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January 27, 2009

Comments

Fergus O'Rourke

Michael,

I am a bit behind in my reading,but I haven't seen much evidence in your posts that you are taking on board the difference between a small open economy like Ireland and a relatively closed one such as the U.S..

Even the UK, which is fairly open, is in a better position - and not for fiscal reasons alone - when it comes to the efficacy of a Keynesian stimulus.

Jer

Michael, I am very sympathetic to this analysis but - Are not cuts now expected by the markets who want to see this part of Ireland demonstrating control over finances before they will ease up on the cost of our borrowing.
There is a point surely where that must weigh in.

Also I saw how Irish consumer spending dropped hard (maybe 14%) end last year and that it pointed to increased saving rates. Are maintained wages going to be spent or are consumers going to build up their savings?
Does that suggest wage cuts would not be defationary if the govt. did push a capital investment programme. I agree that the govt needs to get some money and demand circulating but can it do this with high borrowing costs.

Michael Taft

Fergus, admittedly I have only touched upon this subject only in passing. I have been busy fighting the wage-cutters, spending-cutters, general tax-raisers with ol' fashioned counter-cyclical weapons. As to the problems of posed by a small open economy, I would neither over-play or under-play these issues. Unfortunately, we don't appear to have many economists working these and related-fields, so we have to accumulate the information in, at times, an unsystematic manner.

For instance, the call for a fiscal stimulus is usually met with the rejoinder that we'd only be spending it on imports - essentially sending the money out for others' benefit. But the data isn't as straight-forward. Between 2000 and 2007 personal consumption rose by €40 billion (nominally). However, imports of consumption goods ready for use rose by €5 billion. The data suggests that a large amount of our expenditure went on personal services (from health to hairdressers to education). This has a considerable domestic impact. Even importing goods for direct sale or use in production has a domestic impact: they have to be unloaded, transported, warehoused and wholesaled and sold in shops that employ thousands of people. Another huge component of imports goes to our exporting sector which then sales the finished product abroad. I have been searching around for studies on the domestic job-content of imports or the degree to which increases in consumer expenditure impact beneficially on home production.

This is just one component of a larger picture. For instance, would a huge shift to public tranport reduce imports such as fuel and provide job increases at home? To some extent yes, but to what extent?. Even that old standby - infratructural investment; how much would government money go on imports to provide the raw materials for such initiatives? Do we have such data? And if we did, do we have a government that could implement a 'smart' stimulus?

I will endeavour to pay more attention to this issue in the future as you are right to point out the problem of 'leakage' if we try to do something ourselves in this small home market.

Jer, you have touched upon an important issue, namely the impact of wage maintenance on demand. That's why I have argued strongly - both from an equity and economic efficiency standpoint - that we should skewer wage deals, tax reform, income support measures, etc. towards low/average income groups who have a higher propensity to spend. For instance, I'm dubious about the effects, fiscal or otherwise, of freezing public sector wages. However, given that we have one of the highest wage inequality regimes and we need money to be spent, I can't see the rationale for providing a high-paid public sector worker the same percentage increase as a low/average paid one.

I am not going to get dogmatic about the role of wages in recovery (though I accept that sometimes I come across a bit like that on the subject). Were the Government seriously proposing that a portion of wages, equitably distributed, be diverted into, say, a national childcare network with subsidised childcare places (thus lowering costs to working parents and, so, lowering upward wage pressures); or a national primary health care network which would provide comprehensive community health care services for free for everyone (or for 75% of the population at first, which again would reduce people's living costs and, so, make up the wage difference - that is something seriously worth considering. Job creation, cost reduction, service expansion - just what we need in a recession.

However, we don't get that from the Government or the 'leading experts' so far appearing in the Irish Times. And we would still have to deal with the thousands of job losses in the retail sector that is coming up - how do we protet those jobs?

It's all a difficult call and I suspect that 'the market' is just as interested in seeing how the Government deals with this situation. If a practical stimulus programme were offered, the 'markets' might be impressed. After all, investors are not ideologues - they just want to know they'll get a retun on their investment. The problem now is that we are in a deep, deep hole and when we look we don't see any light - it just rains on our faces.

Jer

Muchas gracias

PatDonnelly

Well said! Must read yr blog more often. Morgan Kelly seems to think that the government are acting out of other than national interest though in their protection of all of Anglo creditors.... If he is right, what then for all your logical, sensible observations?

Tomaltach

Michael,
The argument the government and many economic commentators such as Alan Ahearne are making is that our public finances are not just bad, but are in a catastrophic state of collapse. We hear figures such as revenue from taxes back to 2004 levels while public spending since then increased by a compounded 40%. Our that we will take in about 40 billion in tax this year but require about 55-66 billion. All this while the economic bottom is nowhere in sight. They then argue that as a result of this terrible shortfall in finances and massive jump in borrowing requirement that, given the state of international financial markets, the government is already paying a high price for borrowing and that they may face a situation where borrowing of the level now needed becomes exhorbidant or even impossible. This is the picture being painted. If this is true or close to true, then I fully agree with the government plan to focus on a sharp corrective path for the public finances. Again, I stress, I am not not a fiscal conservative and I do not for example insist on balanced budgets. But if failing to correct the finances now may mean utter collapse and a catastrophe for the country, then I am behind it.

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