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Dying for a mistake

by Frank Schnittger Wed Aug 14th, 2013 at 10:37:12 AM EST

Fintan O'Toole has long been one of the most prescient commentators on the Irish political scene. Here he is echoing what Krugman has been saying on the other side of the pond:

Who will be the last to suffer for the mistake of austerity?

In 1971, testifying before a US Senate hearing on the Vietnam war, John Kerry famously asked: "How do you ask a man to be the last man to die for a mistake?" We must ask a version of the same question: how do you ask a child or an elderly person to be the last one to suffer for a mistake?

First, the mistake. The Europe-wide obsession with so-called austerity is based on an admitted error. Our masters got their sums wrong. They believed the negative economic effects of cutting public spending would be very limited. They had faith in a magical notion called "expansionary fiscal contraction", which is just as absurdly self-contradictory as it sounds. This faith-based approach is a construction of economic "reality" no less ideologically-driven, and no more based on evidence, than the glorious triumphs of five-year plans in the old Soviet Union.

At the heart of this belief was a mathematical calculation. It suggested a billion euro taken out of the economy in an austerity budget would not reduce economic activity by a billion euro. The damage would amount only to €500 million. The market would somehow absorb half the hit. But these sums were simply and wildly wrong. After four years of austerity, the International Monetary Fund's economists flatly admitted the formula was rubbish. Instead of giving a €500 million hit to the economy, the billion euro in cuts causes €1.7 billion of damage. The sums were wrong by a factor of more than three.

This admission was made last September. In January, the two IMF economists who made the admission published a detailed paper showing why and how the calculations had been so wrong. And since then? Nothing. The official response has been to carry on cutting and to carry on telling the public the corner is just about to be turned. People must continue to suffer for a mistake.


Fintan then goes on to give a very concrete example of what this means:

Who will be the last to suffer for the mistake of austerity?

To take the most urgent example, Minister for Social Protection Joan Burton is under instructions from the troika to cut another €440 million from the social welfare budget in the autumn. The smart lads and lassies who know about these things would have calculated, when they set out the austerity programme, that this would create just €220 million of damage to the economy. But in reality, according to the IMF's admission, it will cause something closer to €750 million of damage - an enormous hit to the local economies of every village, town and city in Ireland.


Magical thinking
It's not hard to see why this would be so. In the magical thinking that underlies austerity, the private market will take up the slack caused by cuts in public spending. But vast numbers of people in Ireland are only marginally attached to the market economy. A paper just published by Micheál Collins of the Nevin Economic Research Institute highlights some striking findings from the most important research on living standards in Ireland, the Central Statistics Office's Survey on Income and Living Conditions. Collins looks at the distribution of "market income", which is the money people earn before taxes and benefits kick in. What's startling is that half of Irish households have between them just 8 per cent of all of this market income. Without social welfare payments, the bottom 10 per cent of households would have an income of just €24 a week.

And that is where the social welfare cuts will hit hardest:

Who will be the last to suffer for the mistake of austerity?

Cutting the incomes of the poorest people is indecent. It is particularly stupid when children are overrepresented in poor households, meaning the long-term social and economic costs will be all the greater. But even leaving aside considerations of basic decency, it is an exercise in bone-headed futility, like generals throwing kids and the elderly on to the frontlines in a war that is already lost. It is not fiscal responsibility, but social and economic recklessness. We've had zombie banks and zombie politics and now we have a zombie idea, a policy based on calculations admitted to be wrong. Are we really telling people to go cold and go hungry because somebody couldn't do the maths?

Presumably the idea behind austerity economics is to try to starve the poor off social welfare benefits and to force them to seek work. That might make sense if there were loads of unfilled jobs out there. But with 13% unemployment and vacancies only in the IT industry that is hardly an option for the vast majority of welfare recipients.

So why are the Troika still insisting on these further cuts to social welfare if they know they are economically and socially counter-productive, and will make it less likely that Ireland will be able to service the enormous debt burden it has taken on from the banks? Is this the revenge of the bankers on those whose leaders have been stupid enough to socialise the losses of bankrupt private banks? Does the Irish Government's mistake of guaranteeing private banks against losses (later endorsed and reinforced by the ECB) have to be compounded by a European mistake in calculating the effects of pro-cyclical austerity policies? Does European solidarity imply some sort of suicide pact? Does anyone imagine that the mistake in calculating austerity multipliers was an innocent mistake?

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Total net wealth of Irish households fell in first quarter - Irish Economy News & Headlines | The Irish Times - Wed, Aug 14, 2013

Household net wealth peaked in 2007 before falling precipitously. It reached a post-crash lowpoint in the second quarter of last year. The peak-to-trough decline in wealth of more than one-third was much larger than declines in household incomes.

Yesterday's figures also included data on the aggregate balance sheet of non-financial companies (NFCs) resident in Ireland. NFC debt decreased by €1 billion over the quarter to stand at €318 billion. This marked the third consecutive quarterly decline in debt.

