Sinn Féin’s Response to the Economic Crisis – A Naive Social Reformism

Sinn Féin recently published its pre-budget submission with some fanfare yesterday. This exercise being the latest attempt by the party’s representatives in Leinster House to appear as a government-in-waiting. In the past, these submissions have been marked by a curious mixture of timidity in relation to offending the market alongside proposals which are so outlandish as to undermine their own credibility – yesterday’s offering was no different.

The current crisis offered the opportunity for the party to re-establish itself as a socialist opposition. Prior to this it had moved back from openly backing the bank bailout after exposure by the equally cynical opportunism of Labour and the loss of some of its few remaining socialists from its ranks. Yet, it is with some disappointment that Socialism or Barbarism has to report this exercise represents nothing but another missed opportunity to present the case for the socialist economic alternative. Worse still, it is grounded on poor economics and will merely reinforce perceptions that the party does not understand the first thing about the subject.

Yet social reformists from labour and within the party have welcomed the announcement prefiguring as they see it a neo-Keynesian alternative to the current Government’s course. This article seeks to dissect the approach, why it is wrong and what is the real socialist alternative a party associated with Connolly should seek to present.

Fianna Fáil and Irish Business

Few would doubt that Fianna Fáil has long been the party of Irish business. From its first beginnings the party was associated with big business and the small farmer. Its early policies were based on a classical import-substitution strategy behind a protectionist trade policy. When these failed, due in large part to the inadequacy of domestic capital, the party eventually suffered an ideological collapse and agreed to pursue an export-oriented growth strategy predicated on open markets and a higher rate of industrialisation. In its early era the party could count on the support of radical bourgeois nationalists whereas in its later departure it could count on the support of the few but influential group of pro-soviet socialists in the Worker’s Party who saw in the country’s industrialisation a speeding of the day of a fully developed proletariat and consequent revolution. At all times, this agenda was amenable to elements of the labour movement’s leadership as the agenda was always to create employment as a means to create growth.

This history should come as no surprise to any student of developmental economics as these were the two strategies adopted by virtually every dependent and neo-colonial society outside the ambit of the socialist system. Ireland was an underdeveloped ex-colony which the national bourgeoisie was seeking to develop so it was only natural that they would pursue these paths. What is perhaps less common is that the same party managed to pursue both at various stages – a fact finding its origins in the exceptional nature of Irish politics. It is essential that any analysis of today’s situation recognises that this is the beginning point for economic strategies in Ireland.

Unlike many other third world economies, Ireland’s adoption of neo-liberalist export-led growth worked as large amounts of FDI were attracted into the country due to a variety of causes not least of which being the predatory low rate of corporation tax.

The history of this approach is of interest. The problem with simply introducing a low corporation tax rate and trying to retain decent social welfare was that it created a pressure on fiscal receipts and so the country placed the burden of taxation onto the workers through higher income taxes. Late in the 1970s this approach collapsed under a tidal wave of anti-tax protests. The burden of taxation was reduced through large scale privatisations and austerity measures and a considerable proportion was transferred to relatively higher rates of indirect forms of tax such as VAT and stamp duty.

The logic of the fiscal environment which underpinned the Celtic Tiger era was growth predicated on low corporation tax levels, low labour costs maintained by low rates of taxation with relatively high rates of indirect taxation. The consequence was low levels of public expenditure and two-tier public services. With the growth of the property bubble, the rates of pay increased beyond the point at which the model worked (largely due to a newly integrated global labour market) and to make matters worse other countries adopted similar predatory corporation tax levels. The model didn’t work any more but the expansion continued for a few years stimulated by positive feed-back loops and a massive expansion in credit.

So now it has all come down and Sinn Fein is advocating a return to a high tax social democratic model unaware that the economic capital base, although significantly expanded, is insufficient to allow the adaption of such an approach. As a matter of fact, the collapse has severely damaged the capital base that the country did build up over the period of the Celtic Tiger and most businesses are suffering from a rapid deleveraging which will not simply re-inflate in the long-term let alone the immediate future. There is no room for manoeuvre.

A Better Form of Capitalism

The first question Sinn Féin and other social reformists should ask themselves is why is it if an alternative exists, an easy option, that does not involve massive structural change to the Irish economy (change necessitating the overthrow of capital itself) why wouldn’t Fianna Fáil pursue it now? Do you think them stupid? Do you think they want to destroy their political base when an easier alternative exists?

They are not stupid and they are not unnecessarily suicidal. The reason Fianna Fáil does not pursue the neo-Keynesian alternative is that it is a pipedream and anybody bar an economic illiterate knows that. The history of the party demonstrates that it has no ideological aversion to that policy and indeed anyone knows that they have few ideological hang-ups of any kind.

