Supply side rabbits (or, the optimists need to decide on a party line)

Its not designed to work – It is beginning to look obvious that the ECB have done a deal with the Anglos of BOE and the FED.
We will reenter their sphere of influence when they implode our economy by feeding us with more debt like some sort of weird fois gras country.

In a very general way, my impression is that the very wealthiest Irish and European citizens are
a) in control of economic policy in terms of priorities by way of their undemocratic influence as owners of bonds, land, industry and substantial cash reserves
b) now determined that it is essential to remove money/spending from “ordinary” (PAYE) citizens and consumers of services so as they can increase their revenues in a time of generalised recession/contraction.

Do we live in a democracy or a plutocracy? Are the elections merely a thin veneer to disguise a system prioritised, in good times and bad, to benefit the very rich?
Maybe it’s just me….

The IMF historically has argued that the supply side measures take a long time, so even if there were any it would not work to solve a fiscal crisis, hence large cuts must happen and a big recession. However, the IMF took the opposite stance in Greece and argued the supply side measures will save Greece due to so much “low hanging fruit”. The stories are humorous: no new truck licenses granted since the 70s, so those cost 300,000 euros in 2007 and Greeks preferred to truck in fruits from the Netherlands rather than grow them domestically and pay high trucking fees. It all sounds like good story telling rather than “big low haning fruit”. But let’s see – growth there is supposed to recover during 2011 (still negative yoy but trending up quarterly by end 2011). So far there are no signs of that. If people decide that fails, then the deflationary trap model wins, and default is the only choice.

I’ll stick my anonymous neck out here and make the heretical suggestion that we do not have a soluble demand side problem. Consumer spending on goods and services as a proportion of after tax income was still close to its historical 2007 high of around 95% in 2008, and insofar as it is possible to pick together numbers from from 2009 it looks as if it remained well above the 91% historical average that year.

Yes, consumer spending on goods and services looks like it has fallen off a cliff, but it is because incomes have fallen off the same cliff, not because they are holding back from spending what they have on goods and services. This is corroborated by rates of employment in retail and consumer service sectors, which have held up well relative to total employment, even if they have fallen badly in absolute terms.

It is also logical, in that people on lower incomes tend to spend a greater proportion of those incomes on goods and services, an effect which could easily be balancing out tendencies towards lower spending due to lack of confidence.

Yes, Irish consumers are deleveraging, but they are doing it by refraining from investing in property, not by holding back on regular consumer spending. Very rationally. And given the overhang in property supply, I don’t think there is a short term policy measure available that will put this money back into construction.

There’s a (hopefully) soluble demand problem internationally, but not in Ireland.

@ BeeCeeTee

In most recessions it is investment that fluctuates the most, rather than consumption spending. (Though for a small business, many of the non-labour overheads have remained steady, so even a small change in turnover can have a huge effect on net profit.)

There is a huge fall off in investment. Much of the investment that did happen was fairly useless (ghost estates, zombie hotels and other scary things). I’m not saying we should go back to that, but we can mitigate the effects by bringing forward public investment that has to happen anyway, targeting investment that is labour intensive and provides a financial return to the exchequer.

Actually spending the budgeted capital allocation for school building would be a nice place to start.

@Kevin O’Rourke,

I think you are teasing us. I would be very surprised if you were not aware of the reality. The tradable sectors are generally in fine fettle – as JtO continuously points out – (even if some workers there are suffering because they got caught up in the property bubble), but they are being weighed down by glorious inefficiencies and deadweight costs in the non-tradable sectors.

The mantra of “more competition and better regulation” spouted continuously by successive governments was simply an optical illusion that concealed precisely the opposite (less competition and worse regulation) in the non-tradable sectors. Because the domestic banks sit between the tradable and non-tradable sectors, we’ve seen the horrible reality there. The equally horrible reality has yet to be revealed in the non-tradable sectors.

It is unfortunate that the Government will be forced to confront this reality under external pressure, when it could have been tackled years ago – as many of us have being pointing out for years and have been villified for our impertinence.

Still, better late than never and the resilience and vibrancy of the tradable sectors will be unshackled to drive a more rapid recovery.

There has been far too much emphasis put on the banking sector. Whilst I appreciate it is a major factor, the bigger picture tells a different story. Ireland have a mobile work force. From 2000 – 2007 they had net immigration …from Eastern Europe, the US/UK (citizens returning to embarce the Celtic Tiger). Now, that trend is in reverse mode…which is positive, as it means less tax on the economy. They also have an export led economy – check out their trade deficit…ops surplus and their main trading partners. It is a massivley different story to Greece,,,and check out shares in Irish Agri business. But we should not forget that yes, they are technically bankrupt…and I put that down to a corupt few.

