Michael Burke: The details of the latest EU Summit remain sketchy and on the surface overwhelmingly relate to Greece alone. The Agreement reached by the Euro Area heads of state only relates directly to both Ireland and Portugal via the cut in interest rates being applied. At the same time, there was great emphasis laid on the declaration that the other measures, including ‘haircut’ for bondholders was a wholly unique event, applying to Greece once and once only, and never to AN Other EU member state.
President Sarkozy was particularly adamant on this point. But it should also be clear that he doesn’t run in the EU, nor does M Trichet. Chancellor Merkel does, and what she says goes.
This is because the EU and especially the Euro Area is a project which allows a tremendous development of production across a continental scale. In a host of industrial sectors, even the German economy alone is too small to compete with key international rivals, the US, Japan and now China. The creation of a single market facilitated the development of transnational industries within Europe and the single currency deepened that integration not least by ruling out competitive devaluations.
Germany is the main beneficiary of that increased potential, even if it and others fail to realise it. The leadership of the main German political parties were all united that the Euro Area would not be broken up because German industry has the most to lose.
As a result, Mrs Merkel got her way that the private sector would take the haircut, against the fierce opposition of Messrs Trichet and Sarkozy, who represent the EU banks and the French banks exposed to Greece respectively. This is a start, a small beginning in rational policymaking in Europe.
At the time of writing, the heavens have not fallen in and the world still turns on its axis. This is despite claims both in Ireland and in continental Europe that similar calamities would follow any losses for the banks. In addition, the Agreement initiates a preventative measure to recapitalise ailing banks in the non-crisis countries. The banks in this jurisdiction are long past saving, and this State is very much in the thick of the crisis. But what the measures (of unspecified size) mean is that default can take place without bringing down the whole of the European banking system.
Trichet and Sarkozy may regard Greece’s selective default as equivalent to The Fall. But the political and banking systems cannot return to a pre-lapsarian state. Default is now on the table.
The actual size of the cut in the interest rate for Ireland is the subject of much heated debate over at Irish Economy. Karl Whelan has come in for some particularly harsh criticism merely for pointing out that the interest rate reduction owes nothing to the prostrate negotiating position of the Dublin government. He is correct. Instead, it arises from the fact that Italy was being drawn into the maelstrom and Chancellor Merkel does not want to allow the break-up of the Euro Area.
Separately, Michael Taft has a series of very useful suggestions as to how the possible €800mn to €1bn annual windfall could be used to stimulate economic growth and thereby increase tax revenues and reduce welfare outlays.
Clearly, that too would be a rational innovation. We shall see, but point 4 of the Agreement refers to the need to stimulate growth and create jobs. Unfortunately, this remains couched in terms of competitiveness, which for the EU Commission usually means deregulation, privatisation and wage cuts- which are the opposite of a growth and deficit-reduction strategy. What is clear is that deficits are rising in all the ‘bailed-out’ economies. Public spending cuts have had the opposite effect to that claimed- the deficit has risen as the economy has deteriorated.
So will this package work for Greece and stop contagion? In my judgement, not a chance.
First, while bondholders get an estimated 21% haircut on the face value of their bonds (if they participate - the FT reports that many won’t) Greece will only see an estimated 7% reduction in its total debt. This arises because Greece will participate in the recapitalisation of its own banks and from other measures. If a 7% debt reduction were enough, there would have been no crisis.
Second, the growth-sapping cuts remain in place. They will be joined by privatisations, leading to lay-offs and bigger welfare outlays, while removing revenue streams from the government’s accounts (but probably not the state-owned enterprises’ debts). The latest Italian cuts will only produce weaker growth and higher deficits. Spanish and Italian yields are still pushing up towards 6% again.
After Britain (equivalent to US$ 135bn) German banks have the highest exposures to Irish debt (US$118bn). Leaving the Euro and disorderly default would be a disaster for this economy. We know that the British Tory ‘friends of Ireland’ insisted their bilateral loan at punitive rates could only be repaid in Euros, and no other currency. It seems likely that others have as well. Irish indebtedness would soar with a Euro exit.
But the same scenario could equally prove disastrous for German banks; a lose-lose calamity. Chancellor Merkel is willing to face down powerful opponents to ensure that does not happen. A government of the Irish Republic worthy of the name would use all these new developments to the advantage of its own citizens: negotiated default, an end to cuts, stimulus measures, job-creation.
Showing posts with label fiscal stimulus. Show all posts
Showing posts with label fiscal stimulus. Show all posts
Monday, 25 July 2011
Tuesday, 9 November 2010
Unemployment, emigration and growth
Tom O'Connor: The seasonally adjusted unemployment figures show a fall of 6,500 signing on the live register. This is totally due to emigration. In fact, it is highly likely that the figures would have risen and not fallen, were it not for the scale of emigration right now, which is now at its highest annual level in living memory.
In the year to last April, the CSO show that emigration stood at 65,300 and the net figure when we subtract the numbers entering the country was 34,500. These immigrants numbered 30,800, a very sharp fall.
Taking the first figure, 5,441 people per month up to last April were leaving the country presumably due to unemployment. Allowing for the outside possibility that 12,000 of the 30,800 immigrants were coming here to draw the dole, which the government would say is outside its control, the numbers leaving the live register due to emigration , up to April last, was 4,441 per month. Over that period, unemployment rose by 51,000 and would have risen thus to 104,292 were it not for emigration. This is in one year!
Now, if we look at the most recent ESRI predictions, things have gotten worse: In the year up to next April, they are predicting net migration to be 60,000 people. This means that the numbers leaving the country minus the numbers coming in will be 60,000 leaving.
If we take it that the numbers coming back will be a maximum of 30,000 per year up to next April, then this would indicate emigration of 90,000. Consequently, 7,500 people are leaving these shores every month at the moment.
Even if we adjust this figure downwards on the off chance that 12,000 of the 30,000 immigrants will come here to draw the dole, the numbers of people being removed from the live register due to net emigration stands at 6,500. This is exactly the same figure as the seasonally adjusted fall in unemployment for the month of October.
So there is no real drop in unemployment, and even with the illusion of a fall of 6,500, there are still 443,000 people on the live register. To make matters worse, were it not for emigration since April, this figure would now stand at 482,000, only 17,000 shy of a half a million people.
Ah, but the government will say that the public finances are stabilising. This is stretching the limits of credulity even further. The government paid €7 billion to the Anglo Irish Bank and the National Pension Reserve Fund last year, bringing the deficit to 25 billion. Netting out this 7 billion to compare last year’s deficit with this year where this 7 billion spending won’t occur, shows that the deficit will widen considerably at the end of this year.
The deficit net of Anglo/NPRF at the end of 2010 was €18 billion last year and it will be €22 billion at the end of this year. Consequently, the government will have saved 4.3 billion mostly by cutting services to those such as old people, children with special needs, community groups, home helps and social welfare recipients and it will have increased the deficit by 4 billion!
Of course the answer is to grow the economy and not deflate it. A whopping 15 billion of the 18 billion deficit last year was due to the fall in tax receipts from €48 to 33 billion from Dec 07 to Dec 09. This was due to unemployment which the government has done nothing about.
In this context, the Irish Congress of Trades Unions have made a very compelling observation this week, that it is the government’s inability to grow the economy and reduce unemployment that is causing the bond interest cost of government borrowing to rise.
The markets know the government is making no headway and the solution is to bring down unemployment. They can see the abject failure of government policy in this regard, which is driving down their confidence and driving up the cost of borrowing.
So, the endorsement by business groups of front loading cuts of 6 billion to reduce borrowing costs is based on the incorrect premise that the markets are looking for this deflationary course of action, when instead they would prefer to see a solution to unemployment and the deflationary cycle in order to grow the economy!
This would reduce unemployment, grow taxes and reduce the deficit alongside a move out of recession and markets know that this would be a far superior result to the current deflation and borrowing policies.
Consequently, the Irish Congress of Trade Unions has called for a wide ranging six billion fiscal stimulus to get the economy growing, reduce unemployment and thus reduce the deficit. This is something that I have been calling for since the summer of 2008 to halt the government’s suicide pact in driving the economy continuously down in to a debt-deflationary cycle.
The Nobel Prize winning economists, Joseph Stiglitz and Paul Krugman have also been advocating this approach and the latter has strongly criticised the failure of the Irish government not to stimulate the economy. TASC has also called for fiscal stimulus. The evidence is overwhelming. Government policy must be radically altered and fast. These are lessons for any alternative incoming government also.
This is a slightly edited version of an opinion piece published in yesterday's Irish Examiner
In the year to last April, the CSO show that emigration stood at 65,300 and the net figure when we subtract the numbers entering the country was 34,500. These immigrants numbered 30,800, a very sharp fall.
Taking the first figure, 5,441 people per month up to last April were leaving the country presumably due to unemployment. Allowing for the outside possibility that 12,000 of the 30,800 immigrants were coming here to draw the dole, which the government would say is outside its control, the numbers leaving the live register due to emigration , up to April last, was 4,441 per month. Over that period, unemployment rose by 51,000 and would have risen thus to 104,292 were it not for emigration. This is in one year!
Now, if we look at the most recent ESRI predictions, things have gotten worse: In the year up to next April, they are predicting net migration to be 60,000 people. This means that the numbers leaving the country minus the numbers coming in will be 60,000 leaving.
If we take it that the numbers coming back will be a maximum of 30,000 per year up to next April, then this would indicate emigration of 90,000. Consequently, 7,500 people are leaving these shores every month at the moment.
Even if we adjust this figure downwards on the off chance that 12,000 of the 30,000 immigrants will come here to draw the dole, the numbers of people being removed from the live register due to net emigration stands at 6,500. This is exactly the same figure as the seasonally adjusted fall in unemployment for the month of October.
So there is no real drop in unemployment, and even with the illusion of a fall of 6,500, there are still 443,000 people on the live register. To make matters worse, were it not for emigration since April, this figure would now stand at 482,000, only 17,000 shy of a half a million people.
Ah, but the government will say that the public finances are stabilising. This is stretching the limits of credulity even further. The government paid €7 billion to the Anglo Irish Bank and the National Pension Reserve Fund last year, bringing the deficit to 25 billion. Netting out this 7 billion to compare last year’s deficit with this year where this 7 billion spending won’t occur, shows that the deficit will widen considerably at the end of this year.
The deficit net of Anglo/NPRF at the end of 2010 was €18 billion last year and it will be €22 billion at the end of this year. Consequently, the government will have saved 4.3 billion mostly by cutting services to those such as old people, children with special needs, community groups, home helps and social welfare recipients and it will have increased the deficit by 4 billion!
Of course the answer is to grow the economy and not deflate it. A whopping 15 billion of the 18 billion deficit last year was due to the fall in tax receipts from €48 to 33 billion from Dec 07 to Dec 09. This was due to unemployment which the government has done nothing about.
In this context, the Irish Congress of Trades Unions have made a very compelling observation this week, that it is the government’s inability to grow the economy and reduce unemployment that is causing the bond interest cost of government borrowing to rise.
The markets know the government is making no headway and the solution is to bring down unemployment. They can see the abject failure of government policy in this regard, which is driving down their confidence and driving up the cost of borrowing.
So, the endorsement by business groups of front loading cuts of 6 billion to reduce borrowing costs is based on the incorrect premise that the markets are looking for this deflationary course of action, when instead they would prefer to see a solution to unemployment and the deflationary cycle in order to grow the economy!
This would reduce unemployment, grow taxes and reduce the deficit alongside a move out of recession and markets know that this would be a far superior result to the current deflation and borrowing policies.
Consequently, the Irish Congress of Trade Unions has called for a wide ranging six billion fiscal stimulus to get the economy growing, reduce unemployment and thus reduce the deficit. This is something that I have been calling for since the summer of 2008 to halt the government’s suicide pact in driving the economy continuously down in to a debt-deflationary cycle.
The Nobel Prize winning economists, Joseph Stiglitz and Paul Krugman have also been advocating this approach and the latter has strongly criticised the failure of the Irish government not to stimulate the economy. TASC has also called for fiscal stimulus. The evidence is overwhelming. Government policy must be radically altered and fast. These are lessons for any alternative incoming government also.
This is a slightly edited version of an opinion piece published in yesterday's Irish Examiner
Tuesday, 19 October 2010
Fine Gael's 3:1 Ratio
Nat O'Connor: Fine Gael has given some useful clarity on their fiscal policy position with the declaration that they would seek €1 billion in tax increases for every €3 billion in cuts (Irish Examiner). Across the period of the four-year plan, this suggests that they would seek to close the deficit while making Ireland an even lower tax economy than it was before the boom; which can only mean the wholesale removal or reduction of public services, and significant cuts to public pay and/or numbers.
The implications of the 3:1 ratio can be spelled out in more detail once we establish just how much needs to be cut in the four-year plan.
The Opposition finance spokespersons were given access to data by the Department of Finance today. Is it just political theatre, or did the spokepersons really not know that the adjustment needs to be more than €7.5 billion over the four-year plan?
Consider, we have known for some time that the deficit is c.€19 billion (not including the banks), although it now seems that it might come closer to €20 billion. In July, the IMF's most recent report on Ireland suggests that the structural deficit is eight and a half per cent of GDP (i.e. the bit that won't go away when the economy recovers, welfare payment decrease, tax increases, etc.); which is €13.6 billion (8.5% of 2010's estimated GDP of c.€160 billion). So, it should have been obvious to them for some time that the four-year plan will have to make adjustments of c. €12-14 billion to meet the target of 3 per cent of GDP by 2014.
Note, I'm assuming that the economy will not have moved to the height of another economic cycle, so we would need to clear the entire structural deficit by 2014, assuming that at least €5 billion of a cyclical deficit remains, which will diminish with further economic growth. (€5 billion in today's money is the 3 per cent of GDP requirement under the Eurozone SGP). Arguably, the target for cutting the structural deficit could be slightly less, if the economy recovers faster and helps closes the gap. Hence, my use of the range €12-14 billion.
If we seek a €12 billion adjustment, Fine Gael's 3:1 ratio equates to €3 billion in taxation and €9 billion in cuts; €14 billion would imply €3.5 billion in tax and €10.5 billion in cuts.
A more moderate approach would be a 1:1 ratio, with an equal balance of tax and spending reductions; for €6-7 billion of each.
