In a new 37-page report, the OECD is adamant that the crisis has led to a decline in innovation:

‘Corporate reports for the fourth quarter of 2008 in many cases already show a decline or slower growth in research and development (R&D) spending. Forecasts for 2009 confirm the trend…

‘R&D is declining because it is mainly financed from cash flow (retained earnings), which contracts in downturns. At the same time, as banks, markets and investors have become more risk averse, firms face difficulties in tapping into external sources of funding to support their investments in R&D. Business R&D is also being re-oriented towards short-term, low-risk innovations, while longer-term, high-risk innovation projects are being cut first.’ (1)

So far, so predictable. But it seems to escape the OECD that the decline of innovation is a cause, not just a result of the crisis. The report recognises that public R&D in energy has long been in decline, but fails to use figures which the OECD itself produces – figures that show, in the US and Europe and as a percentage of GDP, the stagnation of business R&D, and the rapid decline of all aspects of public R&D (2).

You can read the rest of this provocative piece here

The point of stimulus - and here I speak from the UNITE position - is that economic investment should be directed at the those areas in which we need to invest in any case. For instance, we have a degraded physical and social infrastructure, combined with poor social protection. If we wish to be a competitive economy in the future we will need to rapdily and smartly upgrade these areas. We entered the recession with one of the poorest physical infrastuctures in the OECD. GOvernment is proposing to cut investment further while other governments are increasing investment as part of their response packages. On the other side of the recession we will have fallen even further behind in infrastructural quality. How can we expect to compete in such circumstances.

The same goes for subsidies to for job retention meansures - subsidising short-timing to avoid redundancy. THis is a cheaper option than the dole. THere are a number of measures that fit into these categories - necessary investment and economic activity-protection. This is ´stimulus´ adapted to Irish needs.

As to financing, one of the few strengths we have is that we are a low-debt economy. Even if the worst EU Commission prediction holds true - a deficit out of control - we will still be relatively low-debt next year. And thats only at gross level. At net level we are lower still. So we have the capacity to borrow and stil remain ´prudent´, that is, below average by Eurozone standards. This investment, therefore, borrowed within prudent parameters, can be used to create jobs in the necessary infrastructural areas such as telecommunications, energy, water and waste, education, health, urban regeneration and social protection. These jobs created will lower the annual deficit - more jobs, more activity, more tax revenue, less social welfare payments. We end up borrowing less for annual purposes. In essence, we incrase our low debt levels to lower high annual deficit levels while at the same time invest in our productive capacity - both physical and labour.

That is is the essence - but we must follow this through. One of the many casualties of this recession is the low’tax, low-spend, low-insured, low-pay model that has dominated policy. This investment policy is the first step, not to return to normal - there is no normal to return to. Rather it is the first phase towards realigning our economic base along continental lines. This is the ultimate direction.

Or we can do what we are doing now. Cutting historically low levels of current expenditure, cuting investment with a degraded infrastructure, increasing taxes on low and average income groups - is anyone surprised the economy is declining at double’digit rates and, with it, an out of control deficit.

Karl has opened up a useful debate. It would be a pity not to explore all aspects before wringing our hands and continuing with a high-deficit, high-debt strategy currently pursued - one that will certainly frighten the investing horses.

I’d consider that most EU countries (excluding CEE) have GDPs of similar composition that can be used to indicate tax raising capacity. The Maastricht Treaty’s 3% deficit rule would tend to support this view. For Ireland, I suspect a large portion of our GDP has an effective tax raising capacity limited to 12.5%. If true, Ireland’s tax raising ability as a percentage of GDP is lower than our European cousins.

If this is the case, any guesses on what the Ireland to EU (ex CEE) ratio might be? Ideally I’d like to multiply a 10% Irish deficit by x to get an EU equivalent.

I’m not sure much as been added to the debate about economic management from previous threads, but just to re-emphasise:

The Fine Gael “NewERA” stimulus plan is based on a number of observations:

(1) Notwithstanding the slowdown in the economy, there remain major infrastructure constraints to sustainable log-term economic growth in the areas of energy, telecoms and water and waste water (this has been highlighted by the NCC, NESC, eirgrid, the ESRI among many others)

(2) Investment in these areas will, in our view, yield high returns, and it makes economic sense to bring as many of these investments forward as possible given the spare capacity in the economy.

(3) The private sector can be incentivised to deliver some of these investments through better pricing alone (e.g. for carbon) and / or by better regulation, but many others will require more direct state action in the short-term because of private sector financing constraints and / or because of the existence of state and / or effective private monopolies in certain areas (water, electricity transmission, telecoms) which cannot be tackled easily in the short-term.

(4) There is, therefore, a case for driving an investment programme in these areas through new and existing reformed semi-state utility companies. This does not constitute artificially shifting investments off-balance sheet, in the same way that financing the building of schools does. It is regarded as fair and efficient in most advance economies that water, energy and telecoms services are financed, for the most part, by consumers of these services, not by taxpayers. There are no “off balance sheet” delusions to this policy.

(5) Expanding investment by semi-state utilities in these areas can, ultimately, as Fine Gael have proposed, be financed by the sale of other state assets (”old assets for new”), but requires some inter-temporal mediation from other sources (we have suggested the use of the NPRF, but may have to revisit this when it has all been blown on the banks)

(6) Expanding investment in these areas in a way that enhances consumer welfare and long-term competitiveness also requires a complete overhaul of management pedigree and working practices in state utility companies and a much stronger regulatory regime. We have set down proposals for both.

