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October 21, 2009



I am surprised that you don't consider the rate on the bond to be noteworthy.

If it was such a certainty in the market place that the bond would be repaid, surely we could have sold this bond at a fair few points lower?

James Conran

Besides John's important point about the interest rate payable on these new bonds issued, I also find this a little breezy:

"This fiscal policy, in turn, would drive up tax revenue (through increased employment, aggregate wages, consumption, and investment) and, as a consequence, reduce demand on social welfare payments and social services – thus driving down the deficit."

OK, fair enough - you're only one person and it's just one blogpost making a particular argument, so it's unfair to demand a complete model showing how this works out....

...but. I'm not an economist, but I can't help but suspect that this is a lefty version of the Laffer curve (the idea that tax revenues are increased, or at least not reduced, by tax cuts). See Krugman's remark:

"I’m not proposing a fiscal-stimulus Laffer curve here: it’s probably not true that spending money actually improves the government’s long-run fiscal position (although that’s certainly within the range of possibilities.)"

Obviously, increased GDP and thus tax revenue as a result of stimulus offsets the cost of the stimulus but it seems optimistic to say that it exceeds it. You seem to admit this when you say that whether the government can access the NTMA's cashpile depends on whether it sticks to the 2013 compliance date for the Stability & Growth Pact - if stimulus will reuce the deficit, why should this be so?

James Conran

I do think you make a good point when you say that the NTMA's success might suggest that there is no longer serious doubt (if there was) over whether we have the capacity to fund our deficit in the next year or two. That leaves the question as to whether the benefits of a stimulus now would outweigh the risk of the state drowning in debt in the medium term.

Here I think another point made by Krugman in the post linked to above is valid. It is obvious that the Irish recession (as in many other countries) is primarily driven by a collapse in private sector investment, most dramatically in construction/property (which has in turn hit domestic consumption). Obviously a lack of investment now hurts our capacity for growth not just now but also in the future and hence our ability to service our public (and indeed private) debt.

Therefore the increased investment produced by a stimulus would partially mitigate the negative effect on sovereign solvency produced by the increased borrowing necessitated by such a stimulus.



On the Irish Economy there was the point made in comments that our spreads has been falling. I make no claims to understanding international finance, so I ask you: does that mean that the price for Ireland's borrowing is going down?

I don't think Mr. Taft is the only person to claim that spending in times of recession stimulates the economy back to a growth position. There was some guy a long time ago, John Maynard Keynes, said the same thing. I think he was an Irish fella. True, I have been hearing people of neoliberal economic persuasions say that he was discredited, but so have their own policies, I think. The arguments have to be made very simple for me to understand them, but just looking at history, I think I'll go with Keynes, at least on fiscal policy -- and Mr. Taft too.

Michael Taft

John, I have addressed the issue of bond yields in the past (in this post I concentrated on the issue of borrowing capacity and the surfeit of funds at our disposal). But let’s take up the bond yield issue for there is no consensus on why Irish yields remain so high. I suspect that the reason lies somewhere in the following mix: (a) initial misconception of the impact of the bank guarantee, wherein domestic and international commentators were suggesting that our debt was 200%+ of GDP; (b) further reputational damage made by, in particular, Irish commentators: one suggested there was a one-in-eight chance of Ireland defaulting on its debt while another said our credit-worthiness was worse than Peru. Davy Stockbrokers called such commentary ‘hysterics’. (c) speculative activity on the credit default markets, taking advantage of our reputational damage (the NTMA’s Michael Somers referred to this phenomenon earlier this year and predicted that, as it abated, bond yields would improve - as they have). (d) The conflation of bank and sovereign debt – it should be noted that the yield spread with German bonds skyrocketed after the bank guarantee and reached its peak with the Anglo-Irish nationalisation.

I’m not impressed by the ‘fear of default’ argument. First, there is almost no chance whatsoever of Ireland or any Eurozone country defaulting for the simple reason that they wouldn’t be let. The fall-out for the currency would be too unpredictable. That’s not factoring in that individual governments wouldn’t allow that to happen. Second, if the ‘fear of default’ was an issue, then why did bond yields consistently improve during the late spring and summer when the big 3 rating agencies were downgrading our rating? Personally, I doubt that anyone has a rational reason – and that may be due to the fact markets don’t actually act in consistently rational ways (ask Lehman Brothers).