Patrick Honahan, before he became Governor of the Central Bank, suggested that Ireland's tax take could increase by 3 per cent of GDP (i.e. €4.8 billion) (e.g. quoted here). And that level of tax increase is just to return us to the same type of low tax economy we had before the boom. Nonetheless, if €4.8 billion was taken as an ideal level of tax increases, that would imply €7.2 billion to €9.2 billion in cuts. That is a ratio of 2:3 or almost 1:2 (depending on whether we adjust by €12 or €14 billion). Hence, Fine Gael, with only €3 or €3.5 billion in taxes, would not even reach the €4.8 billion that Patrick Honahan suggests is a credible target.
And once we have established what levels of tax and spending cuts each party wants in the four-year plan, the next question is timing; that is, should we frontload the adjustment? Or keep a more even pace? Or should be push out the deadline for fiscal adjustment by a few years? Leo Varadker of Fine Gael is on record calling for more adjustment sooner. TASC argues for a slower pace (€3 billion adjustment in 2010) to avoid damaging the economy too much in one year.
Of course, we will have to deal with more than the structural part of the deficit if we don't foster recovery in the economy!
TASC's budget proposals argue that we need to foster economic growth through targetted investment to build up human capital and intellectual capital (education, training, R&D) as well as physical infrastructure (broadband, schools, renewable energy). Speaking at the Kenmare economics conference, Leo Varadker emphasised his disagreement with the TASC proposals and signaled Fine Gael's intention to focus all investment on infrastructure (including broadband and renewable energy, but also forestry and other areas).
It would be nice if every political party could state what ratio they would choose between tax and cuts, as it would be a useful rule-of-thumb for the broad implications of their fiscal policy. Likewise, we'd need to see their timescale and what they would do to foster economic recovery.
More importantly, from TASC's perspective, it will be essential to see how each party's four-year plan would change the distribution of income and level of economic equality in Ireland. Tax change and cuts to public services affect different segments of the society differently. Whatever package of fiscal policy decisions are taken in these four-year plans will shape our society, as well as the economy, for quite some time.
The implications of the 3:1 ratio can be spelled out in more detail once we establish just how much needs to be cut in the four-year plan.
The Opposition finance spokespersons were given access to data by the Department of Finance today. Is it just political theatre, or did the spokepersons really not know that the adjustment needs to be more than €7.5 billion over the four-year plan?
Consider, we have known for some time that the deficit is c.€19 billion (not including the banks), although it now seems that it might come closer to €20 billion. In July, the IMF's most recent report on Ireland suggests that the structural deficit is eight and a half per cent of GDP (i.e. the bit that won't go away when the economy recovers, welfare payment decrease, tax increases, etc.); which is €13.6 billion (8.5% of 2010's estimated GDP of c.€160 billion). So, it should have been obvious to them for some time that the four-year plan will have to make adjustments of c. €12-14 billion to meet the target of 3 per cent of GDP by 2014.
Note, I'm assuming that the economy will not have moved to the height of another economic cycle, so we would need to clear the entire structural deficit by 2014, assuming that at least €5 billion of a cyclical deficit remains, which will diminish with further economic growth. (€5 billion in today's money is the 3 per cent of GDP requirement under the Eurozone SGP). Arguably, the target for cutting the structural deficit could be slightly less, if the economy recovers faster and helps closes the gap. Hence, my use of the range €12-14 billion.
If we seek a €12 billion adjustment, Fine Gael's 3:1 ratio equates to €3 billion in taxation and €9 billion in cuts; €14 billion would imply €3.5 billion in tax and €10.5 billion in cuts.
A more moderate approach would be a 1:1 ratio, with an equal balance of tax and spending reductions; for €6-7 billion of each.
Patrick Honahan, before he became Governor of the Central Bank, suggested that Ireland's tax take could increase by 3 per cent of GDP (i.e. €4.8 billion) (e.g. quoted here). And that level of tax increase is just to return us to the same type of low tax economy we had before the boom. Nonetheless, if €4.8 billion was taken as an ideal level of tax increases, that would imply €7.2 billion to €9.2 billion in cuts. That is a ratio of 2:3 or almost 1:2 (depending on whether we adjust by €12 or €14 billion). Hence, Fine Gael, with only €3 or €3.5 billion in taxes, would not even reach the €4.8 billion that Patrick Honahan suggests is a credible target.
And once we have established what levels of tax and spending cuts each party wants in the four-year plan, the next question is timing; that is, should we frontload the adjustment? Or keep a more even pace? Or should be push out the deadline for fiscal adjustment by a few years? Leo Varadker of Fine Gael is on record calling for more adjustment sooner. TASC argues for a slower pace (€3 billion adjustment in 2010) to avoid damaging the economy too much in one year.
Of course, we will have to deal with more than the structural part of the deficit if we don't foster recovery in the economy!
TASC's budget proposals argue that we need to foster economic growth through targetted investment to build up human capital and intellectual capital (education, training, R&D) as well as physical infrastructure (broadband, schools, renewable energy). Speaking at the Kenmare economics conference, Leo Varadker emphasised his disagreement with the TASC proposals and signaled Fine Gael's intention to focus all investment on infrastructure (including broadband and renewable energy, but also forestry and other areas).
It would be nice if every political party could state what ratio they would choose between tax and cuts, as it would be a useful rule-of-thumb for the broad implications of their fiscal policy. Likewise, we'd need to see their timescale and what they would do to foster economic recovery.
More importantly, from TASC's perspective, it will be essential to see how each party's four-year plan would change the distribution of income and level of economic equality in Ireland. Tax change and cuts to public services affect different segments of the society differently. Whatever package of fiscal policy decisions are taken in these four-year plans will shape our society, as well as the economy, for quite some time.
Wednesday, 28 April 2010
Lessons from Greece
Michael Burke: Irish Economy has a thread on the impact on Ireland on the decision to downgrade Greece and Portugal.
The credibility of the ratings' agencies ought to have been dealt a fatal blow by the sub-prime debacle. But, as far as sovereign debt is concerned, it seems financial market participants like to have an additional, outsourced voice of neo-liberal orthodoxy as well as their own. The FF-led government has done everythng demanded of them by the ratings' agencies, and more, so it might be impolitic to downgrade Irish government debt too.
However, the bond markets reflect the nature of the crisis. The yield levels at 10yr maturities for govt. debt were as follows as of close of business Tuesday (%, FT bond table);
Austria 3.38
Belgium 3.52
Finland 3.21
France 3.26
Germany 2.93
Greece 9.54
Ireland 5.25
Italy 3.95
Netherlands 3.20
Portugal 5.61
Spain 4.03
Greek yields rose 81bps yesterday, Portugal up 59bps and Ireland up 46bps. Portugal is widely thought to be next in line from the ‘contagion’ effects of the Greek crisis. If so, in terms of both level and change in yields, Ireland cannot be far behind.
Of course, Ireland’s unique experiment in fiscal contraction was designed to “reassure the financial markets”. It has clearly done nothing of the kind. No-one, not even Greece, has a higher projected general government budget deficit this year. And many countries with higher levels of debt now have considerably lower yields, including Belgium, Italy and France.
Yield levels which exceed nominal growth rates, or more accurately the growth rate in taxation revenues which derive from them, cannot be sustained indefinitely. Perhaps, post the German elecions all will return to normaility and yields subside. Perhaps not.
But even in the optimistic scenario, it is clear that Irish government policy has failed in its own terms. Growth has not resumed, taxes continue to decline and the deficit continus to widen. Unsurprisingly, none of this has reasured financial markets and relative borrowing costs have continued to climb.
Perhaps it is worth trying to learn something from the Greek experience, as well as from others. The Greek recesion had been milder than the EU average, and recovering, before austerity measures were adopted, as both the PMI and GDP charts here show.
Now the Bank of Greece warns that the austerity measures themselves have lowered taxation revenues and argues therefore (!) for greater austerity measures. This sounds depressingly familiar.
By contrast, other EU countries adopted fiscal stimulus measures. Their debt has stabilised along with economic activity and they have been rewarded with much lower bond yields than Ireland.
The credibility of the ratings' agencies ought to have been dealt a fatal blow by the sub-prime debacle. But, as far as sovereign debt is concerned, it seems financial market participants like to have an additional, outsourced voice of neo-liberal orthodoxy as well as their own. The FF-led government has done everythng demanded of them by the ratings' agencies, and more, so it might be impolitic to downgrade Irish government debt too.
However, the bond markets reflect the nature of the crisis. The yield levels at 10yr maturities for govt. debt were as follows as of close of business Tuesday (%, FT bond table);
Austria 3.38
Belgium 3.52
Finland 3.21
France 3.26
Germany 2.93
Greece 9.54
Ireland 5.25
Italy 3.95
Netherlands 3.20
Portugal 5.61
Spain 4.03
Greek yields rose 81bps yesterday, Portugal up 59bps and Ireland up 46bps. Portugal is widely thought to be next in line from the ‘contagion’ effects of the Greek crisis. If so, in terms of both level and change in yields, Ireland cannot be far behind.
Of course, Ireland’s unique experiment in fiscal contraction was designed to “reassure the financial markets”. It has clearly done nothing of the kind. No-one, not even Greece, has a higher projected general government budget deficit this year. And many countries with higher levels of debt now have considerably lower yields, including Belgium, Italy and France.
Yield levels which exceed nominal growth rates, or more accurately the growth rate in taxation revenues which derive from them, cannot be sustained indefinitely. Perhaps, post the German elecions all will return to normaility and yields subside. Perhaps not.
But even in the optimistic scenario, it is clear that Irish government policy has failed in its own terms. Growth has not resumed, taxes continue to decline and the deficit continus to widen. Unsurprisingly, none of this has reasured financial markets and relative borrowing costs have continued to climb.
Perhaps it is worth trying to learn something from the Greek experience, as well as from others. The Greek recesion had been milder than the EU average, and recovering, before austerity measures were adopted, as both the PMI and GDP charts here show.
Now the Bank of Greece warns that the austerity measures themselves have lowered taxation revenues and argues therefore (!) for greater austerity measures. This sounds depressingly familiar.
By contrast, other EU countries adopted fiscal stimulus measures. Their debt has stabilised along with economic activity and they have been rewarded with much lower bond yields than Ireland.
Tuesday, 23 March 2010
IMF et al on Fiscal Stimulus
Michael Burke: Philip Lane has posted a link to a very useful IMF working paper here. The paper draws on a wide variety of leading macroeconomic models (IMF, EU, Fed, Bank of Canada, etc.) to examine the effectiveness of fiscal stimulus.
Some interesting features of the paper’s conclusion: “There are four broad conclusions flowing from our analysis.
First, there is no such thing as a simple fiscal multiplier. The response of the economy to temporary discretionary fiscal stimulus depends on a number of factors, including most importantly the type of fiscal instrument used and the extent of monetary accommodation of the higher inflation generated by the stimulus.
Second, temporary expansionary fiscal actions can be highly effective, particularly when the fiscal instrument is spending or well-targeted transfers, and when in addition monetary policy is accommodative.
Third, permanent stimulus, that is a permanent increase in deficits, is much more problematic than temporary stimulus. It leads to a long-run contraction in output, but in addition the perception that deficits will become permanent also substantially reduces short-run fiscal multipliers.
Fourth, the G20 stimulus should have significant effects on global GDP in 2009 and 2010.”
So, it seems that the rest of the world has good reason to believe in the ‘tooth-fairy’ of fiscal stimulus. No such naïveté to be found in the ranks of Irish policymaking, unfortunately.
In discriminating as to types of stimulus, the verdict is also rather clear,
“A number of results are consistent across all models.
First, the multipliers from government investment and consumption expenditures, which are roughly similar in size, are clearly larger than the multipliers from transfers, labor income taxes, consumption taxes and corporate taxes.
Second, multipliers are small for general transfers, labor income taxes and corporate taxes, and somewhat larger (but still small relative to government expenditures) for consumption
taxes.
Third, only targeted transfers come close to having multipliers similar to those of government expenditures……[Yet....]
…it is of interest to note that in none of the regions [of the world adopting fiscal stimulus] do increases in government consumption play a predominant role.”
Figs. 22 and 31 show the very large multiplier effects of government investment and (slightly lower) effects of targeted transfers to the low paid in the US economy and Figs. 64 and 73 show the same for the EU.
There is one unproven assertion in the article on government finances, evident in the phrase above ”a permanent stimulus, that is a permanent increase in deficits.” If, as the models consistently find, the effects on GDP of government consumption and investment have multipliers that stretch to 2 over more than one year when interest rates are low (and have a cumulative five-year impact of more than 5), then the effects on government tax revenues would exceed the initial outlay by some considerable degree; ie investment and government consumption can lower the deficit, not create a permanently higher one. There is too the unacknowledged benefit to government finances from a growth-related decrease in welfare spending.
The alternative approach, based on ‘Expansionary Fiscal Contraction’, is dismissed in the IMF WP. An examination of how the EFC experiment has failed Ireland can be found on this blog.
The main argument against Ireland adopting a fiscal stimulus is openness (The debt and deficit arguments do not hold since Ireland’s debt level is below that of the peer group studied and the deficit matched by some). Yet the openness argument is tested (Fig.88) and found to have no appreciable impact on the effectiveness of fiscal stimulus - perhaps, unstated by the authors, because the propensity to import is offset by both a greater propensity to export and the greater efficiency that openness brings.
Some interesting features of the paper’s conclusion: “There are four broad conclusions flowing from our analysis.
First, there is no such thing as a simple fiscal multiplier. The response of the economy to temporary discretionary fiscal stimulus depends on a number of factors, including most importantly the type of fiscal instrument used and the extent of monetary accommodation of the higher inflation generated by the stimulus.
Second, temporary expansionary fiscal actions can be highly effective, particularly when the fiscal instrument is spending or well-targeted transfers, and when in addition monetary policy is accommodative.
Third, permanent stimulus, that is a permanent increase in deficits, is much more problematic than temporary stimulus. It leads to a long-run contraction in output, but in addition the perception that deficits will become permanent also substantially reduces short-run fiscal multipliers.
Fourth, the G20 stimulus should have significant effects on global GDP in 2009 and 2010.”
So, it seems that the rest of the world has good reason to believe in the ‘tooth-fairy’ of fiscal stimulus. No such naïveté to be found in the ranks of Irish policymaking, unfortunately.
In discriminating as to types of stimulus, the verdict is also rather clear,
“A number of results are consistent across all models.
First, the multipliers from government investment and consumption expenditures, which are roughly similar in size, are clearly larger than the multipliers from transfers, labor income taxes, consumption taxes and corporate taxes.
