NY Times on Irish Austerity

Paul Krugman links to this New York Times piece on Ireland’s recent experience with austerity, which reminds me to link to something Seamus Coffey wrote recently on exactly how much austerity we’ve endured. Seamus goes beneath the headline 21 billion and looks at where cuts have actually (or probably actually, this isn’t an exact science) happened. He finds the figure should be closer to 10 12 billion euros.

Krugman’s point is more basic than Seamus’, because most of the people reading this blog in Ireland probably know the difference between GDP and GNP in our context. Here’s the monthly economic bulletin (.pdf) from the Department of Finance. We can see the difference in GDP and GNP right away from the table I reproduce below which shows percentage changes by quarter. We can also see the effects on the elements of GDP and GNP here.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

83 replies on “NY Times on Irish Austerity”

@ Stephen

Going to the end of Seamus’s piece, it looks like his figure is €12 billion not €10 billlion:

“I would guess that given the woolly nature of some of the current expenditure measures, the huge overestimates of the impact of the revenue measures, and the actual cuts in the capital budget the last three years has been around €12 billion “sucked out of the economy” with nearly 40% of that as a result of capital expenditure cuts. This is only a guess. It would be useful if the actual figure was produced.”

I’m not sure it would be useful to put a lot of time and energy into producing this “actual figure” if it could actually be defined in a sensible manner.

Governments can identify individual measures that they are introducing and the likely savings. If a load of people become unemployed and the government then spends some additional money on them, it doesn’t makes the savings from the other cuts any less real.

That fiscal austerity should be measured as a set of identifiable measures rather than just looking at total spending or taxation was one of the main points of the well known IMF analysis that is widely perceived to have overturned the Alesina-Ardagna claims about expansionary fiscal contraction.

http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf

One other point in relation to “If it was €20.8 billion then that would be a average of €4,500 for every man, woman and child in the country or an average of €18,000 per family of four. There have been tax increases and expenditure cuts but nothing on a scale like that.”

Our system doesn’t work to impose fiscal adjustment on a per-person basis (you don’t pay more tax just because you have children) so I’m not sure that’s a useful calculation.

@Stephen Kinsella

Yes – the distinction between GDP and GNP really matters.

There exists another distinction that needs to be included in how Irish figs are published and disseminated throughout the globe ….

DEBT. A clear distinction needs to be drawn between Genuine Sovereign Debt (lets call it GSD) and Vichy_Financial System Debt (lets call it VFD); and the total GSD+VFD (let’s bracket the unsustainability of the latter for the mo)

Then include these five distinctions in reporting on Debt from say 2005 to 2015 with present odious constraints …

@Seamus Coffee

An interesting challenge to a leading Aesthetic Turner; preferably from a west Cork Impressionistic perspective!

@Dod
Regarding your newly minted VFSD…did I see a hint in the IT today that Gilmore has his eye on a haircut. Question is though..would they have the whatever to do it…
““One thing is, in conjunction with all the other member states of the EU and euro zone, to solve the problems in the euro and that needs to be done by decisive action being taken,” the Tánaiste said.

“Secondly, we have to look at our own national interests here, in particular to what can be done in respect of the debt burden that this country has.”

The Tánaiste insisted that the Government is not prioritising its commitment to Europe over Ireland.

“Both go hand in hand,” he said. “The Government has been saying this is not an Irish problem, this is a European problem, the two go hand in hand and we have to work together in a way that ensures that Ireland’s best interests are protected.”

Simon Johnson as quoted by the NYT: “Why Ireland would want to spend its time being a model student in the context of the broader European mishandling of the situation, I don’t know.”

Because Merkozy-ECB have us by the balls. The real puzzle, for me, is why Merkozy are so keen on an approach which is likely to doom them as politicians. Are they looking forward to a future as non-executive directors of megabanks?

Ireland has yet to have any meaningful austerity as the public sector and welfare classes have been virtually fully shielded from cuts.
Ireland is facing fiscal ruin not as a consequence of the banking collapse but as a result of the disastrous fiscal policies enacted by various governments since independence. Our 10% plus deficit would exist without any banking collapse. This current government is just the latest in a long line to fail to address the real case of our fiscal ruination namely the public sector payroll and a bloated unsustainable welfare state.

Middle Ireland (i.e. self-employed and small business owners) is facing extermination. Our exaggerated export figures are down to an unsustainable tax arbitrage structure that flatters our GDP. The real economic story in Ireland is GNP which this government seems to determined to destroy with ruinous tax hikes on consumption rather than tackling the lecherous public sector.

The only “Heroic” thing about Irish governments as reported in The Telegraph today is the extent to which they pillage the small & medium private sector to feather-bed vested interests in the public sector.

@Kevin
Irishmen have no balls – thats a impossible caricature.

