The Cedar Lounge Revolution

Austerity indefinitely… May 10, 2013

Posted by WorldbyStorm in Economy, European Politics, Irish Politics.
9 comments

… would appear to be the proscription being suggested by Cliff Taylor in last weekend’s Sunday Business Post. And it’s worth noting the piece linked to by CL in comments over the weekend here where, as he says in the FT Wolfgang Munchau’s take is that:

The new ‘austerity be damned’ zeitgeist is mostly flim-flam..

So what does Taylor suggest? Well he notes:

You know we are in strange times when the Financial Times writes an editorial lauding the views of left-leaning President Michael D Higgins. When various Eurocrats who have championed austerity – the latest being EU council president Herman Van Rompuy – join the call to find new approaches, things feel even stranger.

And that, and this is crucial:

There is a growing realisation that the euro recession could just trundle on indefinitely. Even European Central Bank president Mario Draghi conceded as much last week, using the peculiar Central Bank-speak phrase that the risks to the growth outlook were “on the downside”. Roughly translated, this meant he was worried that the ECB’s forecast of a pick-up in growth in the second half of this year might not be realised.

And in fairness he asks:

But is anything really going to change, apart from a few cooked-up announcements for the June euro summit on “job creation”.

Draghi has brought the ECB a long way – both by way of rate cuts and by promising to buy the bonds of countries in difficulties. He also said he may yet do more.

And notes that in comparison to US style ‘monetary expansions’ the ECB is a long long way from a truly interventionist approach.

While he notes:

But the things that might really make a difference – such as commitment by the richer countries to expand a bit more, let wages rise and so on – do not look likely. EU leaders will put together some manoeuvres to boost investment with the European Investment Bank and so on, and some may be useful up to a point, but they will not change the picture.
As for the promise to “break the link” between troubled banks and sovereigns . . . well, let’s not hold our breaths.

So, taking all that he then applies it to the Irish context. But he does this in a way which suggests that he hasn’t integrated the essential point that austerity isn’t working.

So how should Ireland play this? In a two-faced way, I would suggest. We should do all we can to push the Michael D-type agenda at European level – more expansion, eurobonds, whatever. At home, meanwhile, we should just concentrate on getting the deficit-cutting job done. If there are useful things the government can do to support growth in certain areas via investment, while still delivering on budget targets, then fair enough.
However, the focus should be on getting our figures back in order and hoping that the rest of Europe (and the world) finds a way to get growth going internationally. That’s the mix we want. To pretend we have the cash, the leeway or even the ability to actually stimulate our own economy is pure folly.

But this makes little or no sense, even on its own terms. If austerity isn’t working then it isn’t working. If it isn’t able to deliver across the eurozone in states with much greater resources how logically can it function in this state? If the former are seeing at best ‘indefinite recession’ then what will this state face? How can we cut the deficit or get the figures ‘back in order’ if they cannot? Indeed he’s ignoring the point that the reason for the push-back against austerity is because as a policy it has failed, not because it’s an option that is less viable as against one that is more viable.

And given the incredibly constrained economic approach adopted by this government even within the the context of the troika et al, one which has deliberately eschewed increases in personal taxation, the idea that we ‘lack leeway’ seems wrongheaded. I’ve already noted last week that Michael Taft and others using ECB/IMF constraints provided alternative plans.

Cliff Taylor might not agree with such plans, but it is disingenuous to assert that there is ‘no ability to actually stimulate our own economy’ let alone that the very idea is a pretence.

Pat Leahy, in the same edition of the SBP, makes a telling elision of two different things in another piece on austerity. He elides (or confuses – depending upon one’s interpretation) the idea of an ‘end to austerity’ with those who say ‘austerity hasn’t worked’.

All of a sudden, the end of austerity is in vogue. Christine Lagarde, Jose Manuel Barroso, Joan Burton, Jack O’Connor – everyone’s at it.
President Michael D Higgins has warned about the dangers of austerity in a speech to the European Parliament and a Financial Times interview. So is the end of austerity really in sight?

Let’s be clear. Those are functionally and in every other sense two different positions.

The government could declare an ‘end to austerity’ based on the premise that it had worked. Those of us who have been sceptical about it from the off would point to the growing quantity of data to support that contention. That latter position argues that austerity is wrong in and of itself, not that it is coming to an end naturally.