@David in Cork – “Maybe it’s just me….”

It’s not just you. It was ever thus. The only difference between now and the dark ages is that they don’t now come round killing us to get what they want. They copped on to the fact that they could get more out of us by keeping us alive.

The reason for my confusion is that if we are indeed fully deregulated and fully liberalised

Patients of one GP in Dublin 4 pay €70 for a consultation, twice the lowest fee, which is charged by a doctor in Co Kerry, a survey by the National Consumer Agency reveals.

The cost of a simple tooth extraction varies from €40 to €150 depending on where you live

€800 per hour quoted by an insolvency worker/’expert’ to NAMA.

Medical consultants charging as if they are in Beverly Hills.

Law firms that are among the highest earners in Europe; Trinity College pension fund deficit of €315m bailed out by the taxpayer and the litany could go on and on.

Do we have an answer without the IMF?

The economy simply must get used to having less money going through it. There is only one logical solution.

Deflate and default.

As an open economy I am sure we will adapt quickly, lets hope the rest of the world keeps up with us!

JC

Agree with Michael Hennigan .. not sure if we are so fully liberalised.

A “small” example (I know sample of one and all that) … in the last 18 months a EU Framework Programme project that I and a colleague were partners on concluded and we had to get an audit certificate … standard procedure.

The amount my employers (a State organisation) paid to a leading accountancy firm to get the audit completed was EUR 5,000. The cost a partner from the UK incurred for the same service was GBP 500. The audit costs incurred by other partners from EU15 countries of getting their audits done were even lower than those in the UK.

Pork barrel stuff or supply side inefficiency?

@Michael H,

It is reported that the IMF will be in town tomorrow, but, according to the MoF, they won’t be looking at budgetary matters. So I can only conclude that they will be looking at the structural reforms mentioned in the Eurogroup press statement which Kevin O’R has highlighted.

But it’s not in their nature – or consistent with the Fund’s mission – just to make recommendations with which the Government could play silly buggers; these would be requirements under the conditions attached to any baliout package.

I wonder is Mr. Bond around? It would be good to get an insight as to how the markets are reacting to all this face-saving brinkmanship.

@ Paul Hunt
Not much happening – and big margin call today. CDS out a bit.

Does it really matter what some politico/academic thinks or what Guardian bloggers think? These people are of no importance.

It is what business leaders think that counts.

Yesterday:

A survey of CEOs of multi-nationals in Ireland reports that 47 per cent expect growth in 2011 (on top of 2010 growth) and only 11 per cent expect contraction. No doubt that nice lady academic from UCD will be back on posting that they are out of touch with reality.

Yesterday:

As Ludwig Heinrich Edler noted above, in Q3 Ireland was virtually strike-free. Contrast that with elsewhere.

Today:

Paddy Power announce 500 new jobs in Dublin for international HQ.

Here is an idea: invite Paddy Power to post on here on whether or not he thinks Ireland is competitive. It would be informative. I’m fed up reading the opinions of politically-motivated academics, none of whom have ever created a job, run a business, or sold anything. At the end of the day, Paddy Power’s opinion on whether or not Ireland is competitive is worth more than that of all the academics in Ireland put together. I say that even though he has taken a fair chunk of my hard-earney money over the years.

@ Paul Hunt

German 10 yr bund yield at 2.60%; Irish bonds at 8.28%.

The main clearing house raised the cash margin to 30% for Irish bond trading today.

Hopefully, the IMF will go through the shebang like a dose of salts.

The Dutch Fin. Minster said that there would be no approval without the IMF.

So take all the blarney about supporting the banks as that.

At least the real outsiders i.e ex rich professionals and the public sector, may have a chance of getting a square deal at last.

I had to laugh at Dick Roche yesterday saying “but Miriam, if we hadn’t brought in the bank guarantee we’d be in an awful situation now”

@seafoid

I live in Norway. Dick Roche and FF come across as economically and socio-politically autistic – Cowen’s ‘here’s an important speech but I’m not going to tel you anything’ to the Dail was not taken well and simply gave the impression that Ireland Inc – if we must use that term – is being run by the same sort of blaggers and clowns that ran Anglo.

Which of course it is. People abroad can’t understand why FF keep trying to trot out the same nonsensical mantras of bluff and bluster – they haven’t acted quickly enough, or in the right way, and their track record is more eloquent about their the likelihood of their future actions than their spokesmen are.

