Tuesday, June 29, 2010

Is the West Fated to Follow Ireland?

The deal is done, maybe. Harper got his way as host of the G8/G20 summits when the member states pledged to halve their deficits by 2013. Let the slashing begin. So, what lies in store for the developed world plunged into this new, collective austerity? Ireland may show what's coming and, according to The New York Times, it's an awful lot of very long-term pain:

"...Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.

...Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent. Now, the Irish are being warned of more pain to come.

... Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.

...The budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3 percent of gross domestic product last year — worse than Greece. It continues to deteriorate. Drained of cash after an American-style housing boom went bust, Ireland has had to borrow billions; its once ultralow debt could rise to 77 percent of G.D.P. this year.

“Everybody’s feeling quite sick at what happened because things were going so well for Ireland,” said Patrick Honohan, the Irish central bank governor. “But we don’t have the flexibility to do a spending stimulus now. There’s no one who is even arguing for it.”

Mr. Honohan predicts growth could revive to a rate of about 3 percent by 2012. But that may be optimistic: Ireland, as one of the 16 nations in Europe that has adopted the euro
as its common currency, is trying to shrink the deficit to 3 percent of G.D.P. by 2014, a commitment that could weaken its hopes for recovery.

Textbook austerity measures have failed Ireland and the markets are punishing the Irish for it. The best and brightest who flocked to Ireland during its halcyon "Celtic Tiger" days are packing their bags and leaving. Investor confidence in the country has plummeted in response to the austerity policy. Where the Irish government gambled that raising taxes and slashing government spending and programmes would restore investor confidence, it has actually backfired and the Irish people will be paying for that failed bet for years to come.

If this is where the West is heading, a "lost decade" perhaps, don't count on the status quo returning when its over. We may not bounce back, not entirely, not ever. When this finally ends the playing field may look much different than it ever has in our lifetimes. New dominant powers may emerge that dissolve the unipolar superpower world, America's, that has brought us all to the edge of this abyss.

It's going to take more than budget cuts to sort this out. If we're really coming back, we're going to have to give up our addictions. FIRE (finance,insurance,real estate) driven economies don't recover very well from recession/depressions. They're uniquely vulnerable to these collapses because they are, after all, mainly pushing paper. A car has a utilitarian value, a piece of paper has but the notional value assigned to it at any given time. Our addiction to notional wealth and bubble economics got the West into this mess and will not help us get out.

We're going to have to give up the culture of consumption inculcated during the Reagan era and return to what made the West both great and economically stable, a culture of production. Maybe that will mean the end or at least reining in of globalization and the reclaiming of trade sovereignty from the multinational corporate sector by the developed world. That will not be without its own pain, at least temporarily, but the long-term benefits more than justify it.

Some Americans in high places have become acutely aware of the fundamental damage that has been inflicted on their nation's economy by the demise of its manufacturing sector and the attendant devastation of America's middle class. What they have found, however, is that manufacturing, once lost through trade deals, won't come back on its own. You don't catch a lot of fish with an empty hook. You have to bait it. The bait has to be access to markets controlled through the exercise of sovereign tariff powers and other domestic supports. The very idea will send shudders through the ranks of globalized, free traders - the rentier class - but we've tried it their way and it has landed us where we are today.

1 comment:

Anonymous said...

The Ireland government was worried about investors? How much more wrong could they be placing their their confidence in a group that will only lose money if Ireland collapses?