Why we should hope fiscal multipliers are large

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One of the frustrating things about doing macroeconomics during the crisis is that it is so hard to pin down key empirical parameters.    The size of fiscal multipliers is probably the main case in point.   The combination of short time series and a wide range of conditioning factors – confidence effects, the state of credit markets, import leakages, etc. – make it hard to identify the causal impacts of changes in taxes and government spending.  

While there is a widespread view that Irish fiscal multipliers are small (mainly due to the openness of the economy), I have always believed this is exaggerated given offsetting factors such binding credit constraints, an almost completely accommodating monetary policy and a large negative output gap.  At a time when I thought Ireland could retain its creditworthiness, this led me to believe we should pursue as gradual a fiscal adjustment as the State creditworthiness constraint would allow.    But with creditworthiness proving more fragile than expected, there is now little choice but to move expeditiously to close the deficit. 

With significantly more fiscal adjustment to come – probably at a minimum the €9 billion planned for in the EU/IMF programme – there is an obvious reason to hope fiscal multipliers are small.   But there is also a reason to hope they are large.   With the IMF reducing its growth estimate for 2011 and the exchequer returns hinting at a weaker than expected recovery, we would be better off if the fiscal adjustment is a significant source of the observed weakness in domestic demand.  

It is the underlying rate of potential output growth that really matters for Ireland’s debt sustainability.   Uncertainty about this rate is a significant part of our creditworthiness problem.    As others have pointed out, there are competing narratives about Ireland’s medium-term growth potential.   On the positive side is the strong growth in net exports (which added about 3.5 percentage points to Ireland’s real GDP growth in 2010).  On the negative side is the combined impact of the fiscal austerity and the drag from impaired balance sheets (which subtracted about 4.5 percentage points from growth in 2010).  

While unfortunately we are in for a good deal more austerity, it will eventually end; the more of the current drag on domestic demand that is coming from the austerity, the higher is the implied underlying potential growth rate.   Even if the fiscal adjustment is making less headway now in reducing the deficit due to relatively high multipliers, the large changes in taxes and social welfare rates should allow for a rapid improvement in the deficit once the austerity ends and decent overall growth returns.    The hoped for growth narrative – which I think we have good reason to believe is true – is that Ireland has an economy with a strong underlying export-driven growth potential that is being temporarily held back by unavoidable fiscal adjustment. 

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40 Responses to “Why we should hope fiscal multipliers are large”

  1. Brian O' Hanlon Says:

    John McHale says:

    One of the frustrating things about doing macroeconomics during the crisis is that it is so hard to pin down key empirical parameters. The size of fiscal multipliers is probably the main case in point. The combination of short time series and a wide range of conditioning factors – confidence effects, the state of credit markets, import leakages, etc. – make it hard to identify the causal impacts of changes in taxes and government spending.

    The best gauge I have found by far, is to search through the connections of ex. colleagues of mine in Linked In. It is easy enough for me to ascertain, from browsing through the links to my linked in colleagues, the people who are capable of running whole companies by themself, and know how to do that, are at loose ends. The thing about those kinds of people who know how to keep the wheels turning, is that they don’t know how to do anything else. They are no like me, or others, who know how to devote more time to guitar practice or astronomy studies, or fly fishing or mountain biking, to fill a gap in their life. They are people, who when they find themself at a loose end, are just that. They are the kinds of people that an economy sheds, when the system is really broke. Broke in the sense of what would have happened in Eastern Europe, under the communism regimes, with bad under-utilisation of human capital for lengths of time. Except this is not a communist block country. This is Ireland, and yet it has happened. Particularly in the last few months, I have been keeping an eye at Linked In, and the kinds of people I see emerging into the In Search of a Challenge, bracket, in the numbers that I see recently, is the best indicator or barometer of the Irish economy, that I have stumbled across. Simply put, you could not acquire these kinds of people not so long ago, if you needed them. Nowadays, if any entrepreneur who had an idea to do something and required the human capital to make it work, we are simply climbing over it here in Ireland at the present. BOH.

  2. grumpy Says:

    “It is the underlying rate of potential output growth that really matters for Ireland’s debt sustainability.”

    This is a variable function though and the length of “austerity” and accompanying policy choices will have an effect on it. Directing those policy choices towards challenging entrenched vested interests is key in keeping this rate reasonably high. This is why the country needs “smaaaart” (to coin a phrase) political and economic leadership. It doesn’t seem to be in place.

    The Chinese and the Poles are coming. Time to wake up.

