Following on from Philip’s recent post on domestic demand, I dug out this paper I wrote in 2000 with Rodney Thom to see what I was saying at the time. Philip suggested I post the link as part of our ‘nostalgia series’, so here it is.
I’d say about 5 people read the paper. We got some things right and some things wrong.
The context was the incipient inflationary pressures already building up in the economy. Some thought inflation was due to one-off supply side shocks. Rodney and I argued that the inflation was due to excess demand, and that the correct response (given that the first best policy — raising interest rates — was no longer available to us) was restrictive fiscal policy. We did recognise the political difficulties of cutting demand through restrictive fiscal policies at a time when the economy was booming. Sadly, that proved all too correct, but I don’t suppose that either of us anticipated the extent of McCreevy’s pro-cyclical folly.
We identified the risk of overshooting, followed by a hard landing, and I seem to recall that a few people at the time were worried about that — cf. the brief snippet of Krugman on this evening’s Prime Time. That wasn’t prescience, just basic macroeconomics.
One thing we got badly wrong was our assumption that if overshooting occured, and a hard landing ensued, social partnership would provide the means for reducing wages and other costs right across the economy in a coordinated manner. (This was based on the late 80s/early 90s experience. It hasn’t happened. Rather than all jumping together, we have jumped or been pushed one group at a time, which is economically ineffective and politically corrosive.) Worse, social partnership would soon become an important driver of pro-cyclical fiscal policy.
My conclusions from having gone down memory lane in this way is I guess a pretty obvious one: we don’t have either the fiscal or the labour market institutions that are required given EMU membership.
9 replies on “Inflation in 2000”
On the subject of ‘restrictive fiscal policy’, I was shocked while reading Shane Ross’s book ‘The Bankers’ to learn Brian Cowen had increased public spending by €1.6 or something billion euro in the 2007 budget. I may not have the details exactly correct, it is in the chapter called ‘Meltdown’.
Senator Ross notes elsewhere in the book, that Cowen’s largest difficulty as Minister for Finance was his own ambition to become Taoiseach.
Lets just iterate here for the record, that anyone in the ‘International Investment Community’ can pick up a copy of Senator Ross’s book for themselves and read the thing. It is not like we are hiding behind much anymore as a nation. We aught to adapt our future strategy around that fact. It’s all out there now.
The 2000 era social partnership was a very different beast from its late 1980s cousin. By 2000, Bertie Ahern had realized that it was the way to neutralize potential opposition with a “whatever you’re having yourself lads” approach to wage negotiations. It was no longer a macroeconomic stabilization mechanism.
A sharing of the pie approach was also a payoff for restraint in the bad early years.
It was not inappropriate, but the lack of caution, given the Kondratieff cycles and the events of the roaring twenties and sad thirties, was shocking. Did no one say that perhaps the low interest rates were in fact an indicator that there was a massive problem in the economies concerned?
Just who was in control of the rudder? Was it that there was no awareness of as you say, basic macroeconomics? The degree of malinvestment increased over the years after 2000.
When was it to be reined in, if not in the good times? Well it seems we have the answer now, we rein it in when the bad times are here! Not economic management as anyone sensible knows it!
If the partnership process was responsible for this then the major fault lies with those who were voted into government and also with the opposition for failing to warn. The other partners were merely satisfying their electorate!
‘We have neither the fiscal nor lobo(u)r market institutions required …’ lovely to meet a reality …
You are probably a little harsh – we have some of them but insufficient of either that are tuned …. what we do not have is a general idea of of the main institutions (yet to be re-recognised) that are ‘systemic’ to who and how we are – or even if we have thought of it. As a munster man, I’m socialis(z)ed into thinking that if there is a bonus point in the vincinity that the onus is on us to check it out and pick it up – into the unknown with a bit a purpose. The local, the particular, and the abstract universal are often in the same beautiful goddamn play.
The idea that Ireland has been inflating much more than other Eurozone countries, and therefore is unworthy of EMU membership, which seems to be implicit in the opening thread, is somewhat exaggerated. I have calculated the changes in HICP between 2000 and November 2009 (the latest available) and these are the figures:
So, yes, HICP inflation in Ireland since 2000 has been above the Eurozone average, but not by much. In Ireland, the HICP increased by 25.7% between 2000 and November 2009, compared with the Eurozone average of 21%. But, in the same period, GDP growth in Ireland was over 30% (despite the recession), compared with under 10% for the Eurozone. Most people would say that is a reasonably good trade-off. Since 2008, HICP infaltion in Ireland has been less than in the Eurozone and, in recent months, has been on average about 0.5% a month less. If this persists, relative prices in Ireland, compared with the Eurozone, should be back to their 2000 level by around September next year. But, the relative increase in GDP of around 20% will still be there.
Well done. Perhaps you might like to have a go at the data in this table.
Your figures confirm exactly what I said, namely:
“If this persists, relative prices in Ireland, compared with the Eurozone, should be back to their 2000 level by around September next year.”
I stand by that statement. If anyone disagrees, feel free to debate.
Your table only goes up to 2007. That was the peak year for the comparitive price level in Ireland exceeding the Eurozone leve. HICP inflation in Ireland has been lower than in the Eurozone almost every month since then.
What your table shows is:
in 2000, the compaarative price level in Ireland was 14.2% above the Eurozone level
in 2007, the compaarative price level in Ireland was 21.9% above the Eurozone level
So, for Ireland to get back to its 2000 comparative price level relative to the Eurozone, the HICP in Ireland needs to fall by 6.3% relative to the Eurozone from 2007. Agreed?
Eurostat gives the following HICP indices:
2009 (Nov) 106.2
2009 (Nov) 108.53
So, since 2007, prices have gone up in Ireland by about 0.5% and in the Eurozone by about 4%, giving a relative price fall in Ireland of 3.3%. So, they need to fall by about another 3% in Ireland relative to the Eurozone to be back at their 2000 level. Agreed?
As I said, if the recent trend of prices in Ireland rising monthly by about 0.4%-0.5% less than in the Eurozone, this should be achieved by around September.
If you move the cursor to the right you should find 2008. The HICP and the deflator of final consumption by private households are not identical. And one has to be careful applying price indices to relative price levels that use PPP (see note to table).
I’m afraid it will take a little more concerted action to root out monopoly rents, unjustified costs, inefficiencies and implicit taxes to reduce the relative price level of final consumption.
And why should 14.2% above the Eurozone average be seen as an acceptable outcome anyway?