David Begg on the Devaluation Consensus & responses

In today’s Irish Times, a challenge is outlined by David Begg, general secretary of ICTU (and director of ESRI, Aer Lingus, Irish Times, Central Bank and various other bodies) to what Progressive Economy calls the Dublin Consensus on the necessity of a real devaluation. He compares the Irish response to the crisis, cutting public expenditure, to that of countries such as the US and China, where massive public stimuli are being undertaken. He believes Ireland’s strategy, which he outlines below, is “very high-risk”:

In Ireland the policy response has been to invest hugely in rescuing the banking sector but otherwise to act in a pro-cyclical way by deflating the economy through cutting public services and demanding cuts in social welfare, the national minimum wage and wages generally in the public and private sectors. It is a policy predicated on Ireland being able to recover by increasing its exports when and if the stimulus packages of our trading partners begin to take effect.

He also snubs a mention of Ireland’s own Kevin O’Rourke, when citing research that compares the Great Depression with our current international economic turmoil. Perhaps that’s because Kevin is a author on the Irish Economy blog, seen by the anti-devaluationists as key theoretical fodder for the government as it legitimizes public expenditure cuts.

Indeed, Philip Lane has already responded on Irish Economy to Begg’s article. Lane argues that, contrary to Begg’s assertion on the paucity of evidence that deflation facilitates recovery, evidence that real devaluation is helpful for economic recovery is ample, even just looking at Ireland, and cites the devaluations of 1986 and 1993 as contributory factors to economic growth. Lane argues that the best possible solution is to minimize unemployment, and – as so many of us have argued before – we had our fiscal stimulus in the good times:

If Ireland had run a counter-cyclical fiscal policy during the good years, there may have been room to do more in terms of counter-cyclical fiscal expansion now. However, the scale of the fiscal deficits and the fragile state of international bond markets mean that significant fiscal expansion cannot be entertained.

In the comments on the Irish Economy piece, Kevin O’Rourke goes on to make a distinction between two separate challenges, fiscal sustainability and the real economy/unemployment, a distinction I think most economists would be delighted to see embedded in general public debate. Cutting public expenditure can help with the first but not really with the second. A real devaluation is needed for the second. Where the two possibly intersect is the topic of public sector wage rates – hence their importance and presumably the reason that Begg is conflating one (cuts in spending) with the other (cuts in his members’ wages).

A slighltly more frank dissection of Begg’s ideas is also taking place on thepropertypin, hardly a bastion of pro-government hacks. Some highlights so far:

• One Progessive Economy supporter on that forum argued: “I just cant help but instinctively feel that slashing the wages of a load of civil servants and firing a few thousands more will do more harm than good.” The response: “It’s that or double the tax take of the economy. How much harm do you think that’ll cause?”
• Another interesting point raised there is Begg’s idea of risk: is dependence on global trade really more risky than borrowing €20bn a year ad infinitum?
• My favourite line for pithiness, though, even if some of the finer points are lost, is the following:

You don’t understand. The haemorrhaging of jobs is unavoidable. We can either hemorrhage easily replaceable jobs like retail or very very difficult ones to replace like the ones at Intel.

As I write, Begg’s article is generating some comment, mostly critical, on the Irish Times site itself. (This is the first time I’ve seen IT op-eds open to comment, a very welcome development.)