21 March 2002 Edition
What is republican economic policy?
BY DOMHNALL Ó COBHTHAIGH
For some time now, economists have been debating whether the United States will experience a V or a U shaped recovery - these correspond to a sharp or a gradual upturn in economic output, respectively. In order to understand the nature of the periodic rises and falls in economic growth in capitalist economies, and to make estimations of future growth, we must understand the nature of commodity production. Whilst such an analysis is difficult to present in a short article, I will attempt to cover the basics in regard to the production of goods (the supply of services is actually simpler).
Starting off in an 'upswing', demand for goods and services increases given an excess of supply over demand among the population (this is why we get price inflation during periods of growth). The requirement for more commodities creates an increase in demand for the machinery that produces them; this machinery is typically expensive and requires the investment of large amounts of profit in capital expenditure (something which can be partially controlled by increasing interest rates). Due to the nature of competition, this machinery becomes commonplace throughout the sector, increasing the amount of goods produced overall.
In the full length of the growth period, the rate of profit to capital investment falls due to the widespread availability of this technology and its high cost. Consequently, all businesses increase output to gain a larger 'market share' to make up for their capital investment. This causes a 'glut' of production, which cannot be met by demand from the consumers, who are limited in how much they can either afford or consume, and we get 'overhang', a situation where supply exceeds demand. Such a situation yields a classical 'deflationary' recession, of which the 'Great Depression' is a good example.
The neo-liberal response includes policies which involve:
increasing demand by throwing money at consumers (usually the upper-income ones) - an example of this is Japanese financial 'giveaways' over the last ten years or Bush's recent tax break;
the slashing of production and labour force costs by the private sector - either through mass, forced redundancies or wage reductions;
tightening government spending on benefits and social services.
Despite the huge toll these wreak on humanity, these policies can, in most cases, reduce production to a level below supply and the cycle can start again. This cycle, which may appear complicated and even academic, will be obvious to all those readers involved in the manufacturing sectors. The cycle of increased production to meet demand, acquisition of new machinery, the problems of competition and then redundancies or wholesale buy-outs are the characteristics of modern Western political economy.
US policies
Given such an analysis, it is strange to view the monetarist policies of the US Federal Bank, the Fed, which has aggressively reduced interest rates and reduced taxation in response to the downturn in economic growth. This has the dual impact of (a) increasing investment in production and of (b) increasing consumer spending because it will cost less to borrow - or more realistically that credit card payment or mortgage will cost less. The problem is that the first impact would, necessarily, only add to the crisis of overproduction. The second impact actually would help support growth, but that presupposes that consumers will want to spend during a recession rather than save (again a look at the Japanese experience over the past ten years might be rewarding). In addition, such policy is the equivalent of filling your petrol tank with €5 of fuel when you are close to empty - it buys you more time but doesn't solve the underlying problem. The other main policy pursued by the current US administration is that of throwing money at large-scale US industries and in particular, the military-industrial complex (a well-timed war always helps here). These have the impact of increasing consumption and buying the US economy more time until that debt of overhang has to be paid eventually.
A new direction?
Many have lost faith in this understanding of the economy, despite its high correlation with the world in which we live, simply because we don't get 'Great Depressions' every five or ten years and also because ultra-leftists shout 'Depression!' every time the wind changes direction. The reality is that we are living in a slightly different economy, one which experiences such cycles but on a much longer cycle than previously (due to the increased productivity of technology and the lower stock levels required in service industries - now a large sector of the US economy). This is not a great discovery, in fact most economists appreciate this analysis (even if they are blind to its long-term social impact).
Such a change has been produced because, as the corporate economist at DaimlerChrysler, Van Jolissaint, says, "because we get smaller downs... we also get smaller [subsequent] ups". Inded, the much touted US 'recovery' is not washing with the main player in the world economy: the stock market.