And it’s also worth noting that Burton et al have also noted the limits of what is achievable in terms of austerity in contemporary polities:

Lagarde has been beating the drum for Europe’s economies – especially the strong ones which can afford to borrow – to shift from budget cutbacks to investment. In a striking qualification of existing policy, Barroso said that Europe had reached the limits of political and social support for austerity.

That latter is not unimportant. Greece would now appear to be very much an outrider, and perhaps some have learned a few lessons from its example in terms of what negative impacts can occur when a society and polity is squeezed too hard in the name of fiscal rectitude.

What’s fascinating though with Leahy, as with Taylor, is the inability to see that if it is not working in bigger more stable economies then its chances of working in ours is minimal.

There is a slight air of unreality about this – which is fine – but it is begetting a fantasy political debate, and that is not fine. “People need a break,” said Mary Lou McDonald in her questioning of the Tánaiste in the Dáil last Thursday. They sure do. But pretending economic policy can be constructed in these terms is ridiculous.

And:

There is certainly a reasonable debate to be had about the optimum pace of fiscal adjustment and the effects of too much austerity in strangling growth. But any substantial easing of austerity either requires the government to dip into cash reserves intended to provide comfort to future lenders, or to seek to borrow greater amounts. Neither course of action is calculated to inspire confidence in the markets from which Ireland must continue to seek funding.

The problem with that latter argument is that it entirely ignores the point that the economy continues to fail under austerity measures – putting aside the public appetite to accept them for a moment. In other words it is impossible to grow in such a context. Hard to believe that the markets would find that inspiring much confidence either.

Moreover, and again one must consider the lack of interest in alternatives, Leahy appears to believe that there is but one way forward within the orthodoxy:

The budget deficit – the difference between what is raised in taxes and what is spent on public services and welfare – still stands at a billion euro a month, give or take. This sum must be borrowed, thus adding that amount to the existing national debt, on which recurring interest payments must be made. It is currently being borrowed from the troika; when Ireland exits the bailout, it is intended that the shortfall will be borrowed from the bond markets.
But much of the public debate about the “end of austerity” seems to suppose that continuing to borrow endlessly at this rate is an option that the government is inexplicably declining to take.

The truth is that the day-to-day policy-making in the government is still utterly constrained by the need to reduce the deficit. Just because the coalition is used to that now doesn’t mean the need to do it is any the less.

But that again ignores the very shape ‘austerity’ has taken in this context. And as always there’s the recourse to a sort of Irish economic exceptionalism:

Austerity in Ireland has never been the product of a calculated decision on economic policy in the way that it has been for, say, the British chancellor George Osborne. Rather it is a necessity imposed by circumstances.

Except, as we know it is entirely possible that the government could have pushed the balance towards taxation rather than cutting of services and provision. The troika were largely indifferent to such. There’s good evidence that such an approach would have only very marginally delayed any recovery (although at this point the idea that recovery will ensue appears optimistic at best).

And there’s something just a little cynical about the following:

It’s more than understandable that people are fed up with austerity – who isn’t? But here’s another uncomfortable fact: in the post-bailout era, which Ireland will probably enter later this year, the Minister for Finance will probably have to run an even tighter fiscal ship.
As long as Ireland needs to borrow money, either to expand or just refinance its national debt – and that is far into the foreseeable future – all governments will have to govern with one eye on the international bond markets. That may be a deeply unwelcome and unjust intrusion, but it will remain the case. The world is as it is, not as we would have it. That will remain the case for future Irish governments, whoever occupies the Taoiseach’s office.

Again, this ‘there is no alternative’ only holds true to a very very narrow reading of events. It is worth noting that if the austerity approach is discredited, and again it’s worth considering Munchau’s argument that this is ‘flim-flam’, then that itself will engender a radically different context. Look at what Taylor says again. He notes that the US, the UK (in it’s own strange way) and Japan have all followed monetary expansion policies. That is too remains within the orthodoxy, albeit a different version of same.

But in a way this debate is overly complexified, and as a sort of riposte to that it is worth examining closely a piece by Mark Blyth in the current edition of Foreign Affairs magazine (unfortunately behind a paywall), hardly a voice of the heterodox, drawn form his book ‘Austerity: The history of a Dangerous Idea’. Blyth is Professor of International Political Economy at Brown University in the US and his analysis of austerity is one that should make its proponents deeply uncomfortable.

