From top: Ajai Chopra (right), then Deputy Director of the International Monetary Fund (IMF) European Department, and an associate on their way to a meeting at the Department of Finance to discuss an EU/IMF emergency loan, November 2010; Michael Taft
Economic historians will write of the period we are just emerging from as the ‘lost decade’. When the crash hit, jobs were lost, incomes fell, and government spending was slashed.
It is only now – 10 years or so after the event – we have made up that last ground. Now we have low levels of unemployment, rising income and warnings that the government is increasing spending too fast.
But as we emerge from out of the shadow of the crash, what does the world around us look like?
Well, if Eurostat is anything to go by, we still lag other high-income EU countries in key living standard categories.
Living standards is notoriously difficult to measure. However, Eurostat makes a stab at it with their ‘actual individual consumption’ indicator.This combines personal consumption (consumer spending) and government spending on behalf of households.
This latter is important. If one just took consumer spending as the measure of living standards, a number of anomalies could arise.
For instance, if an Irish household spends €150 per week on childcare while a German household spends only €50, a consumer spending-only measurement would suggest the Irish household had a higher ‘living standard’.
However, under the actual individual consumption (AIC) measurement, the amount of state subsidy on childcare which the household ‘consumes’ is also factored in.
That makes it a superior measurement, especially as it factors in prices for international comparison purposes.
Under these living standard measurements – AIC and consumer spending – how do we fare in 2018?
Factoring in inflation we find:
Per capita consumer spending is still 2.1 percent below the peak in 2008
Per capita AIC is still 3.1 percent below the peak in 2009
Hopefully, this year will see us surpassing pre-crash peaks.
Except just as we are emerging from a lost decade we have warnings of over-heating in the economy.
Question: how could we get to a situation where, after a decade, all we do is return to the point at which we started and, yet, we’re in danger of over-heating?
Some might say that our previous peak was unsustainable. Without getting into that historical argument, this is hardly the explanation today.
Even if we concede the argument that consumer spending and AIC (which includes government spending on behalf of households) was unsustainable in 2008, that argument shouldn’t apply today.
Both consumer spending and AIC are significantly below 2008 levels as a percentage of GNI*; yet now we are being warned that we are at capacity (just like a decade ago).
So at this point of full capacity, how does Ireland fare compared to other high-income EU countries, our peer group?
We are far below our peer group average in this living standard measurement. We would have to increase consumer and government spending on households by over 20 percent to reach the average.
When we disentangle consumer spending and government spending on households we find the gap remains somewhat the same.
Both consumer spending and government spending on households are well below our peer-group average, with Ireland coming in at the bottom of the table in both.
Consumer spending would have to increase by 16 percent and government spending on households would have to increase by 40 percent just to reach the average.
So after a lost decade, when we have only returned to pre-crash levels, when our living standards are still well below other high-income EU countries, we have hit a capacity wall suggests the problem is deeper than just fiscal policy (though that is a contributor). It suggests that there is a structural problem.
Now consider the impact of even a ‘managed Brexit’ (?) never mind a no-deal Brexit. We would not only stall, we could start falling backwards.
After a lost decade, we may still be lost.
Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday.