We don’t face just one crisis, we face several interlinked ones. The fiscal and economic crises must be solved, but we must also make a rapid transition away from our over-reliance on imported fossil fuels. Expert groups like the IEA and industry groups including the likes of Richard Branson have warned of a severe (and possibly permanent) energy crunch within 5 or 10 years, and many experts say it could be closer. If Ireland were to somehow emerge from this crisis with a growing economy, only to be hit by the post-peak decline in world oil supplies, the economic damage would be so great that it would undo all our efforts so far.

The only way to deal with all of these crisis is to take an investment-led approach to solving the deficit and growing the economy. Because to do otherwise would fail to achieve energy security.

Austerity makes transitioning to energy security impossible. So even if Karl’s calculations are correct, they are so only because they do not factor in all the other problems that arise from not investing (to which we could also include failing to improve our water infrastructure, communications infrastructure and our education system, all of are liabilities which will either cause economic damage or reduce growth in the future…). We could also add that without investing in conservation and wildlife protection we leave our country more at risk to the destabilizing effects of climate change. And failing to invest in a top-quality public transport system will leave us in big trouble if oil prices rise making road transport hugely expensive.

It is as if Ireland were threatened by two foreign armies at once, and our defence forces were stretched thin. The military leaders then decide that the problem looks more solvable if they just pretend that one of the foes doesn’t exist, and concentrate all their resources on the other. They score a victory against that foe, and just close their ears to the sound of the other army bearing down on them, because if they don’t recognize it as a threat then they can tell themselves that they have won the war.

We face many overall problems, all interlinked: The fiscal crisis, the unemployment crisis, vulnerability to a possible energy shock, neglected communications transport and educational infrastructure. All of which threaten our economy. You can’t just focus on the fiscal crisis and neglect all the others, because the others will all undermine your attempts to balance the budget.

One more problem we need to solve: inequality, which as the Spirit Level and other research shows, is very socially damaging. By redistributing resources from the wealthy towards job creation we could tackle this problem as well.

Just noticed your comment, now, sorry I was travelling over the last number of days.

Your comment is valid for the current time about educated people who are unemployed in Ireland.

However when the upturn comes, these people should find employment prior to uneducated workers etc.

Secondly a person with a good third level education also has the choice to emigrate to another juristiction, i.e. Canada, Australia etc.

It is much easier to gain access to these countries if one is qualified to a high level, rather than just Junior Cert level etc.

I am sure you would agree with the above points.

When I wrote “the world can be your oyster” I ment the world outside the island of Ireland.

However I note Mr Gilmore is starting to flex his muscles, he is now promising to tax people with a Irish passport.

So there may be no point in emigrating as you will be subjected to double taxation, pay tax to the juristiction you live and work in (Australia for example) and pay income tax to the Irish authorities for having a Irish passport.

So if one emigrates, one will have to change your citizenship to avoid double taxation.

In this regard (and for the sake of consistency) is it not logical to argue in favour of a coordinated Eurozone stimulus strategy? If we have no intention of leaving the Euro to adjust our exchange rate then it seems that the only logical strategy for Europe (not just Ireland) is a collective coordinated response driven by Brussels. That is, the choice is national strategies based on deflation or federal strategies based on coordinated investment.

At present, and from my reading of Paul Krugman, he is critical of Ireland not because of its deflationary policies per se, but because it has started a series of competitive internal devaluations as the primary strategy to exit the recession. This ‘beggar thy neighbour’ approach, exemplified by Ireland, has put pressure on other economies to behave in a similar manner.

To put it another way, which two scenarios would work better for economic recovery:

1. Every economy adopts a strategy akin to Ireland

2. Every economy adopts a strategy akin to Krugmans proposal

It is pretty obvious that if every economy behaved like Ireland the world, and in particular, Europe, would be in a pretty bad place. Thus, Krugman is right to be critical of economic policy proposals that resemble the Irish response to the crisis. He knows that it is setting a dangerous and uncertain precedent.

It is a classic collective action problem - adopt a self interested zero sum strategy or adopt a collective positive sum strategy. To be logically consistent with the former we may as well exit the Euro. To be logically consistent with the latter we have to wake up to the policy constraint/opportunity of European integration.

http://www.rte.ie/news/2010/0725/centralbank.html

Kinda sad really. Must make a nice view from on top.

Does the result of a CBA change when the employment sustaining element of a programme/project is taken into account due to a change in market conditions? i.e. when the incremental savings from not having to pay job seekers allowance etc. v the PAYE tax take etc. Does this bias progressing investment projects (improve the overall CBA) in times of involuntary unemployment?

I agree, the pricing of Irish bonds, and others, ultimately reflects a view of the likelihood of repayment, and the risk premium sought to compensate for that risk. The focus is all on cashflows, and Irish taxes (govt. cashflows) have collapsed.

It should be very sobering for those arguing for further austerity measures that Ireland’s risk premium has risen by 235bps since this policy was adopted.

