HEADTOHEAD: Tom O' Connorargues yes, the Government should follow Gordon Brown and Barack Obama by borrowing money to stimulate the economy and create jobs, while Stephen Kinsellaargues no, Ireland is far too small and open for national solutions to work and we need international interventions to create certainty in the real economy.
YES
BACK IN June, the ESRI broke the news that Ireland was in recession. At that time most stockbroker economists were predicting that the recovery would start in 2010. They are now less optimistic. My own view at that time was that the recession was likely to continue if the Government implemented its draconian cuts in public spending. It would also continue unless there was significant government intervention in the economy to stimulate economic growth and employment creation.
This is still my position. However, it is now the position of British prime minister Gordon Brown and US president-elect Barrack Obama. The view that government needs to reclaim a strong position in directing economic and social development has now re-established itself, given the failure of global banks and financial institutions to behave responsibly.
Firstly, why will the recession last if the Government does not reverse cutbacks and increasing spending? Well, the failure of the banking system severely diminished the level of private sector credit available for consumers and businesses. This, when combined with the bursting of the property bubble has resulted this year in the largest increases in unemployment on record.
The dramatic fall in tax receipts immediately after the property downturn has now been exacerbated by increasing unemployment arising from the construction collapse and firms closing due to banks foreclosing. However, the Government is now also contributing to the problem.
It has frozen the hiring of many frontline staff in health and social care. Its current spending cutbacks will now create further unemployment in teaching and other areas. Worse, its overall 2009 budget cut of 10 per cent in capital spending will starve the country of investment capital. The banks will not step in even if they recapitalise, as most future recapitalisation has already been committed.
Government cutbacks on the current and capital side are making the matter worse and depressing economic activity. Unless the Government reverses cuts and invests directly into the economy, like Gordon Brown, this will lead to further falls in tax receipts and growing levels of unemployment payouts. In turn, this will worsen the public finances further, which will require further cuts at the end of next year or before. This vicious circle would likely result in a prolonged recession which could last five to 10 years.
The Government needs to arrest this spiralling recession. It still has substantial scope for borrowing. The current level of GDP is about €200 billion and the Government debt is nearly 38 per cent of GDP. Under the EU Stability and Growth Pact, this is allowed to rise to 60 per cent. The Government's figures show that it will keep capital spending at about €10.3 billion from 2009-2011 and this would keep debt levels at 48 per cent of GDP in 2010 and 2011 and 43 per cent in 2009. However, the Government could borrow an extra €35 billion and still stay within the EU targets.
Even if the Government only used €25 billion of this borrowing, it could inject a fresh economic stimulus of over €8 billion a year into the economy. This would be likely to have a strong positive impact on economic growth, which would increase employment.
There are 43,000 people on housing waiting lists. The National Economic and Social Council recommends building about 70,000 social housing units by 2011. This would give a huge impetus to the flagging construction industry. In addition, there are hundreds of schools in the country which need to be built and many other projects in the NDP, including developing projects to harness sustainable energy.
About €1 billion a year would also need to go to extra training to get the unemployed back to work. There are real jobs still in the economy, but also rising unemployment, a phenomenon known as structural unemployment. This has arisen from a failure of State investment in education and training to keep up with labour market needs.
The State should borrow to train people in key areas. According to the Fás National Skills Bulletin, there are still labour shortages here. There is a shortage of childcare workers, food preparation workers, sales people, caterers, computer analysts, engineers, medical device technicians, engineering technicians, radiographers, instrumentation workers, draft persons, social care workers and clerks.
For a cost of about €550 million in increased training payments, the Government could retrain 50,000 people per year, with an enhanced training allowance of €330 per week. The physical infrastructure to do so already exists. The cost in terms of increased staffing would likely be in the region of €250 million. The current National Qualifications Framework is ideal for this purpose.