Second, multipliers are small for general transfers, labor income taxes and corporate taxes, and somewhat larger (but still small relative to government expenditures) for consumption
taxes.
Third, only targeted transfers come close to having multipliers similar to those of government expenditures……[Yet....]
…it is of interest to note that in none of the regions [of the world adopting fiscal stimulus] do increases in government consumption play a predominant role.”
Figs. 22 and 31 show the very large multiplier effects of government investment and (slightly lower) effects of targeted transfers to the low paid in the US economy and Figs. 64 and 73 show the same for the EU.
There is one unproven assertion in the article on government finances, evident in the phrase above ”a permanent stimulus, that is a permanent increase in deficits.” If, as the models consistently find, the effects on GDP of government consumption and investment have multipliers that stretch to 2 over more than one year when interest rates are low (and have a cumulative five-year impact of more than 5), then the effects on government tax revenues would exceed the initial outlay by some considerable degree; ie investment and government consumption can lower the deficit, not create a permanently higher one. There is too the unacknowledged benefit to government finances from a growth-related decrease in welfare spending.
The alternative approach, based on ‘Expansionary Fiscal Contraction’, is dismissed in the IMF WP. An examination of how the EFC experiment has failed Ireland can be found on this blog.
The main argument against Ireland adopting a fiscal stimulus is openness (The debt and deficit arguments do not hold since Ireland’s debt level is below that of the peer group studied and the deficit matched by some). Yet the openness argument is tested (Fig.88) and found to have no appreciable impact on the effectiveness of fiscal stimulus - perhaps, unstated by the authors, because the propensity to import is offset by both a greater propensity to export and the greater efficiency that openness brings.
Monday, 22 February 2010
Deflation, the economy and growth
Michael Taft: Three Sunday articles with some thoughtful comments. First up, the Sunday Tribune and Eamon Quinn’s survey of six economists from across the political spectrum. Though they may differ as to why, none seem to believe the Government will bring the fiscal deficit under control (i.e. Maastricht compliance) by 2014. However, it is Professor Ray Kinsella’s comments that are the most damning:
‘You have to say to yourself, we have had four budgets now and each of those has been deflationary and unemployment will rise to 500,000. We simply can't afford to keep losing that sort of capacity. Firms are failing every day . . Potential is being lost – I can see it in the university students who are leaving the country. I am very clear that continuing the current fiscal policies will destroy the capacity of the Irish economy to recover.’
Second, is Brendan Keenan’s article which argues that leaving the Euro zone to achieve devaluation may not be such an attractive proposition. He concludes:
‘Those countries which think the balance of advantage for them lies with euro membership will have to tailor their policies to achieve growth within the single currency. Ireland has not yet done so. We should worry less about debt and defaults and more about enhancing the economy itself.’
The third observation is by Will Hutton in The Observer who contrasts the 20 economists writing to the Sunday Times, demanding the deficit be cut and be cut now; with the 60 economists writing to the Financial Times who argued for a fiscal policy that promotes growth and recovery. He helpfully links to an IMF paper which studied financial crises in 99 countries. What is the best response for an economy?
‘The best response is increasing capital spending; lift that by 1% of national output and not only are recessions shorter, but there is a permanent boost to economic growth of around a third of 1%.'
So let’s sum up:
• Current polices equals destruction of capacity
• New priority must be about enhancing the economy
• Capital investment has a positive and significant return
It may not be a syllogism in the technical sense. But it is logical.
‘You have to say to yourself, we have had four budgets now and each of those has been deflationary and unemployment will rise to 500,000. We simply can't afford to keep losing that sort of capacity. Firms are failing every day . . Potential is being lost – I can see it in the university students who are leaving the country. I am very clear that continuing the current fiscal policies will destroy the capacity of the Irish economy to recover.’
Second, is Brendan Keenan’s article which argues that leaving the Euro zone to achieve devaluation may not be such an attractive proposition. He concludes:
‘Those countries which think the balance of advantage for them lies with euro membership will have to tailor their policies to achieve growth within the single currency. Ireland has not yet done so. We should worry less about debt and defaults and more about enhancing the economy itself.’
The third observation is by Will Hutton in The Observer who contrasts the 20 economists writing to the Sunday Times, demanding the deficit be cut and be cut now; with the 60 economists writing to the Financial Times who argued for a fiscal policy that promotes growth and recovery. He helpfully links to an IMF paper which studied financial crises in 99 countries. What is the best response for an economy?
‘The best response is increasing capital spending; lift that by 1% of national output and not only are recessions shorter, but there is a permanent boost to economic growth of around a third of 1%.'
So let’s sum up:
• Current polices equals destruction of capacity
• New priority must be about enhancing the economy
• Capital investment has a positive and significant return
It may not be a syllogism in the technical sense. But it is logical.
Thursday, 10 December 2009
Budget 2010: Multipliers not banished from Ireland
Michael Burke: The Budget contained no estimate as to the real cost, in terms of human misery, of the effects of the crisis to date and the government's own role in exacerbating both. That is a scandal, but perhaps an expected one. From the opposition parties, the case was made that, in addition to being an attack on the poor and low-paid, women and youth would bear the brunt of the cuts. The case was also well made by Sinn Fein that there is a viable an alternative of reflation.
On a smaller scale, it is also a scandal how the government treats estimates of the fiscal effects of its own policies. In the Pre-Budget Outlook, there was no account taken of the contractionary effects of their policy, so a €4bn cut was assumed to be a €4bn saving. Now, in the Budget documentation itself, there is at least a recognition that is not the case and €897mn is estimated as the impact of this Budget's measures on the fiscal position, that is a €4bn cut is now expected to be a €3.1bn saving.
This is a modest step forward. But where does this €897mn estimate come from? There is no explanation beyond "quantifying the impact of these measures is an inherently uncertain exercise". Agreed. But does this estimate correspond to experience? On the face of it, it is no more than the direct losses to the Exchequer from reduced expenditure, with no account taken of the contractionary effects on the wider economy and the further negative impact on both revenues and expenditure.
These are widely known as 'multiplier effects' and they have achieved a certain notoriety in Ireland as many commentators and even economists here doubt there existence, or argue they are so small in the Irish context that they can be disregarded. However, that is not now the view of the government.
In terms of a change in Ireland's growth resulting from a change in interest rates, the DoF calculation (using the ESRI's econometric model) is that a 1% increase in GDP could reduce the General Government Borrowing (GGB) by up to 2.2% over a 5-year period (Table 6). So, multipliers have not been banished from Irish soil after all. A similar exercise was conducted where the improvement in growth arises from export performance, with more modest results, up to 1.5%. Why the same exercise was not conducted for a 1% change in growth arising from a change government spending is not at all clear.
There is no reason to suppose that the impact on government finances from a change in spending would be any lower than from a change in interest rates. Most econometric models assume that government spending, especially government investment has the higher multiplier effects. But, using only the results arrived at for growth arising from changing interest rates, a 1% change in GDP could lead to a change of up to 2.2% in the GGB over 5 years. Now a €4bn cut in in government spending is equivalent to approximately 2.3% of GDP. But, even if all the €4bn is regarded as a 'saving', this multiplier means that the net impact is a deterioration in the GGB over 5 years of up to 2.75% of GDP.
And this is precisely what has been happening. Table 7 shows that both the debt and deficit positions have been getting worse than government forecasts. This is not because of growth undershooting. In fact, the current projection for GDP in 2009 of -7.5% is a slight improvement over April’s forecast of -7.7%. Yet the GGB is expected to have deteriorated, from an initial estimate of 10.7% of GDP to now 11.7% of GDP. At the same time the level of general government gross debt is expected to be startlingly worse, equivalent to 64.5% of GDP compared to 59% as recently as April. This pattern is repeated in official forecasts out to 2013; growth is everywhere expected to be better (indeed very strong in 2012 and 2013), but the deficit and debt levels are worse than previously expected.
This is because the government, the DoF and their supporters take insufficient account of their own negative impact on government finances arising from fiscal contraction. If the assumption was that all previous cuts were going to deliver commensurate savings, the actual outcome would a be a shock. If, as in the latest Budget document, there is a partial acknowledgement that cuts are not savings, then the impact on government finances is still an unpleasant surprise. But, from a perspective in which fiscal contraction is economically disastrous and entirely counter-productive even in its own terms, then the outcome was entirely predictable, and predicted.
On a smaller scale, it is also a scandal how the government treats estimates of the fiscal effects of its own policies. In the Pre-Budget Outlook, there was no account taken of the contractionary effects of their policy, so a €4bn cut was assumed to be a €4bn saving. Now, in the Budget documentation itself, there is at least a recognition that is not the case and €897mn is estimated as the impact of this Budget's measures on the fiscal position, that is a €4bn cut is now expected to be a €3.1bn saving.
This is a modest step forward. But where does this €897mn estimate come from? There is no explanation beyond "quantifying the impact of these measures is an inherently uncertain exercise". Agreed. But does this estimate correspond to experience? On the face of it, it is no more than the direct losses to the Exchequer from reduced expenditure, with no account taken of the contractionary effects on the wider economy and the further negative impact on both revenues and expenditure.
These are widely known as 'multiplier effects' and they have achieved a certain notoriety in Ireland as many commentators and even economists here doubt there existence, or argue they are so small in the Irish context that they can be disregarded. However, that is not now the view of the government.
In terms of a change in Ireland's growth resulting from a change in interest rates, the DoF calculation (using the ESRI's econometric model) is that a 1% increase in GDP could reduce the General Government Borrowing (GGB) by up to 2.2% over a 5-year period (Table 6). So, multipliers have not been banished from Irish soil after all. A similar exercise was conducted where the improvement in growth arises from export performance, with more modest results, up to 1.5%. Why the same exercise was not conducted for a 1% change in growth arising from a change government spending is not at all clear.
There is no reason to suppose that the impact on government finances from a change in spending would be any lower than from a change in interest rates. Most econometric models assume that government spending, especially government investment has the higher multiplier effects. But, using only the results arrived at for growth arising from changing interest rates, a 1% change in GDP could lead to a change of up to 2.2% in the GGB over 5 years. Now a €4bn cut in in government spending is equivalent to approximately 2.3% of GDP. But, even if all the €4bn is regarded as a 'saving', this multiplier means that the net impact is a deterioration in the GGB over 5 years of up to 2.75% of GDP.
And this is precisely what has been happening. Table 7 shows that both the debt and deficit positions have been getting worse than government forecasts. This is not because of growth undershooting. In fact, the current projection for GDP in 2009 of -7.5% is a slight improvement over April’s forecast of -7.7%. Yet the GGB is expected to have deteriorated, from an initial estimate of 10.7% of GDP to now 11.7% of GDP. At the same time the level of general government gross debt is expected to be startlingly worse, equivalent to 64.5% of GDP compared to 59% as recently as April. This pattern is repeated in official forecasts out to 2013; growth is everywhere expected to be better (indeed very strong in 2012 and 2013), but the deficit and debt levels are worse than previously expected.
This is because the government, the DoF and their supporters take insufficient account of their own negative impact on government finances arising from fiscal contraction. If the assumption was that all previous cuts were going to deliver commensurate savings, the actual outcome would a be a shock. If, as in the latest Budget document, there is a partial acknowledgement that cuts are not savings, then the impact on government finances is still an unpleasant surprise. But, from a perspective in which fiscal contraction is economically disastrous and entirely counter-productive even in its own terms, then the outcome was entirely predictable, and predicted.
Sunday, 6 December 2009
The economic crisis: some suggestions
Jim Stewart: The economic crisis has revealed failures in many areas:- regulation, industrial policy, tax policy, corporate governance and planning. Recent flooding has underlined the almost total failure of our planning system. In view of these failures, the view of the Government in the pre-budget outlook that “repairing the banking system”, “restoring the public finances” and “fostering sustainable employment through improving competitiveness” would provide conditions for economic recovery is absurd. The paucity of new ideas is perhaps best illustrated by one of the OECD’s proposals to reform the labour market, requiring “voice-over actors, freelance journalists and session musicians” to be subject to competition law (OECD, 2009, p. 122). Proposals such as these indicate, perhaps, an urgent need to review our monetary contribution to the OECD.
A central plank of policy on competitiveness is that wages in the public sector are far higher than those in the private sector. Recent reports by the OECD and IMF have largely repeated these assertions. However, Foley and O’Callaghan, in a recent SSSI paper, convincingly argue that the differences have been exaggerated (for example, more public sector employees have a third level qualification or are managers or professionals than in the private sector).
However, it is also the case that wage levels for certain key sectors are too high. The differential between the lowest paid and the highest paid is also too high in all public and private sector organisations. Reducing this differential in the public sector would not solve the economic crisis by itself. It would contribute to reducing the budget deficit but more importantly, it would make more earnings revisions acceptable to other groups whose earnings are well above average levels in Ireland, or comparable groups in other countries (academics, hospital consultants, elected politicians, judiciary, regulators, etc.).
A well-targeted fiscal stimulus should be a vital part of current strategy. Such a fiscal stimulus should be aimed at job-intensive sectors such as tourism. Well designed incentives could encourage those who are currently in employment, and who have increased their savings rate, to increase consumption. Careful targeting and design could ensure that this increased consumption benefited the Irish exchequer through increased VAT yields, rather than the UK exchequer.
Graduate and youth unemployment should be tackled by subsidising employers to provide work place experience and training. Employers would not be required to pay such individuals; rather, payment could consist of continuing or establishing social security payments. Subsidies to employers of young non-graduate adults should be higher to compensate for the likely greater costs and inputs by employers.
Industrial and innovation policy needs to be seriously rethought, and not just as a cost cutting exercise as in the McCarthy/Department of Finance proposals. For example, there has been strong criticism of McCarthy/D of F proposals in relation to funding of research in universities, but the point not made by McCarthy/D of F, is that other countries have very successful innovation, internationally competitive firms and a strong science base without the presence of world class Universities (Germany has no university in the THES top 50, and just 2 in the top 100). Economic success does not necessarily follow from the presence of ‘world class Universities’. These issues need urgent focus.
There is scope for raising additional taxation through removing tax expenditures. The Commission on Taxation (p. 315) identify 17 tax expenditures not examined because decisions were taken in the budgets of 2006 and 2009 to discontinue them. However, many live on for existing projects and ‘projects in the pipeline’, as in the case of accelerated capital allowances for hotels.
There is considerable scope for reform of tax regime for pensions in order to support existing State pensions and supplementary pension arrangements. For example:- extending taxation on tax-relieved lump sums, in particular those above the limit of €5 million set in 2005, and reducing tax allowances for those who are retired and have earnings well above average earnings.
