“We have reached our limits,” said Axel Weber, president of Germany’s Bundesbank, in Frankfurt on Tuesday. “The expectation that we could neutralise this synchronised recession through short-term fiscal policy measures is false. We should not even try. There will be costs.”
From this. Apparently they think that the SGP is the key to preserving monetary union, rather than, say, preventing mass unemployment.
For those of us in secure employment, this is shaping up to becoming a fascinating natural experiment in applied political economy.
Update: Christina Romer has a very nice introduction to the lessons of the Great Depression for today’s policy makers here.
11 replies on “Quote for the day”
We can’t neutralise recessions with fiscal policy? Keynes is turning in his grave….
It would be interesting to know just what Herr Weber meant by ‘costs’. I suspect he meant the crowding out of private sector borrowing by collossal sovereign bond yields.
Bloomberg reported recently on a survey in which 40% of Japanese investors thought there was a chance of a US debt default. Only about half that number felt the same way about bund issuances. Maybe that’s what Herr Weber meant…
Interesting that on the same day Deutsche Bank’s research department is telling the Irish to suck it up and take the medicine, no matter how bitter:
http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000238862.xhtml
Or else …
Re: the possibility of a US default, Krugman has an entertaining post:
http://krugman.blogs.nytimes.com/2009/03/10/credit-protection-madness/
This would be the same Deutsche Bank that exuberantly geared itself x40. The too big to fail, too big to rescue Deutsche Bank. Interesting. Had a read… Nothing new. Could have been a copy and paste from irisheconomy.ie
Krugman is right about CDS. As is Taleb with his very smart comment. What I don’t understand is, how in the name of god after all this time watching bubbles explode, supposedly ingenious commentators/economists, masters of all they survey (and our futures) can’t recognize a BUBBLE? The CDS market is a ridiculous entity designed for speculators. Insurance it most definitely is not. In fact if Svetlana Boyarchenko and Sergei Levendorskiĭ commenting at Eurointelligence are right, it will ultimately be abolished.
http://www.eurointelligence.com/Article3.1018+M509debbd405.0.html
So a few questions for all the fiscal rectitude heads out there waving this nonsense Irish CDS stuff about. How low is our National Debt? How great can our deficits go? How many years is this recession set to run? Do the maths, crunch the numbers, and unless we have a depression of greater magnitude that the Great Depression, we’re unlikely to default. Amazing that. Seriously I think right wingers are a bunch of sadists. All this talk of pain gives me a headache.
Interesting article by Romer on the Great Depression, I hope she’s right. Another interesting article on same subject today:
http://www.ft.com/cms/s/0/7544ea78-0daf-11de-8ea3-0000779fd2ac.html
I wonder how easy it will be to “turn off” the great inflation that the authorities have begun when it begins to feed into prices?
Unfortunately, Ireland cannot preach to the Germans on deficits because the collapse in revenues means we will run a massive deficit while cutting public expenditure.
We told the Commission in January that we will have a deficit of 9.5% of GDP this year, three times the SGP reference figure. As part of that plan, we tried to find 2Bn. and ended up with a pension levy which I think will bring in less than 1Bn. net in a full year.
The Taoiseach told the Dail today that (a) GDP would fall by at least 6%, not the 4.5% we told the Commission and (b) the revenue shortfall will be EUR3.5Bn. and the increased cost of unemployment will be EUR1.5Bn so the mini-budget will seek adjustments totalling EUR4.5Bn.
I suspect we will end up with a deficit of 13% even with draconian cutbacks. We told the Commission that the NDP will be our stimulus package but I can’t see that surviving the next few months (“How many hospitals shall we close, Minister, before we cut research funding?”).
@liam: another point made recently about the CDS market is that it is equivalent to being able to buy life insurance for another person.
On Irish fiscal rectitude: I don’t think that arguing that we need to make sure we don’t go bankrupt is right wing. And we are simply too small and too open to be able to go it alone in terms of boosting demand (not do we have the fiscal capacity right now). But, what is impossible in an Irish context right now is possible in a European one, and even more possible at the global level.
