Government is driving economy recklessly

JOBS are (almost) growing on trees. Pay packets have (finally) started to fatten for more and more people. The economy is expanding by (nearly) every measure available. That’s the good news. There’s plenty of it.

But it’s not all milk and honey. That’s what economists from the International Monetary Fund (IMF) pointed out on Monday. Their biggest message was on the Government’s role in stimulating the economy, even if their point was made so subtly that it might have been partially lost.

Why such pussy-footing from the people who were once labelled “economic hitmen”?

As an organisation made up of sovereign states, IMF staff are careful in the language they use to their (dues-paying) members. Their language is coded: not once, but twice. The first code is economic. The second is the sometimescontorted language of diplomacy. As an economist, and someone who once worked as a diplomat, your columnist hopes he can make a decent fist of decoding both.

Here is their big message in IMF code: “Fiscal policy should become counter-cyclical.”

Let’s start by decoding the diplomacy-speak. When an organisation like the IMF wants to tell a government it is doing the wrong thing, it tends not to say so directly. Instead, it spells out what the right thing is. It then advises the government in question that it “should” do the right thing.

It would be better if this sort of nicety was dispensed with, and blunter language used, but that is the long-standing convention. The IMF won’t change any time soon.

Now for the economic jargon code.

“Fiscal policy” is a government’s overall budgetary stance – including both taxation and spending – and how changes to it impact activity in the economy. A tightening of fiscal policy is like applying a brake in a car. Cutting spending and/or hiking taxes sucks demand out of an economy and slows it down. Conversely, a loosening of fiscal policy is like pressing down on the throttle. It makes the economy go faster.

If that is straight-forward enough, what about the “countercyclical” bit?

Economies run in cycles. They rarely trundle along at the same pace for long. Sometimes they go too fast, and sometimes too slowly.

Most economists agree that governments – always the biggest single agent in any modern economy – should aim to counter these cycles, by stimulating activity when it slows, much as a driver hits the throttle to maintain speed on an incline, and cool it when it speeds up, just as a driver needs to brake when going sharply downhill.

Alas, Irish governments have long been driving recklessly. In almost every year since the 1970s, they have been speeding when they should have been braking and braking when they should have been hitting the gas.

That continues to this day. It will continue next year too, according to the Government’s own figures which show the public finances will remain in the red in 2019, the 12th year on the trot.

The IMF explicitly urged the Government to change this, saying that it should get its finances back in the black next year.

Another important point made by the IMF team on Monday was about jobs and joblessness. They said (in plain language) that “determined efforts” were needed on education and training to make sure young people from “disadvantaged regions” were helped into the workforce.

As it happens, their advice came on the same day the Government announced that it would grant the agri-food industry 800 additional work permits to hire workers from outside the EU to do minimumwage jobs. The economic rationale for doing this is highly dubious.

The ultimate purpose of economic growth is to make people’s lives better. Having higher incomes is an important part of a better life. That is now happening as companies are having to compete for workers in a tighter labour market.

The bidding up of wages is a welcome and healthy part of the economic development process, even if there are losers as well as winners. Workers are obvious winners. The companies that can pay more will get the workers they need to grow. The companies that cannot afford to pay more will not grow. The losers are the ones at the margin which may go out of business.

While nobody wants to see businesses fold, the market channels resources into the most efficient – and better-paying – activities. If there are companies and sectors in Ireland which cannot operate at market-set pay levels, then they have no real business being in business.

Companies in Ireland already have a resource of almost 300 million workers who can move freely around the EU. As the Congress of Trade Unions pointed out on Tuesday in its call to halt the granting of the permits, there are 17 million people unemployed across the bloc.

If companies can’t find enough people in that huge labour market to work at the rates of pay they are offering, they need to offer more. Having the Government give work permits to people from outside the EU willing to work at minimum wage rates is likely to depress pay growth for those on the lowest incomes.

It amounts to moving the goalposts just as the low-paid have got in a position to score a point.

The bidding up of wages is a healthy part of the economic development process