What to do in a recession
For most of the twentieth century it was commonly maintained by economists that Governments should conduct economic policy in a counter cyclical way - i.e. that in recessions, they should try to shore up demand and confidence, and in booms, dampen excess demand down.
However, towards the end of that century a vogue arose amongst some, in tandem with the rational expectations theory, the rise of game theory, and wider philosophic notions such as ‘the end of history’, and questioning even of the existence of concepts such as ‘society’ that Government (and consequently economic policy) doesn’t matter.
It would seem that the above views hold force in Ireland, given the lack of consensus amongst economists in recent months and weeks, as the recession took deeper hold, that the Irish Government should adopt a counter cyclical role in relation to the current downturn.
This seems strange, given the clear evidence abroad that policy does matter, and, indeed, that money does matter, despite the ‘pushing on a string’ argument on the efficacy of monetary policy in a recession. Alan Greenspan does not adhere to this end of history view, nor does the US Government, and its allies in regard, for example, to military intervention in Afghanistan.
The particular danger for Ireland of this view holding force as we run up to the budget next month is that the one great opportunity that the Irish Government has to act on the economic policy front will be lost.
Clearly, history has not ended, clearly the Irish economy is in need of support, and clearly, the Government should act in the coming Budget to stimulate confidence.
How it can do so is to continue to pursue taxation and fiscal policies that in the past have worked in Ireland to maintain confidence. Thus, now, of all times, is not the time to withhold tax cuts, particularly those that have been promised already (e.g. on the top and lower rates of income tax), neither is it the time to throttle back on infrastructural expenditure.
If it takes ‘borrowing’ to do this, then so be it. It would not be a bad thing if the Government were to cut planned allocations to the national ‘nanny’ fund (the national pension reserve fund), and invest instead in infrastructure to relieve some of the crisis bottlenecks that exist, notably in roads and transport. At least the resources would be going to directly benefit the economy of Ireland - rather than being ploughed into international equities, bonds or other instruments.
As for the specific ways in which such stimulus should be channelled - there has been much good advice, not least of which has come in this publication (in the form of the policy recommendations of leading Irish economists in the September edition of Finance, and, indeed in the lead story of this issue.
This publication has not been loath to praise the Minister, and the present Government on many of the policies they have implemented over the past four years, and indeed, sometimes it bears reminding in this light that the Government has got it wrong. It certainly got it, sadly, wrong over the Employer PRSI limit, and there is no question that it has got it wrong on some other fronts as well - Pat O’Brien’s balance sheet on tax policy for the Government over the past four years in the KPMG Tax Monitor on Page 14 of this issue is in our view a very balanced assessment.
Elsewhere in this issue, the views of Ireland’s venture capitalists should be a source of some considerable encouragement as we plumb the depths of the recession. A new corporate finance wave is forecast - starting maybe not until 2003, but, when it comes (and it will) it may be too late for those who would wish to capitalise on it now, but who are not yet taking the steps that are needed. The answer, our contributors point out over and again, is to concentrate on building enterprise value - a long term exercise perhaps, but, necessary nonetheless.
Such rebuilding will be the foundations of the new economy of 2002-5; it is certain too, that the new ‘new economy’ of the future will be one based on true enterprise value, and not on the likes of the cash burning vehicles that came to the fore in the exuberant ‘90s. |
