Migration, the limits of internal devaluation, and the bailout

This post was written by Kevin O’Rourke

It is time to dust off old ways of thinking about the Irish economy that were useful in the past.

In the long run, migration sets a floor to Irish wages. It has been thus ever since the Famine of the 1840s, and I don’t believe that the Irish have become less mobile in the last 20 years. Now, a lot of Irish wages are still high by international standards, but eventually as ‘internal devaluation’ proceeds, and as peoples’ living standards are lowered as a result of tax hikes and cuts to public services, it seems inevitable that the ‘migration constraint’ will start to bind again.

Once this happens, then very roughly speaking the size of the Irish economy will be largely governed by relationships of the following sort:

w(1-t) + b + P = E

where w is the wage (which determines employment and output, for given levels of the capital stock and technology); t is the tax rate; b is the value to workers of the public services they receive; P is the premium we enjoy as a result of living in Ireland; and E is the living standard which we can enjoy overseas. If the left hand side of this equation falls too far below the right hand side, people will leave until equilibrium is re-established.

Once we hit this constraint, either because w falls, or t increases and b declines, adjustment in the economy will be more quantity-based and less price-based than it has been to date.

And it gets worse, since t and b depend inter alia on the levels of output and employment. There are fixed costs to running a state, and the debts we are now being saddled with are not population-dependent. You don’t have to be Paul Krugman to see the potential for some pretty nasty feedback loops here.

What can politicians do? The most obvious thing to do is to minimize the debt overhang facing this State, so that t is not higher, and b is not lower, than they otherwise would have to be. Less obviously, if politicians — not the existing ones, obviously, but an entirely new political class — can increase P, by providing people with a political project for national renewal that they can buy into, this might also help convince some people at the margin to stay at home. This is not just essential for our democracy, but for the economy as well.

38 Responses to “Migration, the limits of internal devaluation, and the bailout”

  1. BeeCeeTee Says:

    If, as I think many of us believe, we are insolvent, then the above logic perhaps gives us an extra reason to fiddle the forecasts to keep the size of the fiscal adjustment down … on the principle of “might as well be hung for a sheep as for a lamb”.

    If our spending is going to paid by overseas sources of funding anyway, and piling up more debt hurts only overseas funders, by making the eventual default bigger, why do more than the minimum we can get away with to keep Brussels from blowing a gasket?

    Not that I think this makes sense myself. I believe we’d be better off if we did a single year correction, and restructured all our debts immediately, than with what we are likely to see being announced shortly in Brussels. I think most of our creditors would be better off too.

  2. simpleton Says:

    So, if living in Ireland vs Living overseas is a purely financial transaction and that transaction has minimal costs and rigidities (let’s assume it is not very costly/disruptive to move and it is possible to move to a similar job quickly), it is rational to assume that lots of people will move. More specifically, the higher our debt service burden the higher will be our taxes/lower will be our public services. The higher these are, the more ioncentive there is to leave.

    My guess is that if this was purely a financial/frictionless transaction there would be mass voluntary migration. As it is, the choice between a similar job here or overseas is not present for many people: there are only (limited) jobs overseas. So we have to overlay forced migration onto this gloomy conclusion.

    Spatial planners will be hoping that non-financial reasons for staying are plentiful.

    There must also be some dynamics at work not captured by the simple model: the more people leave, the greater the average and marginal tax burdens that the remaining population have to bear (the starting debt stock is so high and future additions to that debt stock look pretty fixed, no matter what the population).

    This should be a relatively easy model to write down?

  3. Joseph Mary Plunkett Says:

    Ireland has a worldwide community. Remember that a grandson of Ireland saved the world from the Cuban missile crisis holocaust and probably paid with his life for his courage. You must stand by us now, es muss sein.

    Paul Moran, Sandyford, Dublin

  4. Joseph Mary Plunkett Says:

    frisch weht der wind
    der heimat zu
    mein Irish kind
    wo weilest du?

    Wagner, Tristan und Isolde

    Paul Moran, Sandyford, Dublin

  5. Joseph Mary Plunkett Says:

    everything that is happening was fully expected by the Kerry historian JJ Lee in the best history of Ireland, he warned about herrenvolk,

    God himself will not be able to save you mien freunds if you try and take on the old Gaeilc famalies of Eireann

  6. seafóid Says:

    Surely now is the time to shine a harsh light on the massive tax avoidance industry run by the big 4 accountancy firms.

  7. seafóid Says:

    The formula doesn’t seem to make allowance for the mortgage debt over up to 40 years that will keep many people chained to Ireland.

  8. Libero Says:

    The equation doesn’t make sense if P is taken to be a positive figure (”the premium we enjoy as a result of living in Ireland”).

