British Prime Minister Harold McMillian famously replied to the question of what was most likely to trip up governments with “Events, dear boy, Events”, demonstrating the random way in which small things can spiral. Who would have thought that a government could fall on foot of children’s shoes, or because of the appointment of a judge..And yet. Angus Deaton this last week won the Nobel Prize in Economics for a lifetime theorising and evaluating development and the role of institutions and for looking at how consumption and income are related. The way in which the Government has reacted and acted shows that these issues are related.
Take events. In particular, take the Web Summit. I am no cheerleader for capitalists who think that the role of government is to get out of the way (except when they want something) but there is something deeply worrying about how , it seems, the Web Summit left Dublin. In all probability it would have had to go anyhow, as being a victim of its own success it has all but outgrown any indoor capacity in Ireland. Taking the leaked correspondence on face value we see a deeply dysfunctional governance apparatus. Here is a body bringing in tens of thousands of high spending, high impact visitors; operating in a space close to the spoken heart of government policy; networked and connected to an astonishing level with the thought leaders of today. They cant even get a meeting with the city council to discuss a traffic plan. They cant get the state tourism bodies to sit down with the hoteliers and transport providers to discuss reasonable opportunities for all to profit. When they reach out to the Prime Minister to seek his office to throw their weight to break the logjam, they meet at best insouchance, at best indifference. Yes, some of the things the wanted were pretty ludicrious, but do we doubt that if Jorge CostaGravo was bringing 30k techies to Dublin for a week, the Irish Government having aided the city in getting the Madrid Web Summit to move, that they would not have gotten all they wanted and more? We are happy to have a traffic management plan for every sporting event that draws more than three people, but not for this. We have a governance system where they will happily contemplate running a coach and horses through the planning system to facilitate a concert but wont stir themselves to meet an ongoing problem. And they will turn up and mug up at the click of a button to announce any number of jobs over 0 in anything techy. Just, not actually row in.
Then we have the budget. We have the chairman of the Irish Fiscal Advisory Council, a statutory body with an EU remit, making an extraordinary intervention the morning after the budget and then withdrawing same that lunchtime. The IFAC is not just a bunch of academics opining on an issue. It is a state body, enshrined in law, and with a deadly serious remit. Its chair is, or should be, an important and powerful figure. Either he was wrong in the morning or he was wrong at lunch; either he determined he was wrong or he was “got at”/. Regardless of the cause of the volte face there will be zero consequence (except to confirm the view prevalent in government that the IFAC is ornamental at best).
We have the budget leaked, comprehensively and almost fully, by government it has to have been, in the weeks before, and parliament sidelined. We have parliamentarians engaging in the tired rituals of budget day, packing the chamber for the Ministers speech and then sloping off to wherever. We have a government which has presided over regressive after regressive budget refusing to produce the analysis for this one, suggesting that someone can do it in their spare time as a hobby.
Both of these reflect the same thing, an issue which Nobel Laureate Deaton has touched on in recent years. They show poor institutional capacity, whether through commission or omission. Deaton has been very critical of (some) foreign aid, noting that where institutions are weak or ineffective or corrupt then the systems of aid we have at present are likely to at best not make things better. There is a large body of literature in economics that shows the importance of institutions, an in particular how the quality of institutions matters hugely for growth. I have long suspected that a major source of frustration for Irish people is this: we know we can be as wealthy and effective as Sweden or Denmark or the UK but we also know that the institutions up with which we put are not up to the job, the cognitive dissonance of knowing we can do better while voting (either with the ballot box or the Ryanair ticket out) to not then drives us batty.
Deaton also noted a further issue in his long and distinguished career. The relationship between consumption and income, at individual or other level, is one which has attracted a vast research effort. His work generated important insight into how consumption at household levels responded to variations in income and the relative volatility of same. Reverting to the institutions and budgets theme we see echos of some of this. Rather than a 1.5b stimulus to the already expanding economy we in fact have had more like a 3b stimulus. This was achieved by the slipping in of a supplementary budget allocation to departments the weekend before the actual budget. Leaving aside the issue of how this presents itself when viewed through an institutions lens, the result is a massive boost to permanent spending. These increases are going to be hard to row back. That may be fine if we have a permanent increase in the tax base, but much of the largesse seems to be as a consequence of unexpected, and therefore possibly transitory, increases in corporation tax. Far from eliminating boom and bust in budgetary matters the government has gone all in on same, safe in the knowledge that this will win re-election and they can try to undo any damage in 2016-7-8 before restarting the boom for the 2020 election cycle.
We saw how the poor quality of our institutions in regulation and planning led to the bust. We saw how resistant to change much of these were even under the glare of the Troika. We see how the institutions are weakened further with naked political shenanigans. But, we don’t seem to care. We get the institutions we deserve, not the ones we want. Economics has a concept of “revealed preferences”, from another Nobel Laureate Paul Samuelson.This in essence says that actual preferences of people are revealed by what they purchase. In this case we purchase, by our votes for governments, weak and subverted institutions of governance.
Published as a column in the Irish Examiner 17 October