Kevin O’Rourke links to an interesting paper by Jeff Frankel which discusses different ways recessions are measured. The standard European measurement says that when an economy falls two quarters in a row it is officially in recession (we know all about that given our official double-dip). This measurement has the advantage of being statistically clear and simple. This, though, can lead to false readings. For instance, over two years the economy declines in half of the eight quarters – leaving it much lower. If, though, none of those quarters were consecutive, then according to the European measurement, there was no recession even though output has fallen. This may be an extreme case but it shows how quirky this measurement can be.
The US has a different way of measuring recessions. According to Frankel:
‘In the United States, the arbiter of when recessions begin and end is the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER). The NBER Committee does not use that rule of thumb (Europe’s two consecutive quarters of decline), nor any other quantifiable rule . . . When it makes its judgments it looks beyond the most recently reported GDP numbers to include also employment and a variety other indicators, in part because output measures are subject to errors and revisions. The Committee sees nothing special in the criterion of two consecutive quarters.’
The problem with this approach is that there is no single definitive measurement so disputes easily arise.
I’d like to introduce another way to measure a recession. It is based on the sinking-ship metaphor. A ship starts sinking. It eventually stops and starts to rise again. While it’s rising back to the surface we can say that it is in recovery mode. However, it will remain below water until it gets back to the surface.
Similarly with an economy: an economy goes into decline, eventually stops falling and starts rising. However, it remains metaphorically below water until it returns to the point at which it had started sinking. If an economy is below its pre-recession levels it remains ‘recessed’.
Take, for instance, the US Great Depression in the 1930s. The economy tanked big time in 1929. However, by 1935 the economy had experienced nearly three years of rising GDP, employment, consumer spending and investment. However, no one then (or now) would have said that the Great Depression was over by 1935 – it was still well below its 1929 level.
In 2007, the economy was generating a little over €43,000 for every woman, man and child. As seen, according to the IMF projections, even by 2018 the economy will not have returned to the 2007 level. It won’t happen until 2019. In other words, the economy will remain under-water for 11 years – in other words, ‘recessed’.
Of course, this is GDP – which is flattered by multi-national accounting practices (profit-tourism, etc.). What does it look like when we measure GNP per capita? Here we use the Government’s own assumptions in their end-of-the-decade scenario.
When looking at this domestic measurement (with all its faults) we find that the economy will be underwater for 14 years. 14 years. We won’t find ourselves above pre-recession levels until 2022. And if that’s not depressing enough, the ESRI’s John Fitzgerald estimates that even our GNP figures are over-stated given the presence of re-domiciled multi-nationals. The real GNP figures are substantially lower which suggests that a return to the surface could take even longer based on projected trends.
Staying with the metaphor, when the ship returns to the surface what kind of shape will it be in? Even though the economy has returned to the surface, many people will still be underwater. The Government’s end-of-the-decade scenario projects double-digit unemployment by 2019. Average real wages may not return to pre-recession levels until 2020 and even later. How many will still be living in deprivation, how many in poverty, how many will have emigrated? The ship may be back on the surface, hundreds of thousands won’t be.
To give another idea of what we’re facing into, let’s use the Government’s assumptions to track the ‘jobs recession’.
We won’t return to pre-crisis levels of employment until 2024. That’s 16 years under-water.
So when we start growing again – GDP, domestic demand, employment – just remember: we will have to grow for a long-time just to get back to where everything started collapsing. In other words, the ship may start rising soon but we will be underwater for a very long time.
Hopefully, you can hold your breath.
By Michael Taft,
TOGETHER WITH OTHER civil society organisations – the Spectacle of Defiance and Hope, the Campaign Against Household and Water Taxes, and the Communities Campaign Against the Cuts – the Dublin Council of Trade Unions is organising an Anti-Austerity March on November 24. In advance of the Budget, we believe it is necessary to send a clear message to Government Buildings: not only is austerity damaging to society and individuals – it is resulting in a stagnant economy characterised by high unemployment and low growth.
Since October 26, as part of a 30-day countdown to the march, the DCTU has been issuing daily ‘Reasons to March’. They are all available here – but I would like to focus on four specific issues which contradict the narrative that has dominated political and media discourse during the past few years.
We could call them busted myths. Despite what we are told, the facts are that:
Notwithstanding the EU-IMF deal, the Government has choices
Spending cuts have a worse impact on the economy than tax increases
Low pay is part of the problem – not part of the solution.
Austerity is not cutting the deficit
The Troika has made it quite clear that its primary interest is in the bottom line – that is, reaching the deficit-reduction targets. How we, as a people, choose to do that is a matter of choice. The Government is free to introduce a Budget focused entirely on taxation increases, entirely on spending cuts, or a combination of the two. The only requirement is that the measure in question raises or saves the amount projected.
Unfortunately, the current and previous governments have chosen to focus on spending cuts – and the evidence is that spending cuts do more harm to the economy than other measures such as increasing taxes on wealth and high earners.
Both the ESRI and the Nevin Economic Research Institute have examined the relative impacts of spending cuts vs tax increases. The ESRI found that €3 billion in spending cuts will drive down the domestic economy by nearly two per cent. On the other hand, €3 billion in tax increases will reduce growth by less than o.5 per cent. Because spending cuts are so much more damaging, they are less successful at reducing the deficit. Again according to the ESRI, a package of €3 billion in spending cuts will reduce the deficit by only €1.8 billion. €3 billion in tax increases will, however, reduce the deficit by €2.4 billion.
