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'There has been an intellectual rethinking on the whole issue of government borrowing'

Why austerity is out and public spending is back on the menu for economists.

IMF chief economist Gita Gopinath
IMF chief economist Gita Gopinath
Image: Xinhua News Agency/PA Images

WE’RE GETTING USED to remarkable press conferences lately.

The last two months have been filled with them and yet the one delivered by finance minister Paschal Donohoe in Government Buildings this week — in which he detailed the catastrophic scale and speed of the impact that COVID-19 is having on our economy — must be among the most stark.

Whatever its make-up, the incoming government will have to grapple with the second major crisis in Irish and global capitalism in just a decade.

In the wake of the crash of the late 2010s and the recession that followed, austerity and public deficit reduction were central to the responses of policymakers not just in Ireland but globally – even in relatively sound economies like Germany.

But the tectonic plates of economic orthodoxy seem to have shifted somewhat since then. Even the International Monetary Fund appears to be moving away from old ideas.

How did we get here?

The Great Lockdown

IMF chief economist Gita Gopinath (in another extraordinary press conference earlier this month) likened the latest crisis to the Great Depression of the 1930s and explained that the output losses caused by ‘the Great Lockdown’ would cause “a deep recession”, that will scar the global economy.

However, what really caught the eye was Gopinath’s advice to policymakers:

Once the recovery has happened and we are past the pandemic phase, for advanced economies, it would be essential to undertake a broad-based stimulus.

“This would be even more effective if it were coordinated across all the advanced economies,” she said

This would, of course, require governments to borrow heavily, increasing fiscal deficits in the process.

But Gopinath’s advice to politicians? ‘Don’t sweat it.’

“As long as interest rates remain very low as we’ve seen and we get the recovery we’ve projected, then the combination should help in bringing debt levels down slowly over time.”

Austerity budgets

Surely there’s been some mistake?

Is this really the same IMF that, along with the European Commission and the European Central Bank, formed the Troika, synonymous on these shores with austerity budgets and swingeing cuts?

If so, why the seemingly sudden change of tack?

For two reasons says Professor Alan Barrett, chief executive of the state-funded Economic and Social Research Institute (ESRI). Firstly, there is one major difference between our current state of affairs and the last crash.

“The last crisis was all about the buildup of (public) debt so that when people like the IMF, were then coming in to sort of give advice and assistance, what they were looking at was unsustainable levels of debt.

“It was very difficult, in their view, to solve the difficulties that began with debt by issuing more debt. So I think that’s the first element of this.”

The second element, Barrett says, is that there has been an “intellectual rethinking on the whole issue of government borrowing,” in recent years.

“One of the things we always worried about on public debt was if the interest rate on the debt was bigger than the growth rate of the economy, it meant that over time the debt could become unsustainable.

But in more recent years with interest rates so low, there’s a sort of a sense that maybe the amount of public debt that countries can actually carry is bigger than we previously thought.

One of the “thought leaders” in this area, Barrett says, is French economist Olivier Blanchard.

Blanchard, an MIT academic who served as IMF chief economist from 2008 to 2015, admitted as long ago as 2013 that the fund, in economist Paul Krugman’s words, “massively understated the damage that spending cuts inflict on a weak economy”.

Cuts coupled with “debt alarmism” on both sides of the Atlantic, even in Germany, “slowed the recovery” in Krugman’s view.

Ciarán Nugent, an economist with the trade union-funded Nevin Economic Research Institute (NERI), agrees.

Even before the COVID-19 crisis, he says, Germany — the economic powerhouse of Europe — was “technically in a recession… as a function of not having the freedom to invest (and borrow)”.

Nugent believes that globally, “the writing has been on the wall for some time” for the old ways of thinking about public debt and spending.

Green investments

What policy options might be available to governments in light of this new thinking?

Because a lot of people have lost their jobs and a lot of people will have lost confidence, there’ll be a need for the public authorities to maintain spending in order to supplement the loss of private expenditure.”

One way to do this, he says, is to spend money on infrastructure.

Barrett explains, “People are already talking about using this as an opportunity to introduce green investments. So would it be a good time now to sort of retrofit every house in Ireland and have a housing programme, but a very sort of green housing programme, and public transport investments?”

Nugent thinks so.

When it comes to green investments, he thinks, “a publicly funded retro-fitting (housing) programme targeting, first of all, the social housing stock after that, the public building stock, schools, hospitals, whatever else and exploiting opportunities in those areas,” could help kickstart the recovery.

He believes this would create “middle income” jobs in trades like carpentry and help put people back to work, stimulating demand in the economy. By making the housing stock more energy-efficient, it would also help Ireland meet its climate targets, he says.

These issues will have to be kicked around in the political arena first, not just in Ireland, but in Europe as well.

There is also the small matter of the tempestuous debate at EU level over how the funds will be raised, how they will be deployed and how the burden should be shared between relatively strong northern economies like Germany and the Netherlands and their stricken southern cousins, Italy and Spain.

Although there was a small glimmer of hope this week when leaders agreed to release €540 billion in recovery funds through existing mechanisms, “The Europeans, in a sense, haven’t got their act together,” Barrett says.

But for Nugent, the need for new thinking about how to get the economy back on track is clear, particularly for young people.

“The labour market never recovered for young people from 2008. The danger would be (repeating the same policy choices from the last crisis) and, in the process of doing that, failing to address it properly.”

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