Comments on: Fiscal Policy and International Competitiveness http://www.irisheconomy.ie/index.php/2008/12/17/fiscal-policy-and-international-competitiveness/ Mon, 13 Feb 2012 05:43:30 +0000 http://wordpress.org/?v=2.6.3 By: Kevin O'Rourke http://www.irisheconomy.ie/index.php/2008/12/17/fiscal-policy-and-international-competitiveness/#comment-55 Kevin O'Rourke Fri, 19 Dec 2008 22:28:14 +0000 http://www.irisheconomy.ie/?p=77#comment-55 This is why the Good Lord provided economists with two arms! This is why the Good Lord provided economists with two arms!

]]> By: Alan Ahearne http://www.irisheconomy.ie/index.php/2008/12/17/fiscal-policy-and-international-competitiveness/#comment-54 Alan Ahearne Fri, 19 Dec 2008 22:09:28 +0000 http://www.irisheconomy.ie/?p=77#comment-54 Indeed. Though I would have thought that with a progressive tax system, lower L with wL fixed would give higher tax revenues. Dole payments would rise, but higher unemployment should put downward pressure on private sector wages. So the wage differential gets even larger. Indeed. Though I would have thought that with a progressive tax system, lower L with wL fixed would give higher tax revenues. Dole payments would rise, but higher unemployment should put downward pressure on private sector wages. So the wage differential gets even larger.

]]> By: Kevin O'Rourke http://www.irisheconomy.ie/index.php/2008/12/17/fiscal-policy-and-international-competitiveness/#comment-47 Kevin O'Rourke Fri, 19 Dec 2008 14:40:43 +0000 http://www.irisheconomy.ie/?p=77#comment-47 And furthermore, holding wL fixed, if you lower L, you lose tax revenue and have to pay people on the dole, thus raising required tax rates. Which strengthens the case. And furthermore, holding wL fixed, if you lower L, you lose tax revenue and have to pay people on the dole, thus raising required tax rates. Which strengthens the case.

]]> By: Kevin O'Rourke http://www.irisheconomy.ie/index.php/2008/12/17/fiscal-policy-and-international-competitiveness/#comment-46 Kevin O'Rourke Thu, 18 Dec 2008 23:41:33 +0000 http://www.irisheconomy.ie/?p=77#comment-46 Moving outside Philip's model, I would say that holding the wage bill wL fixed, you would get a lower relative price of non-tradables with a lower w and higher L. I am thinking of what wages Irish workers will accept. First, keeping wL fixed, taxes are fixed, and so any compensation workers need on that score is fixed also. So we can forget abou that mechanism. Second, if the public and private labour markets are linked (OK, perhaps doubtful) then a lower public sector wage will feed into lower private sector wages, and hence lower non-traded goods prices. Third, a higher L will mean more services, and like Dani Rodrik I tend to believe that when times get uncertain and workers worry about risks, certain government services can help lower the risks workers face, which might make them more sanguine about lower wages. (On the other hand, you could argue that a few high paid public workers will blow all their wages on imports, skiing holidays etc, while lots of lower paid workers would spend money on more domestic goods...Depends on income effects.) Moving outside Philip’s model, I would say that holding the wage bill wL fixed, you would get a lower relative price of non-tradables with a lower w and higher L. I am thinking of what wages Irish workers will accept. First, keeping wL fixed, taxes are fixed, and so any compensation workers need on that score is fixed also. So we can forget abou that mechanism. Second, if the public and private labour markets are linked (OK, perhaps doubtful) then a lower public sector wage will feed into lower private sector wages, and hence lower non-traded goods prices. Third, a higher L will mean more services, and like Dani Rodrik I tend to believe that when times get uncertain and workers worry about risks, certain government services can help lower the risks workers face, which might make them more sanguine about lower wages.

(On the other hand, you could argue that a few high paid public workers will blow all their wages on imports, skiing holidays etc, while lots of lower paid workers would spend money on more domestic goods…Depends on income effects.)

]]> By: Alan Ahearne http://www.irisheconomy.ie/index.php/2008/12/17/fiscal-policy-and-international-competitiveness/#comment-45 Alan Ahearne Thu, 18 Dec 2008 22:59:02 +0000 http://www.irisheconomy.ie/?p=77#comment-45 Philip, did you try splitting government consumption into compensation and purchases of goods/services? Also, would it matter if the change in compensation was driven by wages per employee versus number of employees? I ask because it may be relevant for the current debate on public sector reform and because I used to work with someone who was convinced that cuts in wages per public sector worker delivered much more disinflation than cuts in worker numbers (with average wages constant). Philip, did you try splitting government consumption into compensation and purchases of goods/services? Also, would it matter if the change in compensation was driven by wages per employee versus number of employees? I ask because it may be relevant for the current debate on public sector reform and because I used to work with someone who was convinced that cuts in wages per public sector worker delivered much more disinflation than cuts in worker numbers (with average wages constant).

]]> By: Kevin O'Rourke http://www.irisheconomy.ie/index.php/2008/12/17/fiscal-policy-and-international-competitiveness/#comment-44 Kevin O'Rourke Thu, 18 Dec 2008 22:57:49 +0000 http://www.irisheconomy.ie/?p=77#comment-44 It makes sense. For your next trick, can you decompose this investment expenditure further, to tell us what sorts of investment is most useful? I guess investment boosting non-traded sector productivity, but what does that mean in practice? Is transport infrastructure an input to the non-traded or the traded sector? Broadband? etc? I guess another big factor not modelled here, but which you implictly acknowledge in your comments above, is how labour markets respond to government expenditure (and, hence, taxation). The Celtic Tiger model is that higher taxes require higher wages and hence a higher relative price of non-tradables. On the other hand, the experience in other European economies in the 1950s and 1960s was that government safety nets of one sort or another compensated workers for lower wages. Complicated stuff. It makes sense.

For your next trick, can you decompose this investment expenditure further, to tell us what sorts of investment is most useful? I guess investment boosting non-traded sector productivity, but what does that mean in practice? Is transport infrastructure an input to the non-traded or the traded sector? Broadband? etc?

I guess another big factor not modelled here, but which you implictly acknowledge in your comments above, is how labour markets respond to government expenditure (and, hence, taxation). The Celtic Tiger model is that higher taxes require higher wages and hence a higher relative price of non-tradables. On the other hand, the experience in other European economies in the 1950s and 1960s was that government safety nets of one sort or another compensated workers for lower wages. Complicated stuff.

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