Macroeconomic Adjustment: The Second Phase

Robert Wade has an interesting piece on Iceland in today’s FT: you can read it here.  The main point he makes is that some of the assistance measures adopted last year are due to expire soon: much of the pain of the crisis was delayed rather than eliminated by these measures.  Accordingly, the full impact of the crisis on Icelandic living standards has yet to kick in.

6 replies on “Macroeconomic Adjustment: The Second Phase”


If the journalist’s description is only half-right, then the population of Iceland are having a far better time of it than we are here.

Presumably, if the IMF came in to Ireland in the morning, there would be no question of delaying the pain for us. Also, if it’s true that the ‘recovery’ and end of recession calls in the major European economies are founded on the sand of stimulus packages that are now petering out and that a new dip in the world economy is on the horizon, then the cuts agenda proposed in the McCarthy report and any tax increases proposed by the Commission on Taxation may not be enough. Or am I being too pessimistic?


I don’t think you are being too pessimistic. I was only recently reading about the dangers of the US (and other major economies) facing a double dip when the various stimulus packages fizzle out. Not that I’m convinced that we are truly at the bottom of the first dip yet but then, I’m a bit of a cynic.

We seem to have had a barrage of ‘good news’ in the past few days and you have to say, it is looking very orchestrated. I presume the G20, if they don’t have an in-house one, have plenty of money to buy a good spin machine.

For the past six months we seem to have had ‘confidence polls’ (aka ‘opinion’) and ‘declining less quickly’ comments rammed down our throats… while trying to put a smoke screen over hard data.

Something is afoot. Mark my words. I smell a rat out there somewhere and I’m trying to track it down…….. even if I get my description only half right 😉

The Icelandic piece is particularly interesting if you substitute NAMA and other bank losses (50% of GDP in total doesn’t sound too far out of kilter if you include all bank losses through the cycle and not just those that will be passed to NAMA) for Icesave.

The figure for the required reduction in the cost of public services also looks comparable to that required here.

I thought a very relevant piece in the FT, which deserves attention.


If you want to sniff out that rat of yours take a look at the electoral cycles in some of the major economies. UK and Germany are facing elections in the next 18 months, so their governments naturally want to paint as optimistic a picture as possible for their respective electorates. Governments like ours, that (in theory anyway) have three years to run, are under a different sort of pressure, i.e. to take decisions that may or may not benefit them electorally in the medium term, but are unavoidable nonetheless.

There’s the self-fulfilling prophecy aspect too. Relentless negativity promotes despair and apathy. Unfortunately, a lot of public debate here is almost entirely negative. Maybe with good reason in the current circumstances, but also arguably a contributing factor to the ever deepening stagnation in the economy. Has anyone ever done a study on the influence of political culture on economic crisis management?

The writer R Wade, is professor of political economy at the London School of Economics and author of Governing the Market.

Not a journalist. He is 100% right about the financial details, except he thinks they will pay off UK and Netherlands. He does speculate about the impact fo these devastating changes, though.

This depression has been 19 years in Japan, 9 years in the USA and 2 years in Ireland. It is six months in evidence in Australia where, technically, we have not yet had a recession. I count the property bubble in the USA as Fed action to reverse the depression and deflation cycle, but incomes fell slightly during the asset boom, and now the debts are so much greater.

What is wrong, is that the markets in the states are artificially high, due to the PPT. Plunge protection team. It is centred on, too big to fail, Goldman Sachs. Rigging the market can last for a very long time, ask the Japanese. But eventually, it reverts. This is to disguise the collossal destruction of capital. The stimuli are dwarfed by comparison.

The pollies have to clean up this mess. It will be worse than the 1930s. Save your capital while you still have some!

Pat Donnelly,

Thanks for filling me in on Robert Wade. I’ll look up his book. By the way, I think I read somewhere yesterday that the Icelandic parliament has approved the deal to pay back the Netherlands and the UK (?)

I think we can take international comparisons too far. What works for one country – and the extent to which it is publicly acceptable – simply won’t work in another, due to differences in political culture. For example, our political culture is generally adversarial, while the French model is one of centralised autocracy whereas in the Nordic countries there is a more consensual approach to decision-making on issues of national importance, which in turn affects their respective society’s response to policy. Sometimes I think economists and other expert groups here, never mind politicians or political commentators, don’t take sufficient account of that in their analysis.

Comments are closed.