Of course the leadership of Sinn Féin themselves know this too. This is not an exercise in putting forward a credible alternative policy but just playing the game like Labour did when it opposed the Bailout outflanking Sinn Féin in the process; it is a piece of political opportunism. Unfortunately, this realisation has not dawned on activists on the left who are allowed to delude themselves that Sinn Féin would somehow implement this policy if they were in government refusing to look at how the same leadership continue their years old policy of rapidly expanding privatisation through PFI/PPPs and call for lower corporation taxes north of the border in order to stimulate FDI-led growth.

The reality is that Fianna Fáil would dearly love to pursue a course which reinvigorates the Irish economy and creates growth. That they of all parties could secure widespread agreement from domestic business to pay more tax if it would work – but it would not. The model is built on export-led growth and this is dominated by multi-national investors such as Dell who have already pulled out with such devastating regional consequences.

If the state could borrow its way out of the recession, then Fianna Fáil would surely adopt this approach as they did back in the 1930s but it is no more reasonable today than it was in the 1950s when that policy collapsed.

Critique of Sinn Féin’s Alternative

The failure to grasp the context for an Irish economic development strategy marks the paper and results in a huge layer of poorly formulated policies. The party hides behind comparisons of public spending to GDP and debt to GDP being lower than European equivalents. But surely they know that GDP is the most inappropriate denominator in a country where the economy is built around foreign direct investment. Instead on measures based on GNP (which allow for repatriated profits) Irish expenditure and debt are outliers. What’s worse is the figure of debt to GDP excludes the value of the Bank Bailout which the party supported.

The party finally appears to have absorbed at least part of the essence of the Keynesian argument but has misunderstood another part. A Keynesian stimulus is based upon borrowing not taxation. Taxation merely results from a recycling of value within the economy. There is no stimulus associated with what is proposed – in fact due to excess of taxation over spending – it is in fact deflationary. The party again has exposed its embarrassing lack of economics to the public. It is only because they are not taken seriously that this has not been more widely exposed.

The party argues that taxing the rich and spending the money on consumption is stimulative. This used to be a Keynesian mainstay but in today's Irish economy the case for it would appear marginal in the extreme given the scale of leveraging in the banking system. The party spokesperson clearly does not realise that money in banks does not simply sit there doing nothing but is used to leverage investment amounting to maybe 25 or 30 times its value. Given the dominance of the domestic construction market in the credit books of the Irish banks it is highly likely that taxing the rich actually reduces overall consumption many times more than what results from paying money to poorer consumers. This is even more likely if you add in the leakage associated with consumption in the modern import-dependent Irish economy in comparison to the very high economic multiplier associated with the construction industry.

A Capital Tax - A Revolutionary Demand?

The proposal of raising a 1% tax on all non-residential and non-agricultural property is perhaps the most radical but naive of all the recommendations. In the hands of a revolutionary working-class movement such a demand should be supported every step of the way but unfortunately Sinn Féin present it largely without understanding its implications. If and when they realise just what it would cause the leadership would run away from it faster than they ditched raising corporation taxes ahead of the last election.

At a time when businesses are struggling to maintain cash-flow (let alone achieve break-even) the application of this tax would probably break the economy. Investment would dry up and operations would close as businessmen calculate that they were losing money on already tight margins. Unemployment would shoot up and capital would fly out of the economy by every means at its disposal. And that’s before the ECB started to raise interest rates as the core EU economies begin to lift a measure which would further increase the impact of this move. It is unlikely that Sinn Fein representatives realise just how radical a 1% property tax would be. For the sakes of comparison perhaps they shoud look at the uproar and threats that have compelled the whole array of EU governments to beat a hasty retreat over proposals to introduce a 0.1% tax on financial transfers. How much worse would the reaction to a 1% wealth tax in a small country like Ireland be?

Let's look at it another way. Businesses operate to make profits above the rate of interest. If they don't make such profits it's better to save the money and get interest paid direct. That's how the market decides to allocate investment. More profitable sectors get greater investment at the expense of less profitable ones. More investment lowers operating costs and increases competition resulting in more production and lower prices. Eventually, the average profit rate lowers with the entry of more suppliers and more supply into the market. It's the essence of the market. To apply a 1% capital tax would make investing in the Irish economy profoundly less attractive to the global market. It would raise the break-even point for businesses to the rate of interest plus one percent. One percent on the margin is a lot at the best of times let alone the worst of times. That's why a 0.1% Tobin tax is so important. It's deployment is not primarily fiscal (the revenue raised will be large but pale into significance alongside its impact on how the economy operates) but economic. It would reshape business around the world. So a 1% property tax would also reshape Irish business but not in the way that Sinn Féin 'economists' might anticipate.

Perhaps revolutionaries in the party would celebrate such a radical turn but the reality is that there’s no way the party would ever implement this measure. It would be sufficient to collapse the capitalist economy in Ireland at this time. It's likely that they just don't know what they're after proposing.

From a revolutionary perspective the party would be better to join the Socialist Party in arguing for a set of immediate, transitional demands setting out actions on behalf of the working class than to make such a proposal which would probably result in more damage than simply nationalising the commanding heights of the economy.

