I don’t argue with your point Michael. However, it is important to insert that qualification. We are unsure if, at certain times the government spending increased first, or the private consumption. My guess, at various times one or the other took the lead. The private consumption became an engine for public spending, or visa versa. I just wanted to insert that qualification. We shouldn’t make automatic assumptions about sequence, when it comes to these matters.

It is worth stating the obvious maybe - that a stamp duty tax on a residential property in Ireland during the Celtic Tiger could easily amount to €30k. If we were really efficient in Ireland, that sum might be enough to pay for a property tax, a water charge and a bin charge for 30 years. I know I am stretching a point a bit there, but the local authority would receive a recurring payment, and the taxpayer might see a return for their money.

I just want to tack on something else if I may. We have the comment recently at the Irish Economy blog, that departments within central government in Ireland, other than finance, didn’t worry unduly about economics or finance. Their attitude was, that was the dept. of finance’s job only. On top of that, we had the added complication in Ireland, that our banks were given a monopoly and a huge degree of freedom to dictate the economic policies for the entire private sector. This is the issue I scratched at in my blog entry, 1979, a year ago. But I don’t fully know how to develop the argument any further. I just said I would mention it again. It is a bit like dept. of health outsourcing duties to HSE.

In Ireland, we have a large permanent government, which outsources economic responsibility to a dept of finance. Which in turn outsourced a large amount of responsibiliy since the 1970s, to private bank institutions. Clearly, a deep study of that arrangement is overdue. BOH.

http://designcomment.blogspot.com/2009/07/development-as-freedom.html

I think you have proved my point for me.

Private consumption continued to increase after public spending rose.

One small qualification.

When we speak about central government in Ireland running a deficit, it is hard to find the evidence with the various departments investing in specific projects. However, when we look at the various semi-states or quangos established by local government, it is there were visibility of borrowing appears. For instance, the new Terminal project by the Dublin Airport Authority, or the Irish Glass Bottle site, where the DDDA was concerned.

Our government borrowing appears to be divided by industry sector, rather than by geographic region. Maybe this makes the investment easier to manage and track. I assume it does. But it also muddies the waters, from the taxpayer point of view. As very little tax-take ends up being spent by the local authority, and more of it diverted in ’sectors’ by the semi-states and quangos. The semi-states were a 1950s creation by Lemass. The quangos seem to be a 1990s phenomenon, from the Ahern-McCreevy era. BOH.

http://www.irisheconomy.ie/index.php/2010/08/31/whelan-on-ricardian-equivalence/#comment-68915

Barro treats the case (your paragraph 1) where the government has high-return investment opportunties. In terms of implicit forecasts (your paragraph 2), Barro uses Radner’s equilibrium of plans, prices and price expectations which is standard in these model. In a Radner dynamic equilibrium, noone knows which random state will occur in the future but each actor creates a rational plan based on knowing the impact of prices etc. of everyone else’s rational plans. It is essentially a dynamic variant of a Nash equilibrium with the extra assumption of a competitive market. As Karl Whelan notes above there are problems with the specication of a Radner type dynamic equilibrium and it can lead to model flaws. So for example we might use in the model the wrong assumed plan for the future government state-contingent tax and spend policy. Radner-type equilibrium can be a problem but there is no alternative, they just need to be specified appropriately and with sufficient care.

But surely it depends on what the government is spending its money on. Suppose there is a public good that only a government would invest in. Would it not make sense for a govt to borrow the money at 5% if it gave a return of 6%? As a rational person I would think to myself that this government spending will lead to lower taxes in the future. The bonds may not be real wealth, but the infrastructure is.

Alternatively, suppose the government has two choices 1) a programme of spending in mind, and is going to finance it not through borrowing but through taxes each period regardless of where we are in the business cycle or 2) The government can take a smoothing approach and borrow to invest during down turns when there is plenty of spare capacity in the economy. I know taxes will increase during the next upturn, but I still know the smoothing approach will lead to lower taxes over the business cycle.

Are there any papers that deal with Ricardian equivalence with some form of business cycle model?

A conversation I overheard in the 1980s is now revealing to say the least. Various models were used in those days to assess the viability of third world debt. There were all kinds of statistics but one of the best and the simplest to obtain was: How much concrete is the country pouring per annum? That was the basic method used to decide if a country would default on its loan or not.

http://designcomment.blogspot.com/2009/07/development-as-freedom.html

Economic theory is well stocked with clear and elegant proofs of propositions that turn out to be wrong. Forget the overfitted quarterly models, many of the crucial underlying assumptions of the proof clearly don’t hold.

For starters, why would someone react to the emergence of a large fiscal deficit by assuming that the path of government spending will remain unchanged, so that the PDV of taxes remains the same?

An increase in taxes is what it is, an increased deficit on the other hand may trigger increased taxes in the future or it might trigger lower government spending. Certainly there’s no sensible reason for someone to assume that a €1 billion deficit will have the exact same effect on their present discounted sum of tax payments as a €1 billion tax increase.