  3. Brian O' Hanlon Says:

    @ All,

    Regarding the Chinese, looking at it from the outside, and listening to some observers who have visited it and been asked to advise etc, these theme of spare industrial capacity, over-capacity and redundant investment in the same, seems to crop up a lot. That is, there is a price to be paid for such over capacity, such a surplus of machines ready for production of goods and all sorts of items the world may need as we enter the 2010s.

    Ireland is on the complete opposite end of the spectrum, in scale. But in some sense, the Chinese example does remind one of the Irish example at the moment. You have to replace industrial capacity with human capacity, and one has to come to the same conclusion. If I was to lay a bet, at how folk outside, view Ireland and other places at the moment, it is like this. They see the rows and rows of infrastructure, mental capacity that Ireland has managed to assemble over the last decade or two, and the mind must boggle, as to why so much of it gathers dust. BOH.

  4. nuig Economics Says:

    You say: “Ireland has an economy with a strong underlying export-driven growth”

    Export is probably the last stand for this economy to have any chance of avoiding coming back to the stone age.
    My concern is that the issue we face now with the global downturn has the same principal and it is different this time. Debt crisis that western world faces at the moment has been accumulating since the end of the war. Too much “aggegation” and abolishment of gold standard, combined with sub prime, artificial rates, massive borrowing has an reached maximum. Fattest economies (US,Japan, EU) are on their knees and there is no recovery coming – lets face it.
    FED is going to print $$$ as long as they can. Politicians never make the right choices,we all know that, especially with the elections coming 2012. SHORT RUN of 24month is up, QE3 is coming,CPI is fraudlent,hyperinflation is unavoidable. Vertical Philips curve is permamently shifting with massive money supply in play.There is a certain point they can go to untill they have to deflate.Or the armed people on the streets will forced them. It will bring down the whole system as it happened in germany,Argentina,hungary.

    Irish exports are mostly to US. If US is dead, Ireland is dead.
    Forget about growth, turism or any chance for development.
    I say;default, take a hit, print Irish£, abolish minimum wages, restructure, shrink government and get competitive again!

    Polish and chinesses are not coming. Why would they?

  5. grumpy Says:

    Imagine what the Germans will make of this:

    http://www.reuters.com/article/2011/04/11/us-pimco-bonds-short-idUSTRE73A2IR20110411

    I can almost hear the sound of the unemployed, carers and the disabled being elbowed into the firing line by those with armour plated elbows.
    and gold plated pensions.

  6. Ronan Burke Says:

    To really take advantage of the opportunities we need the kind of leadership that I’m not at all sure exists within the current government. Sophisticated “crowdsourced” financing, ongoing adult education, and entrepreneurship-encouragement implements need to be fashioned and executed post haste.

    It may be an oft repeated truism but true nonetheless, many of our problems would be resolved merely by the creation of gainful employment in large quantities-why this is not the first and last priority of politicians is anyone’s guess.

  7. Brian Woods Says:

    Growth?? I have questioned this before. Debt, sure, on steroids at present. Unemployements, ditto. Emigration (aka: our social and political safety valve!) Exports? Why are these important? Hard to comprehend in the total context. Those ‘magic multipliers’ again! What ARE these? Still no answers.

    Its back to the farm time – again! That’s our national asset. Unless it is intended to sell that as well.

    We’ll be back on this treadmill a few times more. But will we learn anything. We might, if we could just forget a few things in the meantime.

    BpW

  8. David Blake Says:

    My enthusiasm for this analysis was limited to begin with. it got even less when I saw this headline in the Examiner. “Taxes set to be hiked as growth stalls”
    The refusal to stand up to the ECB, which is the real source of pressure to pay bondholders, is driving Ireland into a classic vicious circle. Weak growth leads to tax hikes and spending cuts. These lead to even weaker growth. Meanwhile, ECB tightening strengthens the Euro against the pound, worsening Ireland’s competitiveness against one of its biggest trading partners. When is it all going to stop?

  9. nuig Says:

    Brian,

    Export are important. This is our national revenue. We have to sell to eat especially that Ireland has no resources to consume.” multipliers” are always associated with government intervention into free markets.
    What is wrong with farm life? We have all been created to live from the land of our fathers. What is wrong with living withing our means?

    People never learn anything, that is why we have patterns on every financial chart going back 100 years.
    I think we , as a humans, have been designed to destroy ourselves.

    If we followed Ludvik von Mises genuine economics with 100% reserve banking, gold standard, no gov intervention in commerce, we should have the standard of living next to ALIENS!