The Government needs to take bold measures to revitalise the economy. In terms of training, the proposed measures would correct for past over-reliance on construction. Meanwhile, public construction work, on housing, energy and other infrastructure, would add long-term capacity to the economy. This would likely put the country back on a more sustainable growth path and prevent unnecessary hardship.
• Tom O'Connor teaches at the department of social and general studies at Cork Institute of Technology
NO
WHEN A government tries to spend its way out of a crisis, the idea is for the government to buy goods and services the market will not or cannot provide given that the economy is in a downturn. This increase in demand for goods and services will keep the workers at work, keep them spending, and keep employers investing in new business ventures.
Assuming the government does not have a huge budget surplus to play with, it pays for this increase in spending either through increasing taxes, which dents domestic consumption by households and firms, or increased borrowing from abroad, the interest on which must be paid back (plus the principal) at a later date.
The thinking goes that government-induced boosts to overall demand for goods and services in the economy also cause ripple effects from one sector to another, which help the economy grow, and most importantly, keep people working.
This type of recovery plan, where we spend our way out of a downturn, is most closely associated with the economist JM Keynes.
I think Keynes would have said the present situation is largely a matter of overconfidence in certain markets ("animal spirits") combined with historically low liquidity preferences thanks to years of cheap money, and inappropriate financial market regulation here and abroad.
But Keynes had never seen a world as interconnected as ours, although he was aware of one as globalised before the first World War.
He had never seen the heights to which mathematical finance could take markets in the internet era.
I don't think we can just spend our way out of the crisis alone, because, through borrowing year on year that would get us back to the dark days of the 1980s, or, through taxation, we hurt the average person's ability to consume what they want, because taxes are higher.
Because Ireland is a small, open economy, any Government expenditure will perforce "leak" out into other economies, because of our reliance on imports and exports, benefiting our trading partners, but not ourselves, directly. Either we hurt ourselves now, or later.
Nor do I think the Government, even as part of the EU, currently has the policy tools or the international institutional frameworks in place to mitigate the downturn to a significant degree, considering the small size and openness of our economy, and the magnitude of the global economic downturn we are watching unfold.
The most pressing problem, in my opinion, is to reduce uncertainty in the real and financial parts of the Irish economy, rather than simply propping up demand through increased Government spending, financed primarily by borrowing. The problem, in other words, is structural rather than simply situational.
The Government has committed itself to insuring the liabilities of individual financial institutions so as to prevent "runs" by creditors.
The point of this guarantee scheme is to calm creditors who are worried that mandated aggressive writedowns are going to render an institution legally insolvent.
We saw the efficacy of this approach as €10 billion flooded into the Irish financial system in the week following Minister for Finance Brian Lenihan's announcement of these guarantees.
In a time of increased uncertainty, people cannot rely on historical or current market data to forecast future prices reliably. In the absence of institutions that regulate and assure the existence of orderly markets, there can be no reliable existing anchor to future market prices.
In such a world, speculative activities can not only be highly destabilising in terms of future market prices, but the volatility of these price changes can have costly real consequences for the aggregate real income of the international community, and we are experiencing those.
Nowhere has this been made more obvious than the capital flight to and from Irish banks following the crash of house prices amid the fear of bad debts corrupting balance sheets in an international credit crunch.
Investors don't know how much bad debt the banks have on their books, and this creates yet more uncertainty. Trust has broken down. The images of the banks are tarnished and, in the absence of real data that can confirm or deny people's suspicions, imagery matters.
What is necessary is to build into the international financial system permanent fireproofing rules and structures that prevent image-induced currency crises, speculative attacks and credit crunches.
Crisis prevention rather than crisis rescue must be the primary long-term objective. Nobel laureate James Tobin argued for intentionally placing "sand in the gears" of the financial system for this very purpose.
Ireland must work with its international partners to achieve the objective of macroeconomic financial stability through prudential regulation designed to reduce uncertainty in international markets. We are far, far too small to go it alone.
• Dr Stephen Kinsella lectures in economics at the University of Limerick. His website is www.stephenkinsella.net.