The renewed programme for Government as originally published planned a uniform tax rate of tax relief on pensions of 30%. This was subsequently republished as 33%. However, as advocated by TASC, relief should be granted at the standard rate
A central plank of policy on competitiveness is that wages in the public sector are far higher than those in the private sector. Recent reports by the OECD and IMF have largely repeated these assertions. However, Foley and O’Callaghan, in a recent SSSI paper, convincingly argue that the differences have been exaggerated (for example, more public sector employees have a third level qualification or are managers or professionals than in the private sector).
However, it is also the case that wage levels for certain key sectors are too high. The differential between the lowest paid and the highest paid is also too high in all public and private sector organisations. Reducing this differential in the public sector would not solve the economic crisis by itself. It would contribute to reducing the budget deficit but more importantly, it would make more earnings revisions acceptable to other groups whose earnings are well above average levels in Ireland, or comparable groups in other countries (academics, hospital consultants, elected politicians, judiciary, regulators, etc.).
A well-targeted fiscal stimulus should be a vital part of current strategy. Such a fiscal stimulus should be aimed at job-intensive sectors such as tourism. Well designed incentives could encourage those who are currently in employment, and who have increased their savings rate, to increase consumption. Careful targeting and design could ensure that this increased consumption benefited the Irish exchequer through increased VAT yields, rather than the UK exchequer.
Graduate and youth unemployment should be tackled by subsidising employers to provide work place experience and training. Employers would not be required to pay such individuals; rather, payment could consist of continuing or establishing social security payments. Subsidies to employers of young non-graduate adults should be higher to compensate for the likely greater costs and inputs by employers.
Industrial and innovation policy needs to be seriously rethought, and not just as a cost cutting exercise as in the McCarthy/Department of Finance proposals. For example, there has been strong criticism of McCarthy/D of F proposals in relation to funding of research in universities, but the point not made by McCarthy/D of F, is that other countries have very successful innovation, internationally competitive firms and a strong science base without the presence of world class Universities (Germany has no university in the THES top 50, and just 2 in the top 100). Economic success does not necessarily follow from the presence of ‘world class Universities’. These issues need urgent focus.
There is scope for raising additional taxation through removing tax expenditures. The Commission on Taxation (p. 315) identify 17 tax expenditures not examined because decisions were taken in the budgets of 2006 and 2009 to discontinue them. However, many live on for existing projects and ‘projects in the pipeline’, as in the case of accelerated capital allowances for hotels.
There is considerable scope for reform of tax regime for pensions in order to support existing State pensions and supplementary pension arrangements. For example:- extending taxation on tax-relieved lump sums, in particular those above the limit of €5 million set in 2005, and reducing tax allowances for those who are retired and have earnings well above average earnings.
The renewed programme for Government as originally published planned a uniform tax rate of tax relief on pensions of 30%. This was subsequently republished as 33%. However, as advocated by TASC, relief should be granted at the standard rate
Monday, 23 November 2009
IMF chief warns on exit strategy
Michael Burke: Report in the Financial Times, Monday November 23:
"'Economic stimulus programmes, including those in the UK, should not be withdrawn too soon, Dominique Strauss-Kahn, managing director of the International Monetary Fund, warned on Monday.
He stepped into the intense debate about how quickly to tackle the UK’s £175bn budget deficit by telling the CBI employers group that “this kind of support will have to last some time more until we are sure the recovery is firmly established."
“It is too early for a general exit. We recommend erring on the side of caution, as exiting too early is costlier than exiting too late,” he said.'
He had nothing to say, though, about an economy which had not engaged in any reflation at all, but had only enacted a sharp fiscal contraction.
"'Economic stimulus programmes, including those in the UK, should not be withdrawn too soon, Dominique Strauss-Kahn, managing director of the International Monetary Fund, warned on Monday.
He stepped into the intense debate about how quickly to tackle the UK’s £175bn budget deficit by telling the CBI employers group that “this kind of support will have to last some time more until we are sure the recovery is firmly established."
“It is too early for a general exit. We recommend erring on the side of caution, as exiting too early is costlier than exiting too late,” he said.'
He had nothing to say, though, about an economy which had not engaged in any reflation at all, but had only enacted a sharp fiscal contraction.
Thursday, 19 November 2009
Multipliers then and now
Michael Burke: There is further evidence that fiscal stimulus works. Kevin O'Rourke has (re)posted here a very interesting piece by Barry Eichengreen et al here - on the parallels between the period of the Great Depression and the current 'Great Credit Crisis'. Taking into account the global economy (not just the US) then and now, the authors find close and very disturbing parallels; that global industrial production has fallen as fast now as then, that global stock markets have fallen more now and that the collapse in world trade is even graver now.
The authors also examine the effectiveness of monetary policy then and now, focusing on short-term interest rates. They also examine the effectiveness of fiscal policy changes.
Their key conclusion is also the most interesting and relevant one;
“[Scepticism suggested that] monetary policy is ineffective when the banking sector is in distress. Fiscal policy is ineffective when the need is to reduce the level of indebtedness and when much previous output in the declining sectors is unsustainable; it simply cannot be replaced by replacing demand.
“Our results push back against this scepticism. They suggest that fiscal stimulus made little difference in the 1930s because it was not deployed on the requisite scale, not because it was ineffective” (p.25).
The authors go on to add that their mathematical estimates for the government spending fiscal multipliers were 2.5 in year 1 and 1.2 thereafter.
Now, we are repeatedly told that Ireland is a small very open economy, where the fiscal multipliers would not work in the same way; that government expenditure would leak abroad in the form of increased import demand. Yet many of the leading economies discussed in the Eichengreen paper were large very open economies in that they were centres of vast established political and economic empires, or putative ones. Furthermore, the colonial possessions were the destinations for huge capital outflows and the source of ultra-cheap labour and imports. Therefore, it would be reasonable to assume that the 'leakage' overseas of any fiscal stimulus would be fairly high, certainly no lower than 21st century Ireland.
But we do not have to rely on supposition in that regard. Bang up to date, the government's Pre-Budget Outlook (PBO) tells us what some of the multipliers are for the output that has been lost to date in the Irish recession and their effects on government finances.
The PBO states that, in the past, the official expectation was that a 1% change in nominal growth would lead to a 1.1% change in tax revenues (strangely low by intenational standards, but perhaps reflecting Ireland's very narrow tax base). But in the last 2 years, tax revenues have declined by 32% while the value of GDP has declined 13% (p.20.). That is, a revenue multiplier of approximately 2.5 over 2 years.
Now, no doubt, there will be those that argue that this is previous taxation data based on the housing bubble, as if that was an argument for maintaining the current narrow tax base. But the decline in Ireland's tax revenue is not wholly attributable to housing as there has also been a commensurate decline in other areas of investment, notably machinery and office equipment, which had a peak-to-trough decline of over two-thirds. In any event, it is entirely possible to adjust the tax base to reflect any areas the government chose to target for reflationary measures.
But that's only one part of government finances. The other side is expenditure. Here, the PBO states that there will be a rise of €4.5bn between 2008 and 2010, "predominantly the rising cost of social expenditures due to an increase in unemployment." This represents a rise in spending of approximately 8.5% in response to a decline in GDP of 13%. Even this total significantly understates the effects on spending given the large number of cuts already enacted.
Based on the PBO's current spending total of €56bn in 2009 and tax receipts of €32bn and the effects on government finances to date, a 1% rise in GDP could yield increased taxes of €790mn and lower spending by €350mn to give a total saving of €1.14bn over two years.
The alternative, attempting to cut your way to a balanced budget has already been tried and has already failed, as the PBO inadvertently admits. The increase in unemployment noted above, and the increasing costs associated with it, predictably, "have more than offset the expenditure economies already announced."
The authors also examine the effectiveness of monetary policy then and now, focusing on short-term interest rates. They also examine the effectiveness of fiscal policy changes.
Their key conclusion is also the most interesting and relevant one;
“[Scepticism suggested that] monetary policy is ineffective when the banking sector is in distress. Fiscal policy is ineffective when the need is to reduce the level of indebtedness and when much previous output in the declining sectors is unsustainable; it simply cannot be replaced by replacing demand.
“Our results push back against this scepticism. They suggest that fiscal stimulus made little difference in the 1930s because it was not deployed on the requisite scale, not because it was ineffective” (p.25).
The authors go on to add that their mathematical estimates for the government spending fiscal multipliers were 2.5 in year 1 and 1.2 thereafter.
Now, we are repeatedly told that Ireland is a small very open economy, where the fiscal multipliers would not work in the same way; that government expenditure would leak abroad in the form of increased import demand. Yet many of the leading economies discussed in the Eichengreen paper were large very open economies in that they were centres of vast established political and economic empires, or putative ones. Furthermore, the colonial possessions were the destinations for huge capital outflows and the source of ultra-cheap labour and imports. Therefore, it would be reasonable to assume that the 'leakage' overseas of any fiscal stimulus would be fairly high, certainly no lower than 21st century Ireland.
But we do not have to rely on supposition in that regard. Bang up to date, the government's Pre-Budget Outlook (PBO) tells us what some of the multipliers are for the output that has been lost to date in the Irish recession and their effects on government finances.
The PBO states that, in the past, the official expectation was that a 1% change in nominal growth would lead to a 1.1% change in tax revenues (strangely low by intenational standards, but perhaps reflecting Ireland's very narrow tax base). But in the last 2 years, tax revenues have declined by 32% while the value of GDP has declined 13% (p.20.). That is, a revenue multiplier of approximately 2.5 over 2 years.
Now, no doubt, there will be those that argue that this is previous taxation data based on the housing bubble, as if that was an argument for maintaining the current narrow tax base. But the decline in Ireland's tax revenue is not wholly attributable to housing as there has also been a commensurate decline in other areas of investment, notably machinery and office equipment, which had a peak-to-trough decline of over two-thirds. In any event, it is entirely possible to adjust the tax base to reflect any areas the government chose to target for reflationary measures.
But that's only one part of government finances. The other side is expenditure. Here, the PBO states that there will be a rise of €4.5bn between 2008 and 2010, "predominantly the rising cost of social expenditures due to an increase in unemployment." This represents a rise in spending of approximately 8.5% in response to a decline in GDP of 13%. Even this total significantly understates the effects on spending given the large number of cuts already enacted.
Based on the PBO's current spending total of €56bn in 2009 and tax receipts of €32bn and the effects on government finances to date, a 1% rise in GDP could yield increased taxes of €790mn and lower spending by €350mn to give a total saving of €1.14bn over two years.
The alternative, attempting to cut your way to a balanced budget has already been tried and has already failed, as the PBO inadvertently admits. The increase in unemployment noted above, and the increasing costs associated with it, predictably, "have more than offset the expenditure economies already announced."
Wednesday, 11 November 2009
Home truths from abroad
Michael Burke: It’s in the nature of a globalised economy that all economies tend to exhibit a specific combination of global trends. For a small extremely open economy such as Ireland, this is an inescapable truth. It is especially true in a period of crisis. So, despite widespread claims to the contrary, there is little that is unique in the current Irish crisis. And there is nothing which justifies the uniquely pro-cyclical fiscal policy that is currently being implemented. Instead, to treat the Irish patient, what must be diagnosed is the specific combination and strength of the widespread virus that it has acquired in the current pandemic.
The European Commission’s latest biannual economic forecast for the European Union is useful in this respect. It shows, amongst other things, what is and what is not unique about the current situation in Ireland. In doing so, it helps to undermine some the myths that have grown up regarding the features of the current crisis. Below are some of the key issues for Ireland that are worth highlighting:-
* Ireland’s bloated public sector: Before the current recession Ireland’s government spending as a proportion of GDP was the lowest of any economy in the Euro Area, 33.6% in the years 2002-2006, compared to a Euro Area average of 47.4% (Table 35, p.205). A number of countries, France, Belgium and Austria, have a public sector which is proportionately 1½ times greater than Ireland, at over 50% of GDP.
* There is no scope to raise taxes: In the same 2002-2006 period Ireland’s tax take was also the lowest of any Euro Area economy, at 34.9% of GDP compared to Euro Area average of 44.9% of GDP (Table 36).
* Ireland has a uniquely high level of public debt: Even with the disastrous and counter-productive policies currently being pursued, the Commission forecasts that Ireland’s public debt level will rise to 96.2% of GDP in 2011, compared to 135.4% for Greece, 117.8% for Italy, 104% for Belgium and a Euro Area average of 88.2% (Table 42). Shifting the goalposts a bit, it is also often claimed that Ireland’s export successes should be ignored in calculating debt ratios (even though exports can provide part of the taxes to fund deficits). But even if GNP is used, Ireland’s debt ratio is still the second lowest in the Euro Area at 38.4% of GDP, and still way below the average.
* There’s no scope for fiscal stimulus: Ireland’s output gap relative to potential GDP is expected to be up to 8.5% of GDP in 2009 and will still be as high as 5.4% of GDP in 2011, the largest in the Euro Area and compared to averages for the Euro Area as a whole of 3.6% this year and 2.5% in 2011 (Table 13).
* Ireland has become uncompetitive internationally: In the years 2002-2006, the price deflator for Ireland’s exports fell at an annual average rate of 2.7% and the price deflator for imports fell at an annual average rate of 2.3%, compared to Euro Area average rises of 0.5% and 0.7% respectively (Tables 18 & 19). In addition, Ireland’s growth of per capita labour productivity was an annual average 2.2% compared to just 1.2% for the Euro Area, and 1.6% for Britain and 2.1% for the US (Table 26).
Absolute, historical and relative comparisons are all useful to establish context. It is certainly the case that the pace of the rise in Ireland’s public deficits is the most dramatic of all the OECD economies. According to the EU, there has been a deterioration in public debt equivalent to 12.3% of GDP in just two years, compared to a Euro Area average of just 4.7% (Table 37).
But, as shown above, this had nothing to do with the entirely false assertion that Ireland has a bloated public sector. Instead, it relates to two genuinely unique factors in Ireland, in addition to the very small and narrow tax base which has exacerbated the rising public deficits.
The first unique factor is the depth of the recession itself, a forecast decline of 13% in GDP over the recession and more than double the average decline in the Euro Area (Table 1). This has driven down taxation revenues as well as forcing welfare spending higher. The second is the bank bailout, which at 232% of GDP is greater in Ireland than the next worst 4 Euro Area economies put together.