    We would have low interest rates, packed loanable fund with cash, huge exports, surplus, advanced technology in manufacturing, low or no taxes and happy, growing society.
    Is is simple, stop printing money!

    Will we ever get there?No!
    Thanks to our politicians we print money to produce growth before next elections. They borrow up to their ears and lie to taxpayer.This will never change. Stop beliving your politicians and make smart decisions. Keynes in dead now so is his aggregation!

    For now is back to the land people!

  10. Paul Hunt Says:

    @John McHale,

    You present a refreshing honesty about the lack of precise knowledge of the key macroeconomic variables and parameters. It could be that there is a seriously dysfuntional domestic, sheltered microeconomy underlying this macroeconomy. I know I keep banging the same old drum, but while the price level of private household consumption is 20% above the EZ average, further fiscal retrenchment will bury the domestic economy. The first step is to knife into the monopoly profits, anti-competitive practices, structural and financial inefficiences and deadweight costs (caused by the public, private shelters and semi-state sectors in unison). Resolving some of these problems will require hard graft; but all some require is the stroke of a pen. However, any reform will be resisted to the bitter end by deeply-embedded vested interests.

    The privilged few who enjoy, largely unearned, profits, position and prestige would rather see the sink ship than endure a limited cutailment of their privileges. A sense of entitlement has become embedded. The political process from the mid-90s to late 2008 was based on the distribution of largesse. Our current rulers spent most of that time gnashing their teeth in frustration that they were not in power to extend this partonage as they would wish. The coffers are empty now and the undeserving need to be curtailed, but the political mentality remains unchanged.

  11. Michael Taft Says:

    John – as the ESRI has pointed out, austerity does not end when the Government stops doing it. It becomes embedded in the economy. Reducing public sector employment, equivalent to 0.75% of GNP, deflates GNP by 1.0% in the first year, deteriorates to 1.3% in the third year; by the fifth year it is still 1.1%. Similar patterns can be observed in public wage cuts – austerity’s negative impact accelerates after the first year. So we will be carrying the burden of past measures for years to come; that we are absorbing new contractions only compound the deflationary burden going forward.

    Hopefully, you are right re: export growth. However, we should be cautious about the impact on the domestic economy of higher exports. While in the pre-recession period in the last decade (up to 2008) multi-national exports increased in value by over two-thirds, direct expenditure actually fell. This reflects the fact that the multi-national sectors import their inputs. Ironically, as production in these sectors increase, down-stream jobs will be created elsewhere. Direct employment in the capital intensive sectors are unlikely to contribute much – but, again hopefully the IDA’s current strategy of targeting HQs with associated research and marketing functions will add to the direct expenditure in the economy.

    It certainly would help if the new Government would publish the underlying growth rates that the Department base their estimates on, rather than trying to extrapolate from headline figures. Then we could have a more informed discussion (at least regarding DoF calculations) about the deflationary impact of austerity measures. The last Government’s EBO projected real GDP growth at 1.7 percent and nominal growth at 2.5 percent. They further estimated that a contraction of 3.7 percent would result in taking 1.5 to 2 percent off growth. This suggests that the DoF was estimating the 2011 underlying growth rate to be approximately 4 percent. This is debatable.

  12. Ronan Burke Says:

    @Michael Taft
    When you put forth a 3:4 expenditure:GNP shrinkage figure are you taking into account that the funds used to pay for the expenditure themselves represent leakage from the economy in the first place?

  13. Michael Hennigan - Finfacts Says:

    Industrial production data yesterday for February showed a dip in the ‘Modern’ sector, which is unusual.

    Pharma+ medical devices accounts for 60% of merchandise exports and 33% of total exports.

    Just be aware that it’s a sector in flux.

    @ Michael Taft

    Michael,

    The critics of ‘austerity’ would have more credibility if they supported reform and modernisation.

    The growth situation in developed economies is not going to allow us to grow quickly to increase our creditworthiness.

    The systems of exorbitant legal fees and other charges have to be addressed as it is private sector workers who are at risk from them.

    So it would be good to know what comes under the label ‘austerity’?

  14. John McHale Says:

    I would agree with Michael Taft that the demand effects of any given year’s austerity are likely to be quite long lasting. However, I do think that Ireland is relatively advantaged in being able to reallocate resources across sectors as it regains competitiveness, and in particular being able to move new entrants into the internationally traded sectors (though Michael Hennigan provides a useful warning not to take the strength of key traded sectors for granted). Brian O’Hanlon makes an interesting point about the availability of human capital that would have been previously pulled into the public sector and elsewhere.

