Nat O'Connor: In the spirit of Kennedy, asking us to think of what we can do for our country, President McAleese has launched a national competition: Your Country Your Call.
"Your Country, Your Call gives you the chance to share your creativity to give life to new industry, revitalise or revolutionise an existing market, or even change the way we do business entirely. It's not about creating new products. It's about creating something that will make a long term positive impact on the future of Ireland, its people, and its economy"
Rather aptly, the competition website has a 'ticking clock' with 72 days allowed for entries. The top 20 ideas will be listed and two final winners will receive €500,000 and other support to implement their ideas.
You can read more about it in the Examiner or Irish Times (which also summarised the competition rules).
This competition is an open door to give some progressive ideas a wider hearing...
Showing posts with label recovery. Show all posts
Showing posts with label recovery. Show all posts
Thursday, 18 February 2010
Thursday, 28 January 2010
The State of the US
Nat O'Connor: I'm sure I'm not the only one who watched President Obama's State of the Union address to Congress. (Various versions of it are on YouTube, including here). I'd be interested to hear any comments you have on it.
It provided an interesting summary of the major steps that were taken in the USA to combat recession. And one can compare with what was done here. It's also interesting to see Obama's proposals for continued major reforms despite the recession.
President Obama said that he "hated" the bank bailout, but thought it was necessary. He noted that the US had recovered most of the money spent on recovering the banks, and his proposed levy on major institutions was designed to recoup the rest, so that taxpayers do not lose out. Is there much chance of taxpayers being 100 per cent paid back for the bank bailout here? Would Irish banks (once bailed out) have the capacity to pay a significant levy to bridge the gap?
He spoke about making 25 tax cuts, benefitting 95 per cent of working families. He also noted that income tax wasn't raised for anyone. Meanwhile, we had the income levy that affected everyone, and the pension levy on public servants. Our tax base simply collapsed without any cuts.
Obama's primary focus in 2010 is to be jobs, he said, and outlined some details of a Jobs Bill to be put before Congress. For example, his solution to the problem of credit flow was to take $30 billion of the levy from Wall Street banks and give it to community banks to lend to small businesses. Again, could our banks provide enough funds through a levy in order to fund such a scheme?
While admitting the $1 trillion added to the US national debt, Obama emphasised the role of the Recovery Act in developing infrastructure, such as high speed rail and clean energy facilities, to make up for the US lagging behind other countries. You might call this a classic case of counter-cyclical investment by the state in useful infrastructure that will help generate economic growth in the future. (At the same time, Obama is not a pure Keynesian. Many of his proposals are tax cuts or tax breaks).
However, despite the estimated 2 million jobs created by the stimulus package, this is overshadowed by the 7 million jobs lost in the recession. Hence, Obama spoke of the need for a long-term plan for economic growth; including "real reform" of the banking/financial system, major investment in basic research and various proposals about energy (including new generation nuclear power plants, offshore oil and gas development, biofuels and clean coal technologies). He spoke of making clean energy profitable (presumably by carbon tax or green subsidy) and the need to develop the US as a leading clean energy economy. He set an ambitious target to double exports in five years and compete for new markets, with some reform of export controls to help this. There seems to be a real risk that our "national plan" is to wait for the worst to be over and then get back to business as usual, with little real reform of finance/banking and no real strategy to diversify the economy.
In terms of skills and education, Obama proposed the end of the tax subsidy to banks for providing student loans and the conversion of that expenditure into $10 thousand tax breaks for families paying for college. He also took on the question of student debt, setting a maximum of 10 per cent of wages to be paid towards student loans per year, and for outstanding debt to be forgiven after 20 years (or 10 years if they enter public service). Personal debt is going to be a burden in Ireland for years to come. Could debt forgiveness become easier here than outright bankruptcy?
Obama also spoke about propping up house prices and helping people move to more affordable mortgages. Mortgages are going to become a major burden on many families as ECB interest rates rise (as they will). Major reform of the mortgage market may be required here to allow people to move to keep costs affordable. Also, our house prices were way above the equivalent US values (in terms of relating prices to likely rental income). So, we need to let the price of housing fall and stay lower, despite the obvious damage that has done to families' major asset and investments like property-based pension schemes.
In his speech, Obama also re-stated his case for health insurance reform, as well as speaking about the wars in Iraq and Afghanistan. He said he will use an executive order to progress a commission to look at ways of dealing with the US's enormous debt. He also spoke against the election spending ruling by the Supreme Court and spoke of lobbying reform. He spoke of civil rights, including taking steps to ensure equal pay for equal work for women.
At one point, Obama challenged the elected members of Congress to stop thinking solely about the next election, and to think about the needs of the next generation.
Good ideas?
It provided an interesting summary of the major steps that were taken in the USA to combat recession. And one can compare with what was done here. It's also interesting to see Obama's proposals for continued major reforms despite the recession.
President Obama said that he "hated" the bank bailout, but thought it was necessary. He noted that the US had recovered most of the money spent on recovering the banks, and his proposed levy on major institutions was designed to recoup the rest, so that taxpayers do not lose out. Is there much chance of taxpayers being 100 per cent paid back for the bank bailout here? Would Irish banks (once bailed out) have the capacity to pay a significant levy to bridge the gap?
