Aaron McDaid

It's easy to recommend straightforward Keynesian responses for the Republic of Ireland today, such as David McWilliams. But this neglects one crucial factor, Ireland is in the euro now. I hope David will go into more detail sometime on what we should do given that we can't print punts any more.

When Ireland had its own currency, the punt, creating full employment and fixing the economy was relatively easy. The government could borrow as much money as it liked, by printing punts if necessary. Keynesianism tells us that full employment will cause the recovery, not the other way around; so any move to increase employment is a good thing. Hence deficit-funded infrastructure programs are a no-brainer. And any mild inflation that results is probably a good thing, because the alternative is much worse; deflation can be the final straw that turns a recession into a depression.

But Ireland doesn't have that option. We can't just deliberately devalue. Any euros borrowed by the government are going to have to be paid back, in euros, at some point; the government can't create any inflation to get itself some 'free money'. We may soon find that interest repayments swamp our ability to repay, causing further borrowing until the market eventually refuses to lend to Ireland any more. Then we default.

So how do we implement a Keynesian response given that we have no direct control over our currency? The US in the 30s was saved, not by Roosevelt's 'fear' speech, but by their ability to devalue the dollar to fund government spending and to induce inflation. Similarly today, Britain has control over sterling and will likely be glad to have that control.

To be honest, I don't know what to do. But I have been giving it a lot of thought, as would any amateur armchair economist like me! I had previously thought that the Irish banks should be let go bust, as the nationalisation seems to be corrupt and it benefits foreign bondholders in the Irish banks. However, one advantage of nationalised banks is that the government can deliberately run them at a loss and gradually forgive a lot of debt; I'm recommending this only because we need to be able to whittle away debt, and we can't engineer inflation to do that for us. If the banks, especially Anglo, were allowed to go bust, the current management and shareholders would be wiped out (good news, they deserve it) but the bank would then be owned by the bondholders; the bondholders, foreign investors equally desperate to find money, would (understandly) want to squeeze every cent out of us. We need to somehow get rid of much of the debt, as this encourages both debtors and creditors to work and spend again (debtors because they can afford to, and even creditors will be happy as a recovering economy means they might actually get some repayments).

But, as I've already said, the government can't wave the magic inflation wand to remove debt. It's going to have to take much of the debt onto itself if it wants individual Irish people and businesses to spend and work. I had previously called for agreed, uniform, wage and price cuts across the economy as this would make it cheaper for the government to employ more people with its borrowing. But that would be difficult to achieve without causing deflation expectations and, perhaps more importantly, this would worsen the position of debtors who find the debt is the same but their wages have fallen.

So I think I've come back around to recommending massive government borrowing to increase employment. But we need to be cuter in where we find the money. We need to implement heavier taxes on the richer people; they are less likely to spend their money and will, via the multipliers, destroy jobs by the hoarding. Hence I wholeheartedly support the temporary public sector pay cuts ('pension levy') that are being targetted mostly at the highest earners. The government will have to find a job, any job, for these people to do; if that means bankers retrain as roadbuilders, then so be it.