(And this is not a party political stance – FG and Labour don’t inspire much confidence either.)

No one doubts that we are capable of turning ourselves around but not with the current elite (and that includes the elites that were been in FG and Labour during the boom) in charge.

@ seafoid Yes. As a neoliberal I am personally committed to keeping tight regulation on all sectors that run by South Side blue bloods. Also I’m committed to government-central-bank fiat money interest rates that are designed to make money cheap and politicians popular. If you read Hayek or Friedman you will see that expensive state healthcare monopolies dominated by highly paid consultants was at the core of their value system.

Afterall with many years of neoliberal policy in place we now have an economy where the private sector accounts for nearly half of all economic activity. That is simply unacceptable. Unless the government nationalises Tesco now then we are in danger of starving.

Dick Roche, Hayek, Friedman. That is our holy trinity.

@Carolus Galviensis these indices of Economic Freedom (the Open Republic has done one with Cato and Fraser) rely on GDP as a base figure to work from which for Ireland is not helpful. Then they add things like rule of law, freedom to contract, move money out of the country and even freedom from being drafted into the military or right to a fair trial. Ireland is so small it doesn’t mean much. I have to confess that in the past I argued that Ireland’s economic success was at least partly a result of this ‘freedom’ – which in some ways it was. But I did not suspect the worldwide bubble as being that big a part of the story.

The argument for economic freedom is an extrapolation of the basic concept of division of labour in Adam Smith. Specialisation and trade will lead to higher production – ergo – more overall wealth. But bubbles will contaminate the science.

@ Paul Hunt

‘Still, better late than never and the resilience and vibrancy of the tradable sectors will be unshackled to drive a more rapid recovery’

As @ Michael H never tires of pointing out, the tradable sector may push up GDP, corporate taxes, and other good things, but cannot be expected to produce employment. I doubt there will be much assistance on that score in the IMF handbook.

As @ JtO notes, we are getting 500 more jobs in the gambling/entertainment sector. Trouble is, that sector unfortunately seems to include banking, property development, and house prices. We gambled the economy away.

I suspect we have had our own version of deregulation. The domestic and foreign vested interests colluded to ‘regulate’ things to suit themselves. The subsequent bankruptcy proceedings, in and out of court, are taking on a bit of a Father Ted quality.

A survey of CEOs of multi-nationals in Ireland reports that 47 per cent expect growth in 2011 (on top of 2010 growth) and only 11 per cent expect contraction.

As Ludwig Heinrich Edler noted above, in Q3 Ireland was virtually strike-free. Contrast that with elsewhere.

Paddy Power announce 500 new jobs in Dublin for international HQ.

Great. Our proud national industries of (re)selling Viagra tablets and MS Office CDs continues apace. The workers are too cowed and broken to rebel. And what little money they have left is set to be siphoned off by a superpredator of the desperate.

But you’re right you know. All this supply side rubbish does please owners, managers and investors. If we keep this up, we can turn into a nice place altogether for foreign direct investment and can look forward to a bright future alongside our fellows in Mexico, Guatamala and Foxconn.

@Paul MacDonnell

Ta for your most informative comments.

@Adrian Kelleher

“The Heritage Foundation is filled with the worst sort of partisan hacks.”

‘the worst sort of partisan hacks’ = ‘partisan hacks who do not share my prejudices’

*IRISH OPPOSITION SPOK: EUROPE LOOKING FOR FINAL IRISH SOLUTION

eh, careful now…

@ OMF

you see Vincenzo’s piece in the IT today? Double OAP and social welfare, whack 30k public servants and get rid of public sector pensions completely. Not thats radical from someone on the left…

Keep in mind that if the country gets bailed out, the people currently retiring will get to keep their pensions, e.g. Jim McDaid. At least proposals from SF and Vincent Browne would attempt to tackle that kind of egregious remuneration.

@ObsessiveMathsFreak

I completely agree. One of the things that regularly comes up in foreign media reports about Ireland is the way in which the political elite are looking after themselves at the expense of the country at large. It’s seen as being morally if not outright economically and politically corrupt.

Many people in Ireland don’t realise that in other EEA member states – as a rule – politicians do not reward themselves handsomely and shamelessly. Given the operation of social solidarity and the social market in other EU countries most commentators abroad are simply aghast at the craven mismanagement of Ireland by its make-it-up-as-you-go-along and get-away-with-it leaders.

As I said earlier if people in Ireland were exposed to foreign media other than those of Britain and US (and in languages other than English), and perhaps if the European media went straight to the source in Ireland (rather than via the BBC), this whole dynamic would be playing itself out completely differently.

