The balance of anger and fear | 45 comments (45 topical, editorial, 0 hidden)

Re: The balance of anger and fear (4.00 / 3)

For a political elite to engage in "election buying" by engaging in a tax reduction and spending increasing splurge at a time of already high growth is almost as undesirable as engaging in austerity economics at a time of recession. The negative effects may be delayed, but they are very real in recent Irish historical experience, and is, perhaps, one of the main reasons why Ireland may yet support the Treaty.

I made the point in the context of a longer question (also referred to towards the end of the diary) and so it wasn't specifically addressed by the panel - who I think took it as read. It has always surprised me (a little) that the yes side isn't using that argument to bolster their case.

Of course the point is often made that the Fiscal Stability Treaty wouldn't have prevented the Irish collapse had it been in force in 2007. Irish national debt was then at 25% GDP and the budget was in surplus. It was private debt, at c. 400% GDP that was the problem, largely because of inappropriately low ECB interest rates (set to meet German economic needs) and a lack of bank regulation at both Irish and European levels.

This is my larger problem with the Treaty - it doesn't really address problems associated with lack of regulation of private markets and focuses purely on the public responses to economic challenges. The focus on underlying structural deficits taking business cycles and and once off extraordinary events into account is an improvement on the prior Growth and Stability pact which focused only on headline deficit rates, but the Treaty remains blind to what is happening in private markets and the real economy outside the state sector.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Wed May 16th, 2012 at 09:58:44 PM EST
[ Parent ]

Re: The balance of anger and fear (4.00 / 4)

For a political elite to engage in "election buying" by engaging in a tax reduction and spending increasing splurge at a time of already high growth is almost as undesirable as engaging in austerity economics at a time of recession.

This is almost never true. Overspending, and the consequent inflation, is nearly always less a problem than underspending and accompanying deflation. Unless you're a bondholder, but fuck them.

The negative effects may be delayed, but they are very real in recent Irish historical experience,

This is a consequence of defending a rigid currency peg, not a consequence of inflationary policy per se.

The correct response to a period of excess inflation, once it is over, is to let bygones be bygones and allow the currency to drop. It is not to attempt to "correct" the inflationary episode by a deflationary one. As I often put it, that is akin to "curing" a man who has been shot in the front by shooting him in the back, on the theory that on average no bullet will have passed through him.

It was private debt, at c. 400% GDP that was the problem, largely because of inappropriately low ECB interest rates (set to meet German economic needs) and a lack of bank regulation at both Irish and European levels.

Low interest rates do not cause untenable levels of private debt. The private sector, if left to its own devices, builds up untenable levels of debt when interest rates are high, it builds up untenable levels of debt when interest rates are low, it builds up untenable levels of debt when interest rates are stable and it builds up untenable levels of debt when interest rates are fluctuating.

Because the private sector, if left to its own devices, will build up untenable levels of debt. Full stop.

The only way for interest rate policy to prevent this is to engineer a macroeconomic crisis. Which, in another medical analogy, is akin to amputating the limb to treat a sprained muscle. Half the time amputating the wrong limb.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 17th, 2012 at 01:34:39 AM EST
[ Parent ]

Re: The balance of anger and fear (4.00 / 3)

I will leave it to you and any others who wish to to debunk the CW and popular perception of what went wrong with the Irish economy in the early 1980's, but the virtually unchallenged political perception in Ireland is that it was caused in large part (and ignoring outside factors like Oil prices) by the Fianna Fail Party buying the 1977 election by promising all sorts of electoral goodies such as the elimination of household rates (i.e. property taxes). This proved so popular that FF won by a landslide despite the fact that the outgoing Government had managed the economy pretty well and growth was at c. 5% in any case.

More generally there has been a lot of criticism of the "clientalist" nature of Irish politics whereby parliamentarians competing against each other in localised multi-seat constituencies will attempt to outbid each other in saying how much funds they will secure for worthy investment projects for local schools,l. roads, roads etc. The CW is that whilst these expenditures may be desirable or at least defensible in particular cases, the aggregate effect has been an inexorable rise in public spending often on crazy projects and especially in marginal electoral areas or those represented by a powerful Minister.