The arguments presented that capital is not mobile and is inflexible stand against economic realities of the last 20 years. The reality is that capital is very mobile that transportation costs are historically low in comparison to the costs of production. Indeed, in the current climate there is less reason than ever for companies to be attached to investments when they are operating at such low capacities (and consequently obtaining significant productivity increases with marginal growth).

Effective Taxation, Spending and Borrowing

Sinn Féin reiterates its focus on eliminating tax breaks again in an attempt to present a populist policy yet forgets about the issue of salary levels in the public service. The reality is that closing tax loopholes is very difficult to do, would have significant unforeseen implications for the wider economy, would result in capital flight and would likely raise very little additional revenue (in terms of what’s required).

Some of the measures proposed are sensible such as hitting the Pension Reserve Fund although it is unclear why the party didn’t go all the way with this. Again, however, it is not clear that taking money from this reserve would actually result in a net stimulus depending where that money is invested at present.

The party's position is more solid when it comes to spending with its suggestions for a useful job retention proposal and the recommendation of harmonising VAT on an all-Ireland basis both of which are good suggestions (and would likely cost a lot less than they anticipate due to unforeseen savings elsewhere in the economy). It is perhaps indicative that the party does not seek to address the differential in the minimum wage and social welfare payments either side of the border as this would likely expose the realities of its stance on these matters in the north. Arguments about the need to maintain the gap between the minimum wage and social welfare fail to understand that it is likely that both are to be reduced proportionately in the onslaught on workers.

In a step forwards from its earlier position and the naive positions of other reformist economists, it recognises that the cost of borrowing will increase due to the interests of international lenders. But this concession undermines the ethos of a package which is meant to act as a stimulus to the economy since funding has to be sought from taxation itself which produces a potentially greater deflation in the economy. It is precisely for this reason that more consistent and better economists from the Keynesian tradition have not conceded that the cost of borrowing must necessarily increase.

The Socialist Alternative and the historic conflict with Reformism

Sinn Féin are desperately trying to find an alternative to today’s free-market capitalism; a fairer capitalism but one which does not involve any radical social change. They are doing so with the same degree of naivety as they approach the question of Irish reunification where they are neither capable of engaging Protestants effectively nor presenting an economic answer to the unavoidable questions presented by the economics of Irish unity.

But they are not alone. Lefts within Labour wish to present the possibility of a better, kinder capitalism – one that does not necessitate a revolutionary overthrow of the state such as suggested by such figures as Marx, Lenin, Connolly and Guevara. We are told continuously that their politics has become dated by history and instead of their revolutionary socialism we must ditch it to join with the followers of Bernstein, Kautsky, MacDonald, Jaures, O'Brien, Ebert and in today's world Tony Blair in seeking a third-way of accommodation with capital. It is, of course, beyond these people who wish to ignore history that the very same arguments were raised by the opponents of Lenin, Luxemburg and Connolly in their lifetimes by reformists in their day. Socialism has always been out of date. It might interest readers to note that the very earliest democrats were assailed by the same means before the necessity for democracy was accepted by all and sundry. The likes of Bismarck and the British argued against the simplicity of the French model which did not take into account the historic particularities of their era.

The reality is that there are no easy answers within capitalism in today’s globalised economy no more than there have ever been. The market dictates the terms of social provision in each country forcing countries to compete in a race to the bottom. This crisis is about achieving a new balance between the net consumer economies in the west and the net producers of the east. Ireland has been caught in the middle of that 'correction' with an export-oriented economy built on FDI unable to compete with new market entrants.

Socialism or Barbarism! - the choice for a new generation

There is no solution to this conundrum within the system of capitalist production. Indeed, due to the operation of the law of value there is no solution outside of it for one country – no more than there was when de Valera gave up on the import-substitution approach. Socialism must be international and it must be based on a democratic conquest of power. It is only by taking control of production and distribution outside the control of the market that a humane solution to this economic impasse, the crisis of the third world and the environmental catastrophes facing humanity is to be found.

Many have given up on this alternative but it is more necessary than ever to consciously reiterate the demands of past generations of socialists. There is no better form of capitalism. You cannot make a cake without cracking the egg.

In the absence of that alternative Ireland’s eventual rebound will be built upon mass emigration of surplus labour, a reduction in the living conditions of Irish workers to a level where domestic capitalists can compete in the global market and widespread privatisation. It doesn’t matter whose in government or whether they call themselves revolutionaries, socialists or communists for that matter, the economics of austerity will be the agenda and those parties in government will find themselves forced to enact those policies by the forces of the global marketplace.

Only by extracting ourselves from this system can we address the problems associated with the global race-to-the-bottom and environmental catastrophe associated with globalised capitalist production. The revolutionary path today is to set out and popularise a series of transitional demands on which workers can begin the task of transforming society.