The state and recession

Last Friday saw over 100,000 angry public sector workers take to the streets of Dublin to demand that their employer, the government, does not go ahead with its plan of reducing public spending by introducing savage wage cuts.

This latest protest follows on from previous actions in March 2009 (1) and industrial strife that followed. (2) However, unlike the first round of protests and strikes, last week’s action consisted public sector workers only. Previous protests, by contrast, had included large swathes of private sector workers so concerned about their jobs that some had taken to occupying their workplaces.(3)

Since then the government, aided by the media, has driven a wedge between workers in the public and private sectors. Where once we were rallied to attack ‘fat cat’ bosses and bankers engaged in ‘casino capitalism’, the narrative has now shifted to attacking slothful public servants, overpaid and mollycoddled with huge pensions and other perks.

This regurgitation of old tropes about public servants would have much less traction if it didn’t have at least the ring of truth about it. For a start, public service pensions are generous, even with the tax levy imposed by the government. In addition, stories of widespread absenteeism did a lot to cement the image of public employees as and idle, work-shy bunch.(4)

Nevertheless, the tone is simply one of envy. Workers in private industry have complained that they would never get away with such shirking, egged on by media commentators who are either simply seeking to create an argument – papers don’t refuse ink – or are actively working in the interests of employers by attempting to further weaken trade unions. The image of ‘fat cat’ state employees would be laughable were it not for the fact that many in the higher echelons of public service clearly are overpaid and mollycoddled. However, the lower ranks of the civil service are poorly paid and suffer appalling working conditions and total mismanagement, whether from in-house or from outside consultants.

The sham-fight between public and private sector workers is not entirely without merit, however. It has raised the issue of what, exactly, should be the state’s role in the economy, albeit inadvertently.

State your business
The role of the state in economics is, without a doubt, the main question at the heart of politics. Or rather, it was until politicians gave up managing the economy and instead turned their attention to managing individuals. Still, society’s economic relationship with the state on the one hand and markets on the other defined just about every major political battle in the post-war era (and a good many of those before it) and has once again risen as a question worth asking as a result of the recession.

In the Stalinist economies of the old Eastern Bloc the state was the economy. Whether one viewed the Soviet Union as communist, a deformed workers’ state, bureaucratic collectivist or state capitalist is, as far as this argument goes, an irrelevance. What all of the ‘socialist’ economies had in common was that the state was the principal economic force in control of all major industries. Conversely, the United States and its allies relied to a much greater extent on market mechanisms to control production.

(Although, in fact, even the United States was much less capitalist than is generally accepted. As Richard Barbook meticulously details in his social pre-history of the internet ‘Imaginary Futures’,(5) the ‘dead hand’ of the state had a much greater role in industry, particularly in technological research and development, than is generally realised – arguably more than the ‘invisible hand’ of the market).

At the same time Ireland occupied a kind of vague position where the state had a major role in the economy but private enterprise was encouraged. Ireland’s peculiarity was – and is – that the state’s interventions have been concentrated more in sectors of industry than in welfare. As much as Ireland still retains a semi-corportatist body politic (particularly with regard to the various ‘semi-state’ companies and the ‘social partnership’ deal with the unions) it did follow international trends, opening its economy to international market forces from the 1970s onwards.

Since the Reagan and Thatcher ‘revolutions’ of the 1980s a watered-down form of free-market capitalism has been viewed as the optimal situation. The state continued to play a role in the economy, primarily through controlling the money supply, but also through contracts and the continued existence of the welfare state. However, the current era which began with the massive changes in the 1980s does represent a significant break from the post-war consensus which emerged as a result of a clash of ideologies immediately after the Second World War.

During wartime (and the Great Depression) the capitalist economies centralised control of significant sections of the means of production either through direct intervention in the form of nationalisation or through contracts and other mechanisms of control – something the United States still excels as in the form of military production. In Britain the post-war era was marked by not only the 1945 Labour government of Clement Atlee but also by the continuation of price controls, nationalised industry and rationing. The development of social services including the National Health Service can be viewed as a bulwark against the then very real attraction of Soviet-style communism. The same forces were at work in the United States with the New Deal and also after the war, but to a lesser extent. (6)

Stating the obvious
Classical liberals have long argued that left to its own business, the market would take care of all human need. From this point of view the recession is not the fault of speculators but of the state.

