Belfast Telegraph

Thursday 28 August 2014

Oh brother! Don't go from bad to worse

Charlie McCreevy's SSIA saving scheme may show the way forward

Everyone knows - well, everyone should know - that the monk Nicolaus Copernicus demonstrated that the earth goes round the sun, rather than vice versa.

Not many people - certainly not me - know that he also showed how "bad money drives out good".

A man of many parts. This proposition, as applied to precious metal coinage, is generally attributed to Sir Henry Gresham, an adviser to Queen Elizabeth I.

But according to Wikipedia, Copernicus got there before him and the rule is known in his native Poland as the Copernicus-Gresham law.

Devaluation is not the subject of this week's thoughts, but I felt I ought to share that little snippet.

The thought which brought it to light was whether the principle can be applied more widely than to coinage - whether the bad in general has a tendency to drive out the good?

And the thought arose at last week's conference in Kenmare, Co Kerry, organised by the Dublin Economic Workshop. It is notable how much attendance at this annual event has fallen in the last two years.

The dreaded cutbacks, both public and private, have reduced the number of people available to go and reduced even further the number able to cover expenses incurred in going.

Yet now is the time when applied economic brainpower and serious networking are most needed.

Other good things which are much more badly needed - such as bank credit, fiscal stimulus and debt relief - are also curtailed by the very bad situation in which we find ourselves.

It might, for instance, be good to impose no more fiscal adjustment on the Republic's economy than the €3.6bn (£3.1bn) originally envisaged.

But if it were seen as a weakening of political resolve so soon in the life of the new government - or if the deficit/ GDP ratio stayed above 10% as a result - the bad effects might well outweigh the gains.

Economic policy is now very much the art of the possible.

The contributions to the conference, in their different ways, wrestled with this dilemma.

Dermot O'Leary of Goodbody Stockbrokers and Don Walshe of University College Cork took the view that it was really not possible to ease up on the budget adjustments, at least until the deficit ratio is in lowish single figures.

They also thought that it was not possible, in current circumstances, to persuade households to spend more.

This is a key judgment, since much of the debate centres on whether slower fiscal correction would induce more consumer spending by making them feel better about things, as well as leaving more money in their pockets.

The ideas proposed at Kenmare are radical indeed, although based on systems elsewhere, notably Singapore. A national pension scheme would be created, benefiting from much lower costs than small private schemes.

Tax relief would be replaced by Exchequer contributions - which might even save money initially.

We actually have experience in the relevant areas through the now nearly empty National Pension Reserve Fund and Charlie McCreevy's SSIA saving scheme.

Of course, it would require bold political action and a fight with powerful commercial interests.

The crisis may also be killing the good appetite for such things in a hard-pressed government - assuming it was there in the first place.

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