The Soft Hurley culture of the future will make this a permanent physiological condition.

@Ceterisparibus

Noticed that one. Strange that the blatanly explicit should be welcome – and both Gilmore and Noonan have some form with balls in their misspent youths – hopefully they rediscover them and nobody, and I mean nobody, can name an economy/society that has shouldered 45-55% of GN(D)P of financial system debt [sans central bank] and prospered.

@KD
Simon Johnson, not a fool, is on record for quite some time now, and in the refereed journals so beloved of a certain class, as deeming Irish GSD+VSD based on all plausible projections of GNP or GDP as totally unsustainable. A small cadre of protected upper_echelon could continue to prosper, but a Republic (by definition) places the interests of the collective and The Citizenry over and well above the interests of a small scavenging cadre willing to enforce the dictates of the MatrixsQuid on the supine serfs.

So, let’s see the colour of Gilmore and Noonan’s Republican cards on the EZ lunch tables; and if they have the wherewithall to go all in at the appropriate time …

Does anyone have an estimate of the size of Ireland’s ‘black economy’. Given the dysfuntional state of Ireland’s ‘official’ domestic economy, i.e., absent the export enclave, it must be booming.

Now – where is that Industrial Development Bank? Sinn Fein? Labour?

A recent issue of the Review of Financial Studies featured (as lead article) our study “Self-Fulfilling Credit Market Freezes.” This paper develops a model of a self-fulfilling credit market freezes and uses it to study alternative governmental responses to such a crisis.

The primary contribution of the paper is in analyzing the effectiveness of various government policies in getting the economy out of such a self-fulfilling credit-freeze equilibrium. The analysis identifies the role and potential limitations of standard instruments such as interest rate cuts and infusion of capital into the financial sector. It also considers less traditional forms of intervention – including direct intervention in lending to nonfinancial companies, provision of incentives to financial firms to lend to such companies, and supplying government capital to private funds dedicated to such lending – and analyzes why and when they may be needed.

http://blogs.law.harvard.edu/corpgov/2011/12/06/self-fulfilling-credit-market-freezes/

Real economy – as distinct from the rogue MatrixsQuid variety …

Looks very tight for a referendum…
“Germany would like a treaty signed by 27, we think that will be difficult. We will try during the European Council on Friday and, if there’s no unanimity, we’ll do it with 17 with a timetable for March 2012″…French finance minister.

Maybe a good thing…they won’t have a lot of time to frighten the living daylight out of the populace. No cash in the ATM, Croke Park etc.
Wonder what the date of the second referendum will be.

We’re going round in very depressing circles. Salami slicing at the politically acceptable bits of spending and gradually increasing all sorts of taxes. Current spending is still at 2007 level despite all the noise about painful cuts.
This stalemate will continue for the next 10 years with misery for most particularly the unemployed and forced emigrants and will be funded by the ECB to protect European banks.
Something has to change. We either negotiate a very substantial reduction of debt or we default and take the risk of being kicked out of the Euro.
We have to bear with austerity budgets but we need to see a path to the sunlit uplands and out of this dark space.

Great attempt by Seamus on trying to quantify what was always a bogus number of 20 Billion sucked out of the economy. It became a favourite of FF politicians.

A bit like the ministers admission on the amount to be generated by a VAT rise of 2% it was a gross number.

The net is roughly half in both cases.

interesting that we are not going to meet Troika bailout terms this year or next. What punishment will we get?

@Portugal

Portugal, glittering prize for emerging nations
6 December 2011 Expresso Lisbon

To cut its debt, Portugal’s government has embarked on a far-reaching privatisation program. Brazilian, Chinese and Angolans are the main candidates for taking over its national enterprises.

http://www.presseurop.eu/en/content/article/1255321-portugal-glittering-prize-emerging-nations

If Greece gets PSI volunt – why not Portugal? Both are fiscal runaways …. Portugal needs assistance – not savage ravaging by tentacles too well known ……….

@Karl,
Updated the post from 10 to 12. I do think Seamus’ numbers are speculative and up to debate–don’t think he’d argue they were definitive in any sense–but it’s worthwhile taking the time he’s taken to go through the austerity committed and, ahem, actually achieved in the last few years though.

Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management and a former chief economist at the I.M.F. “Why Ireland would want to spend its time being a model student in the context of the broader European mishandling of the situation, I don’t know.”

Simon is not familiar with cronyism, gombeenism, incompetence in Ireland, it seems.
Emigration is also acting as a government safety valve. Also ‘the falling man of austerity’ hasn’t hit the ground yet.

Re Seamus Coffey piece above and Prof McHale contribution below:

“The overall general government deficit fell from 11.7% of GDP in 2009, and the most recent projection is that it will be 10.3% of GDP for this year, so that is a reduction.”

