“Ireland is not laying the groundwork for future growth because it has cut back on investment in fixed capital formation (from €48 billion in 2007 to €15 billion in 2011) and the private sector has not come in to fill that gap,” claims Nat O’Connor.
Two per cent real growth is needed, he tells eolas, “because neither the economy or the labour market stands still.”
This growth can be achieved through productivity, which in turn would be generated by investment in prevention and early intervention measures as part of the Budget.
O’Connor contends that “prevention is better than cure”, and in order to stem the rise in unemployment, the Government needs to focus on what are traditionally seen as ‘soft’ issues. i.e. the prevention of social exclusion and the deterioration of wellbeing, and the development of human capital.
“A lot of people will say that’s vague, aspirational and we can’t afford it,” he says. In his view, the attitude that it’s a nice idea but won’t provide a return to the economy must be challenged.
At the time of interview, Ireland’s unemployment rate was 14.9 per cent, with 60 per cent of those long-term unemployed.
O’Connor recognises that “the structural change that’s going on in the Department of Social Protection is a reflection of what’s needed in order to ensure that we don’t embed a certain degree of long term unemployment.”
However, the risks form long-term unemployment remain prevalent, he believes. The unemployed population consists of people with skills that are not matched to the needs of the market place e.g. construction workers without skills to get a job in the burgeoning ICT sector. The longer these people are unemployed, the more they can become de-motivated and disconnected from the labour force, thereby eroding the skill base in the workforce.
O’Connor is concerned that Ireland may be heading back to decades of high unemployment.
“Seen from 2001, Ireland’s unemployment looks like it shot up. But seen from a longer term perspective, we can see that Ireland had high unemployment for decades, despite significant emigration, and we are simply returning to those high levels where three-in-20 people could not find a job,” he claims.
The way an economy is structured by laws and practice leads some economists to suggest that there is a ‘natural’ level of unemployment i.e. the economy in a given configuration will only provide a certain number of jobs.
O’Connor explains: “We know that a lot of the late Celtic Tiger boom was fuelled by an unsustainable property sector and related financial sector, which was in turn all based on debt, most of which has yet to be repaid (i.e. all those big mortgages) and will continue to drag on the economy.”
If the boom was all unsustainable, the risk is that unemployment will rise back up to the mid-teens despite emigration, he believes.
“I think there have been many real improvements in the economy (e.g. better infrastructure, new types of business, better education) which leads me to believe that some of the progress since 1995 will be maintained,” O’Connor tells eolas. However, he wonders “what number of jobs (and consequently levels of employment and unemployment) will be the new settling point given the current configuration of the Irish economy?”
There is a risk that the ‘natural’ level of unemployment will be high, “leaving far too many people unable to find jobs despite their desire to work.”
The related physical and mental health problems such as addiction, suicide and breakdowns in family and social cohesion all come with a cost to the public purse.
In order to solve this problem, the Government cannot simply get the public sector in order by cutting costs because this approach “has deep, complex effects on the economy as a whole,” O’Connor states.
“We have to embed growth in such a way that is going to grow the economy and avoid a negative spiral and we have to do so in a cost-effective way,” he suggests.
This can be achieved by:
• taking a multi annual approach to the budget;
• investing in ‘softer’ prevention and early intervention initiatives; and
• investing in human capital (a person’s knowledge, skills and experience.)
“There’s no point in saving €1 million this year if it’s going to cost us €2 or €3 million in two years time: it’s false economy and a bad way to try and save money,” according to O’Connor. Every year “there seems to be a scramble in each department for what they can get away with cutting in the short term.” O’Connor argues that the ‘soft’ targets should not be the first port of call and that the Government should “make radical changes and go after ‘hard’ targets such as pension tax reliefs.”
Turning to the health problems, O’Connor highlights coronary heart disease which is expensive to treat and can be caused by bad diet and lifestyle “which in turn is linked to weaknesses in our education system.” Similarly, criminal behaviour is costly to the State, with the average offender costing the State €70,000 for one year in prison.
Youth diversion schemes are often seen as a ‘soft’ investment, but O’Connor argues that “if you don’t have those type of schemes you have to deal with major social exclusion and disadvantage which can manifest in other ‘harder’ ways at a later stage, which is going to cost more.”
A “cheaper and innovative” way to treat homelessness is the ‘Housing First’ initiative expounded by non-profit agencies throughout the USA. It involves housing becoming the first step. Then, outreach workers tackle mental and physical problems. This is opposed to the other way around i.e. treating substance abuse before securing stable housing for the homeless individual.
Human capital can generate income and increase innovation in the economy, O’Connor contends. He cites Indian economist Amartya Sen who argues that economic development is based on human ‘freedoms’, including shelter, health care and security. “These are all mathematically linked to the economic growth we need to get out of this crisis,” O’Connor comments.
“It’s worth considering new modes of delivery,” he adds. He gives the example of Harvard and MIT which are offering 100,000 places on new training and education programmes. “It’s a new phase in third level education with world class lectures accessed by a mass audience. Ireland needs to step up to that scale if it is to increase the human capital needed to change the long-term unemployment trend,” he states.
Rather than stimulus, the Government needs to implement targeted productive investment, according to O’Connor. “That has the same effect as stimulus but because it is targeted investment, it also creates the infrastructure needed for long term growth.”
Building roads, laying broadband internet or insulating homes “gives you a return on your investment.” Likewise, investing in human capital and focusing on relevant skills “will allow citizens to do the jobs of the future.”