Policymaking: Before, During and After the Crisis

Michael O’Sullivan writes in today’s Irish Times about the importance of establishing a new policymaking institutional structure in the wake of the crisis: you can read his article here.   In his contribution, he identifies the pro-cyclical nature of fiscal policy as one of the main problems:

“The second related issue is the topsy-turvy nature of Irish economic policymaking. In an economy that is expanding too quickly, the normal approach is to try to slow it down; and when it is contracting, the typical response is to support or even stimulate it. In the early years of this decade, our politicians and policymaking “elite” responded to a very “hot” economy by lashing on more fuel. Now they respond to one of the sharpest contractions ever in a developed economy by squeezing harder on the brakes.”

It is certainly vital that the political system in the post-crisis era finds institutional mechanisms that can guard against procyclicality.  It would have been helpful in responding to the current crisis if the fiscal situation had permitted some level of counter-cyclical fiscal intervention.  However, the scale of the structural fiscal deficit (determined by the skewed nature of the pre-crisis tax system) means that the general nature of the government’s fiscal adjustment strategy is conditionally optimal  – it cannot un-do the past.  (Of course, there is still plenty to debate in terms of the precise design and timing of the fiscal adjustment.)

6 replies on “Policymaking: Before, During and After the Crisis”


“However, the scale of the structural fiscal deficit (determined by the skewed nature of the pre-crisis tax system) means that the general nature of the government’s fiscal adjustment strategy is conditionally optimal – it is cannot un-do the past.”

But I think what the Broad Mass of the Ordinary Working People want to know is whether the government could do more stimulating if it refused to fund NAMA, let the bankers and builders go to the wall and spent the borrowed megabucks on counter-cyclical fiscal intervention.


Michael O’Sullivan says “First, the behavioural response of those in positions of power and authority to crisis still follows the well-established pattern of dismissal, denial and debacle.”

He is right to highlight the glacial speed of the government policy response. We are approaching the anniversary of the government guarantee and we have only succeeded so far in Japanifying our banks.

This crisis, like all crises, demands swift affirmative action. Perhaps our government, softened by a decade of having very little real governing to do has forgotten who is supposed to make the decisions at times like this.

There also seems to me to be a mindset of attempting to get ‘things’ back on track, that we can go back to a chosen point in the development of our current situation.
I believe that a more radical mindset is needed here.
However, Mr O Sullivan’s proposal of a 2nd Republic is a little off.
How about an E.U. state in a federal system?

It is quite safe to say that both the political and the economic systems have failed over the last number of years.
The economic system failed because greed became its guiding light. The Share Holder became King and ever increasing returns on the money invested were the Holy Grail. All the major companies harped on about Shareholder value and rising stock prices which inflated the bonuses of the investment managers and the C E Os. As an example the banks share price shot up and this was hailed as a sign of success.
Profit is not a bad thing but profit at the expense of all else, well that’s a crime and like any crime should be punished.
Everybody cheered, the government, pension funds and investment funds. Few wondered how high the Mountain was because to do so meant that you also thought about the drop on the other side. Everything that goes up must come down but the unspoken hope of Government and business was that the drop would be a gentle tumble down the slope into the valleys tall grass of comfortable middle to high single digit return, a perfect fairy tale ending!
As for the political well that is a deep failure and it goes back to the way the system is setup and structured.
Polices are put in place with an eye on the election cycle. The Government listens to all the different groups that stand on the sidelines shouting in their demands and the grouping that shouts loudest gets its wish.
Think of the government as the gene in the lamp and if ask them in right way they grant your wish.
It did not matter if your desires were fanciful or just down right disastrous if you dressed them up in sound bite English and populist clothing and they fuelled the engine of boom they found away to make them fly.
Policy was not designed for long term sustainable growth, development or social equality but for short term political and economic gain.
We all smiled when the print and electronic media told us that our country was beating hands down nearly every other counties rate of growth. We all laughed smugly when we heard that Ireland was becoming one of the richest nations on the earth. We all thought we were great and kept on voting for the ones that enacted the polices that made it happen.
The opposition parties threw polices into the ring that meant/showed there was no opposition because they were not going to call a halt and warn the electorate that the end would come and be a financial storm of biblical proportions. What little chance they had of getting their collective bum on the seat of power would have gone up in a puff of smoke if they had.
We agreed after much consternation to up the salaries of our political elite after they had been found out by even the dogs on the street to have their hands in the cookie jar because they said we would get a better calibre of person to lead and guide our nation. Well that’s another falsehood that needs to be thrown out with the rubbish that litters the counties highways and byways.
The beauty pageant style of politics is a root cause of the quagmire we now find ourselves in. Our media needs to be separated from the government and also from all the big business that it needs to feed it money through advertising. The Irish Times said last year that it’s profits would be down because of the falling revenue it would receive from property related advertising.
How can an organisation that depends so heavily on this stand up and tell the young people trying to realise the Irish dream of home ownership of the greed, (that caused house prices to increase by 300% in ten years to the peak in 2007), and saddled them with an unrealistic debt burden that will cripple them and the nation for years to come.
Nor will they warn the public of the unsustainable polices that caused government expenditure get out of control because if they did their reads who are affected by these policies may well put down their paper and not buy a copy again (benchmarking). Headlines seemed to say one thing put the article underneath turned it on its head and had people believed the spin of the government and vested interests. The old sling enough mud and some of it will stick theory.
It has been a painful failure of the economic and political systems that will reverberate through our society for years to come. The opportunity to change must be taken and the political and business elite must accept their large share of the pain that will come and not think that ordinary people can carry their burden.
There must be a greater division between business and government. Business must realise that short term screw the nation profiteering is unacceptable. There must be a new long term view instilled in business objectives. There must be not a repeat of the failure that has driven us back to the past.

Pro-cyclical policies is an area on which you have written and presumably still keep up to speed on.

What interests me is the extent, if any, to which such policies are followed by countries (with governments subject to elections) which
1) are becoming “wealthy” for the “first” time;
2) have certain kinds of political structures eg. centralisation of decision making, with influential sectors of the economy heavily dependent on public expenditure (if only through tax-breaks) ie. defence spending, construction, health-care spending;
3) are, in practice, dominated by the “private wealth, public squalor” perspectives on managing economies outlined by J.K. Galbraithl
4) do not see themselves as dependent on trade;
5) control their own currencies;

Can you suggest some material that might throw light on this – apart from suggesting that I attend your lectures?
Perhaps you might even post a piece here?

This could lay down some markers for the “Second Republic” advocated by Michael.

Couldn’t agree more. But it won’t happen unless some vacancies occur, however they occur.
But expect more policies that increase the divide, aping the USA. here are countries but withn each country there is another country. No voting system. Information “on” others is key. Worship of power and wealth as the proof. Expect lots of fellow travellers expecting to serve an apprenticeship and eventual admission. So be prepared for disappointment if you just expect it to happen! In some countries expect to be disappeared if you ask too many questions. Remember that international honesty charts are merely comparative. All that drug, arms people smuggling and bribery money ends up going into pockets all over the world. Especially where they worship banks!

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