No, in fact, it is completely meaningless to make that point. It implies GDP is not a variable.

GDP can go up or down, just as the deficit can go up or down. Lets say the deficit is cut further. If GDP falls, its likely that deficit reductions will rise as a percentage of GDP.

The point is everything factors on growth. If there is no growth, if GDP decreases as it is likely to do due to local/EMU/Global downturn, the deficit rises proportionately to unsustainable levels.

Desperately Seeking Capital

Berlin May Have to Nationalize Giant Commerzbank

Europe’s banks urgently need fresh capital to meet tougher EU rules, but they will have problems raising it amid the current crisis of confidence plaguing the euro zone. The survival of Commerzbank, Germany’s second-largest bank, is at stake, and Berlin is considering a full nationalization of the bank if necessary.

http://www.spiegel.de/international/business/0,1518,801827,00.html#ref=nlint

Naww – think it will be DeutscheBanke that triggers it. Love to see Timmy’s face when the big fat CEE_DEE_SSSSSSSSSSs hits the fan and the Tentacles on the MatrixsQuid slide down the Wall and into the FIRE.

Not good …. as an aside to Timmy little S&P EU Parade ….

In an interview with German newspaper Die Welt, Barroso dropped his demand for euro bonds, saying they were not a solution to the current crisis. “Joint sovereign debt requires a much higher level of integration and discipline within the euro zone, which we haven’t reached at the moment,” he said.

http://www.spiegel.de/international/europe/0,1518,801973,00.html#ref=nlint

No. Not good. In fact, very bad for around here.

@DOD
Barrosso is well and truly sidelined. That proposal was shot down before he got a chance to publish it.
With the WSJ blog indicating the lawyers are getting ready for a Greek exit..this game is far from over.
I noticed the Greek 10 year got worse today. I think it’s now priced at a 77% discount.
Could end up at a complete write off.

Personal Insights:

The political price for the actions of the elected Irish Troika compliance managers remains a special offer, it comes in very cheap! Austerity is a form of social genocide to redistribute wealth and maintain the status quo of bondholders and the financial system at large and can constitute a violation of human rights.

The attack performed by the Frankfurt Group of Eight, behind closed door arrangements to serve prussian demands and push a franko-german agenda, “outsmarting” official EU procedures and Institutions, they leave no doubts on their intentions.

The Muasher doctrine applies, as long as there is no strong solidarity amongst the people and across the social divide, those in power can do as they wish.

This global heist attacks sovereign states and the very foundation of democracies. Captured politicians execute the dictate of the financial markets, the blackmail that is going on could not be more obvious.

Dr. Damiano Brigo, Dept. of Mathematics, King’s College, wrote a thought provoking paper on counter party risk, highly recommended:

http://tinyurl.com/c74rrcn

I am afraid, without a massive re thinking of our current theoretical economic framework, this so called crisis, which is more of a permanent situation, will result in significant social political uncertainties that, including current U.S. foreign policy activities that contribute to further geo political frictions, can result in a substantial global destabilisation.

Perhaps, a temporary closure of markets should be a serious consideration now?

The purpose being a re-fitting of the entire building’s pipe-works, otherwise we might not be able to fight the ‘Legionella pneumophila’ that has infested the building, and ECB need no longer worry about Inflation but social conflagration instead.

Articles such as the linked NYT one are deeply confused, and sloppy. By reporting only on the ‘loss’, to the complete exclusion of the healthy/normally functioning parts of the economy, they report a very biased picture.

Ireland has very high living standards and salaries, this preponderant obsession with modest losses is a classic example of the ‘loss aversion bias’

@Colm
Baa Baa Black Sheep………….. – The budget defecit is merely a artifact of negative bank credit creation as you cannot tax credit money that is not there – its not a real physical economic indicator although the veneration of banks monopoly on money creation creates the economic vortex we are now living through.

Back in the 70s GNP was higher then GDP!!! shock horror – I suspect because of money transfers from people living abroad.
It will be a while before the me generation transfers a net surplus back from Australia I suppose.

@Kevin Donoghue
” The real puzzle, for me, is why Merkozy are so keen on an approach which is likely to doom them as politicians. Are they looking forward to a future as non-executive directors of megabanks?”

Manys the true word is said in jest. Closer to home there is a strong case for all politicians , (and certainly ‘left-wing’ politicians ) to be made to sign pledge never to seek private sector directorships, especially bank directorships, after their spell in politics (or in any career breaks they take).

I was astounded that the ‘public interest’ bank directors did not have to pledge they would never accept a bank chairmanship or seek any further career in banking.

These are the low-hanging fruit of an anti-corruption drrive.

