Year: 2010

Unpleasant Stimulus Arithmetic

One by-product of Paul Krugman’s latest intervention on Ireland is that it will provide further ammunition for the many people who believe the government should abandon fiscal austerity and provide a stimulus package of new spending to boost the economy. Stimulus advocates believe that budget cuts are self-defeating and that, by contrast, a stimulus package will pay for itself and actually improve our budgetary situation.

I know that the majority of Irish economists don’t agree with this idea but perhaps we’re not doing a very good job at communicating why, so here’s a brief explanation.

Continue reading “Unpleasant Stimulus Arithmetic”

Krugman and the ESRI

Paul Krugman criticises the ESRI’s Recovery Scenarios paper:

What the careless reader might miss, however, is the fact that the policy conclusions are not, in fact, derived from the analysis — they come out of thin air. The authors simply assert that more austerity now would lead to a lower risk premium and hence higher growth, based on no evidence I can see.

This criticism appears to relate to the paragraph on page 41 of the report starting with “Recent experience ..”

Two aspects of this criticism strike me as unfair.

First, the assertion that Krugman refers to appears to be the following concluding sentence:

It also raises the question as to whether a more rapid fiscal adjustment than currently planned would have a more beneficial outcome for the economy. 

This seems to be pretty far from an assertion. Rather it flags this idea as something to consider. Krugman seems to be jumping on the ESRI for what it is little more than a speculative remark.

Second, in relation to the “based on no evidence that I can see” comment, I’d note that the relevant paragraph contains the following sentence:

This means that action to reduce borrowing, which would otherwise still be deflationary, could actually increase domestic activity if it produced a sufficient reduction in the risk premium (Alesina, 2010).

Now I’m guessing that Krugman has no time for the analysis in Alesina, 2010 (and he may be correct in this assessment) but it’s still worth noting that the ESRI did cite evidence from a Harvard economist when making the supposed assertion.

What seems to be happening here is that the ESRI-bashing is just a small element in Krugman’s greater campaign of opposing austerity in the US and Germany (with which I’m sympathetic.)  However, it’s worth recalling that last year, Krugman noted about Ireland that “there isn’t much disagreement about the need for fiscal austerity. As far as responding to the recession goes, Ireland appears to be really, truly without options” and referred to an “Irish-type fiscal straitjacket.”

I’d be surprised if Krugman’s assessment of the bond market’s attitude to Ireland has changed much since then: The spread over bunds of the Irish ten-year bond was 282 basis points yesterday versus 293 the day Krugman’s Erin go Broke column was published.

So while kicking around a little research institute his readers have never heard of may seem to provide a nice example-de-jour of crazy people advocating Herbert Hoover economics, in truth it’s likely that even Paul Krugman doesn’t really believe Ireland is in a position to abandon austerity.

Budget 2011 (ctd)

My prediction earlier this week is now supported by the Times (and again in more detail) and Independent.

I would agree that the focus should be spending cuts rather than tax increases.

However, I would also argue that taxes need to be reformed too. Particularly, I would use the revenues of property taxes and water charges to reduce income taxes — as that would help to price Ireland back into the export and FDI markets.

I have also called for privatisation of particular state companies and agencies (ESB, CIE, DAA, Bord Bia, RTE, etc). This would only improve the public balance sheet if the market would pay a higher price than the current book value — that is, if a private operator thinks she can improve efficiency. However, privatisation would, in the longer run, improve domestic competition and reduce the costs of energy and transport.

These things will not happen soon as the necessary preparations are slow at best. Some have taken this as me criticising the civil service, particularly the DoF. That would be incorrect. Reform is complex and requires careful consideration — and DoF has its own budget cuts and hiring ban; endless complaints from other departments; the EU and IMF; and NAMA to cope with.

Nevertheless, you should never let a good crisis go to waste — and the public sector should be reformed as well as cut in size.

How housing slumps end

Agustín Bénétrix, Barry Eichengreen and I have a piece over at Vox looking at the end of house price collapses. Historical patterns don’t suggest that Irish residential prices will stop falling any time soon; the best way to ensure that they do is to let them adjust downwards as speedily as possible.

Update: in light of a recent article in the Sunday Tribune, I should clarify that nowhere in the Vox piece do we present estimates of the extent to which house prices will decline in Ireland. When asked by the journalist in question how far they would have to fall, I replied that I agreed with Morgan Kelly’s analysis, or words to that effect. When pressed as to what that meant, I gave the figure mentioned in the Sunday Tribune. I am always happy to cite and give credit to Morgan’s work in this area, but I am not happy to be presented as an independent source of analysis on the subject, much less to be described as a “leading housing researcher”.

There. That feels better.

Recovery Secnarios for Ireland: An Update

For those who are interested, our article on the above topic is available here.