Having looked at the threats of multinational layoffs and global trade disruption last week, it’s time to look at the other two major threats I see facing the Irish Economy: Inflation & Stagnation, and a choked indigenous sector.
Inflation and Stagflation:
A few years ago, before I entered politics, I was working with a business when inflation drastically spiked significantly for the first time in my adult life. One of the talking points among business people and financiers at the time was that high inflation and accompanying high interest rates were so infrequent that most of the people around boardrooms or in central banks had literally never experienced it and we were quite worried we wouldn’t know what we should do. By contrast, my parents’ generation remember double-digit mortgage interest rates, and inflation as a result of oil crises. Those things had a severe cooling effect on economic activity, and can be extremely damaging especially for people on fixed or low incomes.
I think we all inherently understand if prices accelerate beyond wage growth, you get squeezed. We’ve all experienced it a lot recently. But there are other effects, as well: investment in companies or countries becomes much much harder, buying power across the economy goes down and so people spend less and companies produce less. Rising interest rates punish borrowers, further reducing spending in the economy. Businesses come under incredible pressure, especially small, local and domestic businesses. It can become a vicious cycle – one we’ve thankfully avoided so far, but one that is definitely a real risk.
‘Stagflation’ is the worst version of this – when inflation is accompanied by rising unemployment. The US Federal Reserve has a ‘dual mandate’ to avoid this at more or less all costs, very much informed by the stagnation and depression that gripped Europe and the US in the time preceding the Second World War. It’s worth remembering what is often posited about this dynamic, which is that it was a major factor in the rise of extremist fascist elements in Europe precipitating the war.
Ireland is in a unique position in that one of the core levers to tackle stagnation is in how central banks control their currency’s value, and our central bank is now in Frankfurt since we joined the Eurozone. On balance, that’s been a really good thing for Ireland. But in the case, say, that Ireland with its relatively small population is experiencing inflation or stagflation more severely than our European neighbour, it’s unlikely the European Central Bank would act as forcefully as we would need domestically. That puts a lot of pressure on our own domestic budgetary interventions to spend or tax its way out of stagflation, particularly and so far, the EU more generally has resisted major crisis-based transfers of spending between countries to compensate for this.
This is why ensuring inflation stays low is really important, and often implies structural reforms: creating more indigenous food supply rather than price-volatile imports, expanding public services so the costs of healthcare and childcare and transport stay reasonable, and building energy independence through renewables rather than importing fossil fuels. These structural changes are a big part of what we focus on in the Social Democrats to try and head off the risks of inflation and stagflation.
A choked indigenous sector:
This last bit isn’t really talked about enough. It’s very rarely featured in the public discourse, mostly because everyone thinks the economy is doing really well. So what are we worried about?
As a result of the multinational success in Ireland, things look like they are (on average or on the whole) booming, and it’s true that we do have high income jobs. But our reliance on multinationals to fuel our economy is actually extremely unusual internationally. Most countries rely on their domestic businesses to fuel employment, wage growth, and provide products and services to their people. For a very long set of reasons I won’t get into, Ireland doesn’t.
As a result of the multinational activity, though, successive governments have taken their eyes off the ball on how domestic businesses are doing. I raised this issue with the Taoiseach recently, pointing to the fact that we have 70% less credit available to domestic businesses now than we did in 2011. In any other country, that would be a catastrophic drop that would almost certainly be felt as a recession or depression. But as domestic businesses did less to hire, create new products and services, expand, export, and all the good things they should do – multinationals expanded at a much higher rate, and masked the issue.
What we have now in the 2020s is actually a real domestic economic deficit: a lot of microbusinesses (about 92% of businesses in Ireland employ less than 10 people), which are not contributing a very significant share to our corporate tax receipts (but disproportionately fueling our income tax and VAT receipts). Add to this the failure to add fuel to grow the domestic economy by the way of credit availability and you have a pretty dire picture the landscape for domestic businesses.
For those of you who aren’t as familiar with why credit to businesses is important, think of it as a kind of oxygen for a business to survive. You have less of it, and you struggle to breathe. You have too much of it and you get kind of light-headed. You need to have a balance. But if you reduce the amount of it very drastically, nothing grows. You get a kind of ‘choked’ sector of the economy.
But, you may say, I see local coffee shops and restaurants and bars thriving all over the place. For one, it is not the kind of export-focused business which can buttress a broader economic model. And again, these thriving local represent a kind of masking of the multinational sector: higher income jobs have higher spending power, yielding stronger revenues for local businesses. But if that were to decline, even just a little, we’d have a very different scenario very quickly. It’s a bit like the core assumption which left us so exposed to the Global Financial Crisis – it was assumed that average property prices would climb past the rate of inflation forever. That was obviously untrue (even before everyone realised it). Similarly, to assume that multinational high income employment will keep on going up is a big gamble.
So what’s the alternative? Giving everyone a big pile of debt to overheat the economy? No. And unfortunately the alternative is not easy. It’s hard: it requires real investment in R&D, real investment in the commercialisation of businesses, fostering entrepreneurship, getting the State to create strong conditions for domestic businesses to thrive, and – crucially – providing businesses with the oxygen they need in the form of access to capital. That’s the only way to grow an economy that you’re in control of. The bad news is that this takes a lot of time; and my fear is that by the time the government and wider public discourse catches on, it’ll be too late.
Conclusion:
And now the kicker: any one of these things isn’t a huge huge deal. They’re all weatherable, in a way. A mild or even moderate recession is normal in an economic cycle, as difficult as it can be for many people. And those difficult moments can be met with government supports. The issue is actually if you get more than one – or all of them – at the same time. Then it becomes catastrophic. That’s the kind of economic armageddon my constituent raised with me – severe recession, maybe even depression. And it’s a real risk. Not some kind of ‘edge case, 1 in 1000 years scenario’, it’s more like ‘we built this economy in such a way that this is something that could reasonably happen in my lifetime’. So it’s really important that we mitigate these risks now.
This does read very depressingly, and I’m sorry for that. The whole point of writing this, though, was to weave together the central threats to the Irish economy so people could understand what’s at risk and how we can avoid them.I really do hope none of this comes to pass. But I think as a policy-maker, I have a responsibility to be aware of the risks and work as best I can to mitigate them. Maybe by putting this down all on paper, as well as raising these issues in the Dail is the best I can do for now.
But for the broader political system, we’ll have to be imaginative about how we build a strong domestic economy with strong domestic businesses that create high quality, well-paid jobs for the future. I’m thinking about that a lot – but I think we all should be. A few years from now, we might wish we had done a lot, lot more today than we’re doing.