@Ceterisparibus

Yes – Greeks and Lawers – Sinn and Tentacles Issing are pushing this one …. both Issing and the Tentacles have some ‘form’ here

Still think a big german would do it – No need to ask why Herr Geithner is in town – shannon front row are on standby with our €30billion U Owe US – and Engels took over as CFO at Commerzbank – maybe Marx is waiting for DeutscheBanke and on his way home …. side_lining of Commission is really BaD Newz

@Georg R
At the global level – you are on ball. Prob is that too few who matter are … other than the ‘string’ pullers of course.

@The Dork

Heard you were speaking French and eating Cake in Skibbereen! Hope the MMT tutorial in the local went well ….

@David
I am only useful when it comes to clearing the bar…………… Doom Doom ………..Doom I tell you.

@Colm Brazel

“Contribution to the budget deficit of the 40,000 who emigrated last year…”

Maybe you can educate me before I make a fool of myself.

Many, (many, sigh! – in the mid 70s) years ago, with a freshly-minted Irish degree in my pocket that was unlocking no employment in Ireland ( other than driving around in my car selling services people would come to want, but not back then), I negotiated a teaching contract with an oil-rich West African country and ended up building and running a secondary boarding school in deep “bush” not far from the old Biafra.

It was my first, painful experience of ‘management’ and changed my life. i also saved quite a bit of money. Enough to make me “independent”, in more ways than one, at 24.

Last year I attended a reunion of over 100 Irish teachers who did (almost) the same thing in that country alittle while later. Most had returned permanently to Ireland, many remained in education or academia but some completely changed career and ended up in management, IT and business.

ALL agreed that the two or three years they spent outside Ireland was “the best thing we ever did”.

So, Colm, is the contribution of those who ’emigrate’ positive or negative, taking ‘saved’ job seekers and other welfare payments, lost contributions, remittances, but also work and ‘life’ experience into account?

How would a neutral-cost, government-supported programme to send 10,000 young Irish people ( a mixture of graduates and unemployed but qualified tradespeople) abroad (say 5,000 to China and 5,000 to India) impact on our finances and how would it “seed” familiarity, and life contacts, in two of tomorrow’s superpowers?

Would 20,000 be too high a target?

Don’t know if announcing a scheme like this would have brought wider global coverage of Enda Kenny’s “state-of-the-nation” address!

Check the comments on Paul’s blog, there are some Germans who have a real issue with our corporate tax rate. Now as I understand it our corporate tax rate has (at best) minimal impact on the average German, so why the ire? Is there a media campaign in Germany claiming that Ireland is engaging in predatory tax policies and costing Germans money over and above the bailout, or is it just a resentment of the fact that we are not taxing more while they are giving us dosh ( at a tidy amount of interest I might add) to help Ireland out.

@ Richard

No sir, you are wrong, all emmigration, even that of a now qualified and/or experienced Polish person returning to Warsaw with some money in his pocket, to set up his own business close to his friends and family, is a “national tragedy”. Young Irish people seeing a bit of the world for the next few years and getting a bit of experience is a national tragedy. Ireland is only good at exporting people, and the past 20 years of inward migration cannot be mentioned. This issue cannot be questioned, or have some context added to it, ever.

Of course, we Germans, and even more so the French, have a problem with the very low corporate tax rate of Ireland. It’s a “beggar thy neighbor” policy, designed to allow multinational corporations to shift the profits on their books to your small tax paradise. Here’s an example how that works:
http://www.npr.org/2011/09/10/138867588/corporate-taxes-how-low-can-you-go

So, sorry, folks, but of course it’s not popular if you help corporations to avoid paying taxes in those nations where the products are produced and sold. Or do you think that’s a fair policy?

I suspect that this is what’s boosting the Irish GDP, lots of money which is transferred into the coiuntry, being booked there as profits, and immediately leaves again, without doing much to increase the GNP. Would be nice if a better economist than me would look into this.

Pls don’t forget: With this race to the bottom of the coporate tax rate, billions of taxes are lost. And the nations have to make up for that shortfall somehow. Sadly, the easiest way to do that is by raising the VAT, which puts the burden on the consumers, with the low and medium incomes paying a high share. That’s not fair, and of course the EU’s tax rates will have to be harmonized in the future in order to close this tax evasion loophole. I guess that Sarkozy and Merkel didn’t press too hard for a change of the Irish corporate tax rate for now, because they are well aware this would harm your recovery, but after this crisis is over, the topic wiill be on the agenda again. Imho everybody should agree that fairness demands that profits are taxed where they are generated!

@Richard Fedigan

How would a neutral-cost, government-supported programme to send 10,000 young Irish people ( a mixture of graduates and unemployed but qualified tradespeople) abroad (say 5,000 to China and 5,000 to India) impact on our finances and how would it “seed” familiarity, and life contacts, in two of tomorrow’s superpowers?