In relative terms, compared to the Euro Area economies, Ireland is unique in these two particulars; a uniquely severe downturn, as well as a uniquely dysfunctional banking sector which is sucking the lifeblood from the economy. The scope of the economic decline would require uniquely dramatic stimulus measures to revive it, while a rapid exit strategy from the policy of bailouts for bank bond and shareholders is also urgently needed.
The European Commission’s latest biannual economic forecast for the European Union is useful in this respect. It shows, amongst other things, what is and what is not unique about the current situation in Ireland. In doing so, it helps to undermine some the myths that have grown up regarding the features of the current crisis. Below are some of the key issues for Ireland that are worth highlighting:-
* Ireland’s bloated public sector: Before the current recession Ireland’s government spending as a proportion of GDP was the lowest of any economy in the Euro Area, 33.6% in the years 2002-2006, compared to a Euro Area average of 47.4% (Table 35, p.205). A number of countries, France, Belgium and Austria, have a public sector which is proportionately 1½ times greater than Ireland, at over 50% of GDP.
* There is no scope to raise taxes: In the same 2002-2006 period Ireland’s tax take was also the lowest of any Euro Area economy, at 34.9% of GDP compared to Euro Area average of 44.9% of GDP (Table 36).
* Ireland has a uniquely high level of public debt: Even with the disastrous and counter-productive policies currently being pursued, the Commission forecasts that Ireland’s public debt level will rise to 96.2% of GDP in 2011, compared to 135.4% for Greece, 117.8% for Italy, 104% for Belgium and a Euro Area average of 88.2% (Table 42). Shifting the goalposts a bit, it is also often claimed that Ireland’s export successes should be ignored in calculating debt ratios (even though exports can provide part of the taxes to fund deficits). But even if GNP is used, Ireland’s debt ratio is still the second lowest in the Euro Area at 38.4% of GDP, and still way below the average.
* There’s no scope for fiscal stimulus: Ireland’s output gap relative to potential GDP is expected to be up to 8.5% of GDP in 2009 and will still be as high as 5.4% of GDP in 2011, the largest in the Euro Area and compared to averages for the Euro Area as a whole of 3.6% this year and 2.5% in 2011 (Table 13).
* Ireland has become uncompetitive internationally: In the years 2002-2006, the price deflator for Ireland’s exports fell at an annual average rate of 2.7% and the price deflator for imports fell at an annual average rate of 2.3%, compared to Euro Area average rises of 0.5% and 0.7% respectively (Tables 18 & 19). In addition, Ireland’s growth of per capita labour productivity was an annual average 2.2% compared to just 1.2% for the Euro Area, and 1.6% for Britain and 2.1% for the US (Table 26).
Absolute, historical and relative comparisons are all useful to establish context. It is certainly the case that the pace of the rise in Ireland’s public deficits is the most dramatic of all the OECD economies. According to the EU, there has been a deterioration in public debt equivalent to 12.3% of GDP in just two years, compared to a Euro Area average of just 4.7% (Table 37).
But, as shown above, this had nothing to do with the entirely false assertion that Ireland has a bloated public sector. Instead, it relates to two genuinely unique factors in Ireland, in addition to the very small and narrow tax base which has exacerbated the rising public deficits.
The first unique factor is the depth of the recession itself, a forecast decline of 13% in GDP over the recession and more than double the average decline in the Euro Area (Table 1). This has driven down taxation revenues as well as forcing welfare spending higher. The second is the bank bailout, which at 232% of GDP is greater in Ireland than the next worst 4 Euro Area economies put together.
In relative terms, compared to the Euro Area economies, Ireland is unique in these two particulars; a uniquely severe downturn, as well as a uniquely dysfunctional banking sector which is sucking the lifeblood from the economy. The scope of the economic decline would require uniquely dramatic stimulus measures to revive it, while a rapid exit strategy from the policy of bailouts for bank bond and shareholders is also urgently needed.
Monday, 2 November 2009
'Cut Deep, Cut Now and Keep on Cutt'n'
Slí Eile: The cage was truly rattled, today, by David Blanchflower, UK economist, who challenged the home consensus about deflation. Speaking at the third in a series of 'Crisis' conferences today in Dublin he said that he was against pay cuts, cuts in public spending and deflation to right the economy. He is very concerned that as Governments respond to the crisis by cutting off stimulus interventions too early or - worse still - adding fuel to the fire by undertaking sharply deflationary approaches there is a real danger that the economy will be 'pushed over the cliff'.
When pressed by a perplexed audience of sensible mainstream Irish economists to comment on the current Irish fiscal situation, he made it clear that he was not in favour of the deflationary push. This created some concern and reaction including an intervention by John Fitzgerald, the chair of the first session, to provide a stout defence of a rapid 'fiscal adjustment' and the unworkability of a fiscal stimulus in current Irish fiscal situation. This was followed up by a lengthy presentation by Philip Lane in which he gave a very rounded and robust defence of the current strategy and against any let up in adjustment (even arguing for more cuts in addition to the €4bn adjustment envisaged this year and again for each of the coming two years). His background notes for the conference can be downloaded here.
A clear difference opened up on ends and means. The fiscal adjustment at all costs school believes that we must adjust quickly or else the 'markets' will lose confidence and the recovery will be stretched out over 10 years instead of 3 or 5. Everything else follows - peace, jobs, prosperity.... This view is firmly established in Government, the Department of Finance, the ESRI, nearly all the major newspapers, most political parties and most academic economists who comment on these matters in public. Only the odd TU economist, lefty or Nobel economist from America or Britain who doesn't, well ... fully understand the unique Irish situation (and how bad it is and how dependent we are on markets for sovereign debt risks and how screwed up we are because 'public spending exploded' in last few years). We are now on the road to socialist serfdom as spending has rocketed to over 51% of GNP (much of the increase last year was pure cyclical and advance payments into the NPRF).
Brian Nolan wondered if one way of dealing with unemployment is to distribute it more evenly and avoid unhealthy concentrations. Colm McCarthy says that the choice is between a 30% youth unemployment rate (which is what it was in July of this year) for five years or for 10 years (essentially if we don't follow his prescriptions).
It is really unusual and refreshing to hear an 'outsider' such as Joseph Stiglitz last month or David Blanchflower now challenging this consensus view. Not a few people resent the comments by 'outsiders' as ill-informed and not suitable for Irish situation. Specifically, Philip Lane in a clear response to Blanchflower said that the Irish situation was very different:
* small open economy with high import leakage and low fiscal multipliers
* extremely bad debt situation made worse by pro-cyclical policies in the past (and with the result that we must be pro-cyclical now)
* no option of currency devaluation.
For Lane and all mainstream economists the only solution is 'real depreciation' through salary, wage, rent and other cost reductions allied to cuts in public spending (Lane concedes some room for investment programmes but only at the cost of even more cuts elsewhere in public spending).
Blanchflower who has researched and published extensively on unemployment sees the rise in youth unemployment as profoundly worrying and threatening. It has huge implications for social cohesion, health and morale. There is clear evidence that a whole cohort of young people in the UK suffered from 'permanent scars' as a result of a period of unemployment in their late teens or early twenties (citing, e.g., 1958 birth cohort studies in the UK tracked over 50 years). He argued that we needed to throw everything at this problem because the social costs are incalculable. Not only did he support continuing stimulus measures abroad he clearly favoured some type of counter-cyclical measures in Ireland too. He is very concerned about a 'double-dip' or W-shaped recession - building on evidence from previous recessions and the timing of a slow recovery. He was also scathing in his criticism of 'economics' and 'macro-economics' not only in failing to understand and anticipate the crash but also in making the problem worse by adherence to dogma. He was not optimistic about a recovery any time soon and thought that the world might be headed for a fresh recession especially if Government over-react by withdrawing stimulus spending.
Blanchflower also commented on the state of banking (he was an external member of the Bank of England's Monetary Policy Committee up to last June). He stated bluntly that if you 'don't own it' (banking) you cannot effectively get banks to lend (please, sir, lend). There is no evidence, he says, that banks will start lending any time soon to businesses.
Other presentations were by Colm Harmon on the role of education as a medium-term strategy to position us in the global market and John McHale (on pensions). Both papers should be available on the web in the next day or two (see Geary Institute).
In the wrap-up discussions there was some debate about stimulus measures. George Lee, TD tried to pin down the platform including Colm McCarthy on how much they would need to cut to get the deficit down to a required level. In other words, is there a level of cuts that they would not go beyond ? (Lee). McCarthy ducked.
The timing of adjustment also featured with McCarthy, Lane and Fitzgerald warning against any delays ('we don't want to go down the road of the 1980s..'). So, cut deep, cut now and keep on cutting and if a whole generation is lost through unemployment, emigration and despair - that's just the way it is. We can get back to 'sustainable growth' more quickly by restoring competitiveness (read profitability through driving down other costs). Two speakers (Lane and McCarthy) claimed that the public deficit would be as high as 15% (instead of 13% now) were it not for the fiscal adjustment in last April's budget (but the target was to reach 10.75%). Implicitly, and not so implicitly, one had a clear impression that nobody in this assembly believed that the 3% SGP target would be reached by 2013. However, as we cut and cut we delude ourselves with the thought that had we not cut the deficit would have spiralled up and up (someone even mentioned a possible 20% deficit). no evidence, no modelling, no counter-hypothesis was provided to support these assertions.
Again George Lee asked 'must people be crucified to reach some target?' to which McCarthy replied ' how long do we want to be crucified?'
Please, can decent women and men get up, speak out and stand up.
And could we have a more broad-based debate than one dominated by failed economics which simply doesn't care about the impact of its failure on people.
When pressed by a perplexed audience of sensible mainstream Irish economists to comment on the current Irish fiscal situation, he made it clear that he was not in favour of the deflationary push. This created some concern and reaction including an intervention by John Fitzgerald, the chair of the first session, to provide a stout defence of a rapid 'fiscal adjustment' and the unworkability of a fiscal stimulus in current Irish fiscal situation. This was followed up by a lengthy presentation by Philip Lane in which he gave a very rounded and robust defence of the current strategy and against any let up in adjustment (even arguing for more cuts in addition to the €4bn adjustment envisaged this year and again for each of the coming two years). His background notes for the conference can be downloaded here.
A clear difference opened up on ends and means. The fiscal adjustment at all costs school believes that we must adjust quickly or else the 'markets' will lose confidence and the recovery will be stretched out over 10 years instead of 3 or 5. Everything else follows - peace, jobs, prosperity.... This view is firmly established in Government, the Department of Finance, the ESRI, nearly all the major newspapers, most political parties and most academic economists who comment on these matters in public. Only the odd TU economist, lefty or Nobel economist from America or Britain who doesn't, well ... fully understand the unique Irish situation (and how bad it is and how dependent we are on markets for sovereign debt risks and how screwed up we are because 'public spending exploded' in last few years). We are now on the road to socialist serfdom as spending has rocketed to over 51% of GNP (much of the increase last year was pure cyclical and advance payments into the NPRF).
Brian Nolan wondered if one way of dealing with unemployment is to distribute it more evenly and avoid unhealthy concentrations. Colm McCarthy says that the choice is between a 30% youth unemployment rate (which is what it was in July of this year) for five years or for 10 years (essentially if we don't follow his prescriptions).
It is really unusual and refreshing to hear an 'outsider' such as Joseph Stiglitz last month or David Blanchflower now challenging this consensus view. Not a few people resent the comments by 'outsiders' as ill-informed and not suitable for Irish situation. Specifically, Philip Lane in a clear response to Blanchflower said that the Irish situation was very different:
* small open economy with high import leakage and low fiscal multipliers
* extremely bad debt situation made worse by pro-cyclical policies in the past (and with the result that we must be pro-cyclical now)
* no option of currency devaluation.
For Lane and all mainstream economists the only solution is 'real depreciation' through salary, wage, rent and other cost reductions allied to cuts in public spending (Lane concedes some room for investment programmes but only at the cost of even more cuts elsewhere in public spending).
Blanchflower who has researched and published extensively on unemployment sees the rise in youth unemployment as profoundly worrying and threatening. It has huge implications for social cohesion, health and morale. There is clear evidence that a whole cohort of young people in the UK suffered from 'permanent scars' as a result of a period of unemployment in their late teens or early twenties (citing, e.g., 1958 birth cohort studies in the UK tracked over 50 years). He argued that we needed to throw everything at this problem because the social costs are incalculable. Not only did he support continuing stimulus measures abroad he clearly favoured some type of counter-cyclical measures in Ireland too. He is very concerned about a 'double-dip' or W-shaped recession - building on evidence from previous recessions and the timing of a slow recovery. He was also scathing in his criticism of 'economics' and 'macro-economics' not only in failing to understand and anticipate the crash but also in making the problem worse by adherence to dogma. He was not optimistic about a recovery any time soon and thought that the world might be headed for a fresh recession especially if Government over-react by withdrawing stimulus spending.
Blanchflower also commented on the state of banking (he was an external member of the Bank of England's Monetary Policy Committee up to last June). He stated bluntly that if you 'don't own it' (banking) you cannot effectively get banks to lend (please, sir, lend). There is no evidence, he says, that banks will start lending any time soon to businesses.
Other presentations were by Colm Harmon on the role of education as a medium-term strategy to position us in the global market and John McHale (on pensions). Both papers should be available on the web in the next day or two (see Geary Institute).
In the wrap-up discussions there was some debate about stimulus measures. George Lee, TD tried to pin down the platform including Colm McCarthy on how much they would need to cut to get the deficit down to a required level. In other words, is there a level of cuts that they would not go beyond ? (Lee). McCarthy ducked.
The timing of adjustment also featured with McCarthy, Lane and Fitzgerald warning against any delays ('we don't want to go down the road of the 1980s..'). So, cut deep, cut now and keep on cutting and if a whole generation is lost through unemployment, emigration and despair - that's just the way it is. We can get back to 'sustainable growth' more quickly by restoring competitiveness (read profitability through driving down other costs). Two speakers (Lane and McCarthy) claimed that the public deficit would be as high as 15% (instead of 13% now) were it not for the fiscal adjustment in last April's budget (but the target was to reach 10.75%). Implicitly, and not so implicitly, one had a clear impression that nobody in this assembly believed that the 3% SGP target would be reached by 2013. However, as we cut and cut we delude ourselves with the thought that had we not cut the deficit would have spiralled up and up (someone even mentioned a possible 20% deficit). no evidence, no modelling, no counter-hypothesis was provided to support these assertions.