He spoke about making 25 tax cuts, benefitting 95 per cent of working families. He also noted that income tax wasn't raised for anyone. Meanwhile, we had the income levy that affected everyone, and the pension levy on public servants. Our tax base simply collapsed without any cuts.
Obama's primary focus in 2010 is to be jobs, he said, and outlined some details of a Jobs Bill to be put before Congress. For example, his solution to the problem of credit flow was to take $30 billion of the levy from Wall Street banks and give it to community banks to lend to small businesses. Again, could our banks provide enough funds through a levy in order to fund such a scheme?
While admitting the $1 trillion added to the US national debt, Obama emphasised the role of the Recovery Act in developing infrastructure, such as high speed rail and clean energy facilities, to make up for the US lagging behind other countries. You might call this a classic case of counter-cyclical investment by the state in useful infrastructure that will help generate economic growth in the future. (At the same time, Obama is not a pure Keynesian. Many of his proposals are tax cuts or tax breaks).
However, despite the estimated 2 million jobs created by the stimulus package, this is overshadowed by the 7 million jobs lost in the recession. Hence, Obama spoke of the need for a long-term plan for economic growth; including "real reform" of the banking/financial system, major investment in basic research and various proposals about energy (including new generation nuclear power plants, offshore oil and gas development, biofuels and clean coal technologies). He spoke of making clean energy profitable (presumably by carbon tax or green subsidy) and the need to develop the US as a leading clean energy economy. He set an ambitious target to double exports in five years and compete for new markets, with some reform of export controls to help this. There seems to be a real risk that our "national plan" is to wait for the worst to be over and then get back to business as usual, with little real reform of finance/banking and no real strategy to diversify the economy.
In terms of skills and education, Obama proposed the end of the tax subsidy to banks for providing student loans and the conversion of that expenditure into $10 thousand tax breaks for families paying for college. He also took on the question of student debt, setting a maximum of 10 per cent of wages to be paid towards student loans per year, and for outstanding debt to be forgiven after 20 years (or 10 years if they enter public service). Personal debt is going to be a burden in Ireland for years to come. Could debt forgiveness become easier here than outright bankruptcy?
Obama also spoke about propping up house prices and helping people move to more affordable mortgages. Mortgages are going to become a major burden on many families as ECB interest rates rise (as they will). Major reform of the mortgage market may be required here to allow people to move to keep costs affordable. Also, our house prices were way above the equivalent US values (in terms of relating prices to likely rental income). So, we need to let the price of housing fall and stay lower, despite the obvious damage that has done to families' major asset and investments like property-based pension schemes.
In his speech, Obama also re-stated his case for health insurance reform, as well as speaking about the wars in Iraq and Afghanistan. He said he will use an executive order to progress a commission to look at ways of dealing with the US's enormous debt. He also spoke against the election spending ruling by the Supreme Court and spoke of lobbying reform. He spoke of civil rights, including taking steps to ensure equal pay for equal work for women.
At one point, Obama challenged the elected members of Congress to stop thinking solely about the next election, and to think about the needs of the next generation.
Good ideas?
Wednesday, 13 January 2010
A Progressive Plan for Dublin (and the Country)?
Nat O'Connor: Dublin City Council have launched the Draft Dublin City Development Plan 2011-2017 and are actively seeking "conversations with, and feedback from, citizens, thinkers, agencies and other stakeholders."
Many commentators have asked where is the Government's plan for economic recovery, jobs and sustainable development. In the absence of a national plan, the Dublin plan might be the nearest thing we've got. So, with the acknowledgement that not everything will be apt for those living and working outside of the greater Dublin area, I thought it was well worth asking whether the Dublin plan is progressive and a possible model for sustainable economic development nationally.
The plan's vision statement is premised with the following message:
"It would be folly to adopt projections from either the economic boom years or the recent downturn as the basis for a vision for the city. Instead, the city must, collectively through its citizens and civic leaders, develop a shared vision of what sort of city we aspire to, not in the six-year lifetime of a development plan, but over the next 25 to 30 years. It is only by developing a shared vision for Dublin that we can deliver the core strategies of each successive Development Plan as crucial stepping stones towards the long term vision. This Development Plan is not so much based on short-term forecasts, but on ‘backcasting’ from the 30-year vision. Without a vision which enjoys broad support, short-term, often competing interests will prevail, ultimately to the detriment of the city." You could insert Ireland for Dublin and country for city in the above, and you would have the kind of positive, forward-looking statement that has been missing on the national level.
The Vision for the City is:
"Within the next 25 to 30 years, Dublin will have an established international reputation as one of the most sustainable, dynamic and resourceful city regions in Europe. Dublin, through the shared vision of its citizens and civic leaders, will be a beautiful, compact city, with a
distinct character, a vibrant culture and a diverse, smart, green, innovation-based economy. It will be a socially inclusive city of urban neighbourhoods, all connected by an exemplary public transport, cycling and walking system and interwoven with a quality bio-diverse greenspace network. In short, the vision is for a capital city where people will seek to live, work and experience as matter of choice."
The plan covers six themes: Economic, Social, Cultural, Urban Form and Spatial, Movement, and Environmental.