Would 20,000 be too high a target?

I am a little lost here.

A cost neutral program to send 20,000 to BRIC?

Assuming that you mean to send them as a voluntary act, I refuse to think for a second you mean otherwise, and assuming you find 20k people willing to live and work in a culture like India or China, how would this be cost neutral?

Honestly, it strikes me as a technocratic ‘teflon-proposal’. Every single person that chose to live in Ireland and that is forced to leave because this country did not have the balls to stand up to banksters and chose to become blackmailed instead is a loss to this country, and the amount of people directly affected by just a single person leaving certainly is greater.

There is a great difference between a young man/woman ready to see the world and gain some experience in different cultures, and those who are forcefully washed out of the Irish social fabric, don’t you think?

@Gray

On one condition I would agree 100% to the notion and demand to abolish such policies which are nothing but tax heaven schemes to boost GDP and increase political capital.

It makes no sense to point to Ireland and make this single demand with eyes wide shut!

Only if we acknowledge that the common mainstream theoretical economic frameworks have failed to deliver, we can start to address such anomalies of which there are many and not only in Ireland.

Only if we fully acknowledge that the much bigger scheme to worry about are the overwhelming power of Lobbies in Brussels that are steering politicos behind the curtains of official polit-propaganda, we can start to address the real problems that are currently dismantling the very foundations of democracies.

I shall leave it at the two examples, but I have many more. Ireland is a small open economy and as such is extremely vulnerable to forces beyond our control, trying to swim in a pool of sharks, such policy is fully understandable.

@ Gray

P.S.

For what it’s worth, my reaction to the franko-german demand would have looked very different in deed.

I would have announced to lower the rate to 11%, 9%, 7.5% in 2011, 2012, 2013.

Imagine their reaction for a second!

@ George

whats the annual cost of having someone on the dole here, 20k per annum (when everything is included)? By cost neutral i assume Richard my mean spending some of that money (because it won’t get spent in the economy here) to facilitate and subsidise, voluntarily, young people spending a year or two working and experiencing India/China/Brazil, learning the language/culture and getting valuable work experience, and maybe being given the opportunity to travel at the end of it all, before returning here at the end of it. Is there not obvious upside here, and very little downside?

@ Bond,

Thanks… understood!

So the proposal would be to offer someone a 80K once of payment for a 4 years placement in BRIC’s, which of course should be initiated and accompanied by Irish Institutions, adding additional help packages such as special deals with health/life insurances for example and offering the placements to begin with.

This would make sense if there is cooperation between Ireland and BRIC on the highest political level supporting such a scheme.

I guess, if such would exist, a great many people would be willing to look into it.

It could be thought even further, offering a 1 year exchange to unemployed people to go to China to intensively learn mandarin and get work experience with a view to come back after 12 months.

Then again, I think such would only make a deeper sense if really coordinated on the highest levels. Are you aware of such schemes?

@Baumann
“Others are doing it, too” is no reasonable excuse. As I said, nobody wants to harm the Irish now, but this problem WILL have to be adressed in the future. And this includes other offenders, too. There have been strong efforts in the last years to close tax loopholes, just ask Luxemburg or Switzerland. Nobody’s especially picking at Ireland, but this situation can’t be tolerated in the long run. And pls don’t forget that Ireland did decide to swim with the sharks, by deregulating its financial sector. It’s not as if that idiotic neoliberal course was forced upon the government, it was their own stupid idea, and lots of Irish people warned about the risks. And it turned out they were damn right. Let’s hope such ultra-capitalist madness won’t find a majority ever again.

Well, and I don’t think Ireland would have been well adviced to provoke the creditor nations even more. Such nonsense certainly wouldn’t have gone down well with the vast majority of German people. Merkel is already facing a lot of criticism from her constituency for her support of the GIPSI’s, let’s better not imagine what would happen if the voters would make a determined stand against more credits for the struggling nations. We need more European solidarity now and that includes the people in the periphery. Idiotic infights are totally counterproductive.

@Gray, Germany

I think you might be able to better understand Ireland’s position on corporate taxation (and life as a small or peripheral country in the EU in general) in the following way:

If Europe remains committed to standardizing taxation and state costs levied on businesses but opposed to fiscal transfers it means that countries further from Europe’s geographic centre will face all high value corporate activity migrating closer to their core markets and find their economies gradually reduced to low value service industries.

This would be fine, even great, for Germany but in such an EU Ireland would be reduced to surviving by providing top notch golf courses,data and call centres to the rest of Europe as wealth was sucked into the geographical and now corporate core. Large European multinationals would still control much of the economy (telecommunications, retail) but decisions would be made elsewhere.

So in an EU that is not committed to redistribution or social democracy but is committed to free movement of capital and businesses Ireland can not be like Germany without being destroyed.