Sigh.

sorry – re mortgages

*IRISH GOVT.ARREARS GROUP RECOMMENDS NEW BANKRUPTCY LAWS

*IRISH GOVT.ARREARS GROUP NOT RECOMMENDING DEBT FORGIVENESS

@Ger

None of the vested interests are remotely committed to reform.

I mentioned some time back that after the Single Farm Payment was introduced as an EU ‘reform’ of CAP, Area Aid forms were (and are) still sent out for completion every year. The enormous dronocracy that is the department of Agriculture didn’t seize the opportunity to shed a single job in the ‘old’ Area Aid section.The ratio of Agricultural staff to farmers (if my memory of IFA figures is correct) is about one departmental ‘officer’ for every seven registered farmers. Sure it’s gas, isn’t it.

The major reform of the past twenty years in the public service is the citizen’s entitlement to be given the name of the public servant at the other end of the phone or across the counter.

I spoke with a medical consultant yesterday on a public contract in a public clinic who was managing without a secretary – nurses and other front-line staff were manning the hones, seating patients and opening the door. The admin god in charge had declined to shift a secretary from the pool to provide cover.

Do we need all the local authorities, county enterprise boards, and 3rd level institutions that currently hoover the public purse? Of course, we need a sufficient number but who bothers to parametrize that?

@Carolus Galviensis

They’re nutcases. “Exceptionalism is back in with them — i.e. why other countries should be subject to laws but not the USA, or not its Republican presidents anyway. More self-congratulatory crap justifying unilateralism.

L Paul Bremer’s Iraq administration was stuffed with Heritage Foundation and AEI staffers btw. They really did believe they’d create a paradise on the Euphrates with a little of their “unique understanding of statecraft”, to quote the second article.

HF, AEI etc. don’t know where to stop; the ideological genie is out of the bottle and whatever they think it’s beyond their control. They’re the most serious existential threat to the USA since the Soviet Union.

@Bond. Eoin Bond – “Anyone got any idea on what he means/suggests?”

I often think we need the equivalent of a Rosetta Stone when trying to decipher what Eurocrats are actually saying.

What the Wall Street Journal says is correct. Ireland should stand its ground and emerge triumphant. The strategy should be as follows:

(1) Drag things out as long as possible until statistics from the real economy come to the rescue, which they are doing allready. The current panic is as much about future economic growth as about anything. A handful of economists have sold the line that the Irish economy can not/will not grow in coming years. They repeat this ad nauseum. They have world-wide attention. They are interviewed endlessly by the foreign media. But, as I never tire of pointing out, they are about to be torpedoed.
The export-oriented wealth-producing sectors of the economy are surging ahead. We could quite easily be recording real increases of near 20% in both manufacturing output and exports by Q4, miles ahead of any other EU15 country. We may well be back at the top of the league table for year-on-year increase in GDP by Q4. The GDP/manufacturing/export figures for Q3 and Q4 will be the equivalent of a large stick of gelignite under the doom industy.

(2) Invite FG to join the government in coalition with FF, thus restoring the alliance that saw off the Black and Tans. It can see off their successors equally well. Once that happens it matters little what smaller parties do. Stable government until June 2012.

(3) Request the population to work one extra hour for free each week. I am certainly willing. In fact, I usually work about 20 hours unpaid overtime each week. The figures on industrial disputes published yesterday show the contrast between Ireland and most other EU countries. Ireland has been virtually strike-free all year, while other countries have had strike after strike. That is one of the reasons that the export-oriented wealth-producing sectors in Ireland are doing so well. We should make the most of it.

@JohnTheOptimist

“Invite FG to join the government in coalition with FF, thus restoring the alliance that saw off the Black and Tans. It can see off their successors equally well. Once that happens it matters little what smaller parties do.”

Let me get this straight – everyone agrees that FF have wrecked the economy over the past thirteen years, and you’re suggesting that they continue in government? While I admire that you’re trying to come up with imaginative solutions, a least three-quarters of the population want shut of FF completely.

Anyone who believes that FG are some sort of antidote is deluding themselves too, by the way. FG would not represent any great departure either in policy, practice or proposals. People just hope that – as the largest incumbent opposition – they somehow represent an alternative, in-keeping with our party system tradition of switching one set of Civil War traditions for the other every few years.