    Paul Hunt, grumpy and others have also made important points about the need to remove other barriers to the competiveness of the traded sectors, not least the rent extraction that goes on in the protected sectors, including of course the public sector itself. As Paul is I’m sure tired of reminding us, fiscal austerity needs to accompanied by structural reforms to strengthen the countervailing traded-sector response.

  15. michael burke Says:

    The notion that Irish fiscal multipliers are small because of the openness of the economy has no basis in fact. In the 2007 Supply & Use Tables imports were €135bn compared to total domestic output of €402bn. It is clear from the import sectors (business services, finance, office machinery, chemicals, etc.) that these imports are overwhelmingly for re-export.

    The degree to which the external sector is an ‘enclave’ may be gauged from the fact that final domestic demand has fallen by €40bn in the slump, whereas imports have fallen by just €10bn.

    All evaluations of the NDPs suggest the mutipliers attached to government investment are high in this economy and endure over a great number of years. There is no reason to believe the irresponsible policy of speding cuts is not operating those multipliers in reverse.

    It might asist the debate if Philip Lane publised here his estimates of the various fiscal multipliers for this economy. They too are high (much greater than 1 and persisting over several years).

  16. Paul Hunt Says:

    I always find it amusing when the heavy cavalry from Tasc/P-E come galloping on here at the first sniff of a fiscal multiplier. All we need it seems is tax and spend to work our way out of the fiscal deficit – oh and burn a few bondholders as well. And, of course, anything that might deflect attention from the structural reforms that are badly required.

    Sure, ’tis grand for some.

  17. Michael Taft Says:

    Ronan – I’m not fully sure what you’re referring to. If you’re pointing to the consumer spending leakage from the public sector employment that would be reduced, yes that would happen. But the CSO estimates that the import content of consumer spending was less than 20 percent in 2005; it would probably be less now. But as the ESRI produces balance of payments projections, it would appear that they are factoring this in. In any event, as Michael B points out above, imports are disproportionately driven by multi-national re-exporting. Is this what you’re referring to?

    Michael H – I think everyone should be up for reform and modernisation. I note that Forfas estimates that at the end of 2009 legal costs were nearly 18% higher than in 2007. Anything to cut the costs of professional services would certainly be welcome. Do you have any specific ideas? I’d be willing to line up behind them.

    Paul – I’m not sure what you’re saying. Do you agree that austerity measures last beyond Year 1, can become embedded in the economy and can even accelerate? Or do you take issue with the ESRI modelling? If the latter, I’d be interested in your concerns.

  18. Paul Hunt Says:

    @Michael T,

    As you well know, I’m not raising the questions you suggest I’m raising. And I’m also sure you’re well aware that I believe that some serious structural reform is required to ensure an efficient and equitable tackling of the fiscal deficit. In any event, some semi-state privatisation should be coming your way soon. I’m sure that’ll help to charge the blood. It would be good if it were accompanied by a bit of ‘tough love’ for the private sheltered sectors. Just for a bit of politcial balance. Upset the well-heeled on both sides of the imaginary ideological fence.

  19. Gavin Kostick Says:

    @ Paul Hunt

    With respect as ever, you never quite name names as to what the deadweight costs for the state are. Any chance of giving concrete examples and breaking them down a bit?

    @ John McHale

    Also with respect, you say: “the large changes in taxes and social welfare rates”.

    The latter part of the phrase suggests undermining the living standards of people who have not caused the current fall – unless you intend the cost of living to be cheaper?

    On taxes: I note that Toyota is one of the great, most successful, post war companies. I also note that their pay rates (according to a book I read last year, which I can dig out) allowed for the top rate of pay being 7 times the lowest.

    Using bank of the envelope maths, I reckon a person on minimum wage might be on 17k, which would leave a top wage of 120k, for all of society.

    This could be achieved by tax.

    In normal times, a wage of 120k in Ireland would provide as much freedom as Western Capitalism can provide.

    Where people on over 120k are overextended due to debt, that can be looked at through tax relief.

    Where people on over 120k are spending money on wages for people whom they employ, that can also be looked at.

    If people think that this would knock the incentive to succeed, I would note:

    (a) Toyota
    (b) That bonuses for bankers in the 1980s were paid in Christmas hampers.
    (c) Society needs to disentangle what it means to live a good life, this side of the revolution, from pay slips.

    Any thoughts?