While there was a decrease in the level of debt, debt as a percentage of GDP increased slightly - by 0.3 percentage points to reach 195 per cent. This was the first increase in the NFC debt to GDP ratio since the second quarter of 2012.

Irish NFCs were the second most indebted in the EU in early 2013. The Central Bank warned, however, that when comparing NFC debt across countries, Ireland's unusually large multinational presence affected the figures. The sector is believed to exaggerate the level of aggregate corporate debt relative to GDP.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Aug 14th, 2013 at 12:54:48 PM EST
I don' think 'mistake' is an appropriate characterization of the basis for what 'the Troika' has done. It seems much more reasonable to conclude that they had the policy they wanted to pursue - austerity in Ireland for the purpose of making good losses of European banks - in effect wealth extraction - and were just looking for a rationalization. Then it makes sense that, when the basis for their rationalization is demonstrated to be false they would persist anyway. It was just the cover story for what they wanted do do. Had they really believed that they had to impose austerity on peripheral countries so that the peripheral countries could benefit they might have taken notice of the fact that the policies are having the opposite effect.

The fact that Irish household wealth has dropped so precipitously could indicate that wealth extraction is proceeding as planned. One might object that the collapse of real estate value has been the major factor in the drop of wealth and that is true to an extent. However the more basic problem is that the cost of that drop has been imposed on the Irish to the benefit of those that made the loans. This enables them to avoid acknowledging and writing down those loans. European banks make foolish, high risk loans and, when they explode, the costs disproportionately are imposed on the citizens of the country of domicile of the parties who took the loans. But Merkel won't hear it.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 14th, 2013 at 05:51:44 PM EST
No wonder Merkel is so popular in Germany - although personally I have my doubts as to whether her re-election as Chancellor is assured.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Aug 14th, 2013 at 07:28:50 PM EST
[ Parent ]
Were the witch to fall who knows what might be possible.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 14th, 2013 at 09:06:14 PM EST
[ Parent ]
I don't follow German politics, but the key to me seems to be whether the FDP can surmount the 5% barrier for parliamentary representation. Paradoxically, Merkel's popularity might make that more difficult. If they fail, she has lost her natural coalition partner and the SPD maybe less than keen to play second fiddle in a grand coalition. If so they might seek to cobble together an alternative coalition with the Greens and, shock horror, Die Linke, in which case a lot of policy alternatives open up.

Are Die Linke still off limits for Government participation in Germany? Will the right wing neo-nazis take some votes away from the CDU? I wouldn't be too hopeful that an SPD led coalition would be all that radical, but at least a few different policy options might hove into public discourse.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Aug 15th, 2013 at 05:58:48 AM EST
[ Parent ]
The remarkably stable German polls has CDU around 40, FDP aroud 5, SPD 25, Greens 13, Linke 8, Pirates 3, AfD 2 and then there ae even smaller. Even if FDP manages to hang on CDU+FDP could loose their majority.

SPD has declared against grand coalition and also against coalition with Die Linke. If no other majority coalition can be formed (CDU+FDP lacks majority and Greens balk at CDU+Greens) I think they will break the first declaration before they break the second.

So Merkel will be with us.

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by A swedish kind of death on Thu Aug 15th, 2013 at 07:20:48 AM EST
[ Parent ]
Coincidentally I have just written a diary to discuss the various possible outcomes. Merkel seems the the most likely next Chancellor, but sometimes politics plays out in perverse ways.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Aug 15th, 2013 at 08:07:08 AM EST
[ Parent ]
The experience of the last state elections - especially lower saxony - shows that CDU voters will switch to FDP to help them over the 5% threshold.
by IM on Thu Aug 15th, 2013 at 07:24:32 AM EST
[ Parent ]
That has been the pattern going back many years - the always seem to be in trouble, and they always seem to make in in the end. But if everybody expects them to make it, the reverse could also happen! See a diary I have just written on the subject here.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Aug 15th, 2013 at 08:10:04 AM EST
[ Parent ]
That would require that the vote switching was being done by the voters.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Aug 15th, 2013 at 10:09:56 AM EST
[ Parent ]
This is not the USA we're talking about! :-)

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Aug 15th, 2013 at 10:17:07 AM EST
[ Parent ]
Doing something is safer if all agree it is unthinkable. I would not rely on the moral integrity of Merkel or the CDU. But the actual makeup of the German electoral system may or may not make this impossible. I don't know.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Aug 15th, 2013 at 10:32:17 AM EST
[ Parent ]
My favoured scenario is here

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Aug 15th, 2013 at 10:53:22 AM EST
[ Parent ]
"That would require that the vote switching was being done by the voters."

Yes it assumes that voters can read the polls too and will then resort to tactical voting.

by IM on Thu Aug 15th, 2013 at 11:04:36 AM EST
[ Parent ]


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