I was wondering why Krugman was interested in Ireland. Google search linked to the following previous piece:

http://www.nytimes.com/2010/03/08/opinion/08krugman.html

The key area of interest seems to be how there are lessons to be learned for US financial regulation from the nearly-contemporary but very distinctive Irish credit crisis.

Quoting his article of 19th April 2009 from the NYT, “And the lesson of Ireland is that you really, really don’t want to put yourself in a position where you have to punish your economy in order to save your banks. “

There are just as many people out there who question why your economic preference is given a large media platform as there is Paul Krugman.

(But, if they are not sufficiently forward-looking, then the basis for Ricardian equivalence arguments would also be undermined!)

the curve slopes away from the borrower for sure but the lesson of 2010 is that there is a vicious kink at some unknown point in a range surrounding our likely exit gross debt ratio.

One issue that needs to be addressed is the net versus gross debt, and deleveraging. It is plausible that, for a given net debt, the curve is less favourable the greater the leverage. If I would lend you €1 mill at 5% and zero net debt, I should take a different view if you geared up another mill to punt on external assets, for example. What degree of leverage is there in the State’s overall balance sheet (including deferred and contingent liabilities), and are there low-pain methods of managing it down?

“The golden rule in mountain climbing is that your hands always need to have a good hold. If you have a good grip, you can take some license with your feet– for example, make an attempt to reach a ledge that’s still covered with the dew, or scale a crossing that might be a little too wide for your legs. But if your hold is uncertain, you can take no risks: a single error could be fatal.

A mountain climbing analogy seem apt given that the upcoming Kansas City Fed’s Jackson Hole conference is focusing on fiscal policy. It also helps us understand what the stance of fiscal policy should be at this point in the crisis. It suggests that governments should commit to future spending cuts large enough to stabilize debt levels over the medium term. But, once future sustainability is locked in, they could afford to take some risks with current deficits. They could delay removal of the fiscal stimulus, or even add some additional stimulus if private demand is slow to recover.”

Colm,
I have little doubt that the credit supply curve slopes upwards (by which I take you to mean a graph of the interest against the debt to GDP ratio). My main point is that there are policies that can be pursued that affect the postiion and shape of the curve. We need to broaden the fiscal debate.

Might go to Modena if tie still alive.

Whether they should be giving Nobel prizes in economics is however another matter which deserves to be debated. And I think that *everyone’s* arguments should be evaluated on their merits, not on the basis of their proponents’ cv’s. (Irish public debate involves much too much ‘proof by appeals to authority’ in my view, and that is a reflection of the poor level of the debate in general, and of peoples’ understanding of technical matters. Perhaps also of the Hist/L&H backgrounds of many of the people involved. I am constantly struck when I listen to Danish radio thanks to the wonders of the web how much calmer, better-informed and less ad hominem debates are over there.)

I am not even going to Tallaght on Thursday since I am away!!! Can’t believe it! If Bono wasn’t screwing things up I might have gone to Turin, it’s 2 hours away, but Modena may be a train or two too far for me.

Now one could read all the theoretical material on multipliers until you were blue in the face, but under current Irish conditions it seems only possible to conclude that a borrowed stimulus would lead to a short boost but a mid term disaster (potentially quite soon). A fiscal contraction may well lead to a short term overall contraction and some painful years, but seems the only way to avoid really painful years later on. So, whether or not PK is theoretically generally right about the short term he’s almost certainly wrong about Ireland in particular and whatever your view on the impact of fiscal contractions, I don’t see that Ireland has any other choice right now.

As J Fitz said, the composition of spending will be critical, which is why cuts in infrastructure spending is worrisome. We may not need more highways, but there are lots of other things that would have a positive impact on the economy.

Meantime, the parallel concern for me is that the incentives in the Irish economy have now been skewed away from sensible investment for a long time, and are again increasingly skewing away from rewarding hard work and prudent decision making. Could you honestly argue to foreign high skilled workers (outside the medical field) that they should come to Ireland and pay our taxes, levies and housing costs while simultaneously trying to get their kids into the local school by trying to pretend that they’re good Catholics? Could you honestly argue that personal investment in the kind of education that we hear we need for the economy’s long term future will have a good personal ROI?

Under current conditions John Fitz’s 2nd point 3 leads to scary conclusions, particularly if you make it more forward looking and more investment related. If you ask whether or not it makes sense to invest in yourself (and the country) right now or to stop investing in yourself and/or to leave the country then the right answer for many people is not one that will be good for Ireland Inc.

(sorry to be so long winded)

Excellent debate.

John McHale recommends

bringing forward capital spending plans (or, more practically, limiting the postponement of existing plans)
clear commitments to begin the process of putting in place low-distortion revenue sources such as a property tax and water charges
a clear and well-advertised timeline for implementing the national pensions framework, and especially the phased increase in the retirement age
the fast tracking of an independent fiscal council to increase the credibility of fiscal commitments
and implementation of a special resolution regime for severely undercapitalised banks ‘

Those are some of the things which ought to have been done when we had the necessary economic headroom. Sadly, our political leaders, parties and institutions were unfit for purpose in that respect. I guess the impetus will now have to come from outside, and only after the threat to national solvency become very explicit.

