A Fiscally-Neutral Stimulus Package

Minister Brendan Howlin on RTE’s The Week in Politics has said the government are preparing a “stimulus package that is fiscally neutral”.  As a macroeconomist, this strikes me as a pretty strange concept. Pretty much everywhere else in the world, a stimulus package implies a set of measures that cut taxes or raise spending and are not “fiscally neutral.”

Still, one can hardly argue that the current set of tax and spending policies are optimised to generate as much employment as possible, so it may be possible to adjust policies to generate additional employment and I’d be interested in people’s suggestions for fiscally neutral measures that can boost employment. But shouldn’t we stop calling such changes “stimulus packages”?

44 thoughts on “A Fiscally-Neutral Stimulus Package”

  1. Just goverment noise to give a sense of activity and purpose.

    They are completly tertiary to the fundamental power base now entrenched in this bog hole beginning in the late 60s.

    Executives without executive functions are funny little things

    No Bucks , no Buck Rogers

  2. @Karl

    Just wondering was there ever an economy in the dire mess that we find ourselves in, that didn’t recover to somewhere approaching economic norms without a proper fiscal stimulas initiative unlike the fairytales we are led to believe constitute a fiscal stimulas allowed under the IMF/EU/ECB arrangement.

  3. @ Karl Whelan,

    I will have to restrict myself to a single comment this time, as exam time approaches for me right now. But I think that strikes me about the new government in Ireland, is that they are trying as opposed to bumping into things as the previous government was wanton to do. The trouble at the moment is that after 13 years of the same party political system, our windshield is still a little gummed up with the older policy approach. The new government in Ireland is trying to look at the reality through the same bottle-ends that the Progressive Democrats, used a long time ago. We have a new ministry in Ireland, called the ministry for public service reform. I haven’t been charting the progress too closely of the new Fine Gael, Labour coalition government, but these are the bits I have gathered so far. I believe the trick that the Progressive Democrat, political party played on this country until a very short while ago, was to deny citizens a right to be part of a region on the island of Ireland. We are still looking at the reality through the lense the Progressive Democrats used. We divide up policy and administration on this island, according to specialities of various ministers. The new ministry of public service reform, makes that same mistake, of giving too much bias to the cabinet, and specialities represented within the cabinet. That bias needs to be re-balanced, with policies and policy making processes which focus back on regions and representation of those regions. If that does not happen, then we will continue to produce policy which looks similar if not the exact same to those created under McCreevy, or Ahern, or Cowen. For instance, centres of excellence, in health care. It denies the people of a region of Ireland the dignity of having a facility for a region. It tries to envisage citizens on the island of Ireland as subjects of some kind of centrally planned nightmare from a department of health, which is run by a quango. That is an awful lot of bureaucracy and organisation to go to, to deprive people the dignity they deserve of belonging to a region, which is a subset of a nation. It is time the new government in Ireland, acknowledges the fact that a ministry for public service reform is only about approaching the problem the way the Progressive Democrats would do. We need a new ministry for local government and regional administration, that will harness the full resource of the Irish national parliment. I spoke about this at length in comments on Kevin O’Rourke’s blog entry on the Trilemmas, and I don’t wish to labour the point any longer. I think I have been clear. But I wanted to say, that any discussion about policy of the new government in Ireland should acknowledge, the existence of the new ministry for public service reform, and the absense of a robust communication line of governance between national and regional levels on the island. To roll out a program to build a smart network, or a smart grid, to tie in with a European wide policy to establish a supergrid, or whatever – you cannot do that without the necessary communication lines – and we don’t have that in Ireland at the moment, without the intermediate information collection points for governance across whole regions. BOH.

  4. However if the ECB are truely serious about increasing interest rates to 3% or more they will have to sanction goverment spending via a increase on their balance sheet.
    I cannot see how they could do otherwise – but then again I have been naive in the past.
    The county council here is awaiting orders…………………………….