    I know this because my wife and I are boarding a plane next Wednesday, with a one-way ticket, in spite of the near-term value of E clocking in well below the sum of w and b and the considerable positive element in P (family, friends, etc.)

    So what’s the negative element in P? Simple: future expectations. t is headed up, b is headed down. Ricardian equivalence is in full swing, with the EU/ECB and IMF there to supervise.

    For the sake of Ireland, I hope my wife and I are not that typical of anything but a small part of the population. We are either side of 30, with no personal debt whatsoever and a joint income north of €80,000.
    We are the feedback loop made flesh. The worse the future has come to look, the greater the incentive we’ve faced to opt out. And with people like us leaving, Ireland is in a deeper hole in terms of ability to repay debt, leading to even harsher effects on t and b. We’re probably more foreward-looking than most, but even the Independent readers have cottoned on to where the country’s headed.

    As for the propects of a political project bringing hope (and, with it, an improvement in P), this would indeed help the situation. But it will remain tempting for anyone in government to use fear of complete social collapse to ensure the public’s grudging acceptance of austerity. Needless to say, this M.O. is no good for P. But for many politicians, the imperative of short-term goals will shine brighter.

  9. Joseph Mary Plunkett Says:

    ‘what you do to the smallest of my creatures
    you do to me’
    Gospels of the European tradition

    how you treat my three sons in this Versailles moment will decide how each one of you will be personally and individually will be remembered in the history departments of the world for the rest of time

    Paul Moran Sandyford Dublin

  10. Joseph Mary Plunkett Says:

    Anyone talking at this time in Ireland and about Ireland had better keep it very respectful when you are speaking to one of the old gaelic families who have not been part of the Fianna Fail project

    Paul Moran, Sandyford, Dublin,
    Fine Gael and Labour in government now
    restore tolerant inclusive democracy in Ireland

  11. Joseph Mary Plunkett Says:

    Put not your trust in princes, bureaucrats or generals, they will plead expedience while spilling your blood from a safe distance. Niccolò Machiavelli
    Machiavelli 1503

    we will not accept any malfeasance

    Paul Moran, Sandyford, Dublin

  12. Joseph Mary Plunkett Says:

    Peter Matthews does not speak for me he speaks for corporate predatory finance

    Ireland has to look after Ireland
    goodbye Berlin and hello Boston

    the new 2011 Atlantic Alliance, Canada, USA, Iceland, Ireland, Great Britain

    courage my brothers and sisters
    we tried, they failed

  13. Joseph Mary Plunkett Says:

    Ireland will regroup, Europe can wait, Ireland is Ireland and Europe is Europe.

    We dealt with greater madness than this and we refused to be afraid and hence we made a world class international called the Good Friday Agreement

    We voted on lisbon and we said NO on instinct
    I assert that Lisbon 2 is bogus, was coerced and as we can see, was bogus

    Are we still using the coin of rome?
    THINGS CHANGE, HECK YOU CANNOT SAY WE DIDN’T TRY

    W E A R E O U T

  14. Joseph Mary Plunkett Says:

    we need a danial oconnell monster meeting in phoenix park with fine gael and labour addressing the crowd

  15. Joseph Mary Plunkett Says:

    Brian leave the document there
    And do not hurry back
    Election January 19th, 2011

    Paul Moran, Sandyford, Dublin

  16. hoganmahew Says:

    @Seafoid
    “The formula doesn’t seem to make allowance for the mortgage debt over up to 40 years that will keep many people chained to Ireland.”
    I’d consider that an incentive to permanently leave, wouldn’t you?

    Excellent post.

    Are you arguing for a swifter adjustment to reduce the later debt burden?

  17. Libero Says:

    Paul/JMP: you might not intend it, but the multiple posts come across as spamming.

  18. Eureka Says:

    @ Seafoid
    I think the formula did take this into account. They balanced misery and emigration against the needs of the Reich. And guess who won?
    Time to really think hard about selective default and returning to our roots

  19. Joseph Mary Plunkett Says:

    corporate warriors………

    we will see

    oiche mhaith poball na Gaeilge agus gach duine eile san sean Tir seo

  20. seafóid Says:

    @ Hogan

    I would give the bond holders a very good adjustment . The whole global financial system is lunacy anyway. I have before me a report by McKinsey which shows the growth of US financial assets compared to the real economy and GDP . In 1980 the ratio was 100% - financial assets to GDP. By 2007 it had risen to 300%. Where are the bond coupons supposed to come from now that the magic credit machine has been turned off? What is to stop massively inflated property prices from falling now that banks are in deleverage mode?

    Maybe Ireland is getting the experience ahead of everyone else. I wouldn’t value any bond in a global bank at par myself.