I wish we could have some more imagination than this. Considering even the Labour party are effectively centrist, I don’t see why we don’t put in a Lab-SF-Greens-independents coalition after the next election, maybe with Joe Higgins if he’s elected. We must break the banjaxed monopoly FF and FG have on the socio-economic and political processes in Ireland otherwise we’ll never get meaningfully anywhere.

Innovation not stagnation – that’s the buzzword these days, isn’t it?

@ The Alchemist
agreed. But then, the EU/IMF won’t be similarly hampered by vested interests. They will have little truck with bleating barristers and judges.

@Paul MacDonnell

Thanks for the clarification. Whilst I sense that we come from different viewpoints, you are of course completely correct when you state that we have a “sort of pooled cultural sovereignty” with Britain. It goes further than that – we share a migration zone with them.

Or course it’s equally completely correct to say that in this set-up (which we have acceded or acquiesced to; it is by no means necessary or natural or unavoidable) it’s Britain who calls the shots. The Common Travel Area, for example, does not mean that we have to follow British migration policy but we must follow Britain’s lead but we invariably and unquestioningly do so. If Britain had introduced ID cards, for example, we would have had to follow suit.

While we have a paper independence that for a long time due to anabolic balance sheets looked like economic independence, we are considerably less independent of Britain in nearly all areas than, say, Australia, Canada, NZ are.

But I digress considerably here. The point is that the system we have is the system we have, for good or ill, and we have shown miminal will to change it, whatever the motivation. Inertia is our national past-time. Living in Norway where foresight is a government policy and things get done immediately I was shocked to see how stuff like Bord Snip, the Commission on Taxation etc were shelved.

I don’t necessarily agree with Bord Snip or the Commission on Taxation but only in Ireland would a serious state commission’s findings be considered to be merely an expensive “what if”. It’s unprofessional and would be unheard of in other European countries.

We are a European country and we have to start acting like one.

@Irsk i Norge You say: ‘It’s unprofessional and would be unheard of in other European countries.’ True. The trouble here isn’t that politics are too right wing or too left wing or even too nationalist. It’s that the European Enlightenment never happened here. We don’t do scrutiny. We don’t do consequences. We don’t do transparency. We don’t do reason. The approach to the ‘native culture’ project is not what you have in Norway – which also celebrates a national culture’. What you have in Norway is a very fine artistic heritage which you know is part of a wider pooled European Enlightenment / Romantic traditions. The purpose of Ireland’s ‘native culture’ project is to promote a spurious ‘uniqueness’ about Ireland. Hence at every point of history when Ireland had a binary choice between the right and wrong decisions Ireland has always gone for the ‘Irish solution’ to the ‘Irish problem’. The population are quite literally educated to believe that this is valid – even when they accept it’s not correct.

So. We do vested interests. We do avoidance of conflict (any conflict). Until people are willing to confront the government – and I mean morally and firmly confront them – then nothing will change.

@Paul McDonnell
+1
Particularly the second post. It is no longer “someone else” we are stealing from, indeed, it hasn’t been for a long time. We are stealing from each other or our children.

I agree with the assessment from BeeCeeTee.

It is not lack of confidence that is causing the low consumer spending. It is as simple as that the unemployed do not have the money to spend and the ones re-entering employment are getting lower salaries than when they left employment.

The ‘rents’ extracted from the FDI mainly comes from two parts:
Property related and wage related. Neither will be extracting at the same level as before.

When number in employment increases, then and only then will there be a sustainable recovery.

Rory, at least there’s something we agree on. Approximately €100,000 will keep a construction worker going for a year, between pay, materials and other costs, and its not a bad estimate to assume that the spending will generate another job, so 20,000 job-years is a pretty decent estimate of the short run impact of spending €1bn on construction.

I’m not going to rehash all the reasons why its a bad idea to do this, and probably impossible, as they have been given much more eloquently than I can manage by others posting here in the recent past.

The estimate that €1bn can support 40,000 job years is off the wall, unless you assume that almost all the money goes on pay – maybe something pointless like digging and refilling holesl!!!

40,000 isn’t my figure, I just heard it somewhere.

Suppose your figure of €100,000 per year is true. The government would get back about €11,000 in not paying dole, and maybe more from other benefits. Then tax and various contributions would go back to the government in terms of VAT, PRSI. Suppose €20,000. So the net cost is €70,000. If one other person is employed in a spin off, so we save €11,000 dole, and say get €5,000 back in taxes. So the net cost for two jobs is €55,000

So if €1bn gross spending creates 20,000 jobs (including spin-off), €1bn net would create about 35,000.

These figures are completely off the top of my head, but maybe they explain the wide variation between 10,000 and 40,000?