@ Colm McC is right to focus on national solvency, but @ Hugh Sheehy has raised equally critical issues of trust, governance and the social contract:

‘Unfortunately, although civil servants and TDs seem to be successfully able to claim that they had “legitimate expectations” for high pensions and payouts, legislative changes in tax rates trump any “legitimate expectations” that normal people might have about their income or savings or investments’

‘Normal’ people includes many younger professionals who have not managed to get stake in the old game and also are saddled with negative equity. People have been sold a pup. One way to respond is to go. The other is to stand and fight back.

Professional education can, and should, be used to design fairer and more productive economic relations, including, and especially, taxation arrangements. State reform is inseparable from professional reform, and with the greatest of respect to the expertise on this blog, the problem is political economic. Economics can contribute to solutions, but cannot deliver them.

We have a major agency problem in Ireland. As has happened so often thoughout history, the function of the principal has been usurped by the state’s agents. While spectacular looting has been carried out by the banker/developer nexus, @ Michael H has pointed, in very plain terms, to a fundamental perception in our polity:

‘The culture of grabbing as much as possible while the going is good or even bad, is not going to change.
Public work is important for the some of the highest earners as it usually provides a consistent income stream’

Our state has never escaped the grip of vested intererests, including the professions. Professionals have been able to leverage their self-governing status to secure privileged terms of state employment and state contracting.

Public officials and politicians have, in turn, levered their own set of corporate benefits, as fellow professionals, from this cosy arrangement with the ‘liberal’ professions. That unspoken ‘deal’ sets the standard of social aspiration and social responsibility for our aspiring middle class.

The result is that ‘management’ controls over public work are, in practice, ceded to corporate professional interests within and around the state.
Public sector trade unions are, in large part, modeling themselves on self-governing, and self serving, professional classes. Gouging, dissembling, croneyism, and swinging the lead needs is recognised for what it is. Unsocial conduct.

Paul Krugman seems not to care that throwaway remarks about Ireland or Ruritania in the NYT will be accorded more attention than they deserve, by Irish (or Ruritanian) journalists because he won a gong. I think this is unprofessional (by both parties). What do you think?

You going to Modena?

Positive: has Ireland’s austerity plan boosted GNP, as the negative multiplier confidence fairy crowd suggest? I think not. GNP 20% down and still falling as of Q1 ought to dispense with that one; and we are not regarded as particularly credit-worthy by bond markets either. This is the important point for PK I think — you cannot use the Irish example to argue for pro-cyclical fiscal policy in the rest of the world. As John says, there are no fiscal free lunches out there. (BTW, I thought Marty Feldstein’s piece in the FT yesterday was admirably honest, and I wish more people on his side of the debate would be the same way.)

http://www.ft.com/cms/s/0/2447452e-95af-11df-b5ad-00144feab49a.html

Normative #1: could Ireland have done any different? Not from the moment we put in place an incredible bank guarantee opening the possibility of a fiscal-cum-bank run, that was immediately followed by those enormous projections of deficits. But this is a very sui generis Irish story.

Normatiive #2: do the Germans, Brits etc have to embark on austerity now, and will this boost their GDP via negative fiscal multipliers? See positive above.

My take on the lessons of Irish experience is that (a) pro-fiscal policy is a really bad idea, in both good times and bad; (b) insisting on paying back nearly all debtors of insolvent banks is also a really bad idea. I doubt that either yourself or PK would disagree with either of those lessons.

Maybe when the score of the match is 84-7, it’s not considered big news!

I guess Karl Whelan needs to have some free time!

There have been a few allusions here to David Ricardo who paid £4,000 and lent £25,000 more to Lord Portarlington on mortgage for the privilege of representing 12 electors of Portarlington in the House of Commons.

Politics comes cheaper today and there is no sector of the economy that is not dependent on the public purse.

The end of 40 years of EU foreign aid is looming in 2013 when Ireland becomes a net contributor to the EU budget for the first time.

The culture of grabbing as much as possible while the going is good or even bad, is not going to change.

Public work is important for the some of the highest earners as it usually provides a consistent income stream.

Taxes remain low but how can quality services be delivered?

Total tax revenue was estimated at 47.1 percent of Sweden’s economic output in 2008, second to Denmark’s, at 48.3 percent, according to the OECD. Ireland was at 28.3 per cent.

Sweden had the European Union’s smallest budget deficit to GDP at 0.5 percent in 2009, the European Commission said last May.

On point 3, recent horror stories by Morgan Kelly and Dave McWilliams come to mind too.

Anecdotally (no basis for certainty, but it’s what I have), many people have serious concerns about the outcome of several longer term investment questions.

People simply don’t believe that sensible investments (in career, savings, education, business) won’t be punished whenever it’s convenient for some future government. This is a general concern in most countries by now, but particularly serious in times like this in a country in Ireland’s situation. At the extreme end, and although I’m not 100% in agreement with his reasoning on many occasions, didn’t Constantin G calculate that any education past secondary was a bad investment under the current tax regime, at least in the private sector?

