Past lessons, future policy

Michael Taft: With the news that the increase in unemployment is slowing down (though the range of missing numbers suggest that emigration may be rising at a considerable rate), let’s take a historical look at the last time Ireland emerged out of a recession with a high rate of unemployment. If unemployment tops out at between 14 percent and 16 percent over the next 18 months, how long will it take for unemployment to start falling?

In 1988 (the first year the internationally accepted ILO measurement was used) unemployment stood at 16.3 percent. By 1993 – with the Celtic Tiger growth ready to appear – unemployment remained stubbornly high at 15.7 percent, with the actual number of unemployed marginally higher than in 1988.

During this same period, annual GDP grew in volume terms by an average 4 percent. Employment, however, only grew by an annual average of 1.2 percent. Employment growth lagged considerably behind GDP growth.

The situation could have been much worse if we hadn’t benefitted from that ol’ standby – emigration. Between 1988 and 1993, over 100,000 had emigrated. Given that unemployment rose marginally in nominal terms during that period – from 217,000 to 220,000 – we can see what the effect would have been if people actually stayed in the land of their birth.

So, while GDP growth increased substantially, employment creation lagged behind and the only reason that the unemployment didn’t climb every higher was due to the economic safety valve of emigration. We should expect – and the IMF has warned everyone of this – that when GDP returns to growth sometime mid-to-late next year, unemployment may not start to deline for some time.

But there is one crucial factor we should be aware of during the late 1980s/early 1990s – something that is a bit of an embarrassment to the deflationists calling for massive public expenditure cuts; namely the role of the considerable stimulus expenditure engaged in by the government. During that period:

• Current expenditure increased by an average of 6.9 percent annually
• Capital expenditure increased by an average of 11.4 percent annually

In addition, during that period Ireland received another big stimulus in the form of European social and regional development funds. During the five-year period, this amounted €3.6 billion. This boosted public investment by 30 percent (in addition to the Government’s own public investment), and amounted to nearly 10 percent of our GNP in 1993.

Now compare that situation to what we are looking into over the next five years – severe cutbacks in current public expenditure coupled with a decimation of the capital budget. And all this without the benefit of EU investment funds.

Of course, we have to be careful in making comparisons between then and now. For instance, in the 1980s, the recession was relatively mild (GDP volume growth only contracted in one year). Agriculture played a more important role back then, while our export platform and infrastructural quality was relatively weak.

Still, a key issue which requires much more discussion is the role that increased public expenditure and investment played in eventually lowering unemployment, and its interaction with IDA policy, the devaluation and the emerging European single market. For while unemployment remained sluggishly high during the five year period we examined – starting in 1993, it fell quickly, from 15.7 percent to less than 7 percent in the following five year period.

Would this have happened without the massive stimulus the economy experienced? I would argue that it is doubtful. But what cannot be argued is the fact of that stimulus – something which the Dublin Consensus is in denial about.

Posted in: Fiscal policy • Fiscal policy

Tagged with: fiscal stimulus • jobs

Michael Taft     @notesonthefront

Michael Taft is an economic analyst and trade unionist. He is author of the Notes of the Front blog and a member of the TASC Economists’ Network.