And pls don’t forget that Ireland did decide to swim with the sharks, by deregulating its financial sector. It’s not as if that idiotic neoliberal course was forced upon the government, it was their own stupid idea, and lots of Irish people warned about the risks.

Is this at all true? I ask as one who hasn’t worked in the financial sector this century and didn’t start looking at it very much until my bank shares went down the WC; it’s not meant as a rhetorical question at all. Who made this decision? If the answer is Patrick Neary then it’s a stretch to say that Ireland decided.

@Gray
I’m very much looking forward to retaining and taxing the profits on imported goods to Ireland in Ireland. Given that we import most of our manufactured goods, much of our food, practically all of our clothing, this would be a tremendous boost to the exchequer.

@ KD

our government, and the ECB, essentially mandated the Financial Regulator to do this, at the behest of financial sector lobbying, which was at the behest of consumer demand for cheaper loans, higher investment returns and an “i want it now” mentality to consumer spending. Of course not “everyone”, in the literal sense, was part of this decision, but we, as a democratic and open economy, made these decisions through various government elections and personal economic decision-making.

@BEB
The financial regulator was mandated to do what, specifically? Turn a blind eye to such things as the window-dressing of balance-sheets? If we really were “deregulating its financial sector” there must have been some legislation involved, or at least some ministerial orders. A regulated sector doesn’t become deregulated without some legal formalities. It won’t surprise me if it turns out that all sorts of measures were passed while I was otherwise occupied. And I won’t argue with anyone who tells me I deserved to lose my shirt on my bank shares, since I obviously wasn’t paying attention. But what were these measures?

Apologies if this is a stupid question and thanks for taking the time to reply.

@Bond. Eoin Bond on how the financial sector ended up so unbounded.

which was at the behest of financial sector lobbying, which was at the behest of consumer demand for cheaper loans,

Consumer demand for cheaper loans causing banks to make them sounds a little logic reversed.

There was instead a self reinforcing logic of credit expansion where the need of the financial sector to make more loans in total to maintain profits on low rates of interest caused those loans to individually increase in size as it fed an asset bubble. Nobody wanted to have to borrow three hundred thousand euros to buy a first home, it simply seemed to become necessary.

You are all LCTM now.

@Gray

,,,,Merkel is already facing a lot of criticism from her constituency for her support of the GIPSI’s….

….and here we take a break

@Gray

Quantify the cost to you of the policy. Then do a cost benefit analysis of removing it. Emotive reactions are unhelpful.

@ Shay

“Nobody wanted to have to borrow three hundred thousand euros to buy a first home, it simply seemed to become necessary.”

The interest burden of a 300k home @ 4% is the same as 200k @ 8% or 100k @ 12%, rates which we were well used to in the 80’s and 90’s. And all with steadily higher wages, and ever lowering taxes.

The “Great Moderation” allowed for the ‘conquering’ of inflation and of risk, a huge easing of credit standards and interest rates, a huge reduction in tax rates in many countries boosted by super-cycle credit/property-related taxes, and the understanding that we had become ‘rich, prosperous and ridiculously productive’, all three of these likely to increase at 5%+ compund rates per annum into eternity, with low-risk leveraged investment returns a multiple of this and new-normal interest rates a fraction of this. Oh, and we can provide a cradle-to-grave welfare state for anyone unlucky enough not to share in the benefits of the above….

Governments sold this to the electorate and citizenry, that a great, easy life was available to them if they became part of the ‘ownership society’, and easy credit was the key fuel to this new-normal economic paradigm. This required laxxer financial regulation, more financial engineering, and cheaper credit for a hungry consumer, which governments subsequently delivered, credit institutions readily accepted, and consumers happily bought into/from. We repeatedly returned these governments, or ones like them, to power, and the cycle continued.

But, go on, blame it all on profit-hungry banks (which they were and are), its a more simplistic and satisfying story for the down-trodden punter to understand.

@Shay Well, the EU’s original idea was, of course, that Ireland should put all those billions from the EU programs to good use for boosting infrastructure and consequently investment. Sadly, decades of subsidies didn’t manage to achieve that. Only the rather unsolidaric move to offer multinational corporations a legal tax heaven managed to push up the per capita income of the Irish above the EU average. Well that was a dirty trick, but at least you achieved something positive, so let’s not talk about that anymore. However, that unfair policy has to stop as soon as the crisis is over. The EU can’t afford other nations joining that competition about the cheapest coporate tax rates. It should be obvious to everyone that would have to result in the working class paying an even higher share of taxes.

@hogan Think about this a bit more. Higher tolls and tariffs on necessary imports would only lead to higher prices for Irish consumers. Not a preferrable outcome. Apart from that. the tariffs of all EU members are set by the European Council.