Obviously, the plan in incomplete from a national perspective, as the city council cannot comment on health infrastructure, social welfare, criminal justice or many other policy areas. Nevertheless, the broad thrust of the plan is 'progressive economics', insofar as economic development is not just described in terms of 'growth' but it seen as built on sustainability and the provision of an attractive, well-run place where people would want to live and work, and which would both foster native creativity and attract highly-skilled mobile workers from around the globe. Those of you who are most interested in a strictly economic perspective might be interested in the proposals in Chapter 9 'Revitalising the City's Economy'.
The plan has long lists of policies and objectives; 313 policies and 214 objectives in total, across nine areas:
- Shaping the City
- Connecting and Sustaining the City's Infrastructure
- Greening the City
- Fostering Dublin’s Character and Culture
- Making Dublin the Heart of the Region
- Revitalising the City’s Economy
- Strengthening the City as the National Retail Destination
- Providing Quality Homes in a Compact City
- Creating Goods Neighbourhoods and Successful Communities
(For those interested in local government issues, the policies are also a useful list of the things that the council currently does.)
It is worth noting the verbs used in the plan, in order to get a feel for how aspirational it is. For example, a lage number of policies begin with verbs that indicate the city council's reliance on external actors (state or private): 85 policies begin with the verb "promote", 26 with "support", 12 with "encourage" and 10 with "facilitate". In contast, more active verbs are rarer. Only 20 policies begin with "ensure", 16 with "protect" and 8 with "require". The objectives have a more even balance between weak and strong verbs , with 10 "facilitate", 11 "support" and 13 "promote" versus 16 "implement", 10 "provide" and "6 ensure". This is only a crude analysis, but it is a reminder that this kind of plan requires a lot of public-private co-operation as well as joined-up-government.
I am particularly struck by the various means in which the city council is attracting feedback from Dubliners. The Irish Times reports that "the facilities at the Wood Quay Venue will allow the public to make video submissions on the plan or to use an interactive map to see how the plan will affect their neighbourhood". In addition, there is an online submissions form for comments and suggestion, and an online discussiuon forum for anyone who wants to discuss the plan in detail.
I am not going to start a critique of the plan right now. I really just wanted to open it up as a topic for discussion. If nothing else, I think it is good that they suggest "developing a shared vision" for the future. That's what all of Ireland needs right now.
Many commentators have asked where is the Government's plan for economic recovery, jobs and sustainable development. In the absence of a national plan, the Dublin plan might be the nearest thing we've got. So, with the acknowledgement that not everything will be apt for those living and working outside of the greater Dublin area, I thought it was well worth asking whether the Dublin plan is progressive and a possible model for sustainable economic development nationally.
The plan's vision statement is premised with the following message:
"It would be folly to adopt projections from either the economic boom years or the recent downturn as the basis for a vision for the city. Instead, the city must, collectively through its citizens and civic leaders, develop a shared vision of what sort of city we aspire to, not in the six-year lifetime of a development plan, but over the next 25 to 30 years. It is only by developing a shared vision for Dublin that we can deliver the core strategies of each successive Development Plan as crucial stepping stones towards the long term vision. This Development Plan is not so much based on short-term forecasts, but on ‘backcasting’ from the 30-year vision. Without a vision which enjoys broad support, short-term, often competing interests will prevail, ultimately to the detriment of the city." You could insert Ireland for Dublin and country for city in the above, and you would have the kind of positive, forward-looking statement that has been missing on the national level.
The Vision for the City is:
"Within the next 25 to 30 years, Dublin will have an established international reputation as one of the most sustainable, dynamic and resourceful city regions in Europe. Dublin, through the shared vision of its citizens and civic leaders, will be a beautiful, compact city, with a
distinct character, a vibrant culture and a diverse, smart, green, innovation-based economy. It will be a socially inclusive city of urban neighbourhoods, all connected by an exemplary public transport, cycling and walking system and interwoven with a quality bio-diverse greenspace network. In short, the vision is for a capital city where people will seek to live, work and experience as matter of choice."
The plan covers six themes: Economic, Social, Cultural, Urban Form and Spatial, Movement, and Environmental.
Obviously, the plan in incomplete from a national perspective, as the city council cannot comment on health infrastructure, social welfare, criminal justice or many other policy areas. Nevertheless, the broad thrust of the plan is 'progressive economics', insofar as economic development is not just described in terms of 'growth' but it seen as built on sustainability and the provision of an attractive, well-run place where people would want to live and work, and which would both foster native creativity and attract highly-skilled mobile workers from around the globe. Those of you who are most interested in a strictly economic perspective might be interested in the proposals in Chapter 9 'Revitalising the City's Economy'.
The plan has long lists of policies and objectives; 313 policies and 214 objectives in total, across nine areas:
- Shaping the City
- Connecting and Sustaining the City's Infrastructure
- Greening the City
- Fostering Dublin’s Character and Culture
- Making Dublin the Heart of the Region
- Revitalising the City’s Economy
- Strengthening the City as the National Retail Destination
- Providing Quality Homes in a Compact City
- Creating Goods Neighbourhoods and Successful Communities
(For those interested in local government issues, the policies are also a useful list of the things that the council currently does.)
