Don’t blame liberal economics

Mahatma Gandhi’s reported response when asked what he thought of Western Civilization was to say “I think it would be a good idea”. That is often my thought when considering capitalism and globalization in the world today. Too often commentators conflate a pro-business approach with a pro-market approach. A system that allows businesses and banks to play around with other people’s money, but then helps them out when things get rough is not true capitalism. Neither is a system that encourages businesses and banks to invest in a particular industry, allowing the economy to concentrate where it would not otherwise do so.

I heard Fintan O’Toole recently blaming the situation we are in on neo-liberal economics. I will probably read his Ship of Fools when it’s available from the library to be able to judge his analysis of the causes of our current situation properly, and while much of it will probably be valid, I don’t believe this is a fully accurate description of our economic situation in recent years. Low taxation and low regulation are not enough to qualify an economic system as liberal (or neo-liberal, if one prefers). The implicit guarantee to the banks, which became official in September 2008, was one sign that the banks were not working in a free market, as was the cosy relationship between bankers, regulators, politicians and property developers. In an economy such as ours, the careful regulation we lacked would have been entirely consistent with a liberal approach to the market. A few other features show that this was a populist, rather than liberal, approach to the economy:

• The very structure of social partnership, with the unions and employers, in the form of ICTU and IBEC, was geared towards pleasing certain troublesome sectors of the economy, privileging those who were represented at those talks, rather than the majority of workers who are not in those represented unions. This led to significant pay increases in public sector pay, to the point where Ireland has one of the most highly paid public and civil services in Europe. When the government had the tax revenue, it was happy to pay off unions rather than endure public sector strikes.

• We had a bloated semi-state sector, highlighted in the case of FÁS by Shane Ross, where the government was willing to spend money propping up it and other similar bodies. The boards of these companies had the usual suspects, with ICTU and IBEC well represented.

• Social partnership also led to policies such as the minimum wage, which was not an issue during the boom years, but it now seems foolish to have any such disincentive to employment. While only 2-3% of workers are on the minimum wage, it affects competitiveness at the low end of the scale, and with the economy where it is, employers forced to pay workers at this price will either find other ways to lower their labour costs that would affect their workers’ welfare, or be more likely to let them go. It could also hurt the prospects of those seeking small employment at low skills level at the current time.

• There was a considerable emphasis on taking people out of the tax net entirely, so that nearly half of the working population pay no income tax. This makes people as citizens less responsive to quality in public services, and seems overly progressive.

• While we had budget surpluses in some of our years, this was then used to win votes with more government spending in the form of welfare or public sector payments rather than tackling the national debt. Charlie McCreevy’s response was “I have it, so I’ll spend it”. Not a classical liberal approach.

• We had a universality principle with certain welfare payments. This predated the recent years, and in the case of the third-level fees being paid by the taxpayer was a decision made by the Labour Party just before the Fianna Fáil/Progressive Democrat coalition. But it was continued with measures such as the medical card for all over 70. Most economic liberals acknowledge a role for the state in providing for welfare, but it should not be for those who can provide for themselves, and should be structured in such a way that there is no disincentive to working more.

• Perhaps the biggest and most pernicious instance of a populist rather than liberal policy was the support given to the property market. We should have experienced a recession in 2001/02 after the natural rise in house prices and property development that came with our prosperity waned. This we did, but it was then countered by tax breaks and incentives to development and mortgage interest relief to the public that continued long after it made sense for our economy. It suited the government, for many reasons, but in part because it was relying on stamp duty as a source of government revenue, and also because of the popularity of this artificial boom.

We need reform in this country, and I hope some of these measures are addressed in tomorrow’s budget. But the electorate also needs to realize some of the populist causes of our current situation.