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That financial orthodoxy…and a small argument on the economic right. November 28, 2009

Posted by WorldbyStorm in Economy, Irish Politics.
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An enjoyable piece from Karl Whelan over on Irish Economy which takes to task some of the assertions made by Pat McArdle in the Irish Times this week and in particular the notion that there is no connection between the monies pumped into the banks and the budgetary crisis. I like Whelan’s stuff. He’s honest and although not on our side of the ideological divide (last week he had an interesting piece on flat taxes, but… it was on flat taxes) there’s usually something worth reading.

McArdle argues that:

If the exchequer were to inject another €4 billion capital into Anglo Irish Bank in the morning, this would increase the EBR by an equivalent amount but would have no impact whatsoever on the GGD.
This is because the international rules treat such capitalisation as a “below the line” transaction, i.e. investment in a commercial State body which is outside the government sector, rather than current expenditure which affects the deficit.

Whelan disagrees. Not least because Anglo ‘is no longer a commercial operation and the government will get back none of the €4bn that was put in this year, nor is likely to get back what it will put in next year’.

It’s funny, I was reading McArdle’s piece on Thursday morning and thinking, hmmmm… that can’t be right – particularly when he started to argue that General Government Deficit was the ‘critical measure’ of fiscal policy rather than the Exchequer Borrowing Requirement, but wasn’t quite certain as to whether it was my own bias that was informing me or something a little bit more grounded. Good to see it wasn’t just me for Whelan dismisses this too. And telling to note that a year ago I probably wouldn’t have recognised that something was slightly amiss. Them’s the times we live in.

But important too to note that McArdle’s piece fits into a discourse of There is No Alternative. His overall point was to argue that:

The €4 billion of “cuts” is required to stabilise the GGD in 2010 at the alarmingly high level of 12 per cent of GDP; without them, the deficit would rise to 14 per cent, the highest in the euro zone. It is unlikely that this would be tolerated by either the markets or the EU.
And that:

The estimates given in the April budget, namely €4 billion for the scale of the action needed to prevent the 2010 GGD worsening, stand, irrespective of whether or not the banks are bailed out or the pension fund terminated.
Unfortunately, there is no easy way out of the current fiscal dilemma; fortunately, this seems now to be increasingly realised inside the Dáil. However, the communication of this message to the public at large remains a challenge.

In this case because there is a core of dissenters on one aspect of fiscal policy, that being NAMA, there is an immediate critique, not from the left but the economic right, to point out that his analysis is arguably incorrect and that, as Whelan notes, the capital injected into the banking sector has a direct impact upon the broader budgetary crisis. It is perhaps a sign of how dominant the economic orthodoxy is that it takes IE to provide this critique.

Pat McArdle writes economic commentaries for The Irish Times . He is a former chief economist with Ulster Bank. This is the first of a number of pieces he will write between now and budget day, teasing out the options facing the Government and their implications.

A continuing series? It looks like we can expect entertaining times ahead. At least on that front.

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Comments»

1. Tomboktu - November 28, 2009

“A continuing series?”

Ah. So can we expect to see a matching continuing series of articles teasing out the options in the Irish Times from Paul Sweeney or Michael Taft?

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WorldbyStorm - November 28, 2009

We can not!

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Tomboktu - November 28, 2009

Ah, you’re just a pessimist ;)

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WorldbyStorm - November 28, 2009

I am! :)

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2. alastair - November 28, 2009

In this case because there is a core of dissenters on one aspect of fiscal policy, that being NAMA, there is an immediate critique, not from the left but the economic right, to point out that his analysis is arguably incorrect

Maybe I’m missing a point, but McArdle is clear enough that the bank bail out /NAMA wouldn’t have changed the need for the €4 billion cuts one way or another. The economic right argument for dealing with the banks also involves substantial financial commitment from the state, but assumes commercial property fire sales for bad debts will clear out the banking pipes in short order, and that bank shares will recover quickly enough that the state can offload their financial commitment for less than the NAMA formula would require. They may be wrong, or they may be right, but it wouldn’t remove the need for extensive borrowing, or exposure to great risk in either case.

So the ‘orthodoxy’ and the economic right’s alternative both amount to a similar need to reduce state outlay on services or salaries as far as the public at large is concerned. It’s poison A or poison B.

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3. CL - November 28, 2009

McArdle is a propagandsist for the elite who caused the debacle and who now benefit from the pseudo-solution proposed.

He is using irrelevant statistical and bureaucratic distinctions between the EBR and GGD to make a spurious argument that there is no connection between the bail-out of the banks and the proposed austerity budget.

Whelan rightly points out:
“-Every euro of debt obligations issued in the name of the Irish taxpayer pushes us closer to the point where international financial markets start to question our long run solvency. And sovereign bond markets are well aware of the costs to the Irish taxpayer of the banking bailouts, irrespective of whether some statistician includes them in the GGD or not.-”

Its the total amount of borrowing that counts: reducing wages to reduce the budgetary deficit means that there is more of the total borrowing available to transfer to the banks.
Reducing worker living standards is required in order to preserve the privileges and emoluments of the propertied bankster class.

Purchased economists, such as McArdle, are attempting to deny that this transfer of income from workers to the banksters is what is being proposed by Fiannna Fail and the Greens, -a transfer which will merely aggravate the severely deflationary condition of the Irish economy and impede recovery.

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4. EWI - November 28, 2009

Madam Editor wouldn’t be a property investor, would she? I’m just thinking of the Sindo conducting a campaign on stamp duty at the same time that the Harris’ were looking to offload their expensive pile…

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irishelectionliterature - November 28, 2009

I’m sure Madam Editor wouldn’t be averse to a return to profitable property supplements, nor indeed a return on myhome.ie.

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