It is worth noting the verbs used in the plan, in order to get a feel for how aspirational it is. For example, a lage number of policies begin with verbs that indicate the city council's reliance on external actors (state or private): 85 policies begin with the verb "promote", 26 with "support", 12 with "encourage" and 10 with "facilitate". In contast, more active verbs are rarer. Only 20 policies begin with "ensure", 16 with "protect" and 8 with "require". The objectives have a more even balance between weak and strong verbs , with 10 "facilitate", 11 "support" and 13 "promote" versus 16 "implement", 10 "provide" and "6 ensure". This is only a crude analysis, but it is a reminder that this kind of plan requires a lot of public-private co-operation as well as joined-up-government.
I am particularly struck by the various means in which the city council is attracting feedback from Dubliners. The Irish Times reports that "the facilities at the Wood Quay Venue will allow the public to make video submissions on the plan or to use an interactive map to see how the plan will affect their neighbourhood". In addition, there is an online submissions form for comments and suggestion, and an online discussiuon forum for anyone who wants to discuss the plan in detail.
I am not going to start a critique of the plan right now. I really just wanted to open it up as a topic for discussion. If nothing else, I think it is good that they suggest "developing a shared vision" for the future. That's what all of Ireland needs right now.
Thursday, 19 November 2009
Deal fairly and immediately with the fiscal crises
Slí Eile: The fiscal deficit mirrors at least two other deficits -a deficit in non-Government investment and spending and a deficit in social infrastructure to meet the fundamental human needs and rights of all members of society. The key to fixing the fiscal deficit is to address all of these deficits at the same time. In fact, I can't see another way.
Fixing the fiscal deficit by means of a massive and prolonged deflation (=€12bn over three years by current plans) will takes its toll humanly and economically over time - even if it is done purportedly with a 'human face' (more anon in a later blog). Leaving the public sector deficit stand at its current level is not an option either for all sorts or good reasons including the cost of repaying debt for future generations. The public sector deficit needs to be tackled now and not later but it needs to be tackled in a way that is credible, fair and workable from the point of view of maintaining social cohesion and democratic norms of debate and cooperation. In essence it needs to be tackled by a three prong approach:
A Using Public enterprise holding companies to borrow 'off balance sheet' to invest in new technologies, broadband and infrastructure upgrade (transport, early childhood care, primary health care...) - this is the capital portion of the public sector deficit;
B Using the current account to undertake a forensic, targeted stimulus to raise public and private consumption in sectors such as health, education, tourism (where the multipliers are higher than elsewhere) - the contra-cyclical response to a cyclical deficit;
C Close the structural deficit by raising taxes through a combination of measures on asset-rich and income rich groups coupled with broadening of the tax net.
Very approximately (estimates will vary) A, B and C account for about one third of the current annual borrowing level. There is scope to increase these with a view to generating recover in tax revenues. What is striking about the difference in estimates of tax between the Pre-Budget Outlook document for 2010 and the April Supplementary Budget macro-economic outlook is the collapse in revenues and GDP.
There is a job of work to be done in convincing the EU institutions. However, the schedule is already slipping and there is mounting evidence that we are deflating ourselves into a fiscal deficit trap by neglecting the non-government investment and consumption deficit.
We are confronted with a rapidly evolving situation and one in which could seriously undermine social cohesion, democracy and any prospects of a rapid recovery. A number of critical steps are involved under C:
- Fast-track reform of taxation through an emergency budget by immediately ending all tax breaks and non-standardised tax relief except where there is an immediate administrative or economic imperative to do otherwise;
- Raise the top income tax rate to at least 48%;
- Stop postponing carbon taxes - phase in a significant shift to consumption energy-using taxes over a three year period beginning now;
- Raise Corporate taxes to 15%;
- Introduce property taxes on second homes as well as property over €1million;
- Fast-track local revenue raising and linking these explicitly to local services where people can see where their tax money is going (early childhood care, local health centres, community facilities);
- Introduce a higher super tax rate to apply to salaries over €250,000;
Under A
- Fast-track those elements of the Capital Programme that are labour-intensive and that will yield quick gains in terms of schools, hospital facilities and social housing.
Ideas and objections welcome.
Fixing the fiscal deficit by means of a massive and prolonged deflation (=€12bn over three years by current plans) will takes its toll humanly and economically over time - even if it is done purportedly with a 'human face' (more anon in a later blog). Leaving the public sector deficit stand at its current level is not an option either for all sorts or good reasons including the cost of repaying debt for future generations. The public sector deficit needs to be tackled now and not later but it needs to be tackled in a way that is credible, fair and workable from the point of view of maintaining social cohesion and democratic norms of debate and cooperation. In essence it needs to be tackled by a three prong approach:
A Using Public enterprise holding companies to borrow 'off balance sheet' to invest in new technologies, broadband and infrastructure upgrade (transport, early childhood care, primary health care...) - this is the capital portion of the public sector deficit;
B Using the current account to undertake a forensic, targeted stimulus to raise public and private consumption in sectors such as health, education, tourism (where the multipliers are higher than elsewhere) - the contra-cyclical response to a cyclical deficit;
C Close the structural deficit by raising taxes through a combination of measures on asset-rich and income rich groups coupled with broadening of the tax net.
