Deflation, the economy and growth

Michael Taft: Three Sunday articles with some thoughtful comments. First up, the Sunday Tribune and Eamon Quinn’s survey of six economists from across the political spectrum. Though they may differ as to why, none seem to believe the Government will bring the fiscal deficit under control (i.e. Maastricht compliance) by 2014. However, it is Professor Ray Kinsella’s comments that are the most damning:

‘You have to say to yourself, we have had four budgets now and each of those has been deflationary and unemployment will rise to 500,000. We simply can't afford to keep losing that sort of capacity. Firms are failing every day . . Potential is being lost – I can see it in the university students who are leaving the country. I am very clear that continuing the current fiscal policies will destroy the capacity of the Irish economy to recover.’


Second, is Brendan Keenan’s article which argues that leaving the Euro zone to achieve devaluation may not be such an attractive proposition. He concludes:

‘Those countries which think the balance of advantage for them lies with euro membership will have to tailor their policies to achieve growth within the single currency. Ireland has not yet done so. We should worry less about debt and defaults and more about enhancing the economy itself.’

The third observation is by Will Hutton in The Observer who contrasts the 20 economists writing to the Sunday Times, demanding the deficit be cut and be cut now; with the 60 economists writing to the Financial Times who argued for a fiscal policy that promotes growth and recovery. He helpfully links to an IMF paper which studied financial crises in 99 countries. What is the best response for an economy?

‘The best response is increasing capital spending; lift that by 1% of national output and not only are recessions shorter, but there is a permanent boost to economic growth of around a third of 1%.'

So let’s sum up:

• Current polices equals destruction of capacity
• New priority must be about enhancing the economy
• Capital investment has a positive and significant return

It may not be a syllogism in the technical sense. But it is logical.

Posted in: Economics • Fiscal policy

Tagged with: fiscal stimulus • Deflation

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.