Implications for Ireland
This analysis has clear impact for the US population, which will experience a prolonged period where unemployment will remain high, corporate earnings will continue to be sluggish and the stock market will be slow to rebound. It is my contention that this may well be the new paradigm, where sluggish growth characterises the medium-term forecasts for the US and other 'advanced' Western economies. What is clear is that the fall so far has been relatively small and that it was well underway before the events of 11 September. With even the most optimistic estimates being for only small levels of (short-term) growth by the end of 2002, my own 'pessimistic' outlook pointing to the potential for actual contraction over the medium-term doesn't look too unrealistic.
So what is the importance of this analysis to the Irish economy? Well, the 26-County state is heavily dependent on US foreign direct investment and has one of the most export-orientated and 'open' economies in the world. As such, a downturn in the US would have terrible consequences on Irish economic growth and those 'economic statistics' - the unemployed and their families. A continued period of only sluggish world growth could even lapse into 'stagflation' given a possible rise in oil prices, this might spell economic disaster for the 26 Counties. The outlook for the Six-County state, on the other hand, is that it will continue to experience its poor levels of growth (despite all the DETI propaganda figures which are based on relative comparisons with Britain). However, Republicans should remember that the Six-County economy is relatively cushioned from global market economics, given the size of its public and military-industrial sectors and will behave more like an 'old-style' state-controlled economy than a 'free market one' - one of the great ironies of modern Irish political economy.
What republicans want
The question for republicans is how can we meaningfully improve the conditions for our people? What sort of economy do we want? One which is outside of our control and which can only ever increase the divide between rich and poor or one in which we collectively manage our future? In my opinion, the answer lies in adopting a strategy that prioritises the social economy (particularly within the service sectors), increased public control and accountability over investment, a greater involvement of the public sector in enterprise, state-controlled and run banking and increased control over the national economy. Such demands conflict with the current world political consensus (neo-liberalism) and will mark out and characterise our radical political position. This agenda will also act as a yardstick to measure our ability to deliver on our programme. In order to achieve these aims our strategy must prioritise the dual long-term objectives of the seizure of state power throughout Ireland and the delivery of a programme empowering our people with the necessary authority and capacity to determine their own future, in their own interest.
For some time now, economists have been debating whether the United States will experience a V or a U shaped recovery - these correspond to a sharp or a gradual upturn in economic output, respectively. In order to understand the nature of the periodic rises and falls in economic growth in capitalist economies, and to make estimations of future growth, we must understand the nature of commodity production. Whilst such an analysis is difficult to present in a short article, I will attempt to cover the basics in regard to the production of goods (the supply of services is actually simpler).
Starting off in an 'upswing', demand for goods and services increases given an excess of supply over demand among the population (this is why we get price inflation during periods of growth). The requirement for more commodities creates an increase in demand for the machinery that produces them; this machinery is typically expensive and requires the investment of large amounts of profit in capital expenditure (something which can be partially controlled by increasing interest rates). Due to the nature of competition, this machinery becomes commonplace throughout the sector, increasing the amount of goods produced overall.
In the full length of the growth period, the rate of profit to capital investment falls due to the widespread availability of this technology and its high cost. Consequently, all businesses increase output to gain a larger 'market share' to make up for their capital investment. This causes a 'glut' of production, which cannot be met by demand from the consumers, who are limited in how much they can either afford or consume, and we get 'overhang', a situation where supply exceeds demand. Such a situation yields a classical 'deflationary' recession, of which the 'Great Depression' is a good example.
The neo-liberal response includes policies which involve:
increasing demand by throwing money at consumers (usually the upper-income ones) - an example of this is Japanese financial 'giveaways' over the last ten years or Bush's recent tax break;
the slashing of production and labour force costs by the private sector - either through mass, forced redundancies or wage reductions;
tightening government spending on benefits and social services.
Despite the huge toll these wreak on humanity, these policies can, in most cases, reduce production to a level below supply and the cycle can start again. This cycle, which may appear complicated and even academic, will be obvious to all those readers involved in the manufacturing sectors. The cycle of increased production to meet demand, acquisition of new machinery, the problems of competition and then redundancies or wholesale buy-outs are the characteristics of modern Western political economy.