James, thanks for the Krugman link (I actually missed this one). But maybe you might want to reread it again for I would suggest that it actually confirms my basic position. He quotes the IMF: ‘ the evidence suggests that economies that apply countercyclical fiscal and monetary stimulus in the short run to cushion the downturn, after a crisis tend to have smaller output losses over the medium run.’ Krugman further states:

‘ . . .fiscal expansion is good for future growth. Still, it does burden the government with higher debt, requiring higher taxes or some other sacrifice in the future. Or does it? Well, probably — but not nearly as much as generally assumed.

Here’s why: first, in the short run fiscal expansion leads to higher GDP, which leads to higher revenues, which offset a significant fraction of the initial outlay. A billion dollars in stimulus probably leads to only $600 million or a bit more in additional debt.

But that’s not the whole story. Crowding in (that is, stimulating future investment) raises future GDP — which raises future tax revenues. And the rise in revenues relative to what they would have been otherwise offsets at least some of the burden of debt service.

That’s sound economics. Of course, an stimulus investment programme for Ireland would look much different – as I’ve stated on a number of occasions – than those for larger, less open economies.

This is not a lefty version of the Laffer curve. Stimulus will increase borrowing and expenditure. However, on the other side of the recession, we will be in a stronger position to deal with that debt than we will if we follow on the present course. In the former, you prop up the economy, in the latter you batter it down. And just on the particular point – and I may have not been as clear as I should have been – the drawdown on the NTMA’s free cash balances is not directly related to Maastricht compliance dates. We could theoretically not borrow a penny on the international markets next year and, instead, draw the whole thing down from the cash balances. This wouldn’t change the deficit dynamic – nor would it affect the overall debt levels, since the cash balances are included in gross debt calculations.

Marise – it’s more than just siding with a great economist; while arguing for expansionary policies here is seen as reckless ultra-maoist nonsense, in other countries – regardless of the ideological orientation of the Government – it’s pretty middle-of-the-road stuff. Granted, there are debates over the contents of an expansionary package (tax cuts vs. spending increases, etc.) but the principle is accepted by American liberals, French Gaullists, German Christian Democrats, British and Australian social democrats and Chinese Communists. The only ones who don’t accept this principle are UK Tories and American Republicans. And Fianna Fail.

And the ultimate irony is the Keynes developed his theory to save capitalism from Bolsheviks. When asked why he didn’t join the Labour Party, he said he ‘couldn’t betray his class’. Of course, he also wanted to euthanise rentiers. He must have been great fun at parties.

James Conran

Michael if your basic point is what you say in your comment:

"Stimulus will increase borrowing and expenditure. However, on the other side of the recession, we will be in a stronger position to deal with that debt than we will if we follow on the present course."

Then Krugman's post certainly chimes with it (though of course he did write a famous column in which he said it looked to him like Ireland had no room for stimulus - would be great if he would take a closer look at our situation!).

But this is a different (and stronger) position than saying that the deficit would actually be reduced by a stimulus, i.e. that increased tax revenues as a result of stimulus would outweigh the increased borrowing to fun the stimulus.


Thank you Michael, for your detailed response. Not being well-read, I am unclear about the positions of Mao, Marx, Engels, or even Keynes in entirety. I come from a philosophy of "Does it work? Has it worked in the past?" Being uneducated I couldn't tell ya what part of the political spectrum it comes from. I didn't even realise that I was "left-leaning" until my mother told me I sounded like a far-left loony when saying that I was not fond of American military adventurism. I'm sorry tha I cannot bring an erudite intellect to the debate; I'm here to learn. So far, on the discussions I have seen, I am yet to be convinced that 1) tax cuts give the best return in stimulus, 2) the dificit must be addressed RIGHT AWAY, and 3) there is no alternative to NAMA.
Many thanks to yourself and all other commentators, whether or not I agree -- I really respect the knowledge and intelligence, and find it all very helpful.

Portable Storage

Thanks you Micheal for the information and I hope that in future also I will get this kind of article.

Portable Storage,

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