He notes that that ‘the eurozone countries… have volunteered as subjects in a grand experiment that aims to find out if it possible for an economically stagnant country to cut its way to prosperity. Austerity – the deliberate deflation of domestic wages and prices through cuts to public spending – is designed to reduce a state’s debts and deficits, increase its economic competitiveness, and restore what is vaguely referred to as ‘business confidence’. The last point is key, advocates of austerity believe that slashing spending spurs private investment, since it signals that the government will neither be crowding out the market for investment with its own stimulus efforts nor be adding to its debt burden. Consumers and producers, the argument goes, will feel confiencet about the future and will spend more, allowing the economy to grow again.’

He also suggests that the reasons for the adoption of austerity as a policy are as follows:

Austerity is a seductive idea because of the simplicity of its core claim – that you can’t cure debt with more debt. This is true as far as it goes, but it does not go far enough…three factors undermine the argument that countries in the red need to stop spending.

And these are:

…distributional, since the effects of austerity are felt differently across different levels of society. Those at the bottom of the income distribution lose proportionately more than those at the top, because they rely far more on government services and have little wealth with which to cushion the blows.
Trying to get the lower end of the income distribution to pay the price of austerity through cuts in public spending is both cruel and mathematically difficult. Those who can pay won’t, while those who can’t pay are being asked to.

Which certainly makes clear the paucity of the austerity approach. But he also adds that:

The second factor is compositional. Everybody cannot cut their way to growth at the same time. To put this in the EU context although it ameks sense for any one state to reduce its debt, if all states in the currency union, which are one anthers major trading partners, cut their spending simultaneously, the result can only be a on traction of the regional economy as a whole. Proponents of austerity are blind to this danger because they get the realtinsihps between saving and spending backward. They think that public frugality will eventually promote private spending. But someone has to spend for someone else to save, or else the saver will have no income to hold onto.

Finally, and most importantly perhaps, he argues:

The third factor is logical: the notion that slashing government spending boosts investor confidence does not stand up to scrutiny. As Paul Krugman and others have argued, this claim assumes that consumers anticipate and incorporate all government policy changes into their lifetime budget calculations.

And he makes the following point which is key:

The assumption that this behavirou will actually be exhibited by finically illiterate, real world consumers, who are terrified of losing their jobs in the mids of a policy-induced recession is heroic at best and foolish at worst.

He continues by examine the roots of Austerity in the tension within liberal economic approachs to the state and amidst some useful insights – not least that it was austerity, not inflation, that drove the rise of National Socialism in pre-WWII Germany (and he makes a persuasive case about the role a very deliberate approach by the German government of the period to rebuff reparations played in hyperinflation in that period), and that austerity has pushed the United Kingdom to the brink of the very first triple-dip recession in a developed country, he also has some thoughts that are relevant in light of the discussion above as regards Taylor and Leahy’s arguments. He directly references the supposed argument that Ireland’s situation in the 1980s proves the efficacy of the austerity approach.

All these countries cut their budgets, devalued their currencies, and controlled wage inflation, and their later growth rates were impressive. The purported mechanism behind the growth was consumers’ far-sighted expectations, that is, the confidence effect: anticipating that public spending cuts now would mean lower taxes later, individuals spent their money, making these economies boom.

He suggests that more recent scholarship undercuts this thesis. And he notes that:

First, in each of these cases, a small state was cutting its public spending at the peak of a period of growth and when much larger trading partners were expanding. They were also discrete events, happening in one country at a time, rather than simultaneous contractions.

He also notes Stephen Kinsella’s research that ‘in the Irish case… real wages increased during the late 1980s, suggesting that a routine stimulus effect, not changes in consumer expectations, caused the boom’. He doesn’t mention explicitly the transfers from the EC during this period but they are a crucial part of the story of the ground work for the 1990s boom.

But stepping back a moment if that is correct then it doubly underlines the point that contemporary austerity measures cannot deliver growth. If not then, except off the back of EC transfers and a period of growth, expansion of larger trading partners, then how now in the context of almost continent wide recession? If the policy of austerity cannot work in this state as its proponents argue (even putting aside the inevitable and actually occurring damage to our economic and social infrastructure), then it seems – at best – perverse to pretend that it can and continue implementing policies which are clearly counter-productive. This isn’t a left-wing argument as such, although it is an argument that the left was making from the outset. It is one rooted in pragmatism. If it doesn’t work then why are we continuing on this course. And if it doesn’t work then it is long past time to seek alternatives before the damage incurred is too great.