So the evidence shows that spending cuts are not only socially damaging – they are economically inefficient. Every time we cut a public service, or reduce a benefit, or raise taxes on low and middle income earners, we are taking more money out of the economy and out of people’s pockets – people who had very little to start with. That is why we need to focus tax increases on wealth and high income groups – rather than on those who spend everything they have in the economy.
Which brings us to another reason to make our voices heard on November 24: the claim that, four years into the crisis, we are all still ‘paying ourselves too much’.
That myth, too, is busted by the facts.
Low pay remains a major issue, damaging individuals, communities and the economy, in both the private and the public sectors.
Irish hotel and restaurant workers cost their employers seven per cent below the average of other EU-15 countries. When compared with the average of core EU-15 countries (excluding peripheral countries), labour costs here fall 16 per cent below average. Retail and wholesale workers cost their employers even less. During the last two years, the gap between Irish and other EU labour costs has widened further.
Low-paid Irish workers are near the bottom of the European low-pay league. And that includes low-paid public sector workers. Clerical workers in the public sector have pay levels well below that of other countries measured by the OECD. For instance, Irish clerical workers would need a pay increase of almost 50 percent to reach Dutch pay. And this was before the 2010 pay cuts.
Low pay is not just an issue for the individuals concerned: it reduces the amount of money people have to spend in the economy. And that puts business and jobs at risk.
We know that spending cuts are economically damaging. We know that low pay (and low levels of social protection) are economically damaging.
So it is not surprising that the current economic approach has not worked. It is driving up unemployment, emigration and deprivation while cutting incomes and living standards.
Yet supporters of austerity say this is the price we must pay to get our deficit under control.
But austerity is not even cutting the deficit.
Since the crisis began, depending on the calculation used, there has been between €24 and €25 billion in austerity measures – spending cuts and tax increases. But the underlying deficit (that is, excluding special bank payments and income) has actually increased since 2008. And since 2009, when the big austerity measures started, the underlying deficit has only fallen by just €3.5 billion.
Despite this spectacular policy failure, the austerity cheerleaders tell us we need to cut more. That is because many supporters of austerity are using the crisis for their own political agenda – to cut public services, social protection and public investment. And to cut wages, in the mistaken belief that low wages equate to competitiveness.
The past five Budgets have been driven by false premises – by myths. We’re in a bailout and have no choices. We can shrink the deficit if we shrink spending. We’re all paying ourselves too much.
And the only reason austerity hasn’t worked is because we haven’t had enough of it.
Now, as we come up to Budget 2013, we need to send a collective message to the Government: austerity cannot work. Rather than continuing to shrink the economy and the living standards of ordinary people, we need to invest in growing the economy, putting people back to work and putting more money in people’s pockets. On November 24, we have a chance to make our voices heard.
Michael O’Reilly is the President of the Dublin Council of Trade Unions, and served on the Administrative Council of the Labour Party for ten years.
Government on target to take €3.5bn from economy in budget, cuts 2013 growth figure
THE Government remains on target to cut €3.5bn out of the economy in next month’s budget despite a cut to its Gross Domestic Product (GDP) growth target for 2013 to 1.5pc, down from 2.2pc, as expected.
However, the move should not impact the €3.5bn budget adjustment figure because when inflation is factored in the nominal growth figure is relatively unchanged.
The cut comes against the backdrop of the continuing crisis in the eurozone which is dampening growth at the country’s main trading partners both in the UK and Europe, according to the Government’s Medium Term Fiscal Statement published this afternoon.
Last week, the European Commission cut its growth target for next year to 1.1pc and the document recognises other sector specific risks to growth including that of the export sector which is weighted heavily towards pharmaceuticals with many of those made in Ireland coming off patent.
The GDP target for 2014 remains at 2.2pc while the target for this year has been increased from 0.7pc to 0.9pc.
Spending cuts and tax hikes worth €25bn since 2008, or the equivalent of15pc of annual output, have been made.
The Government believes another €8.6bn from 2013 to 2015 will be enough to get the economy back on track.
Focusing on the domestic economy, the Government expects unemployment of 14.5pc next year with an ongoing necessity for households and businesses to reduce down debt levels built up during the boom.
“Loans to the household sector in Ireland measured 207pc of household income in the year to second quarter with the private sector savings rate at over 12pc in the same period,” according to the document.
“Although household indebtedness is on a declining path, any further acceleration in deleveraging by households presents a downside risk,” it added.
Turning to GNP growth, which excludes multinationals, because of the export-led nature of the forecast economy, the prognosis is for lower domestic growth.
Another risk to the public finances is that tax revenues in the month of November – the key month of the year for revenue collection – do not perform in line with expectations.
According to the figures, €5.7bn or close to 16pc of total tax revenue for the year is profiled for collection this month.
While not expected, if revenues were to underperform, this could have negative implications not just for 2012 fiscal targets but also the base upon which the 2013 tax revenue forecast is built.
Finance Minister Michael Noonan will deliver Budget 2013 on December 5.
Last week, the Department of Finance has signalled it wants a tougher Budget next month to make up for lost tax revenues as a result of lower growth.
Department of Finance secretary general John Moran has said that while decisions were a matter for Cabinet, his view was the 2013 target deficit of 7.5pc of output should be met.
He warned that downward growth would lead to downward pressures on revenue and the “need to adjust accordingly”.