Bill Mitchell (Australian MMT economist) writes with characteristic bluntness about about Ireland’s predicament in one very long blog in Billyblog. I have divided it into two as he tackles the subject from two different starting points to reach the scary conclusion of his title.
The best option for Ireland is to default and exit
Today is the first blog I have written that is exclusively done on an iMac running OS X. It is a nice environment but for a long-time linux and windows user it takes a little getting used to. I have been thinking of writing a Modern Monetary Theory (MMT) guide to debt restructuring for non-sovereign nations such as those in the Eurozone who are now essentially insolvent if we exclude ECB assistance. Several readers have asked me to tease out what the implications of a major debt default in say Greece would be for aggregate demand and private wealth. I will write about that more fully another time but one thing that is certain. MMT does not consider it feasible to run a national economy in a way that advances public purpose at all times if the national government has surrendered currency sovereignty in any way. The point is that default has to accompany EMU exit (in the case of the Eurozone nations). In thinking about that I focused my attention on some interesting data from Ireland that I have been looking at for the last week. What is clear is that Ireland has no real future while remaining in the Eurozone. It might stagger along and grow again some day. But it will be so severely damaged from dragging out the recession for its fourth year now and will similarly collapse when the next negative demand shocks hits the zone that it would be better defaulting now and restoring its currency sovereignty. The best option for Ireland is to default and exit.
In thinking about a restructuring scenario for the Eurozone nations it would not be consistent with an understanding of MMT to advocate default without exit. The EMU nations have to exit as they default and the restructuring of loans has to be in terms of their newly established local (national) currencies.
In that way, the newly sovereign national government can ensure the banking system remains liquid (in the new currency) and that workers do not lose their bank deposits etc.
Anyway, the Economist Magazine provoked me into action today. It ran a story this week (May 26, 2011) – Ireland’s chances of recovery – which carried the sub-heading “A return to decent growth is essential”.
Well you don’t have a recovery without a return to growth so I thought the title etc was somewhat twee! (not the Dutch 2).
I have written about the Irish disaster before – in this blog The Celtic Tiger is not a good example and this blog – The sick Celtic Tiger getting sicker – which both document the steady decline in the Irish economy that is being stage managed (that is, caused) by the irresponsible macroeconomic policies being pursued by the Irish national government.
The Economist writes:
According to a report from the IMF on May 20th, Ireland’s public debt, which was just 25% of GDP in 2007, is already 96% and is due to reach 111% this year … A seemingly model fiscal pupil is now at the back of the euro-area class because of the cost of rescuing Irish banks, which has reached 42% of GDP, and a collapse in national output and property-dependent tax revenues.
Thereafter followed “horrific” IMF debt projections which were described as “dismal”. There was no mention of the horrific unemployment rates in Ireland that are getting worse by the month and are now edging 15 per cent.
The following table is taken from the Irish Central Statistics Office and shows the monthly seasonally adjusted unemployment rate from January 2006 to April 2011.
For a government of an advanced nation (well any level of development really) to willingly impose this level of unemployment on its citizens is the headline story. All the scary headlines about public debt are sideshows.
It is clear that the Irish government faces insolvency because it is using a foreign currency and requires bond markets to lend to it to fund its deficits.
All the problems that have arisen since the property market collapsed can be attributed to it not having currency sovereignty. I realise there are many people who consider the Euro to be an inconsequential part of the story. But if the Irish government was using the “punt” then it could have restored the capital of the ailing banks (by nationalising them) without the need to impose a harsh domestic deflation.
It could have offered all the unemployed a job at a living minimum wage and kept many workers solvent and allowed them to maintain their debts in good standing.
I am not suggesting a major property crash is without consequence. But once it happened, the Euro became the story.
The Economist doesn’t agree. It says:
Even more wrenching fiscal austerity is needed to bring the budget deficit down from the 10.6% of GDP forecast by the IMF this year towards more manageable levels. That in itself will hold a recovery back, unless Ireland’s exporters can overcome the downward pull from a beaten-up domestic economy. This is not impossible.
But highly improbable especially with one of its major trading partners mired in a self-produced downturn again (Britain). Please read my blog – Fiscal austerity – the newest fallacy of composition – for more discussion on this point.
The last thing the Irish economy needs is “more wrenching fiscal austerity”.
The Irish labour market is self-destructing because there is not enough aggregate spending and the fiscal austerity is making matters much worse.