  5. Cut long-term capital projects that import monopolistically-priced technology and materials, and spend the money of labour-intensive projects.

    No?

  6. how can you stimulate an economy when you are living from month to day with 180 billion of short term debt, 100 billion of sovereign debt, and immeasurable contingent debt?

  7. As an economist, Karl, you should know that if you replace a tax with a high marginal excess burden by a tax with a low marginal excess burden, you would stimulate the economy and be fiscally neutral.

    The problem is that we have such a poor understanding of the efficiency of the tax system in Ireland.

    That said, there are a number of wasteful subsidies (e.g., in energy and transport) and there are a number of sectors in which government regulation creates rents. Do away with those and you stimulate the economy and have extra money in the exchequer.

  8. I’m working on some analysis on this.

    The so-called ‘smart economy’ is getting the lion’s share of the enterprise budget.

    It should be diverted to sectors such as tourism, construction or food – – if not just cut.

    Science related public spending across 39 government departments and agencies, rose from €1.2 billion in 1999 to €2.5 billion in 2009.

    While research can have several benefits, direct commercialisation is not a significant one. For example, in the US the income from intellectual property is 4 per cent of university research spending and in England in 2009, only £73m was earned.

    The OECD says there is “little evidence of success” in the commercialisation of university research.

    Germany with a stronger economy than France, has half the percentage of young adults with a university degree

    Maybe, the apprenticeship system should be looked at.

    Minister Bruton is in India today leading a trade mission; India has grown 50% since 2006 and the paltry level of Irish exports, in 2010 at 0.2% of goods exports, have been flat in the interval.

    We look like a company struggling with too many product lines.

    Ditto to Richard Tol’s point on the rent scrounging.

    It’s all very minor to the impact of economic growth but a spin-free enterprise policy based on an unvarnished assessment of the challenges facing Ireland, would be a start.

  9. I’m no macro, but following on Tol, I thought that if you tax people who have too money to know what to do with and spend it on labour intensive public works that would be a stimulusory FN, so the concept isn’t quite an oxymoron.

    So the very obvious FN stimulus is to levy a highly progressive property tax and build us a metro.

  10. @Richard Tol,

    Many thanks for highlighting some of profit-gouging, rent capture and deadweight costs that could easily be reduced or eliminated and would generate significant benefits in various sectors – and be reflected even at the macro level. But I keep asking: where are the microeconomists and what are they doing? I choose economics and have stuck with it because I operated, and continue to operate, under the naive belief that its primary focus is the efficienct allocation of resources to advance public welfare.

    The threads that kick off with anything to do with fiscal consolidation, bank resolution or calls for debt restructuring are inundated with comment. And yes I know the expertise of a number of the principal contributors is often in these areas and I can understand the reluctance to venture beyond their areas of specialism in the discipline, but the resolution of these issues is largely out of our hands. The volume of comment often strikes me as displacement activity. There seems to be urge to bitch, moan, lament about the things we can’t change – or which will be decided largely by external parties – so as to avoid focusing on the things we can change in our own interests.

    There is so much that needs to be done across a wide variety of sectors in the domestic economy that would generate signifciant economic benefits that the apparent determination to avoid considering these strikes me as almost criminal. The terms of the EU/IMF requires the government to get stuck into some of these issues, but there is little evidence that it is doing so in any meaningful, structured or effective manner.

    I just wonder, what will it take to motivate effective action. The Irish economics profession certainly isn’t providing much analysis, guidance or advice in these areas.

  11. @Tol
    In a closed MMT economy you cannot raise NEW money with Tax – however to increase the trade surplus even more I would recommend a further large tax increase on oil imports and perhaps a halt or reversal of tax increases on Labour to revive internal demand whose real function is to reverse the entropy in commercial banks balance sheets.

  12. Before Macroeconomics went over to the dark side, also known as DSGE, there were lots of useful tools in the kit, now all sadly forgotten. One of them was a concept known as the Balanced Budget Multiplier.