Barro’s paper “Are Government Bonds Net Wealth?” (available for free outside the pay wall, courtesy of the Harvard economics department, at http://dash.harvard.edu/handle/1/3451399) gives an elegant and convincing defence of Ricardian equivalence – it is the paper which ignited the modern debate. Arrayed against the clarity and elegance of Barro’s theoretical insight is a barrage of contrary empirical evidence from over-fitted quarterly macro models. Sometimes the clear, big-picture insight is important when thinking about long-run relationships.

I wrote a block in July 2009, which I entitled 1979, in which I tried to examine some of the issues, regarding Ireland and its distribution of responsibilities for economic sovereignty. It seems kind of appropriate to this discussion. BOH.

http://designcomment.blogspot.com/2009/07/1979.html

Have they ever lost control - even during the response to the crisis?

see Simon Johnson’s article linked by Philip Lane here
http://www.irisheconomy.ie/index.php/2009/03/27/the-imf-and-the-global-financial-system/

“There are some reforms such as full transparency on public contracts, would cost very little.”

Of course, were it not for Eddie Molloy’s Severe Implementation Deficit Disorder, which may be related to the above
http://politicalreformireland.files.wordpress.com/2010/07/irelands-sixth-crisis-paper.pdf

Eddie Molloy misses one key point is that as one experienced public servant put it “When you talk to the politicians they blame the civil servants and when you talk to the civil servants, they blame the politicians”

And it is at real risk at some stage of losing sovereignty of its economic affairs if policies do not start supporting long term stability.

The big problem is we are still trying to decide in Ireland what sovereignty of our economic affairs, might actually mean. Because, there is no evidence to suggest we have achieved the right balance and distribution of duties between the European central, national central and national local government layers. In a very real way, our sovereignty definition has to be expanded in the coming years to embrace more ground on the upper (European) end, and on the local regional level. With less ground in the middle, for the central national sovereign executive. Those are quite deep debates and extend far beyond economics alone.

Lets bear in mind also, that many of our critical social systems in Ireland were merely central government grafted on top of systems of the Catholic church. You don’t have to go very far back in Irish history to find a time, when the Church held a lot of sway at all levels, from the European down to the very local. I think we are still working through that process, in addition to everything else. The Health Service Executive, where central government outsourced duties bound to the dept of health, of the central national government - is a prime example of a difficult resolution with the past, and Church influence.

What is that phrase that Garret Fitzgerald often uses? Pre-modern society. BOH.

“…it is quite disturbing..etc”.

I expect you meant “not accepting”. Or am I missing something?

This economy provides a practical demonstraton of that. Under the Barro/Trichet view increased government spendng and tax cuts during the boom ought to have set private sector alam bellis ringing. They would ‘know’ this was unsustainable and reduce inveastment and consumption in response They did the opposite.

The problem is, we know that [central] government expenditure in Ireland increased after the increase of expenditure by the private sector. Not the other way around. Summed up by the famous Charlie McCreevy phrase, when I have it, I spend it.

Because the more stimulus via tax incentives etc, that central government could provide to the private sector, the more taxation the same government effectively gleaned from consumption of property by ordinary citizens. As I mention above, there is a big debate at the centre of this, to do with local versus central government. I don’t think that debate has fully resolved itself yet. Not by a long stretch. In the podcast I linked to above, councillor Eric Byrne relates that one traffic management decision in Dublin city requires no less than 44 separate bodies to be consulted.

I am not a big fan myself, of each local authority having its own planning, housing, water department etc. I believe more centralisation of these services will make a lot more sense. But on the other hand, we have to ask what could local government perform more efficiently? Of course, lets not forget Mr. Trichet either, and that layer of governance above and beyond the ‘central’ nation government. And then, on top of that, the friction between the ‘parlimentary executive’ and the house of parliment in Ireland, which has caused such problems this year. Not to forget either, the fact our minister for health (and associated dept. of health, the permanent branch of government), have out-sourced so much to the HSE. It is all rather confusing, and overall there appears to be a lot of dilution of responsibility, and a whole lot of government to support through collection of various taxes. As I said, the government at the various levels requires the citizenry to spend, in order that government can spend also. It seems to be in the interests of governments to create excessive bubbles to fill their coffers as fast as possible. Hence the need for regional booms, influx of foreign capital, population and so forth.

I think that Diarmaid Ferriter’s excellent documentary series, The Limits of Liberty, developed on the points of the earlier radio programs. The entire radio series I linked above, was called What if, and is available from RTE via iTunes. BOH.

http://www.rte.ie/tv/programmes/the_limits_of_liberty.html

Let us suppose that RE in the classical form does not hold because consumer/taxpayers are too myopic. This seems to be the main sort of objection that Prof Whelan and others have to the elegant logic of RE.

So then govts borrow in recession. Consumers, blithely unaware of the fact that they will have to pay this money back (I really know people like this!) keep spending heavy. What happens?

What happens is investment is directed away from the private sector and into the public sector. This happens because interest rates rise for entrepreneurs, while companies securing public contracts are in effect beneficiaries of state-backed (hence cheaper!) funding. In effect, the Big Gun that is the State (ultimately the State is a bunch of police guys with big guns) points itself at the money and says “go into the public sector, or I’ll shoot you”.