What is Blyth’s solution?

‘First do no harm’ he suggests. And he continues:

Countries cannot simultaneously shed their public and their private debts, which is what Europe has been doing. Rather, governments should get the private sector pay down its debts while maintaining public spending: after all, private-sector savings need to come from somewhere. Once that is done, as the private sector recovers, tax revenues will increase, and the accumulated debts and deficits can be paid down.

It would appear that the only way forward would be through an EU wide programme that would foster growth actively in states like Ireland, Greece and so on, rather than a bland – and self-evidently – incorrect faith, for that is what it is, in the market to provide. Moreover it requires a shift in terms of the attitude towards the deficits accrued (deficits by the way which in many instances the severity of which is borne by the state taking on private sector failure). And it requires a complete rethink of the attitude to public spending which has taken hold.

The problem is that, as noted by CL and others, there is no political will – whatever the shifting mood music – to do so.

What is the point of ECB interest rate cuts or rises… May 7, 2013

Posted by WorldbyStorm in Economy, European Politics, Irish Politics.
9 comments

…at ground level in this part of this island? I only ask because of the weird dislocation between the policies implemented by the ECB and those adopted by banks and mortgage providers in this state.

Now, of course, there is the obvious caveat that it is unlikely that RoI mortgage holders are top of the list of concerns of the worthies at the ECB. But look at how the linkage between interest rates as ‘set’ by the latter and interests rates as set by the banks/mortgage providers are so divergent.

In a widely anticipated move, the ECB cut its main interest rates by a quarter of a percentage point to 0.5 per cent, a record low. While the rate cut was aimed at providing a shot in the arm for the European economy it will also reduce mortgage repayments for hundreds of thousands of Irish people with tracker mortgages tied to the Central Bank’s rates.

I’d be very interested to know the figures of those who will be impacted positively by the cut. Hundreds of thousands, perhaps, but what of those who won’t see them passed on by banks and other financial institutions.

How many are on trackers mortgages? According to David McWilliams:

Today, trackers account for 60 per cent of Permanent TSB’s €26 billion Irish residential mortgages. Trackers make up 54 per cent of AIB’s €27 billion book and 23 per cent of the €16 billion book at its subsidiary, EBS. Some 62 per cent of Bank of Ireland’s €28 billion book are trackers.
All told, that works out at €51 billion, or about 52 per cent of residential mortgages at the four main banks. A higher proportion of buy-to-let mortgages, about 70 per cent, are on tracker rates.

McWilliams, argues that tracker mortgages were a ‘virus’ which – in part given that 85 per cent of them were lent in the 2004-2008 period, were directly responsible for exacerbating the crisis – by encouraging builders to keep building given that enormous sums of credit were being brought into the housing market.

Meanwhile…

While the cut will be automatically passed on to tracker mortgage holders, people with variable rate mortgages are at the mercy of individual banks and with banks pushing variable rate mortgages up irrespective of the course of action being followed by the ECB, the possibility of rate cuts being rolled out across the board seems remote.

And an interesting coalition of forces is crying foul on this, from the Professional Insurance Brokers Association who note that ‘Irish bank interest rates which have been creeping up surreptitiously’ and ISME who ‘called on the Government to take the “strongest action possible” to force banks to pass on the reduction’.

Because as noted in the SBP at the weekend the impact of interest rate decreases isn’t restricted to those on mortgages. Savers will see deposit interest rates fall and SME’s will see little or no change because ‘lenders in peripheral countries such as Ireland are not pricing off the ECB’.

And the response from our government?

Asked whether Minister for Finance Michael Noonan had any comment on whether banks should pass on the rate cut to standard variable rate customers, his spokesman indicated he would not be intervening.
“This is purely a commercial matter for the banks,” the spokesman said.

But it’s not entirely, or not at all, at least it’s not if the rhetoric emanating from government over the last few years is anything to go by. For example AIB for example remains ‘almost fully state-owned after a €21b government bailout’ as noted in the second IT piece linked above. And how this encourages growth in the economy escapes me.