To break a rule, I’ll answer your quaestion with one of my own, if I may. What if tomorrow govt. announced that an independent body, let’s call it the Office for Fiscal Recovery, composed of EU, US and Irish experts was being allocated €2bn from govt. finances (financed by borrowing at 5.5%) in order to invest in NDP-style projects? The OFR would only invest in those areas where there was a return significantly above 5.5%.

In the Mid-Term Evaluation of the NDP 2003, Fitzgerald and Morgenroth estimate that the return is between 14% and 18% annually, depending on the composition of the investment. (They could be two nominees to the OFR, along with other EU experts on monitoring CSF allocations).

The government could announce that the members of this independent body had previously identified such high-return investments, and would oversee their implementation, not the politicians (although the OFR cold take submissions from all intersted parties). The government would also ensure that the evaluation of the investment returns was independent. And that they would only release further funds to the OFR if that were proven to be the case, ie that the investment returns were high and actually helped to reduce the deficit.

Given that the markets didn’t blink when the Ango bailout was announced, I don’t think €2bn woud phase them.

In this way we might be able to dis/prove the proposition that investment returns to reduce the deficit. (In Britain, for example, the 2009 Budget was mildly stmulative and brought forward govt. investment, altogther about £50bn in fiscal expansion. The official forecasts for the deficit for this year have fallen from £178bn to £145bn. Given that this economy is both more open and more highly educated, the effectivenes of all investment, govt. included, should be greater).

My only stipulation would be that, if the returns to govt. were greater than the initial €2bn, the OFR can shout it from the rooftops, and that the govt. would then be obliged to investment large sums to revive the ecoomy and close the deficit.

All investors, including bond investors, will have no problem lending at 5.5% if the anticipated return is c. 16%. They do have a problem lending at 4.3% (when austerity was adopted) when the returns are negative.

Remember the pension funds aren’t running a charity. The government did have some engagement with them last year and the offered to provide very expensive long-term funding. Perhaps others can fill in the details but it was something like 20 year funding at 2 percent over then prevailing 10 year rates.

I’m happy to be corrected on the specifics of this by those who remember it better.

I wonder however whether imagining

(a) just the right programs

combined with

(b) solving the funding problems

doesn’t have a touch of “imagine a tin opener” about it.

The long-term return of capital projects financed by borrowed money has to take into account the future income stream generated by the project. This, in turn, is a function of the wealth of the project’s future consumers, who are the taxpayers paying to reimburse the project.

For example, Ireland Inc. borrows 5 bn to build a metro. The metro’s projected profits are a function of future consumer discretionary spending (a rich future Ireland has lots of metro punters willing to buy expensive monthly passes, etc.). This future consumer discretionary spending is a function of how much the future taxpayers have to pay to service the future debt. An extra 5bn in debt reduces their stream of future spending by 5bn.

If you want people to dig holes at least have the decency to allow them to bury themselves before filling the holes in again.

The (almost unique) openness of the Irish economy means that a stimulus package would have much less effect in Ireland than in other countries.

However, the other side of the coin is that, due to this openness, Ireland’s economy benefits disproportionately from other countries’ stimulus packages, indeed from whatever growth occurs in those countries regardless of whether or not it was stimulus-induced. So, very good news that the UK GDP growth figures for Q2, which came out this morning, were much better than expected.

Also noteworthy are the CSO figures just out this morning, which show merchandise exports from Ireland roaring ahead in May, exceeding their pre-recession peak, and the surplus at an all-time high. While I can’t be certain, not having checked for all countries, Ireland is probably the first EU country to achieve this. As services exports are also growing strongly, it is clear almost beyond doubt now that Ireland’s exports will grow much more in 2010 than the 4.8pc the Dept of Finance predicted a few weeks ago (as indeed I posted here at the time that they would). It is virtually certain now that the next Dept of Finance quarterly report in the autumn will contain yet another upward revision to their forecast for GDP growth in 2010 (having allready been revised upwards from -3pc last summer to +1pc this summer).

Of course, exports themselves generate relatively few jobs. Only when they trickle down into increased consumer spending, via the wages of those producing the increased volume of exports, do jobs get generated in large numbers. This is a slow process, much slower than a government stimulus package, but much more sustainable. There are now signs that this is beginning to happen, as evidenced by today’s statement by Britvic and the survey on Irish retailing reported earlier this week.

I was thinking more along the lines of opening a discussion with the Irish Association of Pension Funds. There wouldn’t be any coercion. Many Pension Fund Trustees have no idea where to invest today. The idea could be presented in terms of likely returns. The money has to be invested somewhere anyway so why not in Ireland ?

EU rules about free movement of prevent governments from introducing rules that force financial institutions to invest their money in home country assets. So this just can’t be done.

I’m happy to agree that, ultimately, we have to subject all public investment programs to detailed cost-benefit analysis to try to figure out their effects. I can’t rule out that there may be projects that tick all the right boxes — short time delays, employment intensive, positive supply-side effects — so that they pay for themselves and suggestions for these kinds of projects should be welcomed.

