The Four-Year National Recovery Plan

You can read my view on the Four Year Plan here.

My comment included two additional paragraphs which were cut, I suppose due to space constraints:

“The current economic and financial crisis has slowed down economic growth in the advanced economies which are Ireland’s main trading partners. Against this background, the assumption of a strong export-led growth might be too optimistic. In addition, improving price competitiveness and reducing the debt burden are two conflicting objectives.   

Operational measures are to be discussed at a later stage and there is little information about the measures to be taken beyond 2011. It is not clear when and how the plan will be reviewed, enforced, and monitored. There is no clear sequencing of the reforms to ensure that short term negative effects on demand are minimised.”

26 thoughts on “The Four-Year National Recovery Plan”

  1. The Irish gov’t is in deep denial, they are too shocked to face up to reality. In Ireland we say reality is for people who cannot face up to booze.

    I do not know what to make of this link, is it the next shoe dropping or an irrelevancy.

    golemxiv-credo.blogspot.com/2010/11/who-bankrupted-ireland.html

  2. @Iulia Siedschlag,

    Very pertinent observations, but this document – on two counts – is political, rather than economic – even if the political context in which it was drafted has changed significantly. On one level the EU wished to demonstrate that it had the political resolve to compel an errant member-state to take action to appease the bond markets. This, of course, hasn’t worked, but the real focus of the team from the Troika is to disentangle resolution of the banking fiasco from the sovereign (which is why the NRP contains no reference to the banks). This could come as early as the weekend.

    On the second level, FF envisaged this doument providing the basis for it getting through to the end of its constitutional term in office. It affirms all the Greens’ costly and expensive fantasies, so as to keep them on board. But that, too, hasn’t worked.

    The balance of economic pain suggests FF has conceded losing a lot of votes to Labour, but it should shore up some of its core vote (bt protecting certian vested interest), put FG in a spot (expanding divergences between it and Labour) and give it a sporting chance of forming some governing arrangement with Labour.

    Securing and exercising political power is the primary concern of irish politcial factions (as it is in most jurisdictions); the public and national interest comes a poor second. In some countries, though, when faced with a crisis of this magnitude, factional differences are sublimated; but not, it seems, in Ireland.

  3. @Iulia

    Regarding cuts versus taxes. Is most of the past evidence based on recessions due to supply shocks? Any evidence specifically to do with demand shocks?

    I think demand versus supply shocks is crucially important when deciding whether it is better to cut spending or raise taxes.

  4. @Iulia
    You write:

    [W]hat evidence is there to suggest that reducing the minimum wage by € 1 will boost job creation?

    Subtext:

    I, the author, am a kind and caring person …

    This obsession with out-Jesusing Jesus on the minimum wage issue must end. You might as well have asked:

    What evidence is there to suggest that reducing the minimum wage by € 7 will boost job creation?

    or:

    What evidence is there to suggest that raising the minimum wage by € 7 will harm job creation?

    No doubt some ECON 501 smart-ass will come up with that New Jersey phone-in survey of McDonald hamburg-flippers .. monopsony … counter-intuitive … surprise, surprise

    Ask any employer, or any jobseeker adversely affected by the minimum wage, what they think.

  5. @Paul Hunt

    Entirely political or idealogical, as you say, as with much of ESRI output, especially the fragrant Mr. Tol.

    Take:

    “Existing evidence suggests that expenditure-based fiscal adjustments are more likely to be successful due to the fact that they improve efficiency while tax-increasing measures have negative effects on long-term economic growth.”

    What evidence? More pertinently, who’s evidence? And why should we assume that any such ideologically filtered evidence is a guide to action in this pretty unique crisis.

  6. @Pope Epopt,

    Apologies for the confusion. The ‘document’ to which I referred is the NRP – not the review by Iulia.

    The final version of the NRP which will be agreed following the next election is likely to be very different. This is simply a mix of options (good, bad and indifferent) that meet the 4-year adjustment criteria, developed in a politcial context and will not be implemented in their current form from early next year.

  7. @Iulia
    You write:

    In summary, the plan is an important step to strengthen the budgetary framework in Ireland and to bring public finances to a long-term sustainable path. It would bring more credibility to the necessary fiscal consolidation process if the planned policy measures would be focused on selected priorities and if it were based on more economic analysis.

    If the plan were ‘based on more economic analysis’ it would actually be a totally different plan — with, say, five positive to negative ‘growth’ scenarios: +2%, +1%, 0%, -1%, -2% etc. It’s not a plan, it’s wishful thinking with knobs on.

    And why this nebulous expression about policiy measures that would be ‘focused on selected priorities’? That’s pure Mandarin, not English.
    Which priorities? Would somebody name them?

    What’s your stance on the Croke Park deal, for example? Why has nobody mentioned it? Why this coyness on the part of everybody here?

