These are two questions that the Economic Social Research Institute (ESRI) must logically answer if their quarterly economic summary for 2010 is to translate into public policy recommendations. The executive summary, based on concrete data, argues for two economic policy options to deal with the public finance and jobs crises; a continued commitment to fiscal consolidation and re-skilling to tackle unemployment. Even if one accepts these policy options as necessary, they are not sufficient to tackle the collective action problem facing labour market actors (government, capital and labour); the need to generate sustainable economic growth and employment. In the absence of coordinated investment (whether public or private), consolidation and re-training may actually prove counter-productive.
Fiscal consolidation, and the reduction of €3b from the 2010 budget is assumed to satisfy international bond markets. Consolidation is presented as an ‘imperative‘ not for any long term economic growth strategy but to ensure we do not fall foul to the vagaries of financial markets. This is neither sound nor logical economic reasoning. There is little or no evidence to suggest that bond markets reward austerity. They reward growth. In the absence of a growing economy, fiscal consolidation will further depress growth potential. The only output to consolidation will be a significant reduction in social services to those dependent on the state-governmental sector (i.e. the vulnerable) not appraisal in financial markets. Thus, if the ESRI are to present a coherent case for fiscal consolidation they must show empirically (i.e. not just in an econometric model) that it will improve real economic growth.
As it stands, the public ‘bailout’ money going into Anglo Irish and INBS is a debt to the taxpayer. Thus, the budget deficit will increase to a staggering 19.7 percent of GDP, the highest in the Eurozone, the EU27 and the OECD. A growing deficit makes a reduction in debt more difficult in the absence of a growing economy. Given that the domestic economy is still contracting, the ‘imperative’ for policy makers is not fiscal consolidation but domestic ‘economic growth’. That is, in the absence of a clear path for economic recovery (beyond a statistical measure), the policy recommendation of more austerity is based on risk not economic forcasting, logic or empirics. Providing public money to a failed bank that results in higher budget deficits which in turn requires deep fiscal cuts in education, health and social services makes no macro-economic sense.
Furthermore, the ESRI, along with the government, are presenting the transfer of public money to Anglo and INBS as an accounting exercise. This is not the case. It is a political decision that will inevitably affect the policy choices facing a government with limited resources. It is a distributional question. All distributional questions contain implicit societal-normative assumptions as to what is ‘fair’, ‘equal’ and ‘just’. There is simply no justice in spending billions on a bank that will not put one cent back into the Irish economy whilst community eduction schemes, disability and eduction services get slashed.
In terms of the jobs crisis, the ESRI argue in favour of more supply side measures to re-train and re-skill the ‘unemployed’ rather than public spending programmes to encourage demand for existing skills. This emphasis on training assumes that those who are without work in the labour market lack sufficient education, training and skills. This may be the case for some workers (particularly low end manufacturing) but it is not the case for many, if not all, construction workers. An electrician, a plumber, a carpenter or a brickie is not lacking in skill. What they lack is demand for their labour. Thus, the current unemployment crisis is a crisis of demand not supply. In a growing and adaptable economy re-training makes sense. But, in a recession, with unemployment growing beyond 13.7 percent, it is a social-administrative re-design of policy not a labour market stimulus. However desirable the former is, it must nurture the latter, in terms of both supply and demand.
Furthermore, even if we take for granted the assumption that re-skilling is a requirement for those without work, the following question still remains; who will employ this new supply of re-trained workers, and what skills should they develop? That is, where will the jobs and sectoral development come from? Presently, most jobs are being created (ironically) in the financial services and banking sectors (see Forfás). Over the past 15 years, most jobs were created in low paid and high paid service sectors in the domestic economy. The high end pharmecutical sector, which dominate the share if Irelands exports, has yet to create very many real jobs. Dan O’Brien argued in the Irish Times yesterday that Irish (US multinationals) exports are increasing. This growth, however, is insulated from the domestic economy and there is little evidence it is creating jobs. Therefore, if an electrician decides to become a IT technician, a stockbroker, or a pharmeceutical consultant, how can he/she know they will get a job? They trained as an electrician because they were certain they could get a job in 2002. Again, the logic of supply side labour market policies is based on dubious empirical assumptions.
If the government has €500 m to spend on jobs it would be better spent on creating demand for existing skilled labour or using it to subsidise short term working. This is not an argument against re-training. It is argument to spend limited resources on policy measures that will actually create jobs and generate economic growth. The same applies to fiscal consolidation. This is a logical policy option if it does not hamper economic growth. If it does, then it is a counter-productive. Furthermore it will affect those who contributed least to the economic crisis (low paid workers and social welfare recipients) and benefit those who contributed most (reckless business-private actors in the finance industry). The Irish economy needs productive investment. The empirical data suggests that this will not come from the private sector. This leaves the public-state and semi-state sectors. The government spent €12.9 bn on Anglo-Irish in March 2010. Is this the most optimal use of public resources? Most people instinctively know the answer to this question.