However, I still don’t think that this deals with the last problem I raised in the post — finding people to lend you that money.

Suppose the government announced tomorrow that it was changing course and instead of cutting public investment, it was going to start raising it over the next few years. Even if the government assured everyone that it was only going to focus on high quality projects that paid for themselves, my guess is that the reaction would be “well they would say that wouldn’t they?” One also must remember that the pretty poor track record of our government in its costing and completion of infrastructure projects would undermine the credibility of this kind of statement.

I strongly suspect that an announcement of this type would not be welcomed by the international bond market who (rather than this being some sort of consipiracy) would just apply standard analysis to project that this program would raise the deficit.

So even if these projects existed, I doubt if we could raise the funding for them.

http://hbswk.hbs.edu/item/6420.html

Were you to subject such investment proposals (of the type being advanced here under the generalised and not wholly satisfactory term ‘stimulus”) to the same calculations as you applied to a permanent increase in Government expenditure, it would be interesting to see if the result is similar (GDP growth, resulting tax revenue, budgetary sustainability, etc.). Were such results to show a more beneficial impact then obviously one should, then, assess how viable such a programme is – taking into account the issues you raise. We would have the benefit of a new fiscal base-line and tackling those issues would, then, have a pragmatic character, one that may or may not wholly or partially negate the benefit in principle. However, in the absence of such a recalculation the question remains unanswered – would a ‘stimulus’ work in Ireland.

The gubbermint is providing a 20bn stimulus so this is a question of degree. We have just about convinced the markets/ECB that the current budget strategy is sustainable, no scope for a reversal now.

That great disciple Gene Kerrigan will be disappointed, he is an avid fiscal stimulator.

????
Seriously
A great education like law, architecture, engineering, all flush with employment oppurtunities at the moment.
There are people who have dedicated years of their lives to a career that wont see a return.

Investing 1% of GDP in infrastructure would cost the government less than 1% of GDP due to savings to social welfare (which in Ireland are more generous than in the US).

RE: Multipliers
The multiplier should be closely related to the output gap. As our output gap is fairly massive, historical estimates of the multiplier can only serve as a minimum estimate. Also any notion of a expansionary fiscal contraction can be safely ignored given that it would require easy access to credit, which simply does not exist at the moment.

“Massive construction workforce”….

I would not be too sure that the Govt created this.

Lots and lots of young immature boys left school after the junior cert to go earn the big bucks on the building sites.

They gave up the opportunity to educate themselves to Leving certificate and or 3rd level. A grave error.

They made this decision of their own free will, perhaps their parents / teachers advised them, or perhaps they did not. We might never know.

But its a lesson to other immature students, never pass by the chance for a good education.

If you have a transferrable skill, like engineering the world can be your oyster.

Kudos to Karl and both Michaels.

It’s interesting to note how the government has been quietly backsliding on capital expenditure over the past couple of years, from the initial talk about ring-fencing the NDP to today. At the same time, even a campaign of building roads, bridges and tunnels wouldn’t provide much relief for, say, carpenters and plasterers (though it’s true that we could do with a few schools as well).

@Michael Burke

If you were given a choice between exactly one of the following two alternatives: a 5% cut in public-sector pay and benefits, with 100% of the deductions going into the NDP, or the status quo - no cuts and no extra capital expenditure - which one of these two options would you consider preferable to the other?

What isn’t so doubtful is that many Irish proponents of stimulus are less interested in stimulating the economy that protecting public sector pay and conditions. This’d be the view that protecting pay via increasing taxes is a stimulus.

the type of investments I have in mind are actually an expansion of the NDP beyond originally envisaged, not its contraction as per current policy. The NDP was (rightly) curtailed during the boom so as not to exacerbate the construction boom. The approriate policy now would be to expand it to counteract the slump.

Investment of that type has both short-run as well as long run effects, as all the evaluations show. The short run efects are of the investment multipliers already mentioned, but the long run are additional, very long-run supply-side effects.

The evaluations also, of course, include any supposed ‘leakage’ effects. To you earlier point, I cannot agree to the reductive assumption that high import levels automatially lead to excessive leakage.

On the contrary, the bulk of Irish imports are for re-export. In the input-out analysis of 2005 the 2nd to 5th biggest categories of imports amounted to €27.1bn - in food and drink manuf., chemicals, office machinery and insurance and their total trade surplus was €39.4bn (ie total exports were €66.bn from these sectors). The biggest category of imports were ‘other business services’ which were €28.6bn in imports and a net deficit of €23.8bn.

CSO explains that this category is the purchase of inter-affiliate management services by large MNCs. This is impermeable to govt. investment here. While the other big import categories actually yield huge net exports.

The high degree of Irish participation in the international division of labour would tend to increase efficiency and therefore the returns on all investment, including govt. investment.

“With our current budgetary path looking barely sustainable to the international lenders,”

Karl,

What is your view on the sustainability of our budgetary path?

Assuming global growth assumptions which you beleive to be the most likely, and the continuation of NAMA in it’s current form, will we have to restructure our soverign debt?