When someone is obviously acting against her own best interest, what should we do?
Ignore it or tell her? Real friends will sort her out. Real friends will argue for change. Real friends will tell her to thinkof her family, her children, her work colleagues, neighbours and most of all herself.
Sycophants, on the other hand, will ignore the evidence and pretend nothing is happening. Paul Samuelson, the great American economist,warned against this sort of behaviour in government. He cautioned against being governed by shibboleths. By this he meant government directed by outmoded beliefs, repeated as mantras, rather than logic.
Yet shibboleth-governed behaviour re-emerges time and again in the running of companies, countries, empires and alliances. Sometimes, huge ventures can end up being run by shibboleths,where a mantra replaces hard thinking as the main reason for doing something.
Unfortunately, the European economy is now run according to mantras rather than hard thinking. This threatens all of us. Economics tell us that when something happens, a government can react. This is why the US is pulling out of a recession.
In 2001,the US started to falter after ten years of powerful growth. In response,the twin arms of macroeconomic management went into overdrive.
Interest rates were cut to the lowest level in two generations. The budget surplus built up under President Clinton was spent quickly, taxes were cut and government spending increased. The currency was allowed to find its own level and deflation, not inflation, was identified as the major enemy.
Close to three years and a massive stock market correction later, America is motoring again. The recession has been beaten. Unemployment is low and incomes are rising. Simultaneously, ongoing immigration has meant that more people are earning a living in the US than ever before. Hey presto, economic management as understood byJM Keynes works!
This proves that the state matters and can affect economic change from the top down. The price that the US has paid for a shallow recession is a falling currency and bigger external debts.
The Americans believe that the state has a role in macroeconomics, but no role in microeconomics. This means that it is not the role of the state to take responsibility for your economic actions.
The European economy works in the opposite way. The economies are micromanaged so you have little financial responsibility for what you do; yet the state does not take a macroeconomic view of demand, exchange or interest rates and react accordingly.
The European economy is run according to a bizarre mantra. The mantra was created by European central bankers and is largely based on out-dated and discredited 1970s dogma.
At the time of the Maastricht Treaty back in the early 1990s, German central bankers were obsessed by the delinquent history of the so-called “Club Med countries” – Italy, Spain and Portugal – economies that had a tradition of excessive government spending.
As a consequence, the Germans insisted on the stability pact, which limits government expenditure to 3 per cent of GDP. Even at the time, this did not make much sense and it makes no sense today. Ironically, now it is Germany and its diplomatic henchman, France, which are hoist on their own petards with the EU Commission taking them to court over breaches of the stability pact. While this may be an unedifying spectacle that titillates Eurosceptics, the greater point is that this type of economics causes unemployment.
All this nonsense has been compounded by the sharp rise in the euro over the past few weeks. The new head of the European Central Bank warned countries that the correct response to the rising euro was for governments to spend less money. What tripe.
The reason the euro is rising is because it has to. When foreign exchange dealers start to sell the dollar they have to buy something else – so they buy the euro. This is the logical extension of the Eurocrats wanting the euro to be a so-called “reserve currency”. It has nothing whatsoever to do with the fiscal stance of EU governments.
For the EU economy, a rising euro puts huge competitive pressure on the exporting sector, so for unemployment not to rise, the domestic sector has to take up the slack. In reality, this means kick starting demand.This can occur via three specific channels.
The first is lower interest rates.The second is increased government expenditure. The third is immigration. Amazingly, the EU mantra is against all three. So the continent is caught in a cul-de-sac, where the mantra has replaced hard thinking.Worse still, the EU Commission has gone to the European Court this week to enforce the mantra. Extraordinary.
So what about Ireland? How will we be affected by these crosswinds?
Well, as always, an old Central Bank expression comes to mind. On their annual trip to Ireland, the IMF suits sometimes found it hard to fathom what was going on in the economy and one of the Central Bank sages remarked that, “the laws of economics stop at Holyhead”.To an extent he was right.
The rising euro and the refusal of the EU commissariat to reflate the EU economy implies that the exporting side of the Irish economy will be squeezed.
In contrast, the fact that European interest rates (because the currency is by default strong) will not go up for some time means that the credit-based parts of the domestic economy will flourish. This is the worst possible combination for Ireland because it means that wages and incomes have to be reigned in, while the housing market bubble will be inflated even more under the “illusion” of cheap money.
Arguably, the opposite should be happening. The exporting sector should be growing,while the domestic sector should be restrained. So houses will become more out of reach. By mid year, the average price of a house may move from ten times the average wage to 12 times, who knows? This is clearly bonkers on an individual level as well as being a delinquent waste of money in general.
As this column has pointed out, money invested in property creates no jobs, no wages, no innovation, no value added and no extra or ongoing tax revenue. Put simply, the Keynesian multiplier is muted. So more money into Irish property means less money into Irish innovation.
In addition, some jobs will continue to migrate to Eastern Europe (just as Philips annouced it was moving its accounts service from Dublin to Poland last week) as the rising euro renders us even more expensive than we already are.
But will politics act as a stabilising force? Hardly likely.The fact that the government has reached the limits of buying wage moderation with tax cuts, means any increase in take home pay now will be felt in increased costs. It is likely that wage deals will be generous as the next general election comes into focus.
But don’t worry, you won’t feel a thing yet. The feelgood factor of cheap credit raining down on the country will keep us all in clover for a while.Will Bertie use the Presidency of Europe to point out that the Eurocrats are running the continental economy into the ground as any good friend would?
To paraphrase Mr Gogarty at the planning tribunal (a place Bertie will be no stranger to in due course), “Will he f-k!”