@Lefournier: no, Irish politicians are in no position to demand anything from anyone.
Kevin
Thanks for the link to the Romer paper, very useful.
In your view, will fiscal rectitude etc (which seems likely to be contractionary fiscal contraction?) work if a stimulus isn’t forthcoming from Europe? Is that a necessary component of recovery within some reasonable kind of time frame?
If we had the fiscal wherewithal wouldn’t it be possible to construct a stimulus which was not built around just pumping money into demand but was channeled through ‘developmental schemes’ that would both improve competitiveness, build infrastructure and stimulate demand (eg enterprise supports, worker retraining, greening public buildings etc – all of which are local services that support social and economic goals)?
Kevin, what I argue for, is a closing of the structural deficit through taxation and a simultaneous increase in the cyclical deficit due to massive investment projects, along the lines of what Sean O’Riain outlines. Consumption is falling, and is going to continue falling as the private sector saves and attempts to pay down nominal debts. Why not use that saving in the form of infrastructural investment bonds, as has been argued elsewhere? Improve the macro efficiency of the economy through conservation programs, such as widespread insulation, green energy investment, widespread public transport development, etc. Destroying demand in the form of cuts isn’t going to help anyone, least of all the exchequer.
What strikes me about this whole affair is the attempt to 1. increase competitiveness, by engineering an economy wide reduction in wages, and therefore prices, leading to 2. a return to an export driven economy. The problem I have with this is that 1. wage reductions will increase the burden of real debts, and have a marginal (at best) effect on competitiveness, whilst 2. demand has collapsed for international trade. Who do we export to? Look at what’s happened to Germany and Japan.
The reason for my overt hostility, is that there is a bout of disingenous scaremongering going on, convincing people that we’re in imminent danger of losing our nationhood. This is nonsense, quite simply. The best decisions are never made during a bout of panic.
We have a sovereign wealth fund and the lowest public debt in the EU, yet we’re the ones being touted for default. I can’t get my head around the logic!
This is an economic crisis first and foremost, the fiscal crisis is second order. We’re trying to solve the wrong problem.
One last thing. Full disclosure: I am a low paid worker with family and friends who are losing their jobs and taking wage cuts. I also read a lot, and what I read I find truly disturbing.
@Seán: it depends on what you mean by ‘work’. If we take the necessary measures we can avoid going cap in hand looking for bailouts. In that were to happen, it seems pretty obvious that our corporate tax rate would have to rise substantially, and that would presumably make the real, economic, crisis much much worse. Other taxes would also have to rise a lot more, and expenditure would have to be cut a lot more. So, it seems to me that we should do what we can to avoid such a scenario. (And yes, there is an even worse scenario, which is that the bailouts might not be forthcoming at all. Why take that risk?)
Yes, we have to hope that the right policies will be pursued at the global level. Everyone else also needs the right policies to be pursued at the global level. Since we have no leverage at that level I guess we need to focus on what we can do. The best anti-unemployment policy we can pursue is to lower wages. I accept that that devaluation would be a much easier way to achieve that, but it simply is not an option.
@liam: the reason people are focussing on fiscal consolidation now can be found here: http://www.finance.gov.ie/documents/pressreleases/bl062.pdf
Tale a look at the first line of Table 4. That is the (grossly optimistic) projections of what the budget deficit would be assuming no changes in taxation or expenditure policies. Scale those numbers up a bit to account for recent trends, add them up, add in a chunk of extra debt for the banks, and assume that things get worse. My instincts are completely Keynesian at a time like this, but I don’t see how we can’t be alarmed by such an exercise.
On wages and competitiveness: don’t forget, being uncompetitive doesn’t just hurt export industries, it hurts firms producing for the Irish market who have to compete with imports. And even in sheltered sectors, the demand for labour curve slopes down.