  20. John McHale Says:

    @Gavin

    On reflection, that line was not well thought through. The point I intended to make was that as a result of the fiscal adjustments, subsequent growth will be more effective in reducing the deficit. This is certainly true for the changes in taxes, particularly those that have made the system more progressive. While it is true that any reduction in unemployment will lower the cost of unemployment benefits for any given benefit rate, of course the deficit reducing effect of a given change in unemployment will be greater the higher (not lower) the existing rates.

    But of course you really are making a more general point about the balance between efficiency/growth and equity in the design of the tax and transfer system, and by extension the design of any fiscal adjustment programme. I tend to approach this with a standard social welfare function approach, with the function exhibiting a significant degree of inequality aversion (with particular weight on income increases below an absolute poverty line). But I also believe there are significant efficiency and (less assuredly) growth effects from a more progressive system. We already have marginal tax rates above 50 percent for relatively modestly earning individuals and families. Without going into the technicalities, standard welfare analysis shows that the deadweight loss of raising an additional euro can be quite high at these marginal rates. More intuitively, the value of such activities as working hard in school — or even doing everything to allow your kids to do well in school — begins to diminish when incentives are made more blunt in this way, which can be reinforced by “social multiplier” effects. The combination of relatively generous benefit rates, low wages and high tax rates can also create initiative-sapping unemployment traps. Put simply, while equity matters, so do incentives, and so we face difficult tradeoffs in the design of the fiscal system.

    Unfortunately, when it comes to fiscal adjustment, this suggests that the overall burden needs to be distributed, but certainly with the biggest absolute and proportionate additional burdens being placed on the better off.

  21. DOCM Says:

    @ John McHale

    I sometimes wonder why we go looking for complex solutions to relatively straightforward problems. Jody Corcoran was complaining in the Sindo that the Irish electorate was stupid because it had voted in a new government almost indistiguishable from the previous one. In a democracy, sectors of the electorate vote for what they perceive to be their sectoral interest. Not a great outcome but better than any of the alternatives as the debate continues within the rule of law. (I think it was Karl Popper who said that the essential characteristic of any democarcy was the capacity to change leadership peacefully).

    The balance of sectoral interest in Ireland is out of kilter and has been for some considerable time. It is this that has to be corrected. It is a political not an economic problem although it will require a knowledge of how a modern economy functions if we are to get it right.

    We are only in the foothills of addressing the difficulties. There are examples too numerous to mention. Why do we speak of the “motor industry”? Ireland has a motor trade. It has no motor industry. A scrappage schemem to keep German, French and Spanish motor workers in jobs make no economic sense whatsoever. Where was the Irish economic academic community on this issue?

    The balance between primary, secondary and tertiary education in Ireland is totally skewed. It must be corrected as a matter of urgency.

    The balance between the public and the private sector equally so. Why should it be presumed that “permanent, secure employment” should apply to the first and not the second?

    The ordinary tax-paying citizen in the wealth producing sectors of the economy is beginning to wake up to these realities. Trade unions can on longer reconcile the essential dichotomy between the interest of their private and public sector membership.

    These are the issues which have been avoided in the past (and I have not even begun to deal with the professions) but the arrival of the Troika means that they can not be avoided any longer. This is the fundamental problem that the academic community should be addressing.

  22. John McHale Says:

    @DOMC

    Reading your comment was quite depressing. I have generally thought of you as one of our more thoughtful participants. But what you have written above is quite ridiculous. My post was on a narrow issue, which you are of course free to ignore. I have no problem with you thinking it is far down the list of priorities, but the idea that posts get criticised on a site with broad coverage because they don’t address the issue that you want to read about makes me wonder why we bother.

  23. Gavin Kostick Says:

    @ John McHale

    Don’t be depressed! I have quietly spent the last hour, meditating on your reply.

    This has also required me questioning whether my specific comprehension of the points arising – not necessarily limited to your explication but from the bigger picture – is sufficient. That is not to say I am swallowing your position whole, but to say that it is intelligible, and is highly stimulating to further ideas.

    All the best.

  24. DOCM Says:

    @ John McHale

    My post was fully considered and relevant to the topic. The academic community in Ireland no longer has the luxury of picking narrow issues, still less of wondering “why it bothers”.

  25. Brian Woods Says:

    @ PH: “I always find it amusing when the heavy cavalry from Tasc/P-E come galloping on here at the first sniff of a fiscal multiplier.”

    Paul, do you know what these ‘magic multiplers are? A few folk around here ‘talk’ about them as if they are some disembodied phantasm, but never provide any information about where they might be located – so I could actually observe one doing its thing!