Clearly, however, the state is not the cause of recession – though it did have a hand in it. In fact, in bailing-out the banks arguably the state has stopped the economy from falling into a true depression. In this case the state is essentially acting as an insurer of the uninsurable in order to guarantee social cohesion.

Interestingly the Irish government has, thus far, refused to follow the lead of other countries by issuing a stimulus package, something that both the trade unions and employers’ organisation Ibec have both called for. (7) (8) Thus far, most of the discussion has simply been about which banks to save. Labour has called for nationalisation of both of the major banks, Allied Irish Banks and Bank of Ireland but neither Fianna Fáil nor Fine Gael support this idea. The Green Party wishes to see further stimulus for its pet projects such as renewable energy micro-generation and home insulation but is not arguing for wider intervention to a degree that could have any effect on the economy. (The Greens also plan on producing money out of thin air – literally – in the form of taxes on carbon emissions).

This in itself is unusual. In most other countries a degree of state capitalism has been introduced.

During the boom the North’s state-centric economy, a legacy not only of the conflict but also of economic underdevelopment predating 1969, was widely criticised as bloated and unproductive. Now many ordinary people are looking at it with some small envy as job cuts hit much harder in the South. Nevertheless, reliant as it is on the largesse of British taxpayers, no-one is suggesting that the South becomes the ‘employer of last resort’.

Still, other capitalist economies, including France, the United States and, crucially, Britain have all engaged in state-led economic stimulus. Ireland has not. This despite the fact that the US and France have both (apparently) pulled out of recession as a direct result of government intervention and British prime minister Gordon Brown claims the UK will by Christmas.

Even Germany’s newly minted conservative government is tinkering in economic affairs, introducing a programme of tax cuts equivalent to one per cent of GDP in the hope of stimulating spending.

Writing in the Financial Times, Martin Wolf noted that: “The private sectors of the US, UK and Ireland are now providing nearly all the savings needed to cover their huge domestic fiscal deficits.”(9)  Wolf also cites an International Monetary Fund report to say that cutbacks in public spending are responsible for increased fiscal deficits. (10)

There are, of course, alternative views. Writing in the Irish Times last year, economist Jim O’Leary said stimulus would not help the Irish economy because the structural deficit occurred because the “huge tax windfall harvested by the exchequer from the property and construction boom has disappeared, but the greatly elevated levels of public spending that were financed by that windfall have not.” (11) So, again we are left with a austerity programme in which the only viable idea is to cut services.

Politically, the recession has had incoherent results. Widespread public anger is evident but it remains politically inchoate and unfocussed, something that has not changed since the recession really began to bite. (12)

At this stage, confusion is a rational response. The world’s leading free-market newspaper wants an increase in public spending but Irish economists and the government want to see cuts.

Whither the left?
Insofar as Ireland has a political left at all, it has tended to trail Britain and, like the British left, most Irish socialist and social democratic groups appear to be incapable of thinking beyond the state in Keynesian terms. (13) For most Anglophone socialists, nationalisation equals public ownership but in fact nationalisation means state ownership, which is a rather different thing. The government having a monopoly on, say, telecommunications does not necessarily mean that telecoms would be under democratic public control – something that anyone who waited for months on end for a telephone line from pre-privatisation Telecom Éireann or British Telecom would immediately realise. This is not to retread the old free-marketeers jibe that the state is necessarily less efficient than the private sector, just that the state and its citizens are not one and the same thing and the control that the latter exercises over the former is both limited and conditional.

Still, the collapse of the financial markets in the sub-prime mortgage crises and the subsequent fallout, including Ireland’s property crash, are being viewed as well-needed correctives to the idea that the market gets everything right. This is a view that it is easy to have sympathy with and, in fact, markets frequently fail – the kind of omniscience that some free-marketers claim for the market is not to be found in the writing of Adam Smith, the high priest of capitalism.