US policies
Given such an analysis, it is strange to view the monetarist policies of the US Federal Bank, the Fed, which has aggressively reduced interest rates and reduced taxation in response to the downturn in economic growth. This has the dual impact of (a) increasing investment in production and of (b) increasing consumer spending because it will cost less to borrow - or more realistically that credit card payment or mortgage will cost less. The problem is that the first impact would, necessarily, only add to the crisis of overproduction. The second impact actually would help support growth, but that presupposes that consumers will want to spend during a recession rather than save (again a look at the Japanese experience over the past ten years might be rewarding). In addition, such policy is the equivalent of filling your petrol tank with €5 of fuel when you are close to empty - it buys you more time but doesn't solve the underlying problem. The other main policy pursued by the current US administration is that of throwing money at large-scale US industries and in particular, the military-industrial complex (a well-timed war always helps here). These have the impact of increasing consumption and buying the US economy more time until that debt of overhang has to be paid eventually.
A new direction?
Many have lost faith in this understanding of the economy, despite its high correlation with the world in which we live, simply because we don't get 'Great Depressions' every five or ten years and also because ultra-leftists shout 'Depression!' every time the wind changes direction. The reality is that we are living in a slightly different economy, one which experiences such cycles but on a much longer cycle than previously (due to the increased productivity of technology and the lower stock levels required in service industries - now a large sector of the US economy). This is not a great discovery, in fact most economists appreciate this analysis (even if they are blind to its long-term social impact).
Such a change has been produced because, as the corporate economist at DaimlerChrysler, Van Jolissaint, says, "because we get smaller downs... we also get smaller [subsequent] ups". Inded, the much touted US 'recovery' is not washing with the main player in the world economy: the stock market.
Implications for Ireland
This analysis has clear impact for the US population, which will experience a prolonged period where unemployment will remain high, corporate earnings will continue to be sluggish and the stock market will be slow to rebound. It is my contention that this may well be the new paradigm, where sluggish growth characterises the medium-term forecasts for the US and other 'advanced' Western economies. What is clear is that the fall so far has been relatively small and that it was well underway before the events of 11 September. With even the most optimistic estimates being for only small levels of (short-term) growth by the end of 2002, my own 'pessimistic' outlook pointing to the potential for actual contraction over the medium-term doesn't look too unrealistic.
So what is the importance of this analysis to the Irish economy? Well, the 26-County state is heavily dependent on US foreign direct investment and has one of the most export-orientated and 'open' economies in the world. As such, a downturn in the US would have terrible consequences on Irish economic growth and those 'economic statistics' - the unemployed and their families. A continued period of only sluggish world growth could even lapse into 'stagflation' given a possible rise in oil prices, this might spell economic disaster for the 26 Counties. The outlook for the Six-County state, on the other hand, is that it will continue to experience its poor levels of growth (despite all the DETI propaganda figures which are based on relative comparisons with Britain). However, Republicans should remember that the Six-County economy is relatively cushioned from global market economics, given the size of its public and military-industrial sectors and will behave more like an 'old-style' state-controlled economy than a 'free market one' - one of the great ironies of modern Irish political economy.
What republicans want
The question for republicans is how can we meaningfully improve the conditions for our people? What sort of economy do we want? One which is outside of our control and which can only ever increase the divide between rich and poor or one in which we collectively manage our future? In my opinion, the answer lies in adopting a strategy that prioritises the social economy (particularly within the service sectors), increased public control and accountability over investment, a greater involvement of the public sector in enterprise, state-controlled and run banking and increased control over the national economy. Such demands conflict with the current world political consensus (neo-liberalism) and will mark out and characterise our radical political position. This agenda will also act as a yardstick to measure our ability to deliver on our programme. In order to achieve these aims our strategy must prioritise the dual long-term objectives of the seizure of state power throughout Ireland and the delivery of a programme empowering our people with the necessary authority and capacity to determine their own future, in their own interest.