The other week, RTE reran the 1976 classic movie The Outlaw Josey Wales, starring Clint Eastwood as the eponymous hero. During a particularly brilliant exchange, the bounty hunter Fletcher, hot on the heels of the outlaw Wales, comes out with an inspired put-down to the cowardly senator who is trying to pull the wool over his eyes. Squinting into the sun, chewing tobacco, Fletcher disdainfully hisses: ‘‘Don’t piss down my back and tell me it’s raining’’.
Against the background of the worst unemployment figures we have experienced since 1975, you can’t help but conclude that over the past few weeks in Ireland, there has been a lot of pissing down backs, as ministers and other government spokespeople tell us the economy is robust. We are reassured that the ‘‘fundamentals’’ are solid. Those who query this position are dismissed as ‘‘doom and gloom merchants’’ – a phrase so hackneyed and meaningless that it again reinforces the patronising attitude of our elite towards ordinary people’s worries and general dissent.
The truth is things are now moving so quickly that no one really has a clue where all this is going to end. Historical evidence from other cycles is not comforting, but that might be because the policy response to these situations was unimpressive. If you use traditional tools to respond to modern developments, you might make a bad situation worse.
Listening to this week’s discourse, there’s a terrible feeling that those in charge do not know what they are doing. The Taoiseach and Tanaiste claimed there would be no return to the 1980s.Along with some of their spokespeople, they reiterated that the economy was a much more sophisticated beast than the one that spluttered in the ‘‘Joshua Tree’’ years.
All week, this mantra was hammered home on the airwaves by the economists who work for the banks and stockbrokers. Let’s run with the idea that Ireland today is totally different from Ireland 20 years ago. It’s not hard to agree with this assertion. The question that arises then is: if 21st century Ireland is so different, why does the solution being trotted out now by the Department of Finance sound like 1980s thinking?
Examine what has been proposed as the panacea. Everyone is talking about cutting government spending as if the root cause of today’s dilemma were 1980s-style government incontinence. But that’s not the root of the problem at all and therefore can’t be the only solution.
The root cause of today’s problems is a collapsing property market, coincident with a rapid deterioration in Ireland’s competitiveness. A credit binge disguised the underlying weakness. In fact, we lived in a Botox economy where other people’s money made us look richer in the same way as Botox makes a middle-aged person look younger. Now that the Botox economy has been laid bare, we can’t hide the blemishes or wrinkles any more. The root cause of our present difficulties is too much credit; the root cause in the 1980s was too little credit. Therefore, the solutions have to be totally different.
In the 1980s, the Irish government ‘crowded out’ the private sector, sucking up all the resources of the economy and choking the private sector’s ability to grow, innovate and create employment. Back then, the focus should have been – and was – on sorting out profligate government. By reducing the government deficit, the stranglehold the state had on the rest of us was eased.
Today, the situation is different. The absolute number on the government’s deficit is a passive residual not an active catalyst. The budget deficit figure is the end of the road rather than the beginning. In the boom, the credit profligacy determined the government deficit. In the 1980s, the government profligacy determined the credit deficit.
In short, cause and effect today are precisely the opposite of what they were in the 1980s.Yet the government’s response has been to wheel out 1980s solutions to 21st-century problems. Obviously, government spending has to be cut as credit-driven revenues dry up.
But to claim that this will have a positive ripple effect on a country facing a credit meltdown, is akin to pissing down someone’s back and telling them it’s raining. We need new thinking. We have to separate the old, toxic, property-related detritus from the new opportunities in non property related ventures. There is still a lot of wealth in Ireland. The problem is that this cash is not finding its way into the right companies. On the other hand, there are plenty of good companies in Ireland, starved of credit.
The banks are petrified of touching anyone, which means that good businesses which are employing people and exporting have been lumped in with the bad businesses that were glorified property scams. With the credit crunch, we now risk the good businesses going down with the bad because banks are indiscriminately pulling in credit from everyone.
This is where the state can start getting inventive. Why not unlock some of our personal wealth by making it tax efficient for a rich investor to put money into a real company with a cash-based business plan? We need a scheme, targeted at real businesses.
If you travel around the country you will find hundreds of small companies, starved of cash. Yet collectively, these small businesses are our national ‘get out’ cards. These companies need fresh capital. There is lots of capital about. The only problem is that it isn’t finding these opportunities. If the state made it tax-efficient for wealthy investors to back these small guys with big ideas, we could begin the process of gradually clawing our way out of this swamp.
An idea like this is simple; it uses private resources and costs little, particularly if the capital is not being used anyway. There is no burden on the state to pick winners or anything complicated like that. The private sector is incentivised to do what it is best at: assess risk. We are talking about an urban renewal scheme for the enterprise economy.
Such a move could be the beginning. The Department of Finance mandarins are obsessed with the budget deficit, but this will not solve our problem. Our politicians have to realise that the property scam is over and that we should never again become infatuated with bricks and mortar. It’s time to channel funds away from that mess and into the real economy. Little by little, this can be achieved. The beauty of EMU is that we should never want for capital. The challenge is in finding away of directing that capital into the right hands.
In this way, we might be able to limit our involvement with the late 1970s to the replaying of old classic movies rather than the rehashing of old, failed ideas.