@Baumann Have a KitKat! 🙂

@Thrifty Afaik you’re not my boss. You can try to order your wife around, if she puts up with that, but I don’t care.

@Gray, Germany

How you doin? A simple question:

How much longer do we have to put up with this awful German Government? Might you not nudge the FDP to implode – and a Social Democrat led coalition could emerge, and provide some decent Deutsche Leadership at a time when Europe badly needs it.

Elections are in 2013, if the coalition doesn’t crash earlier (which isn’t likely, since the FDP reps know they won’t be reelected).
🙁
However, don’t expect too much: Merkel isn’t that far away frome the Social Democrats. And an SPD government wouldn’t generously guarantee bad credits for struggling nations without demanding anything in return for it, either. I mean, come on , would you folks simply subsidize the Greeks, no strings attached, in our position?

@Gray
“@hogan Think about this a bit more. Higher tolls and tariffs on necessary imports would only lead to higher prices for Irish consumers. Not a preferrable outcome. Apart from that. the tariffs of all EU members are set by the European Council. ”
Who is talking about tariffs?

This is taxation on profits in the country where the profit is made. The, to pick a random example, German car sold in Ireland generates a profit in Ireland and that profit should therefore be taxed in Ireland.

@Gray

It wasn’t an order, but if it costs you as an individual 50c per year, why would you care unless you have another agenda. If on the other hand it costs you €200 per year then fair enough. You are making the complaint, you should back it up with numbers, that only seems reasonable to me. And I have no idea what anyones wife has to do with this, is that some sort of personal attack?

@Gray, Germany

Unless I am greatly mistaken you chose to ignore the meat of my post. We would need a federal union committed to fiscal transfers to the peripheral countries if we planned to enforce economic policies that chiefly suit Germany and its neighbours. Do you support the idea of greater popular democratic control of European institutions and a transfer union or do you think the GIPS just need to adapt to the reality of German conservative control over the EU’s fiscal and monetary policy?

The fact is that imposing German CDU economic dogma on countries that are very different from Germany is only really good for the egos of German conservatives. If you measure the effects by metrics of equality and poverty they do not even work for Germany.

http://www.time.com/time/world/article/0,8599,1900649,00.html

The latest OECD figures for inequality show how an increasingly well off Germany has let its levels of inequality gradually worsen to the point they are worse than Irelands (http://stats.oecd.org/Index.aspx?QueryId=26067).

That is deeply shameful.

Also, are you familiar with the idea of a concern troll?

@Thrifty There are 80 million Germans. The German share of guaranteeing Eurobond debts can easily sum up to 400 billion Euros or more. That’s €5000/capita in case of default (which isn’t that unlikely if the struggling nations don’t manage to get their sh** together). I don’t think that sum can be paid back with 50 Eurocent/year…

@Gray

Not the answer to the question, I was asking specifically what the cost of the Irish corporation tax (I’m not Irish BTW) is, not the bailout which is an entirely separate issue.

@hogan Of course, Ireland can pass a sale tax on luxury cars, or something like that. But since no car producer will have an interest in exporting cars to Ireland at a loss, this will only partially reduce profits, if at all. Good example of this may be Denmark, with its high car registration taxes:
http://www.skm.dk/foreign/english/taxindenmark2008/6649/

In order to preserve their market share despite the high additional costs of new car purchases, car manufacturers sell their products in Denmark at a lower profit margin. So, for instance, for German customers, a Volkswagen is more expensive in Flensburg than in Padborg, a few miles away on the nothern side of the border. But that doesn’t help the Danish customers, of course, which still have to add the tax to the retail price and thus have to pay more.

So, this is certainly a good idea for an environmental friendly tax policy, but I doubt it will make a big dent in the Irish debt. And I don’t think Irish auto fans will like that. Still, why not?

@Gray
I suspect you are purposefully ignoring my point. It is not an additional tax/tariff/impediment/deduction/levy I am talking about, it is a tax on the profits that, say, VAG make on car sales in Ireland. Ireland is where the profit is made, Ireland is where the profit should be taxed.

This is not my logic, it is the logic of CCCTB (whatever the initials are). That the multinationals in Ireland are selling intellectual, service, advertising and other ‘soft’ products into Germany is not really any different from the ‘hard’ products that Germany and other countries sell into Ireland.

A sale is a sale and profits go back to headquarters. I am trying to point out that an exporting nation might not like the logic of where CCCTB ends up.

Oops. I see, my fault. Well, I guess I somewhere could find a long list of corporations that put up a residence in Ireland after the implementation of the “legal loophole” tax rate. And then I could check which of those corps formerly paid taxes in Germany, and how much. After adding those sums up and dividing them by 80 million, I could tell you the amount per capita. And it most probably would be more than a measly 50c/capita*year (which, after all, are only 40 million Euros. I don’t think that covers the loss.)

