The Irish Economy

FAS produces a useful quarterly commentary on the Irish labour market, which provides a detailed analysis of what has been happening in recent months: you can read a summary (and download the full report) here.

International capital flows are supposed to be good for two reasons. First, they divert capital to where it can be invested most productively, enhancing efficiency and growth. Second, they help diversify risk. As regards the first benefit, helping rich country consumers borrow and consume is not what we typically think of as a productive investment. As regards the second benefit — well, the less said the better, really.

In a widely noticed article in the FT, Nouriel Roubini has argued that capital flows are now creating major asset bubbles outside the US, as investors exploit the weakening dollar to borrow at negative interest rates and invest the proceeds overseas. If he is right, then central banks are faced with an impossible dilemna. Outside the US, if they raise interest rates to prick incipient bubbles they jeopardize the recovery, and/or attract even more capital inflows. Inside the US, raising interest rates clearly places the recovery at risk.

I understand where Wolfgang Münchau is coming from when he calls for interest rates to be raised sooner rather than later, but having seen the world economy edge away from the precipice, I am not keen on measures that would bring us closer to it yet again.

If the problem is indeed being caused by ‘the mother of all carry trades’, as Roubini suggests, then throwing a few bucket-fulls of sand into the wheels of international finance seems to me to be a far less risky way of trying to deal with it. International capital flows have been associated with enough crises to be going on with these last few years.

In a comment on another post, Declan Fallon raises some interesting issues about the distribution of forthcoming pain. I thought it might be interesting to tease this out a bit more.

Most of the debate about the incidence of the fiscal adjustment has focussed on the public/private sector divide and, to a (regrettably) lesser extent on the insider/outsider (i.e. employed vs. unemployed) divide. However, there is certainly a demographic aspect to this. For example, after the medical card debacle, pensioners seem to be guaranteed immunity from the adjustment - one of the reasons for implementing the public sector pay cut as a pension levy rather than a pay cut was to protect the pensions of current pensioners; and, as Philip Lane mentioned at Monday’s conference, this protection is likely to extend to the budget. But it seems certain that child benefits will be further cut. Does this make sense?

As Declan emphasizes, children are not pure consumption goods; if they were, then the only argument against cutting payments in respect of children would be the particular necessity of keeping children out of poverty, in which case cutting child benefit - at least to the middle classes - would make perfect sense. But children are effectively investments too; they have long term economic value. It is in the public interest for citizens to produce children. So if putting the burden of the adjustment on parents has the effect of reducing fertility, the long-run negative effects may cause us to regret it. (more…)