  13. @ Paul Hunt, Karl Whelan, Michael Hennigan, etc.

    In the interests of Paul Hunt’s comment, I would suggest an easy win would be about doubling the money going into the Arts Council, Culture Ireland and the Film Board.

    This would cost the state approx an additional e80 – e85m pa.

    A DKNY Department of Arts, Sport and Tourism report 2008 and an Indecon study 2008 (I think), both showed that the arts and cultural sector multiplied investment in return to the DoF. This is not the magic multiplier (which can be put on top to look at how arts secures investments through festivals, urban renewal, cultural export, etc). The DAST report showed 3 euro directly coming back in revenue for every 1 euro going into the cultural sector in state investment.

    This is not surprising when you consider that the average stage actor earns about 7.2k per years from their job, and really very established artists of all kinds are on about 20 – 25k. That is, for a sector for which Ireland is internationally world class (75% – 80% of coverage of Ireland in the New York Times is about culture and is positive), we have very cheap labour – sadly for artists – cheap production overheads, a highly driven workforce, and a sector that cannot be simply relocated elsewhere in the world at the stroke of a pen. It sosts more to keep a person on the dole than it does to commission a painter to create a years worth of paintings. Employment in the core business of making art is about 16k – wider if you look at the cultural industries.

    Another way to look at it, is it really didn’t cost much to have our three eminent IMPAC nominees actually write and distribute their books, but the sales, royalties and associated benefits (Dublin: UNESCO World City of Literature), will be paying off now and for generations.

    Even if this is supported and increased funding would close the defecit (fractionally, well, I’m saying 240m pa), where does the extra money come from? Hmm, tricky that. The arts are now part-funded through the Lotto, and this is opaque, and I have not been able to find out what goes where. I would be interested in knowing how Lotto funding is disbursed and I would also be interested in knowing where the EuroMillions is going, as this is also partially earmarked for culture.

    In any case. To be clear, I work in the cultural centre and of course I am thinking about that. I actually am also very positive about Agriculture, Agri-businesses, the PC Gaming Industry and Sport, but I do not know enough to comment on them.

    As this is clearly something that looks even to me, at best, like enlightened self-interest, if Michael Hennigan is interested, I am willing to send him over supporting documentation and links to have a good crunch at.

    Paul, you caught me out, as I was about to launch into a splendid parallels between the current situation and “The Lord of the Rings”. with the ring being the ability to create mountainous debt instruments that make you magically invisible to the markets – until it chooses to slip off your finger. But I shall save that for another thread.

  14. Yes, “stimulus” is being conflated with “more jobs now”. Those optimists who thought that economic literacy would rise with the recession must be disappointed. It turns out that self-interest is still dominant.

  15. @Karl Whelan

    Higher income people are more likely to send money out of the country, so a redistributive policy should stimulate the economy.

    How about increase inheritance tax (by getting rid of lots of the loopholes/ exemptions) and earmark that money for investments like school building.

    If people don’t want to increase income tax by 1% we can put 1% of top incomes into a special 10 year bond paying a few percent. This would basically be similar to raising income tax, but the payers would get the money back in 10 years, assuming we aren’t bust then.

    Remove pro-import policies (specifically the car scrappage scheme).

    Remove the kinks in the tax system.

  16. Basically we should acknowledge that this is not a supply-side crisis, but a demand side crisis.

    A lot of the solutions (eg emphasis on spending cuts rather than tax increases) are the opposite for a demand side crisis.

  17. Simpleton beat me to it! (though the BBM will I guess be pretty small in as open an economy as Ireland).

    Presumably this was not what the government had in mind though,

    Perhaps they want to ‘incentivise the unemployed to try to get jobs’ — I heard on the radio over the weekend that the EU people thought this would be a good idea, which suggests that they don’t understand the causes of current Irish unemployment.