  21. James J Says:

    The problem with emigration is you don’t lose a statistically valid cross section of your population: you lose the ambitious and adventurous. These are the very people we need if we are to put this economy back together.

  22. Michael R Says:

    You always have the option of encouraging greater inward migration, to replace those who are leaving. There are plenty of people/countries, even within the EU, with lower incomes and living standards than those in Ireland, who woud presumably relish the opportunity to move and taken advantage of those living standards.

    NZ has faced a consistent exodus of its own people after its economic decline from the 1970s, but has always been able to more than replace the outflow when it has wanted to. I presume EU restrictions impose more limitations on Ireland’s freedom of action re immigration, but there are lots of poorer Europeans too.

  23. Hugh Sheehy Says:

    @Kevin O’R
    Although I didn’t put it in an equation, I’ve made the point before that the rational thing for many graduates who could get jobs in Ireland will be to get jobs and build lives somewhere else - for a long time to come. Similar calculus will apply to people with portable skills.

    About the only thing that might make a difference for graduates and younger people is if housing costs were to decline much more than they already have. That won’t help most older people with skills and increasing negative equity.

  24. Kevin Lyda Says:

    Emigration is also a solution to negative equity. The penalties for default on Irish mortgages are severe - I wonder how many people will just decide to escape the reach of the banks and leave the country?

  25. Alan Rouge Says:

    Interest prognosis. Whether Irish people/workers have become more or less mobile since the 80s might seem moot considering the situation/question of “where to emigrate to?”.

    The British govt. seems to have hinted that they don’t want half of Ireland flooding Holyhead & they have their own problems as is with secure employment.

    How many qualified graduates have a fluent European language? During the 90s when everyone was giddy about being Irish and European you did a Euro language in secondary school presumably with the idea of providing a base to then expand horizons, greater European integration etc.

    Has this happened? Comparing Ireland to say the Scandinavian countries where most have a grasp of multiple languages seems odd. I could be wrong but most are still relying solely on English so this leaves say Canada, USA, UK & Australia?

    Aside from the “mobility” of Irish people what about the visa and labour controls? It’s not like the 50s when boat loads of men can go to England to build stuff. There’s also migration of workers from Asia and mid east to compete with.

    I think the ESRI spoke of figures of about 100,000 emigrating but how many will be permanent like Libero? Many I know who are emigrating/have emigrated to Aus or Canada or USA are essentially just on a year’s holiday working menial jobs where their degree isn’t much use.

    Finally, on the subject of value of public services balanced out with taxes, this is a good point and surely needs plenty of debate. Taxes are going up but it’s doubtful the quality of services will and since they’ve been the subject of much ridicule during the boom will anything change? You can’t have low taxes and high quality public services.

    I read a quote from a Volvo exec in Sweden recently:

    “Why don’t you leave (Sweden)? Certainly, you would pay a lot lower taxes and probably also have a higher salary in the U.S.”, he responded, “Yes, of course, I would have a lot more money in my pocket. But I would also almost never get home before 7 o’clock and I certainly would not have the vacations everyone has a right to here… and you know what else, I would have to spend a lot more money on insurance, college for my kids, and travel back home to my family. In the end, I’m not really sure I would be any better off.”

    An intensive ESRI study on voters after the 2002 election found that many felt that while the state of the health service and the cost of living going up was the fault of the FF/PD govt. (equally) they too thought that economic prosperity was also the result of their policies. When asked if they felt any other party would have made much different impact on the health, infrastructure, inflation etc. a majority in nearly all cases said they didn’t (think any other party would make much difference)

    There seems to be a vacum in Irish politics and a gulf in society between what people want and what they get out of the political system.

    Michael O’Sullivan said recently on Prime Time that these austerity budgets are likely to produce a very “un-European looking society”. Considering there’s little to no sense of hope or of direction ie. where are we going it’s hard to see how anyone will put up with higher taxes without better service while putting up with lower wages (half of all earners are on about 33k or less).

  26. George Says:

    “w(1-t) + b + P = E”

    I don’t like your variable E, I think the equation should be: Irish [w(1-t) + b + P] = overseas [w(1-t) + b + P]. The Irish variables are understood to all Irish, but the foreign variables would to someone living in Ireland be estimates. Also there is a cost to expatriating, say C.

    So maybe: Irish [w(1-t) + b + P] = estimated overseas [w(1-t) + b + P] - C

    The equation would also have to be individualized as it would be quite different for different individuals. It would also be very different for immigrants to Ireland. As estimates could be optimistic or pessimistic you could add a certain herd mentality as people start to leave, more people will adjust their estimates in favor of leaving. As Irish communities appear abroad, estimated overseas P would improve.

    “There are fixed costs to running a state, and the debts we are now being saddled with are not population-dependent.”

    What are the fixed costs? For example Ireland seems to have gotten away with not having much military spending. I think that needs explaining.