The mainstream commentators seem to ignore path dependency. In the real world, booms in activity stimulates on-the-job training opportunities and raises potential output above the level that would have persisted had the economy remained at low levels of activity. Alternatively, as activity falls due to demand failure, both training opportunities decline and actual skills are lost, as workers lie idle. The potential capacity level falls as a result.
The longer the Irish economy is stranded in its policy-induced recession the worse will be the longer-term consequences. Potential growth rates are now being damaged. So even when growth resumes at some future time, the losses will still be evident in lower than otherwise growth.
Further, the damage to skill development will be severe. Unemployment stifles skill development and denies younger workers the opportunity to gain training and experience which sets them up for the future. The negative consquences of this policy folly on the 15 year olds in Ireland will be profound and that alone warrants the people overthrowing their elected officials and demanding policy action that immediately provides jobs.
The point that most people do not understand and certainly the neo-liberals do not advertise is that the national government with its own currency can always employ any workers who are without work.
In this respect the article in the New York Times (May, 29, 2011) – Against Learned Helplessness – by Paul Krugman is excellent. He says that:
Unemployment is a terrible scourge across much of the Western world. Almost 14 million Americans are jobless, and millions more are stuck with part-time work or jobs that fail to use their skills. Some European countries have it even worse: 21 percent of Spanish workers are unemployed.
Yet a strange thing has happened to policy discussion: on both sides of the Atlantic, a consensus has emerged among movers and shakers that nothing can or should be done about jobs. Instead of a determination to do something about the ongoing suffering and economic waste, one sees a proliferation of excuses for inaction, garbed in the language of wisdom and responsibility.
So someone needs to say the obvious: inventing reasons not to put the unemployed back to work is neither wise nor responsible. It is, instead, a grotesque abdication of responsibility.
That is it in a nutshell.
There is never a shortage of jobs available – just a shortage of funding to make them operational. Any national government with its own currency can introduce a Job Guarantee to ensure anyone who wants to work can find it.
Krugman says that:
The core of our economic problem is, instead, the debt — mainly mortgage debt — that households ran up during the bubble years of the last decade … [and] … there are a number of things that could be done about it.
For example, we could have W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads — which would also, by raising incomes, make it easier for households to pay down debt.
That should be the policy priority in all nations. For EMU nations they first have to exit the Eurozone or vote for a supra-national fiscal authority to subvert their national rights and deficit spend up to the point that the last worker who wants a job has one.
All the faux issues about public insolvency have sidetracked us from that reality – the national government chooses the unemployment rate. If that choice involves a decision to surrender currency sovereignty then it is harder to undo. But never tell me that a national government intent on advancing public purpose cannot do so.
The bond markets cannot stop such a government.
The ECB cannot stop such a government.
The IMF and OECD cannot stop such a government.
All that is stopping national governments is their own mis-guided perception of macroeconomics aided and abetted by entrenched vested interests who are profiting from the malaiase.
I read yesterday (link has evaded me today) that corporate profits in the US are now soaring and well beyond the pre-crisis levels whereas the real wages of workers in the US are going backwards. That tells me that there is something fundamentally wrong with the policy mix in that nation (and all nations).
The Economist magazine is still hanging out the “export-led” recovery hat. But with forecasters (other than the IMF which is always optimistic and always wrong) are predicting Ireland will stay mired in recession – the “fourth year of contraction”. My understanding of the Irish data tells me that exports are not going to be strong enough to offset the on-going contraction in consumer spending, private investment and a retrenched public sector.
There is no other way to achieve growth – spending creates income.
Now is the time for the Irish government to abandon its ideological torture of its own people and exit the Eurozone and restore its policy choices. It will be relatively smoother sailing once it makes that very monumental decision.
Note: Feasta is a forum for exchanging ideas. By posting on its site Feasta agrees that the ideas expressed by authors are worthy of consideration. However, there is no one ‘Feasta line’. The views of the article do not necessarily represent the views of all Feasta members.
mer O’Siochru is a qualified architect and valuation surveyor. She was a founder of Feasta and served on its executive committee for many years. She is director of EOS Future Design which designs and develops sustainable systems and settlements. She also manages the Feasta-led Smart Tax Network which is funded by the Department of the Environment, Heritage and Local Government to develop tax policies in areas related to the environment. She lives in Dublin.