It gets worse, in a way:

The ECB also signalled yesterday that further interest rate cuts could be on the cards.

So, as interest rates fall across Europe for those with mortgages interest rates will rise here. I’ve already pointed to the near certainty that sooner or later, and most likely sooner, ECB rates will rise again. That will, I suspect, push a new tranche of those hanging on with mortgages to the brink and over, with the consequent socio-economic impacts.

McWilliams notes that this will affect those on trackers grievously too:

If the European economy ever recovers, the Germans will insist on interest rates moving up swiftly to pay its savers, who are seeing their income from saving wiped out as interest rates keep falling.
What happens to the ability of hundreds of thousands of Irish people with trackers to meet their mortgage payments when interest rates rise to their long-run average of 4 to 6 per cent?
Clearly we will see mass defaults across Trackerville and these defaults will be unique to Ireland because they will be happening when the rest of the eurozone is recovering strongly.
If anything shows you just how damaging the banking policies of 2000-2007 actually are, it will be the sorry story of the tracker mortgages for the course of their 20 to 25-year life.

A perfect illustration of how the different demands of the different areas within the eurozone operate at odds with one another and how policy is all over the place. Trouble building up there.

The run-away plutocracy… April 23, 2013

Posted by WorldbyStorm in Economy, European Politics, Irish Politics.
3 comments

An amazing stat quoted by RosencrantzisDead here at the weekend

This piece in the Sunday Independent(!) is fascinating:

Some quotes:
The top 10 earners shared €23.52m in core salary, bonus, pension and benefits. This compares with €19.75m last year – representing a 19 per cent pay increase.
…
Apple boss Tim Cook was paid €3.2m last year. Despite heading up what was briefly the world’s most valuable company, Cook was paid less than Smurfit Kappa chief Gary McGann. Apple is 104 times more valuable than Smurfit based on market capitalisation.
We all may have partied, but some of us have evaded the hangover.

Consider it. Tim Cook, cornerstone of US, no – international, corporate culture. An exemplar of same. And yet his salary – despite the profitability of Apple, the fact that it sits on a mountain of money (a fairly useful approach US based companies have to take), the ubiquitousness of its products and services, is less than some Irish corporate heads. It’s worth noting that the previous year Cook took home...

…$378 million in 2011, almost all of which came from a grant of one million shares awarded last August. Cook’s base salary is $900,000, along with annual incentives to the same amount — almost insignificant next to his stock options, but a lot higher than the $1 that Steve Jobs famously drew.

But even in that single example of boom to… well… massive wealth by any reasonable standards we see a perfect illustration of the sheer dislocation of contemporary capitalism and its essential contingency.

Naturally the left – I think sensibly – focus on the disparities of wealth and income. The dangers of a run-away plutocracy beholden and answerable to no-one but themselves and beyond the constraints of democratic oversight is something that is to me one of the key societal dangers and threats facing us in the near to mid-term. The retreat of social democracy and the marginalisation of the further left as well as the paradoxical (in light of the crises attendant on contemporary capitalism) consolidation of the orthodoxy has allowed this to develop in an even more unhinged fashion (Occupy represented one response, although the limitations of same are obvious).

That’s the immediate danger, it’s not just that our projects are unfulfilled and are unlikely to be any time in the near future. It is that those forces arrayed against us are now so deeply embedded, so immovable, that they functionally are able to do mostly what they choose to do on a political and socio-economic level.

What strategies and tactics we should adopt in light of this is difficult to know. But, whether we’re shifting leftwards or simply trying to stymie plutocracies the interim goals are perhaps very similar, not least in bringing back into focus concepts like the primacy (and ability) of the state in terms of ensuring degrees of equity in regard to taxation, and there are more.

Otherwise… not good.

***

By the way, on the topic of Apple, the following comment from an ‘investment analyst’ made in the context of share prices and expected lower growth was priceless…

According to analyst Toni Sacconaghi at Sanford C Bernstein, investors want to get their hands on at least half the cash flow – $22bn a year, up from the $13bn Apple announced last March it would spend on dividends and buying back its shares to help boost the price. He said: “We think a cash-return programme that is smaller is likely to disappoint investors, while a higher number would likely be viewed favourably.”

Really, now?

Apparently Apple has traditionally eschewed dividends.