Chutzpah Charlie

Max McGuinness on some really bad advice from the man who got us into this mess.

Back in the heyday of Celtic Tiger 1.0, the then Minister for Finance “Champagne” Charlie McCreevy used to revel in distributing bags of goodies every budget day. Like a latter day Louis Philippe, his watchword seemed to be “Enrichissez-vous!”. There were tax cuts, spending increases, and handouts galore. The economy was booming already with growth hitting over 10% in 1997, the year Fianna Fáil came to power. But Charlie decided to chuck more and more diesel onto the fire.  The consequences are now coming back to haunt us: inflation sapped international competiveness leading to growth being concentrated almost entirely in the property market; and the swingeing cuts to income tax made government revenues excessively dependent on the housing bubble.

So is Charlie repentant? Does he express contrition for his irresponsible profligacy? Has he conceded that he may have made even a few errors of judgement? To paraphrase Michael Bailey: Has he f**k?

In Dublin this week, he told the Association of European Journalists that “people shouldn’t  kid themselves that past spending levels are sustainable.” Spending will have to be cut dramatically, he declared, and we shouldn't dream that we can borrow our way out of trouble. “Investor appetite for Government debt is not limitless.” Elsewhere, he criticised European policy on bank capital requirements as being “too pro-cyclical”. Yet this man spent five years in the Department of Finance enacting some of the most pro-cyclical policies the world has ever seen.

 In sum, it would be extremely foolish to take any advice from Charlie on how to manage the economy. Alarmingly however, a deflationary consensus seems to be setting in among the government and commentators like Dr. Alan Ahearne of NUI Galway who echoed Charlie's self-reinforcing pessimism on Prime Time last week. Brian Lenihan’s declaration last week that we have been living beyond our means and the hint that further spending cuts are likely next year is the very last thing that he should be saying during a recession, which now threatens to turn into a prolonged slump. Telling people that they are living beyond their means is a way of encouraging them to spend less, which will only depress the economy even further. Lenihan’s words echoed those of Charlie Haughey (who promptly ignored them) at the beginning of the 1980s in a very different economic context. When we had our own currency, running a prolonged balance of payments deficit was indeed a risky proposition because it threatened to destroy investor confidence in the punt. But now that we are cushioned by the euro, the prospect of lenders losing confidence in Irish government debt (which never happened even in the darkest days of mid 1980s when debt spiralled to well over 100% of GNP) is in fact remote. Indeed, banks are currently eager to lend to governments to make up for the collapse in confidence in the private sector. Western governments, which possess theoretically limitless ability to repay debt through taxation, are now the only credible borrowers left in the eyes of lenders. Governments thus actually have to borrow if they are to balance the financial system.

Our problem is not unique and governments in Britain and the USA with higher existing levels of debt than us will run enormous deficits next year as well. This week, Barack Obama announced a massive programme of infrastructural investment to provide a fiscal stimulus when he assumes office next year. Not for nothing is this being dubbed a “new New Deal”. His proposals to boost the US’s dilapidated roads and broadband network are uncannily well-suited to this country too. Alas, our politicians, after years of splurging when they should have been holding back, seem determined to slash their way into a full-blown depression.

And a depression is what you get when the economy enters into a period of falling prices – deflation in the economist's jargon. This is now a realistic possibility in Ireland judging by the most recent Consumer Price Index figures which show a substantial overall fall in prices between October and November this year. Indeed, according to The Irish Times here, the monthly fall of 0.9 percent is the biggest on record! If the massive discounting on the high street along with plummeting oil and gas prices are anything to go by, this trend will accelerate this month.

When prices fall, it means that the real value of debt increases. In a country as over-leveraged as Ireland, this would be a catastrophe, destroying confidence for years to come as it did in Japan during the 1990s. In the US, the Federal Reserve is taking the threat of deflation seriously enough to have embarked on a programme of “quantitive easing” – i.e printing money – in a effort to manufacture inflation. In Ireland, we do not have that option because we no longer control our own currency. So it may in fact become essential for the government to spend, spend, spend next year if they are to prevent the country going down the tubes completely. And the sooner they start, the better.