One of the strangest reactions to last week’s budget was that it was dangerously expansionary. This is quite bizarre, particularly when the economy has so much spare capacity. When you have a rate of unemployment twice that of your nearest and most important trading partners and when your rate of interest is lower than theirs, what is the world telling you?
It is telling you that there is excess capacity everywhere in the economy; there is plenty of room to grow and plenty of scope to invest. High levels of Irish unemployment and historically low interest rates, plus a current account surplus – it all means that the economy can’t possibly be overheating or anywhere near to it.
A current account surplus of nearly €3 billion was registered in the three months to June of this year. This means that in the three months to June of this year, Irish people and companies saved €3 billion more than we spent. That doesn’t strike me as an economy in danger of hurtling out of control. In fact, it appears to be an economy that is not spending enough. It is not an economy with too much demand.
This is also an economy with a dramatic housing shortage and a rate of inflation that is actually falling, not rising. According to the CSO, consumer prices in Ireland decreased by 0.3 per cent year-on-year last month. And what about wages, are they rising rapidly? No they are not.
In short, there is scant evidence of the economy overheating. With a rate of unemployment of 10 per cent, the idea that the economy is operating at full throttle is an insult to all those thousands of people who are available for work and can’t find any.
Yet during the week, it was impossible to turn on the radio without hearing an economist or seven, warn the government about expansionary budgets. Some strange outfit called the “fiscal council” – which has yet to explain why it exists – was warning about the dangers of too much expansion.
Apparently the “fiscal council” got their numbers wrong last week, which is okay because we all make mistakes. I am less worried about their numbers than their understanding of economics. The notion that the economy is expanding into dangerous territory is weird because the economy has loads of spare capacity to grow and there is no danger of overheating – anywhere.
Look at this checklist.
The housing market has too few houses, the labour market has too few jobs and hundreds of thousands of idle people looking for work, the current account is in dramatic surplus, the rate of interest has never been lower and there has never been so much money on deposit in the banking system. Large swathes of rural Ireland are economically crippled and in farming, Ireland’s biggest indigenous industry, deflation not inflation is the problem.
Rarely have arguments for public investment in housing in the right place, broadband in the right place and education in the right sectors been more compelling.
Today, the state in partnership with whomsoever it wants to do business with, can borrow at rates never entertained before to invest in projects that have been on hold for years.
However, it appears that most of the “respectable” economists are screaming caution. These are largely the same “soft landing brigade” who told you that the housing market wouldn’t crash.
In truth, the problem today with the budget is not that it was too expansionary, but that it wasn’t expansionary enough.
All the indicators suggests that, while consumer spending may be back and certain parts of the south Dublin housing market were/are a bit frothy, there is no evidence of too much demand. There is still significant evidence of spare capacity – and the most telling indicator is unemployment.
Just before you think I am overlooking the job creation that is occurring, I am not. What I am saying is the level of job creation needs to keep going at an even faster rate to reduce the rate of unemployment down to acceptable levels. In order to achieved this, we have to maintain demand or amplify it.
I am writing this article from Lexington Avenue in New York. Chatting to Americans here its clear that they would not countenance 10 per cent unemployment. They simply wouldn’t tolerate it.
The American establishment is only now beginning to think about raising interest rates off zero after unemployment has come down to 5 per cent from 11 per cent at its peak.
The US still runs a budget deficit and America believes that low unemployment is a target for the central bank. It seem to me to be a much more humane policy than our obsession with government deficits which the whole world wants to finance.
In Ireland, we tolerate double-digit levels of unemployment and yet are intolerant of government spending. Why not target unemployment, rather than the budget deficit or some other notional ratio?
Employment is related to the growth rate and higher employment will bring down the debt targets anyway. Think about it for a minute. The higher the national income, the higher the level of employment and the lower the level of unemployment. And because the targets such as the budget deficit are always expressed as a proportion of income, if income is rising quickly, the debt ratio will fall on its own.
Rather than thinking differently, it seems that the economic establishment is suffering another bout of “groupthink”. Last time it was the ‘soft landing”, this time it is the “hard expansion”. The truth is there is no real evidence of this dangerous expansion.
Our aim should be to bring unemployment down to the level of that of our neighbours and do it quickly. This means more, not less demand.
The problems associated with full employment are problems we can deal with. Bring them on.
There is little danger of the economy overheating, so why are economists making worried noises about a spendthrift budget?