    Actually, does anyone know? Are they real entities? I suspect they are the virtual elements of a fiscal Ponzi scheme.

    BpW

  26. Brian O' Hanlon Says:

    @ All,

    What is so interesting about the Irish Economy blog, if one has time to follow the various entries over time, is the number of different perspectives it brings together in the one mix. That is, if offers people such as myself and others, a broad overview of the different branches. I am perfectly free to ignore John McHale, Karl Whelan or Philip Lane, but I may focus more intently on contributions of Colm McCarthy or Kevin O’Rourke. Or some other mix. It would soon be a very, very boring web site indeed, if it could not offer that depth and breath. Not to mention the fact, there are other websites also, such as those of David McWilliams, Ronan Lyons, Constantin Gurdgiev, Jagdip Singh and many others, which one can find through the Irish Economy portal, because there are such regular entries linking to the same.

    In summary, if anything on the Irish Economy web site may at first appear to be too narrow, then that narrow-ness, in my view is justified to most rational observers such as myself, because it allows different contributors to drill down periodically into an area they like. That in turn, increases the depth and breath of the website, rather than decreasing it, in my view. As Josh Lyman would say about President Bartlett on the West Wing – I would like to think we can aspire to reaching for it all, rather than just consuming the McNuggets. BOH.

  27. Kevin Walsh Says:

    @Brian Woods

    The difference between the fiscal multiplier and a Ponzi scheme is simple. Ponzi schemes run out of subscribers, and then they crash. The money created or destroyed by fiscal action, on the other hand, never runs out of subscribers, since it feeds back through both the local and global economy repeatedly. There are large exceptions, mostly to do with Central Bank action, but they don’t apply in the case of Ireland, as the ECB doesn’t set its interest rates with reference to the Irish economy.

  28. Jesper Says:

    Is there a relationship between the size of the multiplier and the amount of capital that flows in from abroad?

    The Irish banks seem to be shrinking their balance sheets & it seems that the shrinking indicates that capital is flowing out of Ireland. If the capital would have stayed in Ireland then this capital might have generated some more economic activity, I’m not sure if the Irish government can stop the economy from shrinking as long as Ireland is deleveraging.

    The difference between deficit spending to generate economic activity and government waste probably depends on ones point of view: Spending on things I like provides services and generates economic activity while spending on things I don’t like can be just waste. A bit similar to some NIMBY debates :-)

    Would it make a difference if current spending was maintained but better value for money was obtained? Would hurt some & generate benefits for others

  29. DOCM Says:

    @ BOH

    I agree in general with your point but with one important qualification. Anybody contributing to this blog who is paid from the public purse, whether by way of salary or pension, and I am in that company, should consider what might happen if the envelope with the window no longer arrived each fortnight, as well it might. This applies from the Taoiseach down, through the Governor of the Central Bank, via the Dáil, universities, government departments, local authorities etc. etc.

    The country has been hit by a financial tsunami and the job of the academic community is to address its consequences and to stop living in some kind of parallel universe.

    One can take as an example the thread running on the kite flown by the head of NAMA on supporting the property market. It takes an informed Limerick solicitor to state the blindingly obvious in today’s IT. The market is not functioning because nobody knows what a fair price is and there are many interests trying to ensure that nobody finds out.

    http://www.irishtimes.com/letters/index.html#1224294482992

    We cannot treat the Irish economy as a normal functioning developed economy for the simple reason that it is not a normal functioning developed economy.

  30. Brian O' Hanlon Says:

    On the market functionality,

    It is all the more reason to have different viewpoints, because there are a number of markets in Ireland which do not function, and which do require attention. I normally duck this issue altogether, because I want to avoid going down that whole avenue about central planning. I think I started with a comment on the functionality, or lack of it, of the labour market in Ireland. We have a habit of warehousing labour resources in Ireland, in all kinds of daft ways, and the public sector, is just another way of doing the warehousing. It is slightly better than a dole queue arrangement, but in many ways, not much better, because we fail to extract enough of value from the labour, while it is at its best. It is a bit like stocking fruit in the storage room and forgetting about it.