Very approximately (estimates will vary) A, B and C account for about one third of the current annual borrowing level. There is scope to increase these with a view to generating recover in tax revenues. What is striking about the difference in estimates of tax between the Pre-Budget Outlook document for 2010 and the April Supplementary Budget macro-economic outlook is the collapse in revenues and GDP.
There is a job of work to be done in convincing the EU institutions. However, the schedule is already slipping and there is mounting evidence that we are deflating ourselves into a fiscal deficit trap by neglecting the non-government investment and consumption deficit.
We are confronted with a rapidly evolving situation and one in which could seriously undermine social cohesion, democracy and any prospects of a rapid recovery. A number of critical steps are involved under C:
- Fast-track reform of taxation through an emergency budget by immediately ending all tax breaks and non-standardised tax relief except where there is an immediate administrative or economic imperative to do otherwise;
- Raise the top income tax rate to at least 48%;
- Stop postponing carbon taxes - phase in a significant shift to consumption energy-using taxes over a three year period beginning now;
- Raise Corporate taxes to 15%;
- Introduce property taxes on second homes as well as property over €1million;
- Fast-track local revenue raising and linking these explicitly to local services where people can see where their tax money is going (early childhood care, local health centres, community facilities);
- Introduce a higher super tax rate to apply to salaries over €250,000;
Under A
- Fast-track those elements of the Capital Programme that are labour-intensive and that will yield quick gains in terms of schools, hospital facilities and social housing.
Ideas and objections welcome.
Monday, 8 June 2009
TASC Annual Lecture discussion
Slí Eile: The Annual TASC Lecture given by James Galbraith and Maria Rodigrues attracted limited media attention (see Irish Times coverage). You can find an interview with Galbraith at Irish Left Review as well as a lot on TV3's Nightly News with Vincent Browne. Both Galbraith and Rodrigues pointed to the need for:
- An ambitious, internationally co-ordinated and effective stimulus package; and
- Deep reform of institutions and the regulatory framework within which corporations – especially financial – work.
The key messages are not to be missed – even in Ireland….however the event went without comment on irisheconomy.ie.
Lets suppose some household name Irish economist were to respond to the lecture last Thursday evening what would he (they are almost entirely he) say? Something on the following lines:
Thank you for a very interesting lecture Professor Galbraith and Rodigrues. But, you know, what you propose might be all very well in the US or some European countries …. It just doesn’t apply here. For one thing we are so deeply in trouble financially, fiscally and otherwise that we need to get public finances, competitiveness and banking sorted out BEFORE we can entertain notions of expansion in public spending. Secondly, a domestic, home-grown stimulus package probably would not work so well here anyway because we are a small open economy with high import content in most forms of public spending and, therefore, low Keynesian multipliers…..
Or words to that effect….
The point needs to be seriously debated and we have hardly begun. I suggest that we are confronted by two salient facts whether we like it or not:
1. An overwhelming Irish media, professional economics, political consensus that stimulus packages will not work here, at this time…
2. A lack of a coherent, well-thought out, empirically-backed, convincing alternative package of proposals to counter the orthodoxy consensus.
This, I suggest, is a crisis of political economy. Speaking of the political, some Government commentators who suggest (correctly) that the ESRI – an independent economic think-tank – is broadly behind the Government’s approach to economic policy is correct. If anything, it could be said that Government is too timid and not deflationary enough in the view of some economists (although more outside than inside the ESRI on this one).
So, we have deflationary politics, deflationary economics, ecologically disastrous patterns of behaviour and supporting ‘all growth is good’ ideology and no comprehensive, elaborated economic plan from the left. Is it any wonder that we are not seeing a seismic shift to the left fast enough to match the seriousness of the current economic crisis. If anything we are seeing a very worrying movement in the opposition direction in many EU States. In part that reflects the failure of many progressive forces including allied intellectual forces to embrace a more urgent, joined-up and well-thought out response to the current gathering storm.
Please, please can we have more thought, more debate and more action.
- An ambitious, internationally co-ordinated and effective stimulus package; and
- Deep reform of institutions and the regulatory framework within which corporations – especially financial – work.
The key messages are not to be missed – even in Ireland….however the event went without comment on irisheconomy.ie.
Lets suppose some household name Irish economist were to respond to the lecture last Thursday evening what would he (they are almost entirely he) say? Something on the following lines:
Thank you for a very interesting lecture Professor Galbraith and Rodigrues. But, you know, what you propose might be all very well in the US or some European countries …. It just doesn’t apply here. For one thing we are so deeply in trouble financially, fiscally and otherwise that we need to get public finances, competitiveness and banking sorted out BEFORE we can entertain notions of expansion in public spending. Secondly, a domestic, home-grown stimulus package probably would not work so well here anyway because we are a small open economy with high import content in most forms of public spending and, therefore, low Keynesian multipliers…..
Or words to that effect….
The point needs to be seriously debated and we have hardly begun. I suggest that we are confronted by two salient facts whether we like it or not:
1. An overwhelming Irish media, professional economics, political consensus that stimulus packages will not work here, at this time…
2. A lack of a coherent, well-thought out, empirically-backed, convincing alternative package of proposals to counter the orthodoxy consensus.