Again George Lee asked 'must people be crucified to reach some target?' to which McCarthy replied ' how long do we want to be crucified?'
Please, can decent women and men get up, speak out and stand up.
And could we have a more broad-based debate than one dominated by failed economics which simply doesn't care about the impact of its failure on people.
Wednesday, 28 October 2009
Controversies over speed of fiscal adjustment
Slí Eile: A recent paper by John Fitzgerald of the ESRI (‘Fiscal Policy for Recovery’) indicates the scale of challenge facing public finances in Ireland. His medicine, while conforming to the standard prescription, is greatly more nuanced than the Slash and Burn school of McCarthy/Department of Finance). He outlines six principal Conclusions as follows:
Standard Dublin Consensus Conclusions:
Wages are too high and need to be cut by ‘7% over 3 years’ (in the public and private sectors)
Capital investment should be focussed on producing ‘the maximum impact on the productive capacity of the economy’ but not primarily as generating jobs in the short-run (implicitly the inevitability of continuing high levels of unemployment is accepted pending a larger-scale resumption of outward migration?)
Frontload public spending cuts but in a way that increases efficiency ‘with a minimum impact on services’. ‘Cuts in expenditure now, with an agreed reform package, may well be the only way to achieve long-term reform’. (Fitzgerald rules out a Keynesian stimulus as the scope for borrowing is too constrained by the depth of pro-cyclical squander in the 97-07 period. He also acknowledges that cutting spending and wages will be deflationary and will postpone recovery in 2010 but believes that TINA).
Reform the welfare system to avoid creating ‘poverty traps’ or disincentives to returning to work (when such eventually becomes possible). (This can only mean lower welfare vis-a-vis wages)
Non-Standard Conclusions:
Taxes as a % of GNP should be raised to 45% over a number of years (with an ESRI preference for property and carbon taxes and some shifting in employer PRSI towards employees)
Tax child benefit but no generalised cuts in welfare rates.
Nearly all of the above runs directly contrary to the position taken by the ICTU (see ‘There is Still a Better, Fairer Way’) and by various progressive commentators (see for example
notesonthefront.typepad.com). In essence the disagreement centers on:
* The deflationary impact of pay cuts in general (as against the claim that such cuts will price us back into export markets and boost investor confidence and expectations).
* The need to prioritise job retention and creation through an investment package (as distinct from a lower capital spend suggested by Fitzgerald of around 4% of GNP)
* Prolonging the period of fiscal adjustment (as against a short, sharp snap before the economy bounces back in 2011 or 2012 – hopefully !)
* Defending all families – especially poorer families – in terms of welfare payments and living standards (as against withdrawing net payments to some households and reducing the ‘replacement rate’)
* Raising taxes towards 40-45% more quickly than that envisaged by Fitzgerald.
Fitzgerald makes two further points which should not be overlooked:
Indeed it was remarkable.
On this last point I must concur 110%.
Standard Dublin Consensus Conclusions:
Wages are too high and need to be cut by ‘7% over 3 years’ (in the public and private sectors)
Capital investment should be focussed on producing ‘the maximum impact on the productive capacity of the economy’ but not primarily as generating jobs in the short-run (implicitly the inevitability of continuing high levels of unemployment is accepted pending a larger-scale resumption of outward migration?)
Frontload public spending cuts but in a way that increases efficiency ‘with a minimum impact on services’. ‘Cuts in expenditure now, with an agreed reform package, may well be the only way to achieve long-term reform’. (Fitzgerald rules out a Keynesian stimulus as the scope for borrowing is too constrained by the depth of pro-cyclical squander in the 97-07 period. He also acknowledges that cutting spending and wages will be deflationary and will postpone recovery in 2010 but believes that TINA).
Reform the welfare system to avoid creating ‘poverty traps’ or disincentives to returning to work (when such eventually becomes possible). (This can only mean lower welfare vis-a-vis wages)
Non-Standard Conclusions:
Taxes as a % of GNP should be raised to 45% over a number of years (with an ESRI preference for property and carbon taxes and some shifting in employer PRSI towards employees)
Tax child benefit but no generalised cuts in welfare rates.
Nearly all of the above runs directly contrary to the position taken by the ICTU (see ‘There is Still a Better, Fairer Way’) and by various progressive commentators (see for example
notesonthefront.typepad.com). In essence the disagreement centers on:
* The deflationary impact of pay cuts in general (as against the claim that such cuts will price us back into export markets and boost investor confidence and expectations).
* The need to prioritise job retention and creation through an investment package (as distinct from a lower capital spend suggested by Fitzgerald of around 4% of GNP)
* Prolonging the period of fiscal adjustment (as against a short, sharp snap before the economy bounces back in 2011 or 2012 – hopefully !)
* Defending all families – especially poorer families – in terms of welfare payments and living standards (as against withdrawing net payments to some households and reducing the ‘replacement rate’)
* Raising taxes towards 40-45% more quickly than that envisaged by Fitzgerald.
Fitzgerald makes two further points which should not be overlooked:
My own view is that the 7% public service pay cut in March has made a significant dent in the difference between public and private differentials, while still leaving a substantial public sector premium. The tacit acceptance by the public sector of these cuts was quite a remarkable recognition of the crisis which the economy faces.
Indeed it was remarkable.
Before we can determine the appropriate path of fiscal policy over the next five years we must first decide on what is the long run level of public services that we want. Then the tax level will have to be set at an appropriate level to fund that level of services.
On this last point I must concur 110%.
Tuesday, 15 September 2009
We’re broke (O no we’re not)
Slí Eile: This is September 2009. We’re economically broke. Well not quite…The recent
Commission on Taxation Report has drawn attention to the matter of property tax – usually understood as applying to taxes on houses or residential houses. Residential homes are only one type of wealth. There is a vast array of wealth types from cash, shares, bonds, houses, buildings, lands to other types of immovable assets. Although three years of out date and firmly ensconced in the ‘pre-2008’ world, The Wealth of the Nation report by Pat O’Sullivan, Senior Economist in the Bank of Ireland Private Banking Group makes for interesting reading.
Some of the highlights from that Report include the following:
‘Net wealth’ of Irish households was estimated at €804bn in 2006 (965bn assets less 161 in debt)
Growth in 2006 was ‘one of the fastest growth rates in the OECD’
‘The asset base (excluding residential property) of the top 1% of the population increased by €14bn to €100bn, an increase of 16%’
‘Irish per capita wealth still ranks second among leading OECD countries’
‘We estimate that the number of millionaires increased by 10% to 33,000’
‘the top 1% of the population holds 20% of the wealth, the top 2% holds 30% and the top 5% holds 40%. However, if we exclude the value of housing wealth and focus primarily on financial wealth, the concentration of wealth increases. In this instance, 1% of the population accounts for around 34% of the wealth.’
That was 2006. It would be interesting to know the current position especially in light of the very visible toxic wastelands of half-finished housing estates and non-residential properties around the country. Monuments to hubris, risk gone mad, regulation my hat. For sure, residential and commercial property has been hammered since 2007 (50%?) and equity has taken a battering in 2008 (30%?) with some quiet recovery in recent months. However, the extent to which wealth is concentrated in the hands of very few individuals is incontrovertible. Composition of asset holdings and values are an area where information is somewhat limited and comparisons over time or across countries are hard to arrive at. It is easier to deal in information about income poverty. It is much more difficult to measure the extent of such elusive concepts as negative equity, current market value, long-term ‘hope’ value (otherwise known as Long-term Economic Value) and net assets.
A short-term downturn in the economy leading to a sudden drop in income can be buffeted by drawing on savings or disposal of assets. However, a prolonged period of unemployment or very low income (as in many smaller businesses and farms) can spell ruin for individuals and families.
Economic wealth is a stock at one point in time which potentially yields a flow of benefits over time. Normally, for national or public accounting purposes, expenditure is measured as a flow over 12 months. The total level of liabilities or promises to pay in the future are expressed as a stock of values and divided by the annual flow of income or expenditure. Hence, it is estimated that close to 60% of GDP in 2009 will be accounted for by all types of Government debt. However, some cash reserves and ‘off balance sheet’ assets can be set against the total debt to arrive at net debt. So much for Government debt. The level of personal and corporate debt in Ireland is enormous following the politically and tax-driven commercial & residential property bubble.
It would be interesting to have an overall view of all types of income, expenditure, assets and liabilities in Ireland – distinguishing between Irish households and domestic enterprises, on the one hand, and large-scale financial asset-holding companies parked here on the other. Some idea of the sheer scale of the latter can be gleaned from CSO data on ‘Resident Holdings of Foreign Portfolio Securities’.
The International Investment Position (IIP) comes some of the way to providing an overview of the value and composition of the balance sheet stock of Ireland’s foreign defined as ‘financial assets (i.e. the economy's financial claims on the rest of the world) and its foreign financial liabilities (or obligations to the rest of the world)’
The latest available figures indicate a total of €1.338 Trillion (yes trillion and not billion) in Irish resident holdings of ‘foreign portfolio securities’ (equity, bonds and various money market securities) on 31 December 2007 (claims on the rest of the world). Holdings by Irish ‘residents’ of US Treasury securities, alone, was close to $46billion in June of this year (up from $20billion in June of 2008) according to the US Treasury (table here)
That amount exceeds total holdings of US Treasury securities in any of these countries: India, Canada, France, Netherlands, Norway (Luxembourg holds over $100billion)
In another interesting comparison, as Michael Taft has pointed out
However, an unknown but extremely large proportion of this is accounted for by various financial funds located in Ireland (including, for example, some housed at the IFSC). Some of these include ‘corporate bodies who have a centre of economic interest located here, including branches of foreign-registered companies.’ Along with Luxembourg and Iceland, Ireland appears to be a major hub of cross-national financial flows and deposits – relative to its small size in terms of population and GDP.
The total extent of liabilities to the rest of the world is larger still. If we add Government, corporate debt we get €1.692 Trillion in March 2009
Out of this total, Government debt comes to a mere €60billion in March 2009 (up from €34bn in March 2008)
To get some idea Table 3 of the Report shows that of €2.267 Trillion, €1.181 is accounted for IFSC alone. There are other huge-scale foreign financial interests ‘parked here’ (in referring to such interests as parked I am assuming that such entities are availing of low taxes as well as other benefits). A small proportion of their total asset/liability position is represented by financial service production which enters into Irish GDP.
On the liabilities side, there are equally vast sums – the bulk of which is portfolio investment (obligations to the rest of the world).
Table 1 in that Report shows an additional €831 in ‘financial derivatives and trade credits’ on the asset side matched by €839bn on the liabilities side. To put this in perspective, total annual income in Ireland is projected at about €160 billion this year. So, we are talking about big sums.(The ‘net IIP’ position was just a tiny €31bn in 2007 – merely the entire size of projected tax revenue this year).
Irish banks wouldn’t be so heartless as to invest in overseas bonds rather than job-creating industry here in Ireland would they? Yes they would. An exclusively privately owned banking system runs for profit for people in the first place. What did the regulators ever do for us as Monty Python might have said. We need at least one State retail bank, one National Enterprise Recovery Corporation and one local community bank building on, and extending, the work of Credit Unions.
The best argument for retaining at least one State Retail Bank and not privitising all future nationalised banks is provided by the following:
"We have a growing population, full employment, strong job creation, rising household income, a high savings ratio together with strong retail sales and industrial production. This economy is in great shape and the outlook remains positive," Brian Goggin, Bank of Ireland Chief Executive said at a press briefing on the bank's results (Finfacts June 2007).
As Michael Hennigan wrote on 6 June 2007
“Irish Economy: No crash in sight nor credible strategy to maintain export-led growth in long-term; Overseas commercial property to remain investment of choice”
During the Great Famine of 1848 grain in plenty was being exported as millions starved and over a million emigrated in the immediate aftermath of that calamity. Without signalling a prophecy of doom or attempting to draw a serious comparison between what happened then and what might be coming our way in the coming decade: Is it possible as the Irish exchequer takes on the winding down of fictitious loans and asset values a whole generation is condemned to high personal income taxes, consumption taxes, borrowing to pay off the lenders, economic stagnation and resumption of outward migration? Nobody wants that to happen but if there is any basis for it in the future I cannot see how a much better educated, confident and fair-minded younger generation will put up with it. They might just be prepared to support a political stimulus package involving a different way forward to the neo-liberal Dublin Consensus that is a plague on our house.
Commission on Taxation Report has drawn attention to the matter of property tax – usually understood as applying to taxes on houses or residential houses. Residential homes are only one type of wealth. There is a vast array of wealth types from cash, shares, bonds, houses, buildings, lands to other types of immovable assets. Although three years of out date and firmly ensconced in the ‘pre-2008’ world, The Wealth of the Nation report by Pat O’Sullivan, Senior Economist in the Bank of Ireland Private Banking Group makes for interesting reading.
Some of the highlights from that Report include the following:
‘Net wealth’ of Irish households was estimated at €804bn in 2006 (965bn assets less 161 in debt)
Growth in 2006 was ‘one of the fastest growth rates in the OECD’
‘The asset base (excluding residential property) of the top 1% of the population increased by €14bn to €100bn, an increase of 16%’
‘Irish per capita wealth still ranks second among leading OECD countries’
‘We estimate that the number of millionaires increased by 10% to 33,000’
‘the top 1% of the population holds 20% of the wealth, the top 2% holds 30% and the top 5% holds 40%. However, if we exclude the value of housing wealth and focus primarily on financial wealth, the concentration of wealth increases. In this instance, 1% of the population accounts for around 34% of the wealth.’
That was 2006. It would be interesting to know the current position especially in light of the very visible toxic wastelands of half-finished housing estates and non-residential properties around the country. Monuments to hubris, risk gone mad, regulation my hat. For sure, residential and commercial property has been hammered since 2007 (50%?) and equity has taken a battering in 2008 (30%?) with some quiet recovery in recent months. However, the extent to which wealth is concentrated in the hands of very few individuals is incontrovertible. Composition of asset holdings and values are an area where information is somewhat limited and comparisons over time or across countries are hard to arrive at. It is easier to deal in information about income poverty. It is much more difficult to measure the extent of such elusive concepts as negative equity, current market value, long-term ‘hope’ value (otherwise known as Long-term Economic Value) and net assets.
A short-term downturn in the economy leading to a sudden drop in income can be buffeted by drawing on savings or disposal of assets. However, a prolonged period of unemployment or very low income (as in many smaller businesses and farms) can spell ruin for individuals and families.