    The property market is the other market which is broken of course. So there are a couple of markets which are having trouble functioning, and there are interactions in strange ways, between all of the same. Take for instance a conversation I had with a neighbour a while ago. I know he is restricted from moving to a different part of the country by his negative equity, on the residential side of the property market. But consider this. He was to set up a new business in partnership with someone, who would become his landlord in the retail business. He knows retail, he works in it, and is doing well. He was set to move into his own operation in a new retail unit in another part of the country. But guess what. Some of those crazy NAMA top thirty, came along, without knowing the retail trade at all, and paid double for the lease for the unit he was interested in. Subsequently the same NAMA developer went belly up, and owes billions. The shop unit is sitting empty, the lease having been agreed, and everyone has lost out. It was the habit of panicking Celtic Tiger developers in Ireland, went the cat was out of the bag that residential was bust, they all shoved their way into commercial making a series of bad moves, which ultimately cause many of them to go bust.

    But the point I think is interesting, is that this young man who can create his own employment is being beat two ways by the disfunctional property market – both from finding a premises to trade, and from the point of view of his home. Therefore bad behaviour of the property market is also sickening the labour market, and how it functions. BOH.

  31. Gavin Kostick Says:

    @ John McHale

    You say:

    “While it is true that any reduction in unemployment will lower the cost of unemployment benefits for any given benefit rate, of course the deficit reducing effect of a given change in unemployment will be greater the higher (not lower) the existing rates.”

    I get that. You’re saying that, apart from all the other benefits, the uspide of having quite high unemployment benefits is that when people move off the dole and back to work, as

  32. Gavin Kostick Says:

    @ John McHale

    You say:

    “While it is true that any reduction in unemployment will lower the cost of unemployment benefits for any given benefit rate, of course the deficit reducing effect of a given change in unemployment will be greater the higher (not lower) the existing rates.”

    I get that. You’re saying that, apart from all the other benefits to having people back in jobs, the uspide of having quite high unemployment benefits is that when people move off the dole and back to work, they go from one side of the government balance sheets to the other (from an cost to a benefit), and have quite a substantial defecit reducing effect.

    I wonder if this was why Governor Honohan was so exercised in his interview with Vincent Browne that the main issue was jobs and growth, not the fiscal defecit.

    Apologies for the double posting.

  33. Paul Hunt Says:

    @John McHale,

    Please don’t despair. It is often difficult to focus on the narrow theme of a thread when the enormity of the challenges we face continue to crowd in and inundate commenters. As one of the ‘commenting contingent’ (copyright Karl Whelan) I know I often veer off-topic, but it’s the engagement that counts. In this instance, I’m querying the wisdom of applying well-established macroeconomic analytic techniques to a dysfunctional microeconomy. I don’t think a well-qualified Formula 1 mechanic would have much joy trying to fix a 10 year old banger just using the tools and skills at his command. It’s amazing how many people seem to have swallowed the BS about ‘competition and better regulation’ during the bubble period and avert their eyes from the creepy-crawlies munching away cheerfully under this facade.

    I also note that most of the heavy-lifting here is being done by you, Karl Whelan and Philip Lane (and Philip rarely engages). It would be good if more of the main contributors were to prepared to share the burden. (I know some do, but not, I think, to the extent that they might offer enlightenment.)

    @Gavin,

    Re ‘deadweight costs’: I have been banging on about these for so long that I’m boring myself now. I also have to be careful because this is a very specific economic concept. I use it as convenient shorthand for all sorts of profit-gouging and anti-competitive practices in the private sheltered sectors, institutional and process inefficiencies in the public sectors and structural and financing inefficiencies in the semi-state sector. In simple terms it means that consumers are paying more for goods and services than the cost of efficient provision; or that consumers are receiving a quantity or quality of good or service that is less that what the price they pay for efficient provision.

    I’m sure you can think of plenty of examples.

  34. Brian Woods Says:

    @ KW: Many thanks for your reply. You are one of two, so far!

    The Ponzi goes ‘bust’ ’cause its runs out of suckers, eventually. But eventually can be quite a long time, and many of the early suckers do get their investment back (if they are quick enough!)

    The Magic Multipliers, are to me, a similar schemola (sic). A fixed amount of virtual money is electronically delivered to various entities, and these in turn deliver it to others, and so on. The nett effect is that the original amount still exists, but in much smaller units. You can grind a large rock into very small grains and lose very little of the original mass.

    Now if one has a ‘closed system, and there are no leakages and no frictional losses (you ‘accidently’ light your cigar with a 50!) – then that’s it. However.

    The system IS open. There ARE leakages. There ARE frictional losses. So how come we get ‘growth’. I am assuming that growth, in this context, means MORE of something. You cannot get more value from the same input value (laws of thermodynamics). Well, you can, but. There must be something else involved. So what is it? Hence my reference to Ponzi – you WILL get more from less! If your quick!