Remember also that the cuts we’re discussing are intended only to stabilise a bad fiscal situation, not to actually result in a good fiscal situation, so there must be suspicion that there’ll be another shoe dropping somewhere down the line.

Unfortunately, although civil servants and TDs seem to be successfully able to claim that they had “legitimate expectations” for high pensions and payouts, legislative changes in tax rates trump any “legitimate expectations” that normal people might have about their income or savings or investments.

IMHO the particular current context makes John Fitz’s point 3 on the move faster list a serious - and seriously underestimated - factor.

And these efforts will be just to pay the salaries and pensions of state employees, we wont be getting much else for our contributions.

This is the nub of the problem, the Govt is cutting back to the point where all it is doing is paying salaries! Each employee will be neutered in the ability to function from cutbacks, but each will be paid.

It is illogical to start from anywhere but what Govt is to demand and provide and work from there.
But in a political system that establishes the citizen as a client to the party political caste who can provide for the citizenry, it will take a politican willing to sacrafice their future to point out to the public that it may be better off with getting less from Govt.

Pity the nation…

Ricardian equivalence is everywhere. It informs most business decisions (why do you think bonded warehouses ‘bet’ on what is going to be in the budget - buying or running down their stocks of cigarettes and alcohol - something that will ripple (however small) through to GDP). Think about what suspicions of a change to CAT or inheritance tax would do to those figures in the period preceding?

Many think about future costs. Those who don’t, really don’t matter. They aren’t discrete in their spending - they spend everything they can borrow. Those that do consider future costs are likely to cut spending (and borrowing) when the future tax rates and in particular when the future charges (like school and university fee) environment is uncertain.

Yes, it’s anecdotal stuff, but whatever theory you come up with to model the future has to cope with those anecdotes.

Here are three arguments for faster adjustment than currently planned and three arguments for sticking to the €3 billion for 2011, around €2 billion for 2012 and €2.5 billion for 2013 and 2014 - total €7.5 billion.

Stick to current plans:
1. Changing plans mid-stream can upset everybody. It could sound like panic to change now.
2. It may not affect the cost of borrowing because it is the banking system is the real problem.
3. When the economy has returned to growth the cuts may feel less painful.

Move faster:
1. If it significantly reduces the cost of borrowing then it will significantly reduce the long-term cost.
2. Doing €2 billion in the 2012 budget with an election to come within six months may prove tricky. Also if growth follows our “low” scenario or worse then more than €7.5 billion will be needed.
3. When people know that their living standards are secure - no more tax increases, cuts in expenditure, job losses etc. precautionary savings may fall and investment rise. Bringing forward this time could prove beneficial.

Together these make six arguments for doing at least the €7.5 billion. As things become clearer in the Autumn about the bond markets the nature of the Irish recovery, etc. the balance between these arguments can be re-examined.

http://www.irisheconomy.ie/index.php/2010/04/27/irish-bond-spreads-up-sharply/

All we’re missing so far is for TASC to come along to tell us that we would have no problem getting funding for a fiscal stimulus and that we would see multipliers of 3.

The lesson from Greece is that it ain’t, but slopes sharply away from the high borrowers, and that there may be a severe kink at debt ratios above say 110% of GNP. This is the general area to which we are headed on the ESRI’s figures. So an announcement of a materially slower fiscal adjustment programme could turn out to be deflationary. This has nothing to do with Ricardian Equivalence effects, which may or may not be present, and could be operative even with a flat credit supply curve.

The discussion in Ireland in 2008/2009 about possibly targetting a slower fiscal adjustment proceeded at times as if this curve was flat, or at least shallow. I think we must now accept that, in this respect at least, This Time It’s Different.

In Prof. Krugman’s defence, maybe it’s not for America (yet). Why does he insist on rattling on about Ireland? Why do we pay attention?

While I (may) have your attention, there is one other aspect of the ESRI analysis that puzzles me a bit. One thing that distinguishes the ESRI view is a relatively optimisitic view of medium growth prospects, even though I know you have scaled these back. As I see it, the argument for backloading fiscal adjustment is stronger the steeper the GDP curve. But you seem to be among the most supportive of the front-loading strategy. I would be interested to know how you come to this position given your underlying view of the growth prospects of the economy.

For example the argument in May that Greek debt should have been restructured then because it may realistically have to be done at the end of the 3-year EC-IMF program, ignored a crucial political reality that an endemically corrupt system cannot be changed in slow motion.

In Ireland, it appears that the expectations of significant public sector reform from the Croke Park deal are low at best. Academics, the politicians and everyone else on the public payroll of course would not wish to see a change in for example pension arrangements and with the ESRI holding out the prospect of full employment by 2015, nothing much should be expected.

So the choice is likely to be front-loading or what the IMF termed consolidation ‘fatigue.’

Besides, Eamon Gilmore is likely to defend the existing conservative status quo from 2012, if not earlier.