This, I suggest, is a crisis of political economy. Speaking of the political, some Government commentators who suggest (correctly) that the ESRI – an independent economic think-tank – is broadly behind the Government’s approach to economic policy is correct. If anything, it could be said that Government is too timid and not deflationary enough in the view of some economists (although more outside than inside the ESRI on this one).
So, we have deflationary politics, deflationary economics, ecologically disastrous patterns of behaviour and supporting ‘all growth is good’ ideology and no comprehensive, elaborated economic plan from the left. Is it any wonder that we are not seeing a seismic shift to the left fast enough to match the seriousness of the current economic crisis. If anything we are seeing a very worrying movement in the opposition direction in many EU States. In part that reflects the failure of many progressive forces including allied intellectual forces to embrace a more urgent, joined-up and well-thought out response to the current gathering storm.
Please, please can we have more thought, more debate and more action.
Tuesday, 19 May 2009
Will a Domestic Stimulus work in a Small Open Economy like Ireland?
Sli Eile: Taoiseach Brian Cowen commented over the last weekend that the main opposition parties wants the Government to cut more while the other (minor) opposition party wants the Government to cut less. Hard to disagree with this observation. Draw your own conclusions. But, who is for not cutting at all and instead spending more? Yes, spend more but very differently and under very different arrangements with regard to how banking, public finances and corporations are run in Ireland and Europe.
Turning to political economy, the trouble with many economists is that they can only look back – to old theories, old evidence and old empirical models based on what is measurable and what was given in terms of the external environment. On the other hand, it is hard to look into the future without regard to what has happened in the past and why it happened. The 1960s were the heyday of econometric modelling as economists discovered new data sources and put all their quantitative prowess on display through the science of multi-variate statistical modelling. This was, also, the time of ‘manpower planning’ and Economic Programmes (Whitaker closer to home). The first ‘Oil Shock’ of 1973, and following it the slowdown in economic growth in the early 1980s, disturbed many of the stable empirical relationships.
The new orthodoxy was monetarism – strong medicine for a new world – allied to ever more complex modelling of micro-economic behaviour and macro-economic impacts.
We are in a muddle again as the old world dissolved in 2008. In particular, the emergence of a very different profile of industrial output, labour market structure and public-private balance emerged in Ireland in the 1990s and the present decade.
The bottom line is that it is hard to model an economic ‘readjustment’, let alone a recovery, when you in the midst of an economic tsunami. The ‘old reliables’ are gone in more ways than one.
A future blog will comment on the latest ESRI publication Recovery Scenarios for Ireland (published last week). This blog goes back to an earlier, less publicised, document that sought to quantify the impact of various policy shifts in regard to expenditure, taxation, employment as well as ‘exogenous’ shifts in competitiveness and world trade.
In a heroic attempt to model the impact of various (simplistic) adjustments to taxes, public spending and nominal wages, the authors of the ESRI paper entitled ‘The Behaviour of the Irish Economy: Insights from the HERMES macro-economic model’, (Adele Bergin, Thomas Conefrey, John Fitzgerald and Ide Kearney) have done some service in assessing the impacts of various changes on key economic outcomes such as GNP, GDP, Unemployment, Government Borrowing and price inflation. Using historical data and based on a complex forecasting model (HERMES) drawing data from another global era, they have modelled forward the projected or estimated impacts of a number of ‘shocks’ or adjustments including the following:
5% cut in nominal wages
Cuts in public spending
1% Increases in world growth
1% Improvements in competitiveness
A number of salient points are in order:
Economics is not a perfect science – the questions you choose to ask and explore empirically are a function of your values and those underlying assumptions and interests that you hold dear;
Instability, uncertainty, conditionality and the impact of ‘exogenous’ variables renders standardised econometrics in the league of heroic simplicity, in spite of all its finesse and seeming complexity;
The past is a different place and not necessarily a sound guide to the future or present; and
No policy response is ideologically, politically or morally neutral.
That said, fair play to the ESRI for using the only empirical data available to assess various possible outcomes. But, empirics can never tell the full story, neither can they tell you what to do. The ESRI authors fully acknowledge the limitations (‘expectations in the model are backward looking’, p7 and ‘the unquantifiable effect on confidence’ is omitted).
The doctrine of ‘expansionary fiscal contraction’ (public spending cuts fuelling recovery of private consumption and investment) is firmly rebuked in the paper, as it had been already by Bradley and Whelan in a 1997 paper. The problem identified in many ‘growth studies’ over recent decades is that it is fiercely difficult to account for factors such as new technologies, the impact of political changes and swings in business mood. Some economists such as Harberger (1998) have distinguished between “yeast” and “mushroom” effects in explaining economic growth.
Factors such as knowledge and human capital act like yeast to increase productivity relatively evenly across the economy, while other factors such as a technological breakthrough or discovery suddenly mushroom to increase productivity more dramatically in some sectors than others. The ‘X’ factor is a lot bigger than people imagine. During the heady days of the Celtic Tiger, some growth studies identified a very large ‘unexplained’ residual in the case of Ireland, suggesting productivity increases well above what could be accounted for by standard input measures. Buried in the plot was, no doubt, the impact of temporary foreign direct investment, price transferring and international spillover effects.