Economic wealth is a stock at one point in time which potentially yields a flow of benefits over time. Normally, for national or public accounting purposes, expenditure is measured as a flow over 12 months. The total level of liabilities or promises to pay in the future are expressed as a stock of values and divided by the annual flow of income or expenditure. Hence, it is estimated that close to 60% of GDP in 2009 will be accounted for by all types of Government debt. However, some cash reserves and ‘off balance sheet’ assets can be set against the total debt to arrive at net debt. So much for Government debt. The level of personal and corporate debt in Ireland is enormous following the politically and tax-driven commercial & residential property bubble.
It would be interesting to have an overall view of all types of income, expenditure, assets and liabilities in Ireland – distinguishing between Irish households and domestic enterprises, on the one hand, and large-scale financial asset-holding companies parked here on the other. Some idea of the sheer scale of the latter can be gleaned from CSO data on ‘Resident Holdings of Foreign Portfolio Securities’.
The International Investment Position (IIP) comes some of the way to providing an overview of the value and composition of the balance sheet stock of Ireland’s foreign defined as ‘financial assets (i.e. the economy's financial claims on the rest of the world) and its foreign financial liabilities (or obligations to the rest of the world)’
The latest available figures indicate a total of €1.338 Trillion (yes trillion and not billion) in Irish resident holdings of ‘foreign portfolio securities’ (equity, bonds and various money market securities) on 31 December 2007 (claims on the rest of the world). Holdings by Irish ‘residents’ of US Treasury securities, alone, was close to $46billion in June of this year (up from $20billion in June of 2008) according to the US Treasury (table here)
That amount exceeds total holdings of US Treasury securities in any of these countries: India, Canada, France, Netherlands, Norway (Luxembourg holds over $100billion)
In another interesting comparison, as Michael Taft has pointed out
To put this in some perspective, Ireland’s €1.3 trillion held abroad compares to the foreign holdings of French residents of €2 trillion – even though the French economy is more than ten times larger than the Irish economy.
However, an unknown but extremely large proportion of this is accounted for by various financial funds located in Ireland (including, for example, some housed at the IFSC). Some of these include ‘corporate bodies who have a centre of economic interest located here, including branches of foreign-registered companies.’ Along with Luxembourg and Iceland, Ireland appears to be a major hub of cross-national financial flows and deposits – relative to its small size in terms of population and GDP.
The total extent of liabilities to the rest of the world is larger still. If we add Government, corporate debt we get €1.692 Trillion in March 2009
Out of this total, Government debt comes to a mere €60billion in March 2009 (up from €34bn in March 2008)
To get some idea Table 3 of the Report shows that of €2.267 Trillion, €1.181 is accounted for IFSC alone. There are other huge-scale foreign financial interests ‘parked here’ (in referring to such interests as parked I am assuming that such entities are availing of low taxes as well as other benefits). A small proportion of their total asset/liability position is represented by financial service production which enters into Irish GDP.
On the liabilities side, there are equally vast sums – the bulk of which is portfolio investment (obligations to the rest of the world).
Table 1 in that Report shows an additional €831 in ‘financial derivatives and trade credits’ on the asset side matched by €839bn on the liabilities side. To put this in perspective, total annual income in Ireland is projected at about €160 billion this year. So, we are talking about big sums.(The ‘net IIP’ position was just a tiny €31bn in 2007 – merely the entire size of projected tax revenue this year).
Irish banks wouldn’t be so heartless as to invest in overseas bonds rather than job-creating industry here in Ireland would they? Yes they would. An exclusively privately owned banking system runs for profit for people in the first place. What did the regulators ever do for us as Monty Python might have said. We need at least one State retail bank, one National Enterprise Recovery Corporation and one local community bank building on, and extending, the work of Credit Unions.
The best argument for retaining at least one State Retail Bank and not privitising all future nationalised banks is provided by the following:
"We have a growing population, full employment, strong job creation, rising household income, a high savings ratio together with strong retail sales and industrial production. This economy is in great shape and the outlook remains positive," Brian Goggin, Bank of Ireland Chief Executive said at a press briefing on the bank's results (Finfacts June 2007).
As Michael Hennigan wrote on 6 June 2007
“Irish Economy: No crash in sight nor credible strategy to maintain export-led growth in long-term; Overseas commercial property to remain investment of choice”
During the Great Famine of 1848 grain in plenty was being exported as millions starved and over a million emigrated in the immediate aftermath of that calamity. Without signalling a prophecy of doom or attempting to draw a serious comparison between what happened then and what might be coming our way in the coming decade: Is it possible as the Irish exchequer takes on the winding down of fictitious loans and asset values a whole generation is condemned to high personal income taxes, consumption taxes, borrowing to pay off the lenders, economic stagnation and resumption of outward migration? Nobody wants that to happen but if there is any basis for it in the future I cannot see how a much better educated, confident and fair-minded younger generation will put up with it. They might just be prepared to support a political stimulus package involving a different way forward to the neo-liberal Dublin Consensus that is a plague on our house.
Sunday, 6 September 2009
Past lessons, future policy
Michael Taft: With the news that the increase in unemployment is slowing down (though the range of missing numbers suggest that emigration may be rising at a considerable rate), let’s take a historical look at the last time Ireland emerged out of a recession with a high rate of unemployment. If unemployment tops out at between 14 percent and 16 percent over the next 18 months, how long will it take for unemployment to start falling?
In 1988 (the first year the internationally accepted ILO measurement was used) unemployment stood at 16.3 percent. By 1993 – with the Celtic Tiger growth ready to appear – unemployment remained stubbornly high at 15.7 percent, with the actual number of unemployed marginally higher than in 1988.
During this same period, annual GDP grew in volume terms by an average 4 percent. Employment, however, only grew by an annual average of 1.2 percent. Employment growth lagged considerably behind GDP growth.
The situation could have been much worse if we hadn’t benefitted from that ol’ standby – emigration. Between 1988 and 1993, over 100,000 had emigrated. Given that unemployment rose marginally in nominal terms during that period – from 217,000 to 220,000 – we can see what the effect would have been if people actually stayed in the land of their birth.
So, while GDP growth increased substantially, employment creation lagged behind and the only reason that the unemployment didn’t climb every higher was due to the economic safety valve of emigration. We should expect – and the IMF has warned everyone of this – that when GDP returns to growth sometime mid-to-late next year, unemployment may not start to deline for some time.
But there is one crucial factor we should be aware of during the late 1980s/early 1990s – something that is a bit of an embarrassment to the deflationists calling for massive public expenditure cuts; namely the role of the considerable stimulus expenditure engaged in by the government. During that period:
• Current expenditure increased by an average of 6.9 percent annually
• Capital expenditure increased by an average of 11.4 percent annually
In addition, during that period Ireland received another big stimulus in the form of European social and regional development funds. During the five-year period, this amounted €3.6 billion. This boosted public investment by 30 percent (in addition to the Government’s own public investment), and amounted to nearly 10 percent of our GNP in 1993.
Now compare that situation to what we are looking into over the next five years – severe cutbacks in current public expenditure coupled with a decimation of the capital budget. And all this without the benefit of EU investment funds.
Of course, we have to be careful in making comparisons between then and now. For instance, in the 1980s, the recession was relatively mild (GDP volume growth only contracted in one year). Agriculture played a more important role back then, while our export platform and infrastructural quality was relatively weak.
Still, a key issue which requires much more discussion is the role that increased public expenditure and investment played in eventually lowering unemployment, and its interaction with IDA policy, the devaluation and the emerging European single market. For while unemployment remained sluggishly high during the five year period we examined – starting in 1993, it fell quickly, from 15.7 percent to less than 7 percent in the following five year period.
Would this have happened without the massive stimulus the economy experienced? I would argue that it is doubtful. But what cannot be argued is the fact of that stimulus – something which the Dublin Consensus is in denial about.
In 1988 (the first year the internationally accepted ILO measurement was used) unemployment stood at 16.3 percent. By 1993 – with the Celtic Tiger growth ready to appear – unemployment remained stubbornly high at 15.7 percent, with the actual number of unemployed marginally higher than in 1988.
During this same period, annual GDP grew in volume terms by an average 4 percent. Employment, however, only grew by an annual average of 1.2 percent. Employment growth lagged considerably behind GDP growth.
The situation could have been much worse if we hadn’t benefitted from that ol’ standby – emigration. Between 1988 and 1993, over 100,000 had emigrated. Given that unemployment rose marginally in nominal terms during that period – from 217,000 to 220,000 – we can see what the effect would have been if people actually stayed in the land of their birth.
So, while GDP growth increased substantially, employment creation lagged behind and the only reason that the unemployment didn’t climb every higher was due to the economic safety valve of emigration. We should expect – and the IMF has warned everyone of this – that when GDP returns to growth sometime mid-to-late next year, unemployment may not start to deline for some time.
But there is one crucial factor we should be aware of during the late 1980s/early 1990s – something that is a bit of an embarrassment to the deflationists calling for massive public expenditure cuts; namely the role of the considerable stimulus expenditure engaged in by the government. During that period:
• Current expenditure increased by an average of 6.9 percent annually
• Capital expenditure increased by an average of 11.4 percent annually
In addition, during that period Ireland received another big stimulus in the form of European social and regional development funds. During the five-year period, this amounted €3.6 billion. This boosted public investment by 30 percent (in addition to the Government’s own public investment), and amounted to nearly 10 percent of our GNP in 1993.
Now compare that situation to what we are looking into over the next five years – severe cutbacks in current public expenditure coupled with a decimation of the capital budget. And all this without the benefit of EU investment funds.
Of course, we have to be careful in making comparisons between then and now. For instance, in the 1980s, the recession was relatively mild (GDP volume growth only contracted in one year). Agriculture played a more important role back then, while our export platform and infrastructural quality was relatively weak.
Still, a key issue which requires much more discussion is the role that increased public expenditure and investment played in eventually lowering unemployment, and its interaction with IDA policy, the devaluation and the emerging European single market. For while unemployment remained sluggishly high during the five year period we examined – starting in 1993, it fell quickly, from 15.7 percent to less than 7 percent in the following five year period.
Would this have happened without the massive stimulus the economy experienced? I would argue that it is doubtful. But what cannot be argued is the fact of that stimulus – something which the Dublin Consensus is in denial about.
Wednesday, 26 August 2009
Taxing Surveys
Slí Eile: Do you think the Government can tax its way out of its economic difficulties?
In answer to this online Irish Times poll, it is surprising that as many as 20% thought it could. I wonder what the proportion would be if, instead, the question was:
Do you think the Government can cut its way out of its economic difficulties?
or try this one:
Do you think the Government can borrow its way out of its economic difficulties?
What choices do you have? The implication with the 'tax the country out of its economic difficulties' question angle is that it tilts towards the view that spending has to be cut, or borrowing increased, or both. It’s a loaded question to start with.
My answer to the tax question is no. No, because tax increases, alone cannot generate the economic vitality to restore spending, confidence and job creation. Many things are involved. When it comes to fiscal policy we do best to:
Do no harm, by not adopting a deflationary approach which is exactly what Government is doing and will continue to do;
Redirect spending from areas of inefficiency and inequitable subsidisation of the well-off, to areas of greater impact on equality and public service delivery;
Increase taxes by broadening the tax base, removing many of the inequitable tax breaks, increasing carbon taxes, property taxes and marginal tax rates on high-income earners;
Use a range of 'real economy' measures to complement a strategic focus on job creation, capacity building;
Use off-balance sheet borrowings through a National and European Recovery Bond.
In answer to this online Irish Times poll, it is surprising that as many as 20% thought it could. I wonder what the proportion would be if, instead, the question was:
Do you think the Government can cut its way out of its economic difficulties?
or try this one:
Do you think the Government can borrow its way out of its economic difficulties?
What choices do you have? The implication with the 'tax the country out of its economic difficulties' question angle is that it tilts towards the view that spending has to be cut, or borrowing increased, or both. It’s a loaded question to start with.
My answer to the tax question is no. No, because tax increases, alone cannot generate the economic vitality to restore spending, confidence and job creation. Many things are involved. When it comes to fiscal policy we do best to:
Do no harm, by not adopting a deflationary approach which is exactly what Government is doing and will continue to do;
Redirect spending from areas of inefficiency and inequitable subsidisation of the well-off, to areas of greater impact on equality and public service delivery;
Increase taxes by broadening the tax base, removing many of the inequitable tax breaks, increasing carbon taxes, property taxes and marginal tax rates on high-income earners;
Use a range of 'real economy' measures to complement a strategic focus on job creation, capacity building;
Use off-balance sheet borrowings through a National and European Recovery Bond.
Wednesday, 29 July 2009
Dublin Consensus rattled by Begg article
Slí Eile: Nothing better to create some heat over on irisheconomy.ie or in follow-up comments to an op ed on the Irish Times than an article by ICTU General Secretary, David Begg, arguing against deflation and for a fiscal stimulus. Fulminations followed in quick succession. Interesting to see such passion, conviction and certitude. Remember, a key point of the Dublin Consensus is that There Is No Other Way. Say it often enough, loud enough and confidently enough and the message will stick especially when it is backed by stylised and 'obvious facts'. One commentator on irisheconomy.ie even commented: 'Begg’s quoting of Joe Stiglitz’s comments on the US fiscal stimulus in support of his (Begg’s) critique of Irish fiscal policy is quite ridiculous.' Others were even more strident and impolite.
Michael Taft has been contesting some of these 'obvious facts'.
David Begg was spot on in drawing attention to the very dangerous policy currently pursued. Analysis based on modelling of the Irish economy shows how various policy scenarios including pay cuts, public spending cuts and international recovery would impact on GDP, public sector borrowing and consumption (which I will hasten to add doesn't deter the ESRI from joining the Dublin Consensus). Public sector pay cuts offer extremely limited returns in terms of borrowing reductions.
Two key point that should not be lost in today's article by David Begg are the following:
The first point is vital because I sense that the room for rational debate based on evidence, research and values is very limited because:
In conclusion - the switching to terminology of 'devaluation' over on irisheconomy.ie is very misleading. The 1986 and 1993 currency devaluations adjusted the prices of Irish exports on world markets and imports on Irish markets. It also kept inflation high for a time. Many differences apply between now and then, one of which was the extent to which product and labour markets internationally played a role in helping - eventually - Irish recovery. A so-called real devaluation now based, on wage-cutting, is a dangerous and possibly ruinous gamble. This was the point of Begg's article. The alternative is targetted stimulus based on recovery bonds in the context of a high national savings rate (as consumers are scared to spend) and the beginnings of a strategic investment in skills, jobs, innovation, new traded services. Otherwise, we may face a missed decade like we had in the 1950s, and like Finland initially underwent in 1991-94. Can we not learn from this? There is another way.
