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Reasons for despair: restoring competitiveness

by Colman Thu Jul 30th, 2009 at 09:46:21 AM EST

Irish economic and political debate is currently at a level that leaves me shouting at people on the radio and frothing slightly at the mouth while reading newspapers: the Dublin Consensus, as progmulated by the business organisations, main political parties, "mainstream" economists and economic commentators is depressingly familiar:

1. Sort out Banking through some form of toxic-containment (folks differ on the details)
2. Frontload big, immediate cuts in nominal wages in the private and especially the public sectors (real ‘plain vanilla’ cuts and not just voluntary contributions from the judiciary, contrived ‘pension’ levies and various stealth charges)
3. Frontload big, immediate cuts in public spending across the board from pay (see above) to social welfare (‘the highest in Europe’ false claim) to ‘wasteful’ capital projects to other items
4. Bring the low and middle-income groups back into the tax net
5. Downsize and reform the public sector

Proceeding from that common wisdom - and how to achieve step 1 is the main point of contention - the serious people are explaining that, as a high-wage economy we need to cut wages "to be competitive". Despite Irish wages being below the EU average.

That we need to reduce wages in the public sector, which are only high if you compare them to all private sector workers but low if you compare them to the financial sector and about right if you compare them to the industrial sector.

That we need to reduce our impossible level of public sector expenditure, even though that's low by international standards.

That we don't tax the poor enough but that raising taxes on the rich would destroy the economy.

The people on Progressive Economy do a much better job of covering the issues than I have the skill or time for, Read it and weep or froth as the fancy take you.

Now, you might think this is a local problem, but I think it's symptomatic of the current EU response to problems. The Commission has and is involved in discussions with the Irish government on the response to the recession and it seems that further implementation of a programme of taxing, reducing services and transferring money to the financial sector is either approved of by or, possibly, demanded by the Commission and the Council. They have learned nothing from the crisis.

The same people are in charge, with the same philosophies, unable to admit mistake or change course in any significant way. A new election here would simply bring to power a party which would be more ideologically committed to the Consensus than currently.

The debate has got worse since the crisis started, the blame for which has been transferred entirely to the bankers and the developers according to the conventional wisdom.
by Colman (colman at eurotrib.com) on Thu Jul 30th, 2009 at 09:47:56 AM EST
Frankly, I'm disgusted enough by the whole thing to think that since I'm probably in line to benefit from a implementation of the conventional wisdom I should just lie back and enjoy it.
by Colman (colman at eurotrib.com) on Thu Jul 30th, 2009 at 09:49:12 AM EST
[ Parent ]
European Tribune - Reasons for despair: restoring competitiveness
you might think this is a local problem

Nope. It's pretty much the French government line. There's a consistent message here that it just isn't possible to go on with pensions and national health insurance without cuts in benefits and higher contributions - just look at all the extra debt the country's had to take on.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jul 30th, 2009 at 10:03:28 AM EST
It's just Econo-style 'reform' repackaged and give a new shiny PR push.

The remedy is always the same. Sometimes the stated cause changes and the excuses change, but the ethic of 'Less for everyone else, more for me' remains absolutely reliable and constant.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jul 30th, 2009 at 10:39:41 AM EST
[ Parent ]
lab rats...cocaine...lever...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Thu Jul 30th, 2009 at 11:19:13 AM EST
[ Parent ]
Can't follow Iceland's lead.   Yves Smith

(Runs and hides!)

So how is Iceland faring now? One would assume still broke and chastened. One would be dead wrong.  The krona is down 50% from its peak, and it seems to have sparked a speedy revival. I remarked when Iceland fell apart that someone should swoop in and buy a business that sold strictly in international markets (I had thought fish oil would be a good candidate). But that takes time, legwork, and walking around money.

This is the same remedy that the Nordic countries used in their banking crises, save they nationalized the banks, put in new management, cleaned them up, and reprivatized them, But they also devalued their currencies versus the ECU.  But Iceland and the Nordic countries can make move like that without precipitating competitive devaluations. What works individually does not work collectively.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jul 30th, 2009 at 10:22:39 AM EST
If ever a country needed a land value tax, it's Ireland.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Thu Jul 30th, 2009 at 06:13:25 PM EST
Sigh! They don't understand something as simple as this:

Paul Krugman - Falling Wage Syndrome - NYTimes.com

And soon we may be facing the paradox of wages: workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment.

Here's how the paradox works. Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment -- which they do at the level of the individual employer.

But if everyone takes a pay cut, nobody gains a competitive advantage. So there's no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy's problems on other fronts.

In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don't go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade -- but as wages fall, they're chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.

Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: "The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period." And a rise in the effective interest rate is the last thing this economy needs.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Thu Jul 30th, 2009 at 06:39:51 PM EST
The economic shock doctrine in short:

  1. implement policies that give money to the rich, put some of those into think-tanks and media.
  2. push narrative that more money to the rich makes everyone richer.
  3. when crises hits, goto 1.

You would be at step 3.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Fri Jul 31st, 2009 at 05:00:20 AM EST

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