The number-crunching (based on ceteris paribus on the explanatory side – all else constant while one variable is shifted but allowing for interactions in all the outcome variables) on various scenarios is summarised in the ESRI paper as follows:
Gross National Product and Gross Domestic Product would fall initially but recover in the medium- to long-term as a result of a 5% cut in nominal wages (details are summarised on page 3 of the paper).
GNP/GDP would fall initially as well as in the medium-term (to 2013) as a result of a one-off hike of €1billion in any of the following: income tax, property tax, public sector pay cuts, employment cuts and Government investment reductions. The extent of the impact varies with larger negative impacts in the case of cuts in employment, public sector pay and income tax. Carbon taxes would be mildly expansionary in the case of the GNP measure due to a reduction in profit repatriations by the manufacturing sector (but not GDP).
GNP/GDP would be higher in the medium-term as a result of either a 1% increase in world growth or a 1% improvement in competitiveness.
One of the major sources of instability is migration. Unemployment peaked at 17% in the late 1980s but would have gone much higher were it not for the huge level of outward migration at the time reflecting job opportunities in the UK and other destinations. Clearly, the same does not hold now. A safe bet is that labour supply will remain fairly ‘inelastic’, at least until green shoots of recovery appear in the UK labour market. The implications of this – not spelt out in the ESRI paper – is that any deflationary shock (recall that the ESRI scenarios entailed a €1billion shock, which is a small compared to what Government is promising us for the next 4 years) will have large and difficult-to-predict impacts on unemployment. Although the ESRI didn’t model the impacts on poverty, health and well-being it is safe to assume that these will be substantial – in the absence of any reversal of current economic policy.
Still, while modelling for a fall in employment in the education and health sectors (p20) the authors bank on ‘extensive emigration’ so that the unemployment rate would initially rise by 0.9 per cent points and fall back to 0.2 by 2015 (for a reduction of around 17,000 in the numbers employed in health and education in 2009). They acknowledge the uncertainty in the labour market situation internationally. Nobody has provided solid evidence, yet, that we are looking at return to net outward migration, and certainly nothing of the order last seen in the late-1980s (when unemployment peaked at 17% and net outward migration at 44,000 in 1989). Put another way, it is not obvious that unemployed teacher graduates or nurses can readily find employment in the UK and further afield. But, it may come to that if labour markets pick up elsewhere before the Irish labour market. And, it would seem that domestic policy is, implicitly aiming for this outcome.
Instructively, the ESRI conclude that pay cuts in the public sector have bigger bucks than employment cuts. Hence, a cut of 17,000 jobs in 2009 would save ‘only’ €500 – much less than half of what could be saved from a cut of 5% in public sector pay. The lesson they seem to be strongly hinting at is cut pay before you cut jobs.
Very crudely, if Government is promising an ‘adjustment’ of some €4 billion for each of the coming 3 years on top of the full-year adjustment of €5 billion, this year then we are looking at (very crudely) something possibly like €17 billion in total cumulative terms. In other words, a one-off impact of a €1 billion multiplied 17 times gives a downward long-run adjustment of 7 % in GNP – other things equal. Who is to know the dynamic effect of such an adjustment if it further depresses demand and undermine confidence?
Perhaps the one of the most intriguing aspects of this paper is the estimated impact of cuts in Government investment (p22). They write:
we consider the impact of a €1 billion reduction in expenditure on public investment under the National Development Plan. These results only take account of the demand side impact of the change in investment. They take no account of the longer-term supply side impact reducing national output and productivity as a result of the reduced stock of infrastructure.
Then they spell this out:
Thus the longer-term impact of this cut on output and employment would be substantially greater than shown here.
The impact on public finances is large (reducing borrowing) for a cut of €1billion in the public capital programme. The net impact on national output is very small in the medium-term (to 2015) allowing for some positive impact on private manufacturing and services in the ESRI model. However, the long-term impact on the ‘supply-side’ is unknown and unquantifiable. Put another way, cuts in the PCP (like in the Ireland of the 1950s), along with cuts in public services such as health and education, will have lasting effects and these effects will interact with the rest of the economy and society. Have we not learned the lessons from the lasting impact of health cuts in the late-1980s?
The ESRI paper standardises all the impacts into a monetary-based multiplier Table 9 (p25). The biggest long-term negative impact is -1.35 in respect of a €1b value cut in public sector employment and the strongest positive impact is 0.15 from a carbon tax hike of €1b. Underlying the ESRI analysis is:
An inherent assumption that deflation is a necessary part of the medicine to get back on track – (real) pay cuts, a mix of tax increases and some pruning of public investment is assumed appropriate in the circumstances; and
A hope that improved trade conditions in conjunction with a moderately conservative domestic fiscal stance will lift the Irish boat – in 2011 if thing go well and later if not – eventually the storm will subside and how quickly we bounce back depends on things outside our control and things inside our control.
The Paper does not deal with issues around supply-side initiatives such as training and labour market flexibility – but this can be factored into a package as well.
