Michael Burke: One of the main objections to the government adopting measures to boost the economy is the concept, or more accurately the notion, of 'leakage'. That is, the mantra goes, we are a small open economy and if the government boosts activity it will all leak abroad via imports.
This objection would be simply ridiculous, if the outcome weren't so serious. That's because it completely misunderstands some of the most fundamental processes in this (or any other economy). Of these, the most important to note here is that the division of labour increases productivity. For all but the very largest economies this means participation in the international division of labour. When there is a high level of participation in the globl economy (international division of labour), such as there is here, imports are primarily used as inputs in production, not consumption. Furthermore, most of that producion is for re-export, whose value significantly exceeds the value of all imports.
If, say, oil is imported that is counted as a debit in the national accounts even if it is only an input into the generation of electricity or production of glassware, production of transport services, etc. In the latest data the total use of imports in this economy was €112.8bn. But the final consumption of imports was just €23.4bn. The remainder were inputs for production and re-export.
The spreadsheet can be found here.
Yet no sensible person thinks that this should be halted. On the contrary, it needs to developed as this adding of value is the basis of any country’s prosperity. In particular it is the primary source of this economy's increased prosperity over several decades.
What opponents of measures to boost the economy seem to have in mind is the personal consumption of imports. Perhaps the belief is that the masses are chewing too much chorizo, or swilling too much chardonnay. But in the same year, personal consumption of imports was just €10.6bn, just 9.4% of the total import bill. It was also just 10.7% of total personal consumption of €98.7bn. The overwheliming bulk of personal consumption is of goods and servces produced here (mainly the latter).
These ratios are lower than in many countries which did adopt measures to boost growth. They in no way undermine the case for government action to revive the economy.
15 comments:
No, chorizo is not what they have in mind. What they have in mind is that if the state decides to replace the windows on a state building in Dundalk, the best bid will quite likely come from Northern Ireland. All the money will flow to that economy, not this one and will multiply in that economy, not this one. Even if an Irish contractor gets the job, it is likely that a lot of the manufacturing will be done further afield. For sure, we will save oil heating the building, but this saving will be made over a ten or twenty year period. But we are running out of cash now.
The whole point of stimulus spending is that you create immediate spending and multipliers in this economy, not the neighbouring one. You get the long term benefits too, it's true, but that's only part of the reason for doing it.
"the best bid will quite likely come from Northern Ireland. All the money will flow to that economy, not this one and will multiply in that economy, not this one. "
Have you any evidence for that, Antoin, because all the information we have on the awarding of state contracts shows that over 2/3rds of those contracts go to Irish companies.
Have you discovered evidence to show otherwise, or is this just another "hunch" that he can add to the list of hunches which pass for analysis in Ireland these days?
Antoin
The same spreadsheet refered to above refutes this assertion. Government consumption of imports is negligible.
At the same time it is very likely that increased investment by government would cause the private sector to increase its own activity- that would be one of the purposes of increasing government activity.
Then the imports used by the private sector are inputs, to which value is added by labour in Ireland. In the latest data, the private sector used €89.4bn of imports in total output of €331.4bn (27% of the total), of which €143.2bn was value added.
To reiterate, this value added is the basis of any economy's prosperity, and needs to be fostered and extended. As this economy increasingly participates in the international division of labour it is likely that this import proportion of output will rise, but so too will the level of value-added.
My post above
The Dundalk case of window replacement is a particular one because it happens to be near the border. I admit it is extreme, but it illustrates the point.
Because of where Dundalk happens to be located, and because of the nature of the job, there is a good prima facie probability that the work will go to a contractor from Northern Ireland.
Anyway, there is a disconnect between the tables you are referring to and what I am talking about. Maybe I am misunderstanding you. What potential economy boosting projects would you be proposing?
Antoin
the priorities, based on both objective need and their effect on employment and demand include infrastructure, transport, health care, education, R&D and childcare.
The requirements for these, and the benefits of investing in them are set out well in the National Development Plan.