One can, of course, disagree that there are any high return investment opportunities in these areas, or thay they are the ones that we have identified. One can also present the ideological argument that state utility companies can ever deliver these investments efficiently and effectively.

These are worthy areas for debate. But to suggest that the State or political parties should not be looking at ways to accelerate investment in this economy in a way that supports short-term employment and long-term competitiveness strikes me as rather “bizarre”.

Andrew

He states….”Since much recent debt issuance has been very short, there is substantial roll-over risk, and any higher spreads get payable on historic as well as new debt, and fairly quickly”..

I dont understand your assertion that any higher spreads get payable on historic as well as new debt.
Surely ‘historic’ debt is issued at a certain yield and remains unchanged unless it is sold in secondary markets and even that does nt affect the yield the government still services that debt at.?
If you are referring to short maturities and a large number of these being rolled over and higher yields being demanded I can understand that..

Is this not in the realm of the possible?

If fiscal policy were to be relaxed deliberately, the spread would likely widen. For a substantial relaxation, it would widen more. Since much recent debt issuance has been very short, there is substantial roll-over risk, and any higher spreads get payable on historic as well as new debt, and fairly quickly.

Proponents of ’stimulus’ seem not to be factoring in the debt issuance and debt-service-cost implications. It is silly to believe in self-financing tax cuts or spending increases. Ditto the Tooth Fairy and the infinitely elastic supply of sovereign credit at prevailing spreads.

That said, at the risk of sounding cranky, I’d prefer not to repeat the whole ESB thing all over again. Yes this is a somewhat important sector of the economy but, to be honest, I don’t really get why it dominates so many of our comment threads.

Your strictures about the negligible scope for a fiscal stimulus and the reality of off balance sheet financing are fully justified. However, since the Government’s equity shareholding in the semi-states presumably appears on the asset side of the Government’s balance sheet - not sure where this exists, it should be possible to realise, at least, some of these assets via privatisation and use the proceeds to kick-start new public sector investment. The new equity investment would simply replace the original equity shareholding in the semi-states - a case of new assets for old assets.

I have elaborated this possibility (in conjunction with policy and regulatory reform in the energy sector) on this blog at:
http://www.irisheconomy.ie/index.php/2009/06/16/growing-the-economy/#comments

Am I missing something?

In the spirit of the debate you call for, I would expand/push back on a few points.

First, even putting aside the issue of composition, I think equating concerns about stimulus with reducing the budget deficit is too narrow. It is hard to look at the composition of Ireland’s real GDP contraction and not conclude domestic demand is playing a leading role. Even so, I don’t think there are too many people who have argued that fiscal adjustment can be avoided even in the very short term for the reasons you have outlined. The debate has been much more about the time path of that adjustment.

Second, looking from the outside, Ireland stands out not for the push for stimulus, but the near consensus that deep fiscal adjustment is unavoidable. Of course, a good part of this relates to objective circumstances, not least the large interest rate and CDS spreads that opened up early in the year. But I think that Ireland’s fiscal history also has a good deal to do with it. Now that spreads have fallen back with the modest stabilisation in financial markets, it is worth asking how different Ireland really is. The piece by Martin Wolf linked to by Philip yesterday provides a good illustration of the importance being placed on fiscal stimulus elsewhere. There is certainly no harm in having this debate.

Third, again compared to other countries, the thinking in regard to how to conduct stimulus has struck me as being narrow. The question being asked elsewhere is how to support near-term demand while making a credible commitment to longer-term adjustment. This also raises the issue of reforming fiscal institutions, including such innovations as legislating multi-year budget plans, instituting an independent fiscal watchdog along the lines of Canada’s new Parliamentary Budget Officer, or adopting automatic fiscal adjustment rules such as indexing retirement age to longevity. We should not be taking the fiscal rules as given but looking for ways to relax the fiscal constraint that forces large adjustment in the midst of a deep recession — on the face of it a massive failure of policy making.

Fourth, the issue of risk has rightly played a significant role in thinking about fiscal policy. In an extremely uncertain environment it is right to be cautious in accumulating debt. At the risk of stating the obvious, the concern is that debt accumulation is irreversible (ruling out default), so it is sensible to wait for better information before making irreversible commitments. I would just add that we know some of the consequences of a demand-driven recession will also be slow to reverse, including the rise in unemployment to hysteresis effects and the destruction of skills and businesses. Irreversibility cuts both ways.

I want to disagree with your final sentence: “But simplistic talk of the need for stimulus is not very helpful.” It depends where you’re coming from, though. You could see simplistic talk as an expression (perhaps indeed a defining characteristic) of the popular will. Shouldn’t determining the popular will be the first step in developing any state policy? Should not economics be the handmaiden of politics?

On a separate point, there may be another reason for the “constant calls for stimulus”: perhaps people would prefer to see the billions (that we would have to borrow) spent on something other than supporting banks and builders. If scarce (indeed non-existent) resources are to be allocated, couldn’t they be spent on something more beneficial? The “poor old government” and the “vast majority of mainstream economists in the country” seem to be convinced that There Is No Alternative to spending whatever it takes on the banks, but I don’t think they have convinced the Broad Mass of the Ordinary Working People. That may be because most public discussion has assumed that banks will be bailed out and has focused on the details, without comparing and contrasting bank rescue with other options. (I accept of course that other options would probably require a revolution, so that we could renege on the bank guarantee and provide some popular streeet entertainment, but what’s wrong with that?)

bjg