  18. @Karl

    Competition can be fairly stimulating, no?! Establishing a package of legislation that stimulated competition in some of the ‘protected’ sectors of our economy, e.g., law, pharmacy, dentistry, etc., could logically be considered a stimulus package. Like wise for lowering the taxes on employment (PRSI) and taxes on locally traded sectors (VAT) where human conditions are most austere.

    I would argue that “pumping money in the economy” and calling it a “stimulus package” is a more culpable misnomer here. Though that might be an ecumenical matter.

  19. Could they be assuming a jobs initiative will create xk jobs (increasing tax and decreasing social welfare)? Booking these assumed gains up front and offset against project cost would make things appear neutral.

    Either they’re making this kind of assumption or they plan to make cuts elsewhere, for the ‘fiscally neutral’ to make sense to me.

  20. @Gavin,

    I can see that shifting some of the subsidies that Richard Tol mentions in to the territory you identify would be fiscallly neutral initially and might ultimately be fiscallly positive, but my focus is on the sectors where excessive and unjustifiable costs and prices could be reduced and this would increase real disposable incomes and have beneficial knock-on effects in terms of consumption, employment and fiscal revenues.

    I have this horrible, instinctive desire to give people more discretion over how they spend their money. And they might even decide to spend it on your constituency. My view is that this would be better than moving the money that’s being extracted from them in one area without their permission to another – and still without their permission.

    The problem is that those who determine the allocation of the funding required to do the detailed microeconomic research in these areas that might sensibly inform public policy have no incentive or interest. Indeed they may have every incentive not to so as to protect their own interests (or to avoid drawing attention to their own comfortable positions) and to avoid upsetting other vested interests who might have the ability to bite back at them.

  21. @ Simpleton and KoR

    I’m not so young or DSGE-addled that I haven’t heard of balanced budget multipliers. However, I’m not convinced that they are too far from zero in any economies, not just ours.

  22. Fiscally neutral ‘stimulus’ is utter nonsense. Same principle as asking how many ‘things’ can you place on a fixed surface area if each sucessive ‘thing’ is -50% of the one before it!

    The smallest (atom) of money is the cent. That’s it. You issue 100 cents, you get back 100? Not if the Magic Multipliers are correct. You get back 101! That’s fraud!

    Teach our young citizens to grow their own food. How to conserve food. How to conserve energy. A stoutly engineered bicycle can carry up to 300 kg (rider excluded!). Ah! Now I get it. No one wants to get dirt under their fingernails! That’s only for those outside the Knowledge you-know-what!

    Someone mentioned apprenticeships? Now, there’s a constructive idea.

    Its lateral thinking we need. Not same olde vertical stuff.

    BpW

  23. @Karl Whelan

    Surely BBM are a function of the output gap, so under these circumstances they are probably quite large.

  24. With regard to apprentices, remember that this is work based activity.. remember Gordon brown announcing an apprenticeship plan two years ago? But all the intended jobs had been moved abroad.

  25. My tuppence worth would be an immediate decision to scrap the Public Services Management Act 1997 which is probably the one piece of legislation that did the most damage over the past ten years to the Irish economy, fostering as it did a simplistic view of the operation of the public service and a distancing of Ministers from political responsibility, combined with a waste of human resources in meeting a legislative obligation to submit rolling, and largely meaningless, “strategy statements” every year.

    http://www.irishstatutebook.ie/1997/en/act/pub/0027/index.html

    The immediate benefit would be that it would stop the wastage of scarce resources in the preparation of said “strategy statements” which inlcude the pursuit the mythical beast of “outputs”, usefully defined in the following precise terms; “outputs”, in relation to a Department or Scheduled Office, means the goods or services (including standards of service) that are a consequence of the activities of the Department or Scheduled Office”.

    This, presumably, includes making the tea.

  26. My guess is that at least part of the initiative will be about adding to existing rents in the economy to attract private finance for labour intensive capital investments that would not otherwise happen. It’s the only way that a lot of the stuff in Fine Gael’s NewERA strategy can happen.

