Belfast Telegraph

Wednesday 26 November 2014

A slump by any other name is still depressing

Ireland's Taoiseach Enda Kenny
Ireland's Taoiseach Enda Kenny

There is no consensus on the name, but an emerging one on what to do about it. As for names, some economists are daring to use the D-word - depression - after the series of downward revisions to growth estimates in recent weeks.

One suggestion is the Little Depression, to distinguish it from the Great Depression of the 1930s. Except that, whatever it is, it doesn't feel particularly little. So most prefer the Great Recession, or the Great Correction.

To me, the latter seems best at describing what has been going on. It is a correction, made necessary by the enormous build-up of debt across the rich economies - so enormous that the correction was bound to be enormous, too.

"Recession" does not really fit, even though it is already clear that the cliched "double dip" will be the description of choice.

Yet, if it were a recession, past experience suggests that, at this stage, the US economy would be recovering strongly, growing by something like 5% per annum. Instead, it appears to be staggering along at less than 2%.

But depression does not seem right, either. One should be careful of comparison with the 1930s, when US output collapsed by 50% and it took 12 years and a war to restore wholesale prices to 1929 levels. Whatever we have, thank goodness, that is not it - except, perhaps, in the timescale.

It is well documented that recovery from asset-price crashes is slow. With this crash occurring mainly in the price of ordinary people's homes in the US, and on an unprecedented scale, the recovery may be one of the slowest on record.

And, moreover, there is all the difference in the world between reducing the deficit in ways that will not benefit the public finances in the long run - perhaps make them worse - and ways that ease long-term pressures.

The harsh fact is that, if there is another global slowdown, Ireland will not achieve its target of a €3.5bn increase in tax revenues next year.

What then? As well as more spending cuts, are there to be bigger hikes in income and consumption taxes, adding to the slump now while storing up future difficulties?

Or can the Irish government find the political courage to tackle long-term spending pressures and propose meaningful property, usage and capital taxes, which would generate 10% of normal tax revenues - about €4bn a year?

None of this would raise much money now but it would promote "credible, medium-term fiscal consolidation".

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