That said, does market failure mean that state intervention is inevitable? And even if it does, would this be a victory for ordinary people? Not necessarily so. The much-lauded ‘return of Keynes’ does not really represent anything like a victory for the left. As is argued above, state ownership is not the same thing as public control. Alongside this, which sectors of the economy the state decides to ‘stimulate’ (or take over) is a serious political question. Does ‘public’ ownership of Anglo Irish Bank do anything for ordinary people, for example?

There is, nonetheless, an extremely strong case for state investment in support of productive growth. The Construction Industry Federation (CIF) is suggesting the state must invest heavily in the development of infrastructure. (14) This is a purely self-serving suggestion on the part of the CIF which is desperately trying to keep the industry from collapsing entirely. Nonetheless, that does not make it a bad idea. Despite the National Development Plan, Ireland is still lacking in vital communications infrastructure. New road and high-speed rail would do the country no harm whatsoever. Likewise, Ireland’s telecommunications sector needs to be pushed to speed-up development and energy production is a viable sector for real capital investment.

Now that private finance initiatives (PFI) and public-private partnerships (PPP) are dead in the water as a result of credit freezing the state will be forced to return to making long term investments at least in its own infrastructure in the form of government offices and public buildings. This alone, though, will not be nearly enough.

Those countries that have supposedly exited the recession are in fact enjoying a short-term boost driven by consumption: stimulus has had an effect but it is principally resulting in restocking of consumer goods. Welcome as this is, it is no indication of future economic growth and if misread as genuine growth will lead to a greater fall.

Were the state to involve itself in supporting genuinely productive, value-creating activity this would represent a real sea change. Innovation and development must be at the forefront of any economic policy which can be said to seriously tackle Ireland’s current difficulties.

Rather than harping on about the need for the state to get out of the economy or demanding endless bailouts for failing businesses we should face the fact that the state is already intimately involved in the economy but that, at present, it is misdirecting the money which it is shovelling in. The truth is that the state’s role in the economy is incoherent, particularly in Ireland. The laissez faire capitalist approach simply is not an option, whether one wants it or not, because the state and economy have been so intertwined – and not only in Ireland. Despite the free-market rhetoric, the state never went away. Public spending continued to rise, it was simply redirected from obvious welfare into welfare for business in the form of the aforementioned PFIs, PPPs and other measures.

Holding the economy back together with Keynsian sticky tape, however, will not solve the problem either. At best it will simply result in a temporary recovery which will then be used to advocate freer markets once again and the cycle will continue.

Either way, there is a clear opportunity being lost: the opportunity to reformulate what the state does in the realm of the economy. Unless we make Ireland a genuinely productive economy we will be stuck with the current one that, good times and bad, is perhaps best described as consumptive.

By Jason Walsh

Jason Walsh is the editor of forth. Visit his personal website jasonwalsh.ie

(1) Ireland’s boom ends – with vengeance, Jason Walsh, CS Monitor, March 2, 2009
(2) Back to the 1970s?, Jason Walsh, spiked, September 14, 2009
(4) Sick leave in public service is twice the rate of private sector, Fionnan Sheahan and Brian Hutton, Irish Independent, October 23, 2009
(5) Imaginary Futures, Richard Barbook, Pluto Press, 2007: Buy this book from our Amazon store
(6) Ibid
(7) Unions try to delay the evil hourNiamh Connolly, Sunday Business Post, November 8, 2009
(8) IBEC calls for ‘ambitious’ job package, Inside Ireland, October 27, 2009
(9) Private behaviour will shape our path to fiscal stability, Martin Wolf, Financial Times, November 3, 2009
(10) Maintain Fiscal Support, but Devise Credible Exit Strategies, IMF’s Fiscal Monitor Says, International Monetary Fund, November 3, 2009
(11) Stimulus package will not solve Ireland’s economic problems, Jim O’Leary, Irish Times, December 5, 2008
(12) Irish uprising,  Jason Walsh, spiked, March 5, 2009
(13) Left out, Jason Walsh, forth, August 3, 2009
(14) Irish Examiner, November 9, 2009