    The debts not being population dependent is interesting as you could say people will leave Ireland to avoid paying their share. This should increase as the number of people leave, and the share of debt per person increases. Maybe there should be a worldwide income tax on the Irish to capture those funds wherever they flee to, the US government does this and evidently gets away with it.

  27. Paul MacDonnell Says:

    @Kevin O’Rourke This is a superb post and very instructive. I have been thinking about this myself. Of course the point when people start leaving won’t be a single point of time. I take it that the migration constraint is really a ratchet and the danger is that the public servants and politicians in charge of taxing and spending will cause the country to behave like the proverbial frog in water being brought slowly to the boil. The recovery will come for those with higher skills first: take particularly talented tradesmen or foreign financial services professionals who realise that they’re being asked to pay - say - 20k more in taxes just to live here when they could live elsewhere and put the 20k into a pension.

    But the gov’t won’t notice this.

    This goes to the heart of the matter of what lessons were learned from the 1980s. Answer: none. not a single one.

  28. Frank Barry Says:

    Kevin,
    As you might know, this is pretty much the model I have in “FDI, Infrastructure and the Welfare Effects of Labour Migration”, Manchester School, 2002.

  29. Mickey Hickey Says:

    The emigration safety valve is narrower than it was in the past. Governments around the world have reduced the number of immigrants allowed in for both short terms work stints and permanent residency. Some have made public announcements while others are doing it quietly under existing policies. The lack of facility in foreign languages reduces emigration within the EU. Time to face facts and leave Gaelic to the hard core nationalists. Get on with second and third language training. Norway, Sweden, Germany, France, Italy beckon.

  30. Rory O'Farrell Says:

    I like the idea of some project to improve P.

    One thing that is a change to the past is the number of foreign workers. I heard 75% of those working in Google in Dublin are from abroad. I’m sure they will have a different value of P to Irish born people.

  31. Barry T Says:

    Interestig suggestion from the Onion.

    http://www.theonion.com/articles/new-college-graduates-to-be-cryogenically-frozen-u,17034/

  32. Alan Rouge Says:

    @Rory, where did you hear that 75%?

    @Mickey Hickey that was my point made simpler really - in the 90s as a secondary school kid I was heavily encouraged to take a Euro language but myself and many contemporaries don’t have the level of speaking another language to emigrate within the EU.

    Surely this is an issue? It might be an easy target but our culture is very Brit/American influenced & the Scandinavian & other EU societies are regarded as exotic.

    Is there policy deficiency here?

  33. Modern Ireland: 1600-1972 (Penguin history) | Streets Of The World Photojournal Says:

    [...] The Irish Economy » Blog Archive » Migration, the limits of … [...]

  34. Mickey Hickey Says:

    @ alan Rouge

    Oddly enough I got a job with a Greek company even though classical Greek bears little resemblance to modern Greek, the fact that I could read the script was enough. Through that job I finished up having to translate technical data from Danish, Dutch and French on the fly with just a dictionary. In other jobs I picked up Spanish and finished up with French and English. Once you make the jump and apply yourself the world opens up. I have had dozens of technical and language courses most paid for by employers but some by myself so as I could make the next jump. I married a German which opened my eyes to what can be done, she operates in German, French, English and Spanish her sister operates in German French, Spanish and Russian. By operate I mean they worked for large corporations and governments using those languages. I agree the attitude to the teaching of foreign languages in the English speaking countries is atrocious. If you are ever unemployed move to the country that interests you, take night courses and try to get a job any job the combination of the two will improve your language skills in a very short time.

  35. Hugh Sheehy Says:

    @Various
    I have no idea whether it’s happening these days, but in the past foreign companies recruited Irish graduates who did not speak the language of the country they were hiring them to.

  36. Bónapart Ó Cúnasa Says:

    You have to do this in common currency terms of course - given the depreciation of sterling, Irish wages would have to fall quite a bit (25% or so) before they’d be as low as UK wages in sterling terms, even if they were the same pre-crisis…

  37. Alan Rouge Says:

    @Bónapart A euro used to get you 66p give or take. It’s steadied at about mid 80s this year. What happens if/when the sterling recovers? Will we have welfare/wage rises in line with the sterling?

    Nobody ever compares the NHS to the HSE. With the former your primary healthcare is looked after and you only pay a nominal few quid for medicines (nil in devolved countries I think).

    “Going forward” can we compare the quality of services here to UK services rather than just wages? Of average pay at least…

  38. The Irish Economy | emigratesafe.com Says:

    [...] for economic recovery.    In a thought-provoking post back in November, Kevin O’Rourke drew attention to the danger of an adverse fiscal feedback loop given the large fixed cost of the national [...]

Leave a Reply