You can find the presentations and related materials at the conference page here.
Further notes and video will be posted soon.
Month: November 2009
It is good to see the fiscal policy debate ramping up in advance of the December budget. One aspect of the debate that has received a good deal of attention – not least from the Minister for Finance himself – is the problem of compounding debt service costs. This concern is understandable given the scary arithmetic involved. But it is not something usually emphasised by economists and I think is distorting the debate.
In these gloomy times, here is an update on two socio-demographic trends that give some cause for some cheer, and which do not receive due attention. These trends, previously described for earlier years in a piece in the Economic and Social Review, persisted during 2007 and 2008. They are [1] evidence that the long rise in the proportion of births occurring outside marriage was leveling off, and [2] signs that the number of Irish pregnancies aborted in England and Wales had peaked.
The leveling off in the proportion of extramarital births, which continued in 2007 and 2008, is described in Figure 1.
]. Probably more significant, though, is the continuing downward trend in teenage births. Teenage births surged from 1.6 per cent of all births in 1960 to 6.3 per cent in 2001, but fell off thereafter to 4 per cent in 2005 and 3.7 per cent in 2006. In 2007 and 2008 the shares were down to 3.5 and 3.2 per cent, respectively.
The share of extramarital births to mothers aged less than 25 years has also continued to fall. Between 1998 and 2006 it plummeted from 58.2 to 40.6 per cent; by 2008 it was down to 37.4 per cent (Figure 2). This is important since, presumably, a higher proportion of the births to older single mothers were planned, and thus less costly for mother, child, and society at large.
Abortion remains a controversial and divisive issue in Ireland. A decade ago, the proportion of all Irish conceptions terminated in England and Wales exceeded one in ten. The proportion peaked in 1999-2000, and has declined slowly since then. In 2007 and 2008 the percentage of all pregnancies terminated in England and Wales continued its unheralded but remarkable decline to 6.2 and 5.7 per cent. Nor does the diversion of terminations to the Netherlands—sometimes mentioned as a factor—account for the decline. The number of women giving Irish addresses at Dutch abortion clinics fell from 451 in 2007 to 330 in 2008.
Another feature noted earlier was the striking reduction in the number of terminations by young women as a proportion of the total (Figure 3). Their share has virtually halved, from 6.3 per cent a decade ago to 3.2 per cent in 2008. The proportion of teen pregnancies ending in terminations remained high, averaging 22.2 per cent between 1997 and 2006. In 2007 and 2008 the percentages fell to 18.1 and 17.4, respectively. For older women the share ending in terminations also fell. These declines may be partly due to compositional shifts, but improved sex education and increasing use of the morning-after pill are probably more important factors.
So far, so good. But will these trends survive the recession?
In my presentation to the DEW workshop yesterday and in several previous papers over the last two years (my recent work on the Irish fiscal situation is gathered here, while you can look up my earlier list of papers here), I have tried to explain the reasons why the current Irish situation requires a fiscal response that is subtly different from the standard Keynesian prescription. In general, my global view on fiscal policy would be very much in line with the IMF’s view during the current crisis (as explained here): fiscal expansion should be pursued where it makes sense but “one size does not fit all” and some conditions call for a different fiscal approach.
Here are some of the key issues (but please read my actual papers if you want the more detailed versions of these arguments):
- The current recession in Ireland is not just a demand slump. The pre-crisis economy was highly distorted due to the construction boom and the debt-financed consumption boom. The economy needs to be re-orientated towards the tradables sector and that requires real devaluation.
- Outside the monetary union, other countries are undertaking currency depreciation to achieve real devaluation. The equivalent for Ireland is to reduce domestic wages and prices. Since aggregate inflation is low in the euro area, a reduction in Ireland’s relative wage and price level requires nominal reductions. While this is uncharted territory, real devaluation by this method should parallel the gains obtained by those countries that achieve the same outcome through nominal depreciation outside the currency union
- Part of the distortion during the bubble was that pay rates in the public sector grew rapidly. While this is understandable to some degree due to the very tight labour market at the time, the change in the labour market since then calls for a reduction in public sector pay rates. This is an important component of the overall real devaluation process.
- If the government had run sufficiently large surpluses during the boom, the very large swing in the fiscal position in the last two years could have been tolerated without much corrective action. I have repeatedly pointed to the example of countries such as Chile that successfully ran large enough surpluses during the boom. I have been highlighting since my 1998 paper in the Economic and Social Review the dangers of such pro-cyclicality in fiscal policy.
- A large proportion of the deficit is structural in nature: the resumption of GDP growth in itself will not lead to a return to a sustainable fiscal position. A combination of tax increases and spending cuts is needed to put the structural deficit on a course back towards balance.
- Due to the ageing of the population, public spending is set to increase sharply in the coming decades: excessive accumulation of debt is not appropriate, given future spending needs.
- Funding risk remains non-trivial for Ireland. The sovereign debt spread remains substantial and it is an open question what would happen to the spread if the market’s re-assessed Ireland’s commitment to fiscal stabilisation. The situation of the US and UK is quite different since the sovereigns in these countries ultimately control the currencies in which government debt is funded.
For such reasons, I consider that those who advocate an ‘off the shelf’ Keynesian prescription (as advocated by Danny Blanchflower yesterday) do not have a correct diagnosis of Ireland’s current economic and fiscal situation. The standard Keynesian prescription is appropriate if an economy on a sustainable growth path and with sustainable public finances has been temporarily knocked off course by a demand slump. For the reasons given above, this is not the situation in Ireland.
That said, I would not exaggerate the differences too much: according to the ESRI’s latest projections, Ireland is set for a general government deficit of 12.9 percent of GDP in 2009, which corresponds to 15.2 percent of GNP. A fiscal package of €4 billion in 2010 would still leave the deficit at 12.8 percent of GDP in 2010 – it is not the case that the current strategy is seeking to ‘balance the books’ in the short term.
Here is the background note on this topic that formed the basis for my talk at today’s DEW/UCD Economics Workshop.