  27. DOCM says,

    My tuppence worth would be an immediate decision to scrap the Public Services Management Act 1997 which is probably the one piece of legislation that did the most damage over the past ten years to the Irish economy, fostering as it did a simplistic view of the operation of the public service and a distancing of Ministers from political responsibility, combined with a waste of human resources in meeting a legislative obligation to submit rolling, and largely meaningless, “strategy statements” every year.

    It was this particular issue, I was hoping to address in many of my long contributions recently. BOH.

  28. This article in the Irish Times last December by Prof. Colm Harmon might be of interest to this debate.

    “[W]hat seems to have been overlooked in the maelstrom of economic debate of recent months is that while we have lost our sovereignty, so to speak, on the broad parameters of budgetary strategy, we have not lost our sovereignty to make microeconomic policy choices.

    By microeconomic policy, I mean the internal dynamics of the economy – the regulatory environment, welfare, labour market policy, the broad agenda of distribution within the economy and so on.”

    http://www.irishtimes.com/newspaper/finance/2010/1210/1224285184747.html

  29. @DOCM
    You might be interested in the attitude of the Department of Education in Athlone. In the interests of efficiency, they will no longer answer the phones between 9 and 1 monday through wednesday. Presumably this is to give them more time alone with their strategy statements. It seems answering questions from schools on changes in policy is not an ‘output’…

  30. @ Brian O’Hanlon

    I did read your contributions. But my aims are more modest. I just wish to see this ridiculous piece of legislation interred.

    My hopes are not high. Splitting the Department of Finance into two separate departments (the titles of which I cannot immediately recall) and presenting this as a major reform, when the only clear objective is to allow two disparate coalition partners to ride shotgun on one another, is an indication that, like the Bourbons, the Irish body politic (and this definition has, unfortunately, now to include the upper reaches of the public service) has forgotten nothing and learned nothing.

    This remark applies with equal force to the other recently announced “reform” that the Top Level Appointments Committee will, in future, have a majority makeup of non-civil servants to ensure that outsiders can be made Field Marshals overnight in the ranks of the public service. Why it should be assumed that there is any more talent in the private sector than the public sector given the recent history of the country escapes me.

    But that is not the point. The distinction between most areas of the public service and the private sector simply has to be eliminated and there has to be free movement both within the public sector and between it and the private sector. This seems too revolutionary an idea for the existing system for it even to occur to those involved. But it has to become the norm if for no other reason that the country is no longer capable of funding either the cost of the existing level of public service salaries or the associated unfunded pensions liability.

    P.S. I am not a member of what we can call, for reasons of brevity, the Dr. Ed Walsh School of Economics. This debate is not about knocking the public service but about how we reform the entire balance of employment in Ireland. A situation where the public and private sector play leapfrog from bust to boom and back again simply cannot continue.

  31. In terms of competition and the legal profession, my opinion is that the conventional wisdom is more or less the opposite of the truth. Because there’s so much money in the system, there’s room for competition. If legal fees decreased, lots of marginal solicitors’ firms would shut down, and more junior barristers would give the whole thing up and go on the dole.

  32. @ DOCM,

    Thanks for that reply. It was worth recording those couple of thoughts on this thread, and I note the qualifications in regards to Dr. Ed Walsh etc. It is a two way street though, the knocking of private/public sector. At the height of the property boom, I had an evening out with some museum curators from Dublin. I was warned by a good friend of mine amongst the company, to tread carefully. Because I was private sector, out-numbered about ten to one on that evening. Of course, asking me to thread carefully was asking too much. I was told by the end of the evening, by the museum curator lady I was talking to, that she had a ‘real’ job. Implying that, I had . . . only a mickey mouse job or something. Maybe she had a point! Today I had a sense of deja vue also, when I heard briefly the discussion on radio about the elections in Finland. Rather like my boozy night with the museum curators in Dublin, I had spent another night amongst a group of Nokia workers in Helsinki about ten years ago. I exchanged a very vibrant conversation that evening about technology companies and ideas etc. I related to the group how I worked for Dell computers in Limerick in Ireland, and how I was impressed by the scale of the endeavour in Limerick. At the end of the evening though, I was told on no uncertain terms, that I was not welcome in Helsinki, and they didn’t like my type (capitalists a la Mickey O’Dell), up around those parts. I was kinda shocked to be honest. I was a similar experience to that I had with the museum curator in Dublin. Those divisions do exist unfortunately, and it is nice to read your comment about a need for private and public divisions to me moderated at least, if not elminated. It would be better for society in Ireland, and possibly for society in a wider sense, in Europe. BOH.