Now, if there is no RE, as Prof Whelan and others suggest, because of myopia etc., then the net effect of this intervention will depend on whether the public sector is more or less efficient at investing than the private sector. I’m not sure the answer to this is always what the economists instincts demand, but it should be clear we are an awful long way from digging holes and filling them in again.

If, on the other hand, there is RE, not only does the govt have to invest so very wisely as to secure a greater return that the private investment they just crowded out, but they also have to provide a return to compensate the economy for the overall mismatch in the allocation of income to consumption versus investment which the RE implies.

It seems to me the odds are stacked against the government on this one.

The fiscal position of the core EZ countries will need to be rock-solid to weather this storm. Perhaps M. Trichet is scraping the economics barrel to find additional reasons to shore up the fiscal position in the core EZ economies.

The ‘theory’ assumes that income flows are fixed, and that by increasing today’s consumption tomorrow’s will necesarily be reduced. But no economic agent operates in that way with regard to either consumption or, more importantly, investment, since the latter increases future incomes.

This economy provides a practical demonstraton of that. Under the Barro/Trichet view increased government spendng and tax cuts during the boom ought to have set private sector alam bellis ringing. They would ‘know’ this was unsustainable and reduce inveastment and consumption in response They did the opposite.

Romer says this is imperfect knowlege. Perhaps. But then none of us has a crystal ball. Maybe the inducement to increase consumption arises from the fact that the pro-cyclical fiscal policy encouraged that increase? Just as the pro-cyclical policy now is encouraging contraction.

Investment (GFCF) has fallen for 12 consecutive quarters, for a peak-to-trough decline of nearly €32bn, greater than the fall in either aggregate GNP or GDP.

God I hope we can go back to the early 1990s and not the 1890s.
I need a computer, some decent food and modern beer to have a good look at this train wreck.
Drinking archaic porter will do nothing for my insides.

When the government issues a bond to a household to be repaid by higher taxes on the household at a later date, it is in effect borrowing on the household’s behalf. If the household already had the option of borrowing at the same interest rate as the government, the policy has no effect on its opportunities, and thus no effect on its behavior.

We had a situation in Ireland (driven by policies such as de-centralisation), where our government was borrowing through the citizenry, rather than on behalf of the citizenry. There is a strong argument to suggest the Irish government of the last decade paid a huge interest on such vicarious borrowings. I refer you to an RTE podcast available through iTunes, about taxation and local government, an interview from 2008. It is podcast no. 9 on the list at the link below. We had something called stamp duty which was very high indeed and was a tax on transactions with property. The central government managed to divert most of that for its own use. Which is in marked contrast to a property taxation which would flow to a local government.

As a result, the household has little incentive to increase its saving. Instead it can indulge its high discount rate and increase its consumption, knowing that its tax liabilities will be high only if its income is high.

This does resemble Ireland quite a bit. It is not as if, many households engaged in some way in construction activities during the Celtic Tiger in Ireland, didn’t realise their party would end abruptly at some stage. This is where the comments of people such as Chris Horn do come in useful, to enlarge the debate about Ireland’s capacity for wealth creation. That is, we do not create enough. Various political factions talk about re-distribution of wealth. But what wealth do they mean? I worked side-by-side with people valued in hundreds of billions of euro during the Celtic Tiger. None of whom, have a pot to pee in now. BOH.

http://itunes.apple.com/ie/podcast/what-if-podcast-11-may-2008/id256526032?i=25863778

* simpleton - please please do not mis-spell it as Kahn, it breaks my heart just like that other notorious mis-spelling Ghandi.

As Reinhart and Rogoff point out, domestic default, often in the form of abandoned future obligations, is both less visible and more prevalent than external default of sovereign debt. In that case, expectations of future payouts at current levels lead to a rise in saving at a time of economic hardship.

The discussion of the reintroduction of college fees and the raising of the state retirement age has this anonymous poster saving more on two fronts.

How many microeconomic factors make a macro one dancing on the head of a pin?

It’s nice to have a clear understanding of someone’s values.

I have formed the opinion that there exists an inverse relationship between the level of a persons theoretical intellect and their ability to get a meaningful grasp of reality - the late Richard Feynman is excepted!

We (the developed economies) are all deficited out. So we must produce something to sell to make a negative deficit. Just what is it intended we produce, at such a low cost, that is in such high demand, that commands a nice high price and produces that elusive negative deficit? Actually, who are the buyers for this wonderful product? Deficited out by the looks of it!

Our developed economies are in the process (very SloMo) of regression to a previous lower level of activity - say about the mid-1990s.

B Peter

“Have you any evidence to back that up?”

It would require re-estimating the Bradley-Whelan 1998 magnum opus allowing for a much longer lags, with the lag structure not simple reduced form but rather tied to inward investment and productivity improvements over the post-1987 ten years. That is challenge - I will put it on my to-do list, unless someone beats me to it. I conjecture that the sufficiently long-run effect of the 1987 fiscal tightening was aggregate-GNP positive for Ireland, without providing convincing direct empirical evidence. Ten years seems about right to me to get the correct sign and reasonable magnitude in that specific case. Sorry for the technical comment.