    BTW has anybody noticed that despite the ‘cuts’ in public service pay/pensions there will be a net increase of 5% by 2014 thanks to the underfunded liabilities of the civil service pension system. Each individual pensioner will receive a cut, but there will be far more pensioners and the overall trend will be upward.
    Basic, four-function mathematics is what is needed here. Plus an understanding of the exponential function.

    P.S.

    In addition, improving price competitiveness and reducing the debt burden are two conflicting objectives.

    I don’t understand that.

  8. @Iulia

    I agree that the plan provides a important budgetary framework. But, it is also an unfinished work of fiction as those that wrote it will not be around to implement it and those that will implement it will wish to change it and add the final chapters (re banks).

  9. Trying to post a longer comment and getting this: Not Acceptable

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    Additionally, a 404 Not Found error was encountered while trying to use an ErrorDocument to handle the request.

  10. @ Carolus Obnoxiousus,

    Didn’t the blog manager, Prof Lane, post something here about toning down the ad hominum attacks?

    Ms (Dr?) Siedschlag is entitled to question the evidence on the effects of reducing the minimum wage, just as you are entitled to question the theotical framework of that questioning, but try to have a little more issue-focus. Nobody is Jesus here, just some honest economists trying to contribute intelligentingly to the debate.

    @ Dr (Ms?) Siedschlag,

    I personally think the focus on the budget deficit – as opposed to growing our way out of the recession – is a more responsible approach, overall. It is too easy to hope for export-led recovery, while continuing to run unsustainable deficits.

  11. Reducing the minimum wage is a no brainer Pavlonian response that occurs during economic downturns. A scapegoat has to be found and since the upper class is lily white and virgin pure we must look to the middle chattering classes who dominate discourse as they deflect blame from themselves. That leaves the lower middle and working classes to take the blame. Those who get the blame must suffer (moralistic retribution) hence the cutbacks to the minimum wage. Missing in all this is Paddy Moriarty’s hierarchy of wages which dictates that classes above the minimum wage class are awarded a multiple of the minimum wage. As the wage compensation specialists determine future salaries for the employees making minimum X 1.05 and above you can see large wage bill savings as you move up the wage ladder. Ireland is a class ridden society more hierarchical than most societies so observing the cultural niceties is very important. As my blessed sainted mother (a retail business owner) used to say the more help these poor people get from the gov’t the better off we will all be. She had a deep understanding of how different classes spent money. The minimum wage people spent it within one kilometre of home on necessities, the middle class in the larger cities/towns, the upper middle and the upper on sunny vacations in foreign parts and on foreign made goods. She was a firm believer that giving money to the needy was the best stimulant that was ever devised. The reverse side of that coin is to tax the high income people and redistribute much like the Danes do. Reducing the minimum wage is a blunt force instrument requiring little intelligence which will exacerbate the down ward trend now underway. Conservative thinkers are people who are seeking the holy grail of a moral philosophy that justifies selfishness and greed.

  12. @Pope Epopt

    Successful fiscal consolidations are those which lead to reductions of budget deficits which last for a number of years. Existing relevant research suggests that fiscal adjustments based predominantly on expenditure cuts are more likley to be successful in comparison to those based on revenue increases which are found to result in short-lived budget deficits reductions. Examples of the relevant empirical evidence are

    Alesina, A. and R. Perotti (1995),“Fiscal
    Expansions and Adjustments in OECD
    Economies,” Economic Policy, October 1995 n.
    21: 207-48.

    Alesina, A., R. Perotti and J. Tavarés (1998), “The
    Political Economy of Fiscal Adjustments”,
    Brookings Papers on Economic Activity 1998:1,
    Macroeconomics: 197-266.

    Lambertini, L. and J.A. Tavares (2005), “Exchange
    rates and fiscal adjustments: evidence from the
    OECD and implications for the EMU”, The B.E.
    Journal of Macroeconomics, Contributions to
    Macroeconomics 5(1) Article 11

    @ Carolus Galviensis

    I am a kind and caring person. However, this is not the point I make. All I am saying is that I am not convinced that the best way to boost job creation is by reducing the minimum wage by €1. My view is that abolishing the minimum wage would create more jobs.

    To the extent that improving competitiveness requires a decline of relative prices and costs this implies an increase of real interest rates which has a negative impact on the debt burden dynamics.

  13. @Iulia
    “My view is that abolishing the minimum wage would create more jobs.”

    My view would be that cutting the earnings of the higher paid would create even more jobs.

    According to the 2007 National Employment Survey 14 percent of all employees in the State had hourly earnings below €10 while a similar percentage had earnings above €40 per hour.

    When account * is taken of hours worked, employees earning less than €250 a week represent only 4 percent of the national wage bill as compared with a 13.5 percent share for those earning over €1,500 a week.