Michael Taft has been contesting some of these 'obvious facts'.
David Begg was spot on in drawing attention to the very dangerous policy currently pursued. Analysis based on modelling of the Irish economy shows how various policy scenarios including pay cuts, public spending cuts and international recovery would impact on GDP, public sector borrowing and consumption (which I will hasten to add doesn't deter the ESRI from joining the Dublin Consensus). Public sector pay cuts offer extremely limited returns in terms of borrowing reductions.
Two key point that should not be lost in today's article by David Begg are the following:
1 "A very formidable deflationary coalition has been assembled in support of current policy. This was in evidence at the MacGill Summer School – an irony given Patrick MacGill’s commitment to working people – and it includes many of the State agencies like the ESRI and IDA."
2 ".... there is a growing chasm of scepticism between the elite and the population at large concerning the efficacy of the policy prescription."The first point is vital because I sense that the room for rational debate based on evidence, research and values is very limited because:
- openess to debate and conflicting ideas is not as welcome as it should be in state organisations
- the Irish economics profession is predominantly ... well, right-wing (how else can one put it)
- issues which have a long-term implication (environment, social equality, democractic reform) are crowded out due to an unusually high degree of short-termism - hence, for example, Oireachtas reform is reduced to a discussion about how many T.D.s we should have.
In conclusion - the switching to terminology of 'devaluation' over on irisheconomy.ie is very misleading. The 1986 and 1993 currency devaluations adjusted the prices of Irish exports on world markets and imports on Irish markets. It also kept inflation high for a time. Many differences apply between now and then, one of which was the extent to which product and labour markets internationally played a role in helping - eventually - Irish recovery. A so-called real devaluation now based, on wage-cutting, is a dangerous and possibly ruinous gamble. This was the point of Begg's article. The alternative is targetted stimulus based on recovery bonds in the context of a high national savings rate (as consumers are scared to spend) and the beginnings of a strategic investment in skills, jobs, innovation, new traded services. Otherwise, we may face a missed decade like we had in the 1950s, and like Finland initially underwent in 1991-94. Can we not learn from this? There is another way.
Wednesday, 1 July 2009
The Dublin Consensus
Sli Eile: We recall the term ‘Washington Consensus’ as it was first coined in the 1980s. Dani Rodrik summed it up as:
Stablize, Privatise, Liberalise.
Part of the recipe was to get your ‘macro balances in order’
In Table 1 of his paper, Rodrik (a critic of same) lists the 10 Washington Consensus principles as:
1. Fiscal discipline
2. Reorientation of public expenditures
3. Tax reform
4. Financial liberalization
5. Unified and competitive exchange rates
6. Trade liberalization
7. Openness to DFI
8. Privatization
9. Deregulation
10. Secure Property Rights
Sounds familiar?
Rodrik outlines a supplementary list in the ‘Augmented Washington Consensus’ (sounds a bit less familiar) as follows:
11. Corporate governance
12. Anti-corruption
13. Flexible labor markets
14. WTO agreements
15. Financial codes and standards
16. “Prudent” capital-account opening
17. Non-intermediate exchange rate regimes
18. Independent central banks/inflation targeting
19. Social safety nets
20. Targeted poverty reduction
I suggest that there is, already, a real ‘Dublin Consensus’ and it goes as follows:
1. Sort out Banking through some form of toxic-containment (folks differ on the details)
2. Frontload big, immediate cuts in nominal wages in the private and especially the public sectors (real ‘plain vanilla’ cuts and not just voluntary contributions from the judiciary, contrived ‘pension’ levies and various stealth charges)
3. Frontload big, immediate cuts in public spending across the board from pay (see above) to social welfare (‘the highest in Europe’ false claim) to ‘wasteful’ capital projects to other items
4. Bring the low and middle-income groups back into the tax net
5. Downsize and reform the public sector
There are a few supplementaries like privitising some state assets – but the core of the Dublin Consensus is captured in the above five points. This is a real, audible and visible consensus from the pages of the Irish Times to learned articles and conference papers to ‘economics for the simple’ on the public airways – and of course many but not all the comments among our separated brethren on irisheconomy.ie.
By the way, I completely disagree with the view that the ‘left’ is in any way winning the economic argument.
The right is winning hands down and we are looking at, potentially, the most deflationary fiscal stance since at least the 1950s and further erosion in our already weak public and social infrastructure – relative to the standard of provision and living standards people have become accustomed to following the Celtic Tiger.
So, when journalist Sarah Carey writing in today’s Irish Times argues that the ICTU should roll over and declare:
Is there no other show in town?
Has the Dublin consensus won?
Should we fold up, go home and concede that the logic of market economics, international finances, a failed domestic banking model and an overwhelming media, economics and political consensus that the only path to recovery is through cuts, more cuts, unemployment and dramatic falls in living standards. Nobody likes to say it quite like this – but that is what most people are assuming – there is no other way – we have to price ourselves back into markets, we have to balance the public books fast and hold on until the tide comes back in on an international recovery.
The debate about jobs subsidies is a deflection.
Whether or not you think such subsidies will work is not the point. My original blog questioned the evidence that they would work and implied that other uses of this expenditure would be more effective. At this point in time it is hard to cast judgment since we have no details or analysis beyond a few media leaks. And there is no certainty on where different interests stand on the various issues. The point is that we need to move away from marginal debates about relatively marginal issues to confronting the real issues:
1. Domestic fiscal stimulus versus profound fiscal deflation for 2009-2012/13
2. Skills, innovation and growing the indigenous economy on world markets versus business as usual depending on FDI and a relatively protected and cosseted non-traded sector (as in price controls, costs and rigid work practices in the case of the public and civil service)
3. Corporate governance change versus cosmetic name change
4. Finding another way of dealing with banking rather than bleeding the whole country with a blanket cheque to recapitalise the failed (with the bail-out of Anglo-Irish ultimately costing more than an entire year’s education budget)
This is where the real debate needs to be reclaimed and the Dublin Consensus challenged. Self-proclaimed progressive and left folk including public sectors unions need to get serious about reform of the public service (which is one area where the Dublin Consensus is partially right) – how can we expect people to buy-into Scandinavian tax levels and redistribution policies unless we reform, root and branch, a slowing-moving, under-funded, under-staffed (yes I meant under-staffed) and inefficient public service operating in a very inefficient manner and subject to all sorts of political constraints and centralisation that is out of line with 21st Century public management.
(Glad that progressive economy trumps Grey’s Anatomy).
Stablize, Privatise, Liberalise.
Part of the recipe was to get your ‘macro balances in order’
In Table 1 of his paper, Rodrik (a critic of same) lists the 10 Washington Consensus principles as:
1. Fiscal discipline
2. Reorientation of public expenditures
3. Tax reform
4. Financial liberalization
5. Unified and competitive exchange rates
6. Trade liberalization
7. Openness to DFI
8. Privatization
9. Deregulation
10. Secure Property Rights
Sounds familiar?
Rodrik outlines a supplementary list in the ‘Augmented Washington Consensus’ (sounds a bit less familiar) as follows:
11. Corporate governance
12. Anti-corruption
13. Flexible labor markets
14. WTO agreements
15. Financial codes and standards
16. “Prudent” capital-account opening
17. Non-intermediate exchange rate regimes
18. Independent central banks/inflation targeting
19. Social safety nets
20. Targeted poverty reduction
I suggest that there is, already, a real ‘Dublin Consensus’ and it goes as follows:
1. Sort out Banking through some form of toxic-containment (folks differ on the details)
2. Frontload big, immediate cuts in nominal wages in the private and especially the public sectors (real ‘plain vanilla’ cuts and not just voluntary contributions from the judiciary, contrived ‘pension’ levies and various stealth charges)
3. Frontload big, immediate cuts in public spending across the board from pay (see above) to social welfare (‘the highest in Europe’ false claim) to ‘wasteful’ capital projects to other items
4. Bring the low and middle-income groups back into the tax net
5. Downsize and reform the public sector
There are a few supplementaries like privitising some state assets – but the core of the Dublin Consensus is captured in the above five points. This is a real, audible and visible consensus from the pages of the Irish Times to learned articles and conference papers to ‘economics for the simple’ on the public airways – and of course many but not all the comments among our separated brethren on irisheconomy.ie.
By the way, I completely disagree with the view that the ‘left’ is in any way winning the economic argument.
The right is winning hands down and we are looking at, potentially, the most deflationary fiscal stance since at least the 1950s and further erosion in our already weak public and social infrastructure – relative to the standard of provision and living standards people have become accustomed to following the Celtic Tiger.
So, when journalist Sarah Carey writing in today’s Irish Times argues that the ICTU should roll over and declare:
'Comrades, I have nothing to offer you but cuts and taxes. The deeper the pain now, the quicker all this will be over’we have to ask:
Is there no other show in town?
Has the Dublin consensus won?
Should we fold up, go home and concede that the logic of market economics, international finances, a failed domestic banking model and an overwhelming media, economics and political consensus that the only path to recovery is through cuts, more cuts, unemployment and dramatic falls in living standards. Nobody likes to say it quite like this – but that is what most people are assuming – there is no other way – we have to price ourselves back into markets, we have to balance the public books fast and hold on until the tide comes back in on an international recovery.
The debate about jobs subsidies is a deflection.
Whether or not you think such subsidies will work is not the point. My original blog questioned the evidence that they would work and implied that other uses of this expenditure would be more effective. At this point in time it is hard to cast judgment since we have no details or analysis beyond a few media leaks. And there is no certainty on where different interests stand on the various issues. The point is that we need to move away from marginal debates about relatively marginal issues to confronting the real issues:
1. Domestic fiscal stimulus versus profound fiscal deflation for 2009-2012/13
2. Skills, innovation and growing the indigenous economy on world markets versus business as usual depending on FDI and a relatively protected and cosseted non-traded sector (as in price controls, costs and rigid work practices in the case of the public and civil service)
3. Corporate governance change versus cosmetic name change
4. Finding another way of dealing with banking rather than bleeding the whole country with a blanket cheque to recapitalise the failed (with the bail-out of Anglo-Irish ultimately costing more than an entire year’s education budget)
This is where the real debate needs to be reclaimed and the Dublin Consensus challenged. Self-proclaimed progressive and left folk including public sectors unions need to get serious about reform of the public service (which is one area where the Dublin Consensus is partially right) – how can we expect people to buy-into Scandinavian tax levels and redistribution policies unless we reform, root and branch, a slowing-moving, under-funded, under-staffed (yes I meant under-staffed) and inefficient public service operating in a very inefficient manner and subject to all sorts of political constraints and centralisation that is out of line with 21st Century public management.
(Glad that progressive economy trumps Grey’s Anatomy).
Thursday, 18 June 2009
What did you do during the Great Recession, Grandad?
Slí Eile: Some time in the future this question will be asked and, perhaps, the answer will be (at least in an Irish context):
A small number of us discussed a domestic fiscal stimulus and likely multipliers. And then what? In what could be considered an extraordinary article (‘ Instead of a stimulus package we have gone in the other direction. It could be the worst own goal in our history’) written by Michael Casey (formerly of the Central Bank) and tucked away on page 10 of the ‘Innovation’ Supplement published by the Irish Times the fall-out from not pursuing a fiscal stimulus package is considered. You would think that the subject might get a bigger airing in domestSearch in vain for a considered view on this. Economic textbooks produced for the Irish market deal with Keynesian multipliers like an elderly relative in a nursing home to be rounded off with the assertion that ‘it doesn’t apply here’ (small open economy and all that). Neither recent Economic Crises workshops in Dublin, or publications of the ESRI or other macro-economists deal with the issue in any depth. An exception is to be found in the current edition of the ESRI Economic and Social Review, where Philip Lane concludes that the appropriate response, here, is to stick to the medicine with - at best targetted investment in key infrastructure areas - even though the US, EU and other jurisdictions are following some form of fiscal stimulus approach to a greater or lesser extent (1.5% of GDP in the case of the EU as a whole). Michael Casey writes:
Evidence from the IMF and World Bank indicates that the majority of countries fail to complete three-year stabilisations; the pain and civil unrest almost invariably throws the programmes off track. In the few cases where programmes have been successful, the governments involved have been able to convince people that there is light at the end of the tunnel. In Ireland, the absence of a plan is regrettable.
In the mid-1950s there was a fiscal stabilisation that lasted only a year. The economy nose-dived. But it led to the momentous First Programme for Economic Expansion - a plan that gave hope and a feeling that someone was minding the store. What are the chances of that kind of enlightened follow-up this time?
A small number of us discussed a domestic fiscal stimulus and likely multipliers. And then what? In what could be considered an extraordinary article (‘ Instead of a stimulus package we have gone in the other direction. It could be the worst own goal in our history’) written by Michael Casey (formerly of the Central Bank) and tucked away on page 10 of the ‘Innovation’ Supplement published by the Irish Times the fall-out from not pursuing a fiscal stimulus package is considered. You would think that the subject might get a bigger airing in domestSearch in vain for a considered view on this. Economic textbooks produced for the Irish market deal with Keynesian multipliers like an elderly relative in a nursing home to be rounded off with the assertion that ‘it doesn’t apply here’ (small open economy and all that). Neither recent Economic Crises workshops in Dublin, or publications of the ESRI or other macro-economists deal with the issue in any depth. An exception is to be found in the current edition of the ESRI Economic and Social Review, where Philip Lane concludes that the appropriate response, here, is to stick to the medicine with - at best targetted investment in key infrastructure areas - even though the US, EU and other jurisdictions are following some form of fiscal stimulus approach to a greater or lesser extent (1.5% of GDP in the case of the EU as a whole). Michael Casey writes:
Evidence from the IMF and World Bank indicates that the majority of countries fail to complete three-year stabilisations; the pain and civil unrest almost invariably throws the programmes off track. In the few cases where programmes have been successful, the governments involved have been able to convince people that there is light at the end of the tunnel. In Ireland, the absence of a plan is regrettable.
In the mid-1950s there was a fiscal stabilisation that lasted only a year. The economy nose-dived. But it led to the momentous First Programme for Economic Expansion - a plan that gave hope and a feeling that someone was minding the store. What are the chances of that kind of enlightened follow-up this time?
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