This isn't extra stimulus, this is stuff that is already underway. Most of this is going ahead anyway, so it's hardly extra stimulus.
I have looked through the NDP but I cannot see where any effort has been made to rank the requirements for these projects and I cannot see where the benefits are set out to any great degree It states here and there that there are benefits, but these are not quantified.
Antoin
It has been widely reported both that the planned expenditure in the NDP has been cut and that the government is also failing to fulfil even these much-reduced plans
http://www.irishtimes.com/newspaper/finance/2010/0316/1224266351609.html
The argument here is that the opposite should be taking place, and investment increased over plan (the NDP was also itself reduced because of the then-current boom and a reasonable unwillingness to add to economic overheating).
There are a great many evaluations of the NDP available. This is one of the more comprehensive ones where areas for investment are itemised and benefits assessed
http://econpapers.repec.org/bookchap/esrresser/prs50.htm
This is a post-hoc evaluation of a previous development plan. The usual course would be to evaluate the likely benefits before you begin to implement the plan.
No, the usual course for any major long-term undertaking is to make an estimate of the likely benefits, a mid-term evaluation of them and a final estimate.
All of these have been done in great number.
http://www.google.co.uk/search?q=Ireland%2C+NDP%2C+evaluation&rls=com.microsoft:en-gb:IE-SearchBox&ie=UTF-8&oe=UTF-8&sourceid=ie7&rlz=1I7DKUK_en-GB
Usually, the final estimate is held to be the most accurate,but they are all valuable. Together, they provide overwhelming evidence of the benefits of investment.
All wonderful I am sure, but who will provide the financing?
Paul
there is a widespread myth that borrowing capacity is a fixed amount whose limit is continually being approached, aka Colm McCarthy's 'outward sloping funding curve'.
Even bond investors are a bit more sophisticated than that.
They produce complex, even arcane cashflow models, because they are focused entirely on interest payments and ultimate principal repayment.
So, Anglo, other banks; no cashflow = bad. Productive investment; plentiful cashflow = good.
The 'core' Europe group, the ones with the rising tax revenues, falling deficits and bond yields, they all engaged in government investment and/or other stimulus measures.
@Michael,
I'm not querying the sophistication of bond investors - or your knowledge of their sophistication. I would merely highlight their legitimate demand for some certainty about the precise amount (irresepctive of its size) the wind-down of Anglo/INBS is going to impose on sovereign debt and about the steps the Government is taking to curtail the demand for additional sovereign borrowing arising from the current fiscal deficit.
This suggestion from Johnson and Boone might be worth considering:
http://www.project-syndicate.org/commentary/johnson12/English
Paul
floating ideas for Irish 'Brady bonds' ignores some key differences.
Of these, the most important is that the Latin American countries which issued them had already defaulted.
The US Treasury then decided to make further exactions from the belaguered populations of those countries in order to prop up the ailing US banking system. These payments were then topped up with US taxpayers money, ie funds from viable US businesses and ordinary workers via the US Treasury.
In terms of likelihood or fairness, I don't think Irish Brady's have much to recommend them.
Related to the original point, I don't think the government is doing anything to curtail further borrowing- their cuts policy is increasing it.
For the moment the Anglo mess is not impacting seriously on the sovereign debt position because the ECB is allowing the repo-ing of the various NAMA bonds and promissory notes to support liquidity - and intervening in the secondary market to buy up Irish sovs - but this will not be sustainable indefinitely. Sooner or later the institutional and politcial EU will have to bite the bullet on sovereign debt in Portugal, Grrece and Spain and the bank-induced sovereign debt in Ireland. Some variant of Brady bonds will be required because they can't escape the reality that a large proportion of the bonds are held by many of the EU's not very robust banks and by the managers of the savings pots of millions of EU workers. It would be nice if they were held only by vulture funds, but it would be very unwise to assume this.
And as for modifying the approach to fiscal adjustment (which I accept is necessary) I doubt the progressive left would support the very necessary accompanying measures which would include restructuring and privatisation of the semi-states and the LA water and waste water activities.
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