Nigel Farage and others linked to the UKIP has been doing the rounds in Ireland again railing at unelected EU officials undermining popular democracy. He may get a more sympathetic hearing this time - given the antics of the ECB and Commission - but what he failed to understand in the past was that many Irish people were more than happy for "unelected Brussels Bureaucrats" to put the brakes on often incompetent or very self interested Irish politicians and administrators who they deemed obsessed with public spending as a means of personal and political self-aggrandizement.

My point is that (up until now, at least) the political class in Brussels was often more popular than the local political class in terms of perceived competence and disinterested judgement and this may be a reason why many people will vote yes even as it becomes increasingly obvious to many more people that the political class in the EU has taken leave of its senses and is operating in the political/financial interests of elites elsewhere than in Ireland.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Thu May 17th, 2012 at 04:55:19 AM EST
[ Parent ]

Re: The balance of anger and fear (4.00 / 3)

I will leave it to you and any others who wish to to debunk the CW and popular perception of what went wrong with the Irish economy in the early 1980's, but the virtually unchallenged political perception in Ireland is that it was caused in large part (and ignoring outside factors like Oil prices) by the Fianna Fail Party buying the 1977 election by promising all sorts of electoral goodies such as the elimination of household rates (i.e. property taxes). This proved so popular that FF won by a landslide despite the fact that the outgoing Government had managed the economy pretty well and growth was at c. 5% in any case.

Well, taxes do have a function and deficits do matter. Which means that lowering the one and raising the other for frivolous reasons, like buying the loyalty of your party's clients, is a bad idea. My argument is simply that it is obviously false to claim that it is as bad an idea as failing to check a serious industrial depression.

More generally, the public budget is an instrument of economic planning and control. Budgeting for the public like a Roman patrician buying electoral favors is just as wrong-headed as (but arguably less harmful than) budgeting for the public like a Swabian housewife.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 17th, 2012 at 05:05:48 AM EST
[ Parent ]

Re: The balance of anger and fear (4.00 / 5)

I'd say the Roman patrician and the Swabian housewife are two sides of the same process.

First, inflate the economy by a bubble that your important clients stand to gain the most from - and throw in crums for the plebes. Then crashland and demand that the plebes pay for the excesses. Both phases transfer power to your clients.

Economically, the crash is the problem, but politically the bubble sets up for the crash.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Thu May 17th, 2012 at 09:18:20 AM EST
[ Parent ]

Re: The balance of anger and fear (4.00 / 5)

Frank Schnittger:

My point is that (up until now, at least) the political class in Brussels was often more popular than the local political class in terms of perceived competence and disinterested judgement and this may be a reason why many people will vote yes even as it becomes increasingly obvious to many more people that the political class in the EU has taken leave of its senses and is operating in the political/financial interests of elites elsewhere than in Ireland.

Twenty years ago, when I was often working with my Italian colleagues at my company's Milan site, my colleagues were strongly in favor of the upcoming Maastricht treaty and generally speaking, for more powers for Brussels' EU institutions. Their reasoning at the time was that the EU was badly needed to reign in the worst excesses of the Italian political class that was perceived as corrupted beyond any repair. Then again, Italy put Berlusconi at its head during much of the subsequent decade.

This was twenty years ago. I wonder how the same EU institutions are perceived today in Italy and to which extent people are realizing that "the EU has taken leave of its senses and is operating in the political/financial interests of elites elsewhere". It should become painfully obvious about now...

Europeans think a hundred miles is a long way. Americans think a hundred years is a long time.

by Bernard on Thu May 17th, 2012 at 01:10:34 PM EST
[ Parent ]

Re: The balance of anger and fear (4.00 / 4)

Tax reductions aimed at directing more income into the top tiers of the income ladder to adds fuel to the fire to an asset inflation bubble certainly are destructive, though of course the damage done is not realized until the bubble bursts.

When those tax cuts at the same time reduce the progressivity of the tax structure, increasing the instability of the economy and so adding collateral economic damage to the damage already ensured by further feeding the bubble, that certainly can be "almost as much damage" as the damage done by the austerian fantasy that you can cut spending to boost economic growth.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu May 17th, 2012 at 12:08:10 PM EST
[ Parent ]

The balance of anger and fear | 45 comments (45 topical, 0 editorial, 0 hidden)

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