AS AN ECONOMICS student, the first question I am invariably asked is: ‘How are we going to fix the economy?’ Or, to put it another way: ‘How do we end the recession?’
It hardly needs to be said, but Ireland’s economy is in a deep crisis: unemployment is high, growth is stagnant and emigration is rising. As well as this, we are being crushed by the weight of the bank debt.
It may be surprising that I am somewhat optimistic. This crisis shows that the old ways have failed and that we are on the cusp of new discoveries. The old model is discredited and fit to be dumped and a new one must be built in its place. It is exciting to know that the world is about to change and there are vast possibilities for breakthroughs. We are passing through a unique window of opportunity to change the view of the world. We must not let this chance slip.
We have been here before. This is not uncharted territory where we must blindly wander. We can learn from the examples of the past. This is the worst crisis since the Great Depression – so surely we should examine the solution to that depression to find clues to solving our current one. What worked then may well work now. How was the last spell of mass unemployment solved?
The solution to the Great Depression of the 1930s was provided by John Maynard Keynes, the legendary British economist. He argued not for austerity but for stimulus. For Keynes, the boom, not the bust, was the time for cutbacks. When the economy is weak and private businesses are not spending, then the government must take its place by spending and investing when private business will not.
How does this work? How does stimulus help the economy and austerity harm it? In any given society, people and their actions are interconnected. When you spend money you provide income for a business that can then spend that money on wages, which is then spent by employees and becomes income for another business and so on.
It is because of this interconnectedness that massive job losses in the construction industry brought down the rest of the economy. If fewer people buy houses then there is less demand for houses, so construction firms don’t hire people, so more people become unemployed, so they spend less money generally, which affects the rest of the economy. This is how the economy so quickly went into a downward spiral. It becomes a vicious cycle.
How do we break the cycle? Surely if less spending caused it, then more spending is the solution. But who will do the spending? The economy will only recover if we all spend; if only one person does it, this person uses up their money and the economy doesn’t recover. So everyone wants the other person to spend and so, as a result, no one spends and the economy stagnates. This is where the government steps in, not because it is the best option, but because it is the only option. The government is so large that when it spends money, this has a large effect on the economy.
But didn’t spending get us into this mess? How can that be the solution? Economics is not a morality play, we do not prosper through being virtuous and pure nor does fate punish the wicked. There is no cure-all solution, what is today’s problem may be tomorrow’s solution.
We must spend when times are tough, not because that is our preferred option but because it is the only proven way of getting out of a recession. If consumers won’t spend, then governments must. It is during the good times that we can afford to be thrifty and save money; in tough times we have to dip into our savings.
You cannot balance the budget with 14 per cent unemployment. Attempts to do so are like trying to push a boulder up a hill: every time you push it up a bit, it rolls back down again. When such a large proportion of the workforce is being wasted in forced idleness, the economy will not function properly.
While unemployed, they are costing the state in welfare payments and their lack of employment also means that they aren’t paying income tax. By enabling these people to work, not only does the government help to restore the individuals’ sense of dignity and self-worth but it also significantly boosts the economy and moves us all towards a balanced budget.
This extract is from the book New Thinking = New Ireland, published by Gill & Macmillan, which features essays by 21 young Irish thinkers who present their vision for a new Ireland.
With ambitions to be an economist or writer, Robert Nielsen was winner of the Business and Economics category of The Undergraduate Awards in 2012 and he has just graduated from University College Dublin with a BA in Economics and Politics. One of the striking things about Robert is that he wanted to study these topics in order to help solve the economic crisis. He blogs regularly and he has featured on student and other radio programmes (though he insists he is quiet and thoughtful). Robert exemplifies the mindset of his generation, which believes that past mistakes borne out of greed should never be repeated. His vision is for a more fair and just society.
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