hurt those at greatest risk of social exclusion but also because they don’t go far enough. Short on specifics they commit to budgetary cutbacks on the basis of simplistic percentage targets across Departments. Nothing specific, hence nobody in particular will be offended ahead of an election.

As usual, Sinn Féin’s response is confused. The party initially backed the bailout only to vote against it when it became apparent that their earlier decision was deeply unpopular internally and unnecessary. The party then identified a range of new taxes, which in keeping with Sinn Féin’s economics, was directed at the business sector. Nowhere was there any recognition of the possibility that such additional taxes might generate less revenue than more through capital flight and offshoring. But Sinn Féin simply does not understand economics. The party has steered away from commitments to borrow for a stimulus but key personalities have been talking up the possibility of higher taxes to pay for public services. If nothing they are, at least, consistent in their fallacies.

Some elements within the Labour party based around the TASC economist group have proposed a more substantial alternative; typically that associated the British Labour party since the 1930s. The essence is that there needs to be greater government efficiency but that the government needs to be ready to borrow to create a stimulus to increase domestic consumption and that it is safe to do so due to .

From a marginalist perspective, the logic of this position is that public consumption will increase the marginal efficiency of capital and in the context of a low interest rate stimulate both investment and growth. The consequent deficits should be repaid over the economic cycle.

Marxist Criticisms

It is seldom that a Marxist criticism of the two approaches is provided. The first approach is classical monetarism. The government which cannot change monetary supply or interest rates must simply cut back and live within its means. Market fundamentalists might object to the bank bailout on the grounds that it should be left to collapse but they know well to allow government to prop-up the money capitalists and will only make an appearance in the period of future inflation.
The problem with this approach, however, was correctly identified by the Keynesians. The first is that a medium-term equilibrium may indeed be found between the marginal efficiency of capital and interest rates but that this may correspond to a high overall level of unemployment. And secondly, even if prices (including that for labour) fall in a deflationary collapse and eventually reach a new equilibrium corresponding to full employment this will be at the cost of a protracted and serious collapse across the economy. There is a possibility that deflation could remain for years. Even worse, and this is of particular relevance, pursuing a deflationary approach to ‘correcting’ the economy as opposed to a stimulative response may result in a future aggravation and prolonging of the downturn. As deflation discourages investment (as prices for equipment goes down with time) industrial capitalists will choose not to invest early and this will result in a longer overall period for recovery.

The Keynesian approach has, however, a number of drawbacks. First, and not least, is the fact that Keynes advanced his approach to stymie socialist revolution. The Keynesians believed that the capitalist system could stabilise for protracted periods at a point of significant unemployment and that the government’s role in this was to increase consumption to reduce unemployment. Historically, one of the best ways for governments to increase unproductive consumption has been wars and, hence, we are left with military Keynesianism.

On the other hand, the Keynesians felt that governments should be proactive in pulling an economy out of contraction. This required stimulus, loose monetary policy and low interest rates. Ireland can only do the former (although the ECB is playing loose and fast for the moment). The problem for Ireland is that we cannot devalue our currency and, as such, it is quite possible that we run the risk of a national default. This, in itself, raises the risk premium (spread) on national borrowing and makes it difficult to borrow to enable such a stimulus. This difficulty is further exacerbated by the fact that interest rates are likely to rise to offset German and French economic growth at a time when we are likely to remain in the doldroms.
What is unclear, therefore, is whether the state can borrow sufficiently to enable such a stimulus. The state does not have the ability to devalue or even, as a last resort, to print money directly so this is a very real risk. It is this problem that presents itself to the Keynesian critics of the government.

Another related problem is whether the cost of Irish labour is competitive. The concept that prices will fall to a new lower equilibrium point at which full or natural employment obtains is predicated on domestic consumption being the lynchpin of economic growth. In an export-oriented economy, growth could be achieved on the basis of exports, provided that the relative input prices are competitive. This is precisely Ireland’s quandary where input prices including land rent and labour are above those in competitor nations. The logical position is, therefore, that wage costs must fall to levels in competitor nations in order to enable full employment. The fact that Ireland does not have either the capital base of Britain or the USA or the industrial base of Germany or France would suggest that there are few realistic alternatives. Indeed, given the advantage conveyed by the asset bases of these countries it is likely that their wage levels would stabilise at levels above those in Ireland. Cue substantial emigration to balance supply and demand within the labour force.

The impact of the stimulative policies which have been adopted by the main imperialist ‘core’ nations will be medium and long-term inflation. This is the cost of avoiding the worst of the contraction. The corollary of that will be to increase the cost of living even above that increase consequent to global warming and demand for oil/gas in a global upturn. In this environment, Ireland will import inflation across the board while remaining mired in a protracted recession. At the very time when workers will need pay increases, the pressure will be on for at the very least significant pay decreases. The standard of living with fall precipitously.

The Marxist Alternative

The reality would appear to be, that on the basis of the export-oriented growth strategy, that the politics of the Government are more realistic than the hopes of left-wing critics. The hard fact is that in order for Ireland to compete there must be reductions in the standard of living and large scale emigration or else a move away from the low-cost export-oriented model. There are significant risks with this approach – not least a contraction in the asset base of the nation at a time when debts remain static – which could easily result in default but without a generalised overthrow of the system it is difficult to see how any alternative might be practical.

The Marxist alternative is to overthrow the market as a mediator of production. The market determines what is achievable and what is not simply because we concede that space to it. Unfortunately, so long as the market dominates the majority of the world fundamental change is impossible as the market’s invisible hand will express itself through the basis of exchange. Similarly, so long as the market dictates, real change to improve the environment will be impossible as the environmental costs associated with capitalist production will remain externalised in theory and socialised in reality. Socialists must focus their efforts on exposing the unreality at the heart of all arguments put forward by the ruling elite and their reformist opponents.