    That’s what intrigues me. The ‘more’ bit. I have grave suspicions about it.

    BpW

    ps: I notice the occasional re-posting: Any chance we could have a Pre-view option?

  35. Brian O' Hanlon Says:

    Michael Taft says:

    So we will be carrying the burden of past measures for years to come; that we are absorbing new contractions only compound the deflationary burden going forward.

    I have been listening to this argument on the TV channels, on the radio talk shows and in newsprint for at least 12 months now. I cannot turn on the late night Vincent Browne show any night of the week, without hearing from someone who has been put on the panel, simply to exercise their vocal chords in making this point. What everyone seems to have missed, in all of the debate and all of the talking is as follows. We are collectively (Ireland and in Europe), unable to understand how situation from the point of view of the group dynamic. Michael Taft says, we in Ireland will be carrying. Everyone it seems can recite this argument. Everyone. The truth that everyone needs to get on board with now, is that Ireland will not be able to carry anything, and that Europe will be doing out carrying for us.

    The fact remains, that in situations which involve a group dynamic, there is the strong tendancy for the stronger members of a group to fence off the problem. That is, the fact, that some members of the group are weaker. That is the first human response. It is rational. But that is what is wrong. In order to make the group work as a group, a collective or even aspire to anything approaching what we call team work, one has to behave irrationally. One has to work tirelessly to raise the performance of the weaker group member, and there are several ways to create incentive and fairness in that deal. None of which have been explored, discussed or much less mentioned in most of debate in Ireland. If Ireland cannot carry itself, Europe will end up doing so, and in the long process of things, will experience much difficulty in trying to carry itself also. So before we start to dish out responsibilities as to who will carry what, we should bear all of the above in mind. Lets try and get with that program. BOH.

    http://designcomment.blogspot.com/2011/04/honey-bees.html

  36. Kevin Walsh Says:

    @Brian Woods

    Money is not obliged to obey the laws of thermodynamics, and generally doesn’t. In any economy sufficiently sophisticated to have credit, money can be created ex nihilo and destroyed without trace. The reason people talk about fiscal multipliers because the government is somewhat more capable of controlling how it spends its money than it is of influencing the rate of private investment. Moreover, fiscal expansion really can cure recessions. The Second World War provides experimental proof in the case of the United States.

  37. Brian Woods Says:

    @KW. Really appreciate your reply. Thanks.

    You are indeed correct about money and thermo laws. But something else in the system is constrained by those laws! “There’s the rub”, as they say.

    “Moreover, fiscal expansion really can cure recessions.” Maybe. Depends what the the distal and proximate causes of recs are. This one is caused by massive pre-inflation*. So any attempt to apply more money as a curative will be futile.

    After 1945 Europe and East Asia were (mainly) trashed. Had to keep them ‘commies’ at bay. Lash on the cash.

    Question still remains unanswered. What ARE multipliers? – and how do they work? My semi-informed opinion is they (there are two) are concepts associated with an abstract theoretical model, based on very iffy asumptions. Though the Great Milton dismissed as trifling any concerns we should have about abstract, unreasonable and unrealistic assumptions. Is it any wonder we had (and have ongoing) a property bust based on a massive increase in money supply?

    Debt is future income.

    BpW

    *Fed QE programmes since 2002. And the current ECB and BoI endeavours. Japan tried same. Now its like those nuke plants: slumped in a toxic mess.

  38. Kevin Donoghue Says:

    “What ARE multipliers?”

    Will this do as an explanation? If not, just what are you after?

  39. Brian Woods Says:

    @KD: Thanks for reminding me. Will re-read and see how I get on.

    BpW

  40. Brian Woods Says:

    @ KD: Quick Update: Keynes is discussing an ancient form of economic activity – the Production-Consumption (PC) model. Unfortunately, he had no inkling of the FIRE economy. His ‘magic multipliers’ apply only in somewhat restricted circumstances. Services were smaller proportion of economic activity in his day.

    A much more relevant paper is, ‘The Relation of Home Investment to Employment’ – by R Kahn: Economic Journal, XLI (162). He also models a PC economy.

    Hence, there may be a clue here. The contrast between the two types of economic activity: PC v FIRE. You make a physical product and sell it at a profit -preferably abroad. v You create credit, sell it, skim your commission, and watch the debt grow! That’s some magic multiplier!

    Thanks again. Have to give this facinating topic a ‘rain-check’ for the present. But will return to it.

    BpW

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