ANALYSIS:Saying the recession is over runs the risk of fostering a cruel illusion that the economy is undergoing 'a little technical adjustment'
THE RECESSION is not over. There is no recovery. The toxic mixture of misconceived budgetary policies involving over-rapid adjustment, and ominous development across the landscape of European markets and economies, suggest that there is little time left for us to adapt to a wholly new approach to the reconstruction of our economy that is both credible and sustainable.
What is perhaps most disturbing of all is that there is no plan in the event that the Irish economy is drawn into the maelstrom of a “double-dip recession” – a possible scenario that is gaining increasing traction among market analysts.
The suggestion that the recession is over is based on the increase in GDP in the first quarter of 2010 compared with the previous quarter. However, on a year-on-year basis, GDP actually fell. This latest decline comes on top of the steepest fall in output – over 13 per cent since 200 – in modern Ireland.
What the most recent data on GDP shows is brute arithmetic – not recovery. When an economy falls so far and so fast, an increase in some component of growth is simply inevitable – but that’s not recovery. The phrase “The recession is over” is purely definitional; it has no relevance to the lived experience of our citizens confronted by rising unemployment and continued cuts in public services.
Many people and families are hungry; many more are apprehensive and fearful. Saying the recession is over also runs the risk of fostering a cruel and dangerous illusion – not unlike the assertions of a few years ago – that the economy was merely undergoing “a little technical adjustment”.
The most recent Central Statistics Office data shows a further decline in consumer spending and, importantly, in capital investment. There are a host of other economic indicators that point in the same directions. Where all of these developments really hit us in our lives and in our fears is in the unemployment data. The Live Register has now hit 450,000.
More generally, the Quarterly Household Survey Data shows a contraction in the labour force, as tens of thousands migrate and a significant number simply withdraw from the labour force.
The data shows the number of employed in the last year fell by 108,000 – equivalent to a rise of 23 per cent in joblessness compared with the previous year.
The cancer embedded in this data is the increase in long-term unemployment, which now stands at 112,000 (a rise of 63,500 in the year to March 2010). The real killer is that long-term unemployment now counts for over 40 per cent of total unemployment (International Labour Organisation definition), compared with 22 per cent just a year ago. Labour market economists have an apt name for this – “scarring”. It destroys lives, corrodes and strains families and, by deskilling individuals and undermining their self-belief and motivation, subverts the capacity of the Irish economy to recover. All this whilst playing havoc with the public finances.
Ireland prides itself on being a knowledge-based economy – a “smart” economy. Ireland’s real competitive advantage comes from the skills and capabilities embedded in our people. What we are confronting here in Ireland is not alone a stepped increase in long-term unemployment, but also a significant rise in youth unemployment. In terms of the EU, we come second only to Spain.
We need €5 billion over 20 years to upgrade our third-level institutions to maintain our skill base in the face of accelerating innovation; instead, we funnel three times this amount to maintain a zombie bank because “it’s cheaper than closing it down”. This is pernicious and wrong: it should be closed now, and the financial engineering necessary to do so in a manner that does not spook the markets is available – what’s lacking is courage and common sense.
The “strategy” prescribed by Ireland for recovery is to continue to cut the current budget deficit by 2 percentage points every year over the next four years. It cannot be done; it is counter-productive to attempt to do so. It is not a “strategy”; it’s a slavish adherence to an orthodoxy that howls at common sense.
We have a very short time to get our act together. Ireland is a small subset of a wider EU economy. Germany, an economy that instinctively defaults to a structural export surplus, has neither the resources nor the disposition to pull Europe out of recession. The UK, our largest and closest trading partner, is at the cusp of a long and painful adjustment process.
Most importantly, it is now clear that the €750 billion package announced back in May to resolve the crisis in Greece and to prevent a sovereign debt crisis escalating and engulfing Spain and Portugal has not succeeded. Greece will have to renegotiate its foreign debt.
Equally, the structural problems confronting Portugal and Spain – problems that create significant difficulties for their creditor banks and for the sovereign debt market – point to a crisis for the euro that cannot long be avoided.
All of this matters a very great deal to Ireland and to the Irish economy. At present, the Government remains fixated on a wholly artificial timescale for reducing the current budget deficit. It persists in the illusion that it can continue to make cuts in an already emaciated domestic economy, and in vital public services, where decision-making has gravitated away from those who are at the sharp end.
Decisions are instead being taken by a process that is largely detached from the economic and social damage that’s been done.
In these circumstances, to talk of “recovery from recession” is to display a startling lack of awareness of just how far the economy has fallen; to mistake spasmodic responses for a sustainable recovery from a capacity yet to be built; and to encourage illusions that are cruel and wholly detached from the experience of the long-term unemployed (many of them highly skilled) and of those in the 15-25 years age bracket who are increasingly being shut out of the job market.
There are positives: the employment market is now more flexible (an adjustment was well under way even as the Government persisted in cutting demand in a series of “slash and burn” budgets) and there has been a strengthening in competitiveness.
But there is also a lack of a credible supply-side policy that would make use of the skills and gifts of our workforce and put them to work to deliver projects that need to be done to strengthen our infrastructure.
Most of all, we need to empower entrepreneurs and decision-makers in such areas as health and education.
Is it not common sense to consult with those decision-makers before imposing reactive and brute-force cuts? Wouldn’t they know a little more about where where cuts might be made?
It’s not happening. Meanwhile, Europe’s sovereign debt crisis is now institutionalised within the psychology of the markets, and the knock-on instability is casting a pall over the future of the euro itself.
We have little enough time to get our act together here in Ireland. When confronted by the consequences of failed orthodoxies and self-defeating “strategies”, people riot, social structures buckle, and bad things happen.
Prof Ray Kinsella is on the Faculty of the School of Business and Law at the Michael Smurfit Graduate School of Business, and author of Rebuilding Trust in Banking(www.veritas.ie)