  33. @Karl, Rory O
    I’m inclined to agree that BBMs will generally be quite small. Even in Ireland’s current situation the short term impact of more taxes on the “rich” to allow for more spending by the “poor” is likely to be insignificant.

    Tax revenue at the high end is not proving robust and, after all, we could just borrow more money if we wanted more spending.

    It’d be a crappy idea, but wouldn’t that be a better idea than punishing the few people in the country who might still be able to earn a buck that MIGHT be reinvested? Even if a BBM might be positive we’re far from balance and more taxation at the top will simply deter investment now and for quite a while.

    Even if the metaphor of “a rising tide lifts all boats” is a crock, the alternative of “piling more lead onto the few boats left floating” will hardly help.

  34. @ Brian O’Hanlon

    I think that the differences can only be eliminated when the conditions of employment are the same and each side has the same safety net in the event of unemployment and, of course, that the range of supports are the same for all (health care, education, creche facilities, non-discriminatory treatment etc. etc.)

    The Danes are the furthest along the road in this respect. But implicit in the approach is also acceptance of the fact that there is no such thing as a monolithic “public service”. The variety of activities in the public sector is now on a par with that in the private and, indeed, there is a big question mark as to whether many activities should be undertaken by the public sector at all. There has been considerable progress in this respect in Ireland and the Irish public service is far from being the least efficient in the EU. Far from it! The country simply can no longer afford it.

  35. DOCM says,

    I think that the differences can only be eliminated when the conditions of employment are the same and each side has the same safety net in the event of unemployment and, of course, that the range of supports are the same for all (health care, education, creche facilities, non-discriminatory treatment etc. etc.)

    That sounds correct. I only know the private sector myself in Ireland, and it seems to be a story of extremes. We heard on the morning radio this morning about the golden parachutes and golden handshakes available to some in the private sector. But on the other end of the scale, I think it was in Newstalk weekend morning radio, I heard of foreign nationals in Ireland who had their passports confiscated by their employer in Ireland and had to live in caravans etc without sanitation in order to earn almost nothing, or literally nothing. For some reason, when I think of the private sector in Ireland, neither extreme when you hear the stories seems improbable. I knew people in the private sector who would literally go to the caravan/passport extreme as employers. I also know individuals who knew how to work it, on the other end of the scale. The point is though, as Larry Broderick spoke about on radio this morning, the large bulk of the folk in the middle, in the banking industry or whatever industry are saddled with everything. BOH.

  36. @Kevin Walsh
    “If legal fees decreased, lots of marginal solicitors’ firms would shut down, and more junior barristers would give the whole thing up and go on the dole.”
    Many of them might be surprised to find that they are not entitled to dole if they are not actively seeking work. Giving up a job also disqualifies. Perhaps they would instead find out what it is to be low paid in employment?

  37. @hoganmahew

    You’re kidding, right? Young barristers are notoriously underpaid, on those occasions where they’re paid at all.

  38. @Kevin Walsh
    Fair enough with regard to young barristers. Plenty of drudgery legal jobs for solicitors, provided they specialised in the right bits. Same as it is for every other subject. I am still waiting for my intimate knowledge of the French revolution and the years of the terror to gain me a living…

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