Introduction to the Economic Debate - David Begg, ICTU General Secretary
7 Jul 2009
ICTU Biennial Delegate Conference 2009
Economic Debate - Introductory Remarks
By David Begg, General Secretary
One of the lesser known statistics of this global economic crisis is that shipping rates between China and Europe temporarily fell to zero dollars in early 2009. As consumer demand in the West dried up and exports dwindled, brokers actually waived the transport fee and only charged a minimal handling cost. According to the World Bank exports form China, Japan, Mexico, Russia and the United States fell by 25 per cent in the year leading up to February 2009.
What a catalogue of disasters has fallen upon us since we last met together in Bundoran. The haemorrhage of jobs seems set to continue into next year with the IMF forecast published last week predicting an unemployment rate of fifteen and a half per cent by the end of 2010. By that time we will have lost thirteen and a half per cent of our GDP too. In short it will take us until 2017 to get back to where we were in 2007.
The international economy has been hovering between recession and depression for some time and governments have not been very successful in bringing forward a coordinated response. As Eric Hobsbawn put it in an article in The Guardian on 10 April "Governments are acting like a blind man in a maze, tapping the wall with different sticks in the hope of finding one that discovers a way out".
Our situation has been compounded by domestic policy errors and a downright irresponsible, perhaps even criminal behaviour, in the business, banking and developer nexus. Much of this is documented in the Annual Report but it is worth taking a second to understand the business model operated by the banks.
What they did was to put too much mortgage lending, financed by heavy foreign borrowing from wholesale money markets, into an unsustainable housing price and construction boom. They increased their share of assets in property-related lending from less than 40 per cent before 2002 to over 60 per cent by 2006. At the end of 2003, net indebtedness of Irish banks to the rest of the world was just 10 per cent of GDP. By early 2008 it had jumped to over 60 per cent. Without large scale foreign borrowing by the banks, the property boom could not have grown as it did.
The cost of unwinding the consequences of this will be borne for Irish people for generations to come. It is an outrage.
Some of the economists, who cannot now be kept out of the Op-Ed pages of The Irish Times were actually encouraging the banks in this behaviour. There was a big assembly of economists in Trinity College at the beginning of May and, with a sycophantic business press lying at their feet, they announced that their solution was wage cuts, reducing the minimum wage, job cuts, welfare cuts and public spending costs - the more the merrier. These people have ice water running through their veins. They seem indifferent to the consequences of their solutions.
I am not aware of any country that has ever deflated its way out of a recession.
It seems to me too that there is a certain threshold of decency that we should not cross no matter how bad things are. Cutting the minimum wage and basic welfare rates crosses that threshold.
The proposal to cut wage rates generally is predicated on improving our competitiveness to boost exports. In fact Ireland's exports have dropped by 5.9 per cent where Germany, which has been involved in a competitive devaluation of wages for years, has dropped by 16.9 per cent. More crucially how will this give even a dead cat bounce in an international market where trade is down by 25 per cent? We can be certain though that it will have a big adverse effect on domestic demand which constitutes half of all economic activity.
There is much talk about 'green shoots' and the possibility of an international recovery which, if Ireland sorts out its competitive issues, it could be poised to benefit from. In reality Europe is depending on America to create the stimulus. America in turn is expecting China to act to reduce the imbalance in trade that globalisation has created.
Chinese policy is to peg its currency against the US dollar, allowing a microscopic rise in the value of the renminbi over time. To change that policy, and allow a massive fall of the dollar against the renminbi, would be a massive act of self-sacrifice by China and a massive signal that it intends to move away from an export-led strategy towards developing its home markets.
Many academic discussions of the imbalances tend to assume that the US, or the IMF, would in some way dictate to China the course of rebalancing. It is now clear that the dictating will be done in the other direction. China has already unleashed the world's biggest state spending programme in response to the crisis, pitching 15 per cent of its GDP into a stimulus package in November 2008. But creating a mass consumer market in China to buy the goods that were once exported to the US and Europe would involve turning Chinese workers from the low-paid wage slaves of the world into the consumer spenders of the world.
It seems to me to be a big ask which at best is unlikely to resuscitate global trade any time soon. So when economists make these demands for sacrifices by ordinary mortals they need to be interrogated as to the practicality of what they propose.
Why should we take any notice of these people anyway? What credibility do they have? None of them predicted the recession and now we know that one of the most vocal was actually encouraging the banks in their irresponsibility.
The only effective way of achieving distributional justice is through a progressive tax system. That is what we have been arguing for nearly a year now through our proposal for a Social Solidarity Pact. I might mention in passing that it is enormously frustrating when eminent journalists like Brendan Keenan remonstrate with us for not having such a proposal when we spent thousands on full page ads in his newspaper to ensure that we could comprehensively communicate our ideas.
The outcome of our protracted discussions with Government is well known. It was a disappointing response conveying a poverty of ambition. People expect unemployment, pensions and home repossession to be given the same priority as the banking system. As NESC has pointed out they are all part of a multifaceted crisis which needs an integrated response. A sequential response aimed at first fixing the banking crisis is not the way to go. The problem has to be addressed now.
The problem with the unemployment response is that it is ambiguous. We do not know how it will work. We thought we had a commitment to a €1 billion spend but the Minister for Finance poured cold water on that the following day. It is too narrowly prescriptive in its application in that it excludes large sectors of the economy. While acknowledging the need for some element of targeting and the need for a sustainable scale of activity in each sector we also have to give hope. For instance, although construction will contract, its share of economic activity cannot be zero. Apart from the employment implications the country still has a huge infrastructure deficit which is a big drag on competitiveness. Nor can we be expected be expected to accept a scheme which is a wage subsidy to employers and requires us to buy into the deflationary analysis already outlined.
Since the beginning of this year 122,000 have lost their jobs. The live registrar stands at 413,000. It will exceed 500,000 next year. We know that other European countries including Germany, The Netherlands, France, Finland and Spain have embraced the type of work sharing advocated in our Social Solidarity Pact proposal. We know too that it is working for them. Germany, for example, has 1.25 million people on state supported short-term working. Action on jobs must not be postponed any longer.
Our hope is that the deficiencies in the Government's position can be corrected because if we want to influence policy on employment, pensions, repossessions and the other elements of the 10 Point Plan, the only way to do so is in dialogue with Government. By the same token that is only true if Government is willing to act.
We are, all of us, trying to grapple with a problem beyond our life's experience. In 1991 the Soviet Union collapsed, China went capitalist by decree rapidly followed by the marketisation of India. Suddenly, the global relationship between capital and labour was massively tilted in favour of capital because there were an additional 1.5 billion workers for capital to employ. Politicians thought they had achieved stability in the world but it was a stability sustained by the altered power balance between capital and labour, the deflationary impact of China and the relentless rise of cheap credit. Now that the cheap credit model has collapsed, and the deflationary impact of China turns out to be transitory, we are left with just the capital-labour mismatch. The implications of this are profound.
One thing is certain, there can be no return to business as usual after this recession - however long it lasts. Neo-liberalism has failed. Even if domestic commentators won't accept that fact people like Alan Greenspan, Martin Wolf, Jack Welch and Warren Buffet have. The world of the last three decades has gone. What will replace it is for us to seek to determine.
As Dorothy said to her dog, Toto, after a tornado dropped them in the Land of Oz, "I've a feeling we're not in Kansas any more".