    A ten percent reduction in wages for all 233,000 employees earning less than €250 a week would reduce the national payroll by 0.4 percent whereas a similar reduction for the 233,000 highest paid employees would reduce the national payroll by eight times as much.

    For maximum impact, any campaign to improve national wage competitiveness should start with high-paid employees, directors, public sector workers, politicians and self-employed rather than with the lowest paid.

    * This required a special analysis of NES data by the CSO. I doubt that the pattern has changed very much since 2007.

  14. There seems to be more than just an Irish banking crisis. There is also a crisis of political representation. And not just in Ireland.

    I came across this on an Israeli site

    http://www.haaretz.com/misc/article-print-page/israel-is-effectively-a-single-party-state-1.326937?trailingPath=2.169%2C2.225%2C2.227%2C

    “In the State Party’s consistent effort to recruit immediate and cheap support for itself, representation of most of the citizens has disappeared. Outside the political debate, which repeats itself, are people waiting in an endless line for surgery, contract workers, employees without tenure and denied a pension, employees whose income is losing its value. These people have no representation and no party. The representation becomes “theirs” only when they are threatened with the division of Jerusalem, a settlement freeze, a Turkish flotilla – only then are all Israelis represented by a single party that makes its capital from the false disagreements within it: Who is the greater patriot. “

  15. @Iulia

    All I am saying is that I am not convinced that the best way to boost job creation is by reducing the minimum wage by €1. My view is that abolishing the minimum wage would create more jobs.

    That is also my view and my apologies for misunderstanding you. Though anyone who states it as bluntly as you have is liable to be labelled an ‘unkind and uncaring person’ . 🙂

    The simple statement of fact that there is a tradeoff between minimum wage and unemployment will always set the dogs barking.

    Thanks for the clarification re competitiveness / debt.

  16. @Ludwig Heinrich Edler

    Beneath my obnoxious carapace, there lurks a real ersehole.

    But I take your point. I misunderstood Iulia Siegschlag’s position and am delighted to discover that it is the same as my own, which is bog-standard.
    As to ad hominem comments, I think they can be justified in moderation when the issue at stake concerns the author’s credibility (e.g. ‘you would say that wouldn’t you because you are a pawn of the powers-that-be’ stuff, etc)

    My ‘out-Jesusing Jesus’ assertion was clearly out of place here, though. Thank you for your criticism.

  17. @Iulia Siedschlag

    The Alesina and co papers deal mainly with responses to the oil crisis, a supply shock.

    I think the fundamental problem in the 1970s it that it was a supply shock, but economists proposed demand side solutions, leading to stagflation. As a legacy of the Depression most economists at the time were used to dealing with demand shocks, and they were the tools they used.

    Now I think we have gone off in the opposite direction. I would agree with the cuts vs taxes remedy you suggest in a supply shock (bearing in mind that it just affects adjustment, not the level of state involvement over the whole business cycle).

    However, with a demand shock I think we should take the opposite approach. Maybe we should alter how money is spent, but I would sustain or increase its level with respect to the beginning of the crisis.

  18. @ Carolus Galviensis

    Why do you keep bringing up Jesus? Matt 20:1-16 Workers in the Vineyard. There the minimum wage was set at a daily rather than hourly rate of one denarius, causing some industrial strife. Most trade unions want an hourly rate.

    I suppose we should adjust a denarius for 2,000 years of inflation however. I don’t know what rate they have in the Vatican City, I suspect they follow Italian norms. There they have a de facto minimum wage based on collective agreements.

  19. @ Iulia Siedschlag

    Surely the level of elasticity is crucial. If low wage people frequently change jobs, and the elasticity is less than 1, then the rise in income due to the wage would offset any loss of income during spells of unemployment.

  20. Iulia,

    Thanks. Not that any volume of evidence will convince the true believers. They will cherry-pick and doctor the data until kingdom come.

  21. If Ireland had its own currency, deflation would have been possible overnight across the board by means of a devaluation. 20% , 30%, whatever.

    How is the alternative deflation programme going ? Dole done but still no movement on the medical consultants. Senior bank debt proving tricky. Mortgage debt- forget about it it.

  22. The minimum wage should never have been introduced. It was a political gesture to show off how wonderfully profligate Ireland could afford to be – kind of auto da fe of traditional business commonsense. When 18 year old block-layers were taking home €2000 per week, it seemed heartless not to ensure the people serving them burgers and chips (from China, and Eastern Europe) wouldn’t have a slight floor put under their earnings. The NRP did not indicate that small indigenous firms in the export market would receive anything useful. And this is a more than a shame. If cuts are to be made in the public sector, let some of the savings be given as direct subsidies to trading companies for a period of 2/3 years. The economists may hate it, but those removed form the dole queue may think differently.

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