A problem with the ESRI one-off ‘ceteris paribus’ shocks is that in the real world everything is changing and interacting and a policy stimulus to lower unemployment and improve competitiveness and reduce borrowing in the medium-term and raise national output needs to combine a range of measures into a coherent package. However, the ESRI exercise is useful at least analytically in quantifying the separate effects of one-off shocks on the assumption that everything else on the ‘policy instrument’ side is held constant.
In conclusion one could ask why the ESRI authors chose to try some particular set of scenarios and not others. They probed the impact of cutting expenditure and wages as well as raising taxes. And, they probed the impact of improved international trade and Irish competitiveness on global markets. But, they did not probe the impact of a fiscal stimulus and still less a forensic one targeted at particular sectors and spenders within the economy. Moreover, nobody can quite model the impact of a political stimulus based on a new leadership, new hope and reform of democracy and governance in the corporate and political worlds. It could surprise everyone – even for a small open economy like Ireland with some leverage in Europe and the wider world.
As always, comments, corrections, disagreements, suggestions from the blogosphere on the above welcome.
Wednesday, 1 April 2009
The road to recovery: different responses
There has been, recently, a plethora of reports on the economy in Ireland ranging from the Government publication 'Building Ireland's Smart Economy' (December 2008), to various analyses by research, social partnership and advocacy bodies, to policy responses by various political parties (e.g. Fine Gael and Sinn Féin). It is hoped, over coming the weeks, to review and compare these recent contributions from the standpoint of four pillars
Fairness and equity (do the proposals effectively address inequality and advance a redistribution of income and opportunities towards the less well-off)?
Public, social and community infrastructure (do the proposals provide an adequate basis for delivering vital social services)?
Sustainable economic growth and competitiveness (do the proposals represent a sensible strategy to position Ireland for the inevitable upswing - eventually)?
Public finances (do the proposals address the need to re-structure taxation and improve the effectiveness of public spending in meeting key economic and social goals)?
Beginning with 'Getting Ireland back to work - Time for Action' published by Sinn Féin in March 2009, I will be looking at other documents in the course of the coming weeks, attempting to identify:
Points of commonality among various 'progressive' platforms
Points of difference among them
Questions and issues that appear to be inadequately addressed across all such contributions
Options for taking particular issues or proposals further
'Getting Ireland back to work - Time for action' is one of the latest contributions arguing - among other things - for a domestic stimulus with a particular focus on public capital spending in key areas of social need, incentives for small, medium sized indigenous industry and an all-island perspective in addressing economic and social challenges. The plan places considerable emphasis on the role of education and training in upskilling those at risk of losing jobs or currently unemployed as well as investment in research and development. Interestingly, the document has relatively little to say about the crisis in banking and finance. It does, however, call for the establishment of a State Bank that would ensure access by small businesses to credit. In this regard it cites the example of the Industrial Credit Corporation (before it was privatised) which proactively sought to avoid company closures and job losses through seeking out firms at risk.
Sinn Féin has very much gone with a Keynesian-style stimulus package. This is all the rage now on the left and in such recent converts such as the new US Administration. The European response, by and large, is sceptical and the Irish Government is listening to too many economists who say 'no point - we are a small open economy - it would dissipate in additional imports with minimal impact on jobs and income here - the problem of public finances is too critical anyway to allow any such largesse'. Sinn Féin disagree on this. They call for sustained and possibly higher levels of capital funding in areas such as schools, housing, ICT (including broadband).
The document also critiques the lack of evaluation of effectiveness in public spending in support of enterprises (page 8). A distinguishing feature of the document is the way in which it places indigenous industry at the centre of any national economic revival. While it accepts the benefits of Foreign Direct Investment (the records do not show that Sinn Féin urged any raising of the nominal 12.5% Corporate Tax rate during their 2007 election campaign), it invokes the Telesis Report of 1982 in arguing for the establishment of strong indigenous (and presumably multi-national) industries.
As further posts will show most of the ideas advanced by Sinn Féin are held by other progressive voices. Some specific policies appear to be unique such as the creation of a State Bank with a specific focus on aiding small and medium-sized businesses. In all the document, provides a valuable set of ideas and proposals which, if acted on, could position Ireland well to avoid the worse excesses of slash-and-burn economics during these trying times and at the same time anticipate how the island could compete on the basis of knowledge, innovation and skills in the next phase of our economic development. If Whitaker and Lemass got it right on the need to open the country to trade as well as foreign direct investment in the 1960s, then a new paradigm is called for as we head into the next decade. Citing Finbarr Bradley and James Kennelly 'Capitalising on culture, competing on difference' the document calls for a 'radical rethink of higher education' and a move away from an 'industrial mindset' to a situation where graduates are flexible, self-starting and multi-skilled.
One suspects that a key to recovery is not just 'more education' but a very different kind of education. Interestingly, Sinn Féin also make the case for investment in early childhood education (we have not heard too much about that in recent times) to 'train workers now for a pre-school education system' and to 'start constructing the buildings required' (page 16). Perhaps the €2 billion earmarked for the building of public offices under 'de-centralisation' could be used for that? It pays dividends, as economist James Heckman points out.
In a telling sentence on page 5, the document says: "Initiatives like the 'Ideas Campaign' website are to be lauded, and show the tenacity, creativity and resourcefulness of the Irish people when put to the test - but we need government leadership, as well as people-led ideas"
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