Free riding

Nice article in the Irish Times today by Jim O’Leary. I particularly liked the following unusually honest section:

The case for borrowing more to fund an attempted stimulus package would be more difficult to rebut if there was a high probability of it being successful, but fiscal stimulus is notoriously difficult to effect in a very open economy like Ireland. The reason is that a high proportion of any increase in demand leaks out through imports.

From our point of view, the best sort of stimulus package are those put in place by our trading partners since these boost demand for our exports without costing us anything. And here, the good news is that most of our main trading partners have announced reflationary fiscal measures of one sort or another in recent weeks/months. What we need to do is ensure that we are well-positioned to avail of the opportunities that will flow from these and what that means, first and foremost, is reducing our production costs to competitive levels.

It is hard to disagree with the logic. If the amazingly profligate government we have had over the past decade had listened to people like JOL on issues like benchmarking, then we might have tried to pull our weight as part of a Europe-wide reflationary package, but as things stand, we are going to have try to free ride. Not very glorious (and rebalancing the books will obviously make a bad recession worse) but there you are.

But let’s hope that too many others don’t also take a similar view! The thing about free riding is that what is individually rational can be collectively disastrous. Dani Rodrik is gloomy here.

2 thoughts on “Free riding”

  1. Jean Pisani-Ferry from Bruegel discusses the European Commission’s proposed €200b fiscal stimulus and the associated free-rider problem in this article (http://www.bruegel.org/10056). He argues that “it would be
    best for each country to contribute equally to the stimulus” and “that Brussels must be tough in its assessment of national efforts.” Where does that leave Ireland? Pisani-Ferry adds that “[o]nly those in absolutely
    dire budgetary situations should be exempted.” Alas, I think we qualify for an exemption.

  2. Jim O’Leary also writes:
    “What we need to do is ensure that we are well-positioned to avail of the opportunities that will flow from these and what that means, first and foremost, is reducing our production costs to competitive levels.”

    While we may want to free-ride on the stimulus packages in the UK, US, and China, if we keep raising labour costs we will not benefit much.

Comments are closed.