Sure, I guess I could do that. But sry, imho that’s a bit much work for simply making an argument in an internet discussion. Even I have a real life, too, you know?

@Georg R. Baumann

“I’m a little lost here”. “Assuming you mean to send them as a voluntary act”.

No, I do NOT mean sending them as a voluntary act and I hoped this was clear from the context of my own “negotiated contract” in oil-rich West Africa back in the mid-70s.

From Eoin Bond’s irony I detect that he understands where I’m coming from and many of you are economists so let me elaborate just a little.

Before I do, George, your reference “assuming you find 20K people willing to live and work in a culture like India and China” rather shows the ‘colour’ of your cultural myopia.

Quite apart from the cultural impressiveness of Hong Kong, Shanghai or Mumbai, global “culture” is going to look a lot more like Asia than Dublin in a very short time.

Try an exercise of arranging a dinner for 100 business people proportionate to global population or GDP now and in 5 years ( not to mention 10) and tell me how many Dutch, Belgian, Swiss, Scandinavian, Australian, New Zealand or Canadian ( or Irish) people would be seated at table! And how many Chinese and Indians?

Given that unemployed people in Ireland, Europe, and the US are costing significant proportions of money these countries and continents don’t have, bilateral or multilateral schemes that provide work experience and could constitute the beginnings of business networks with future superpowers is what I had in mind.

Or we can keep paying millions of unemployed people in the “West” to do nothing!

@Gray

Really? All the corporations cost per capita in Germany? Or just the ones who funnel revenue from Germany through Ireland? I just think that reasoned discussion should involve quantitative evidence rather than supposition. Sounds more like an emotive teaction

@hogan, apparently you totally misunderstand the whole point. Multinational corporations are shifting their profits to the nation where they pay the lowest taxes. It doesn’t matter for them where the products are manufactured or sold. They cook their books so that the profits show up in their Irish subsidy, pay the much lower taxes there, and then move that money wherever it pleases them. And the discrepancy between the GDP and the GNP shows that those profits aren’t based on any work or sales done in Ireland.

Ok, that tax law created some jobs in Ireland (because the multinationals got to have at least a presence there in order to profit from the low tax) but that came at a disproportional cost for those nations who lost that tax income. It’s like someone owes your neighbor two bucks (25% tax rate), but you give him a phony recipe that he’s paid his debt for only one buck (12.5% tax rate). As long as he can get away with it, the debtor will make that nice profit, of course. Nobody ever claimed corporations have a conscience when it comes to profits. Still, do you think that’s a fair deal? That this will improve the neighborhood?

Anyway, don’t trust me on that, ask any Irish guy who knows economics about the consequences of the bargain priced corporate tax rate.

“I just think that reasoned discussion should involve quantitative evidence rather than supposition.”
Fine. Then YOU do at all that work. I will gladly check if your numbers and the calculation is correct, later. Have fun!

@gray

Sigh. I’m not the one with an argument to support, i’m just finding it easy to poke holes in yours.

“While many of the US multinationals have a real presence in the country and employ thousands in their plants, some employ only a few dozen yet generate superprofits in their Irish subsidiary.”
http://www.irishleftreview.org/2009/07/22/collateral-damage-impact-irelands-tax-strategy-developing-countries-part/

And the same is ture for EU multinationals. They only need a presence in Irteland to shift their profits there and tax them at the low rates. And, of course, this will raise the GDP, but not really the GNP. The numbers show that this is happening on a significant scale.

@Thrifty: So far, you haven’t poked a single hole. I came up with a reasonable explanation for the GDP/GNP difference, you didn’t come up with a single counterargument. Instead, you’re demanding hard data, but aren’t willing to do any work yourself. Lame.

I never took issue with your explanation of GDP/GNP, this is well known, I simply question the possible gain for you from a change to Ireland’s corporation tax. Will it make your life quantifiably better? I’ll cheerfully join your call for a change if you can provide evidence that it costs you, personally, more than the cost of a pint (in Ireland). As you clearly don’t know what it costs you it raises the question regarding your motivation, what’s in it for you to make this argument?

Since Gray has his/her hands full with the CT question I won’t pile on. But if anyone can back up Gray’s claim that Ireland deregulated its financial sector to any exceptional degree, I’d like to know more about that. (Please note that deregulation is not the same as sloppy regulation, which any fule kno about already.)

Thanks Gray. Here’s the key failures noted:

“(i) the design of and approach to micro-prudential aspects, especially the supervision of individual institutions;
(ii) the approach to macro-prudential or overall financial stability policy; and
(iii) the failure to undertake decisive and effective remedial
measures.”

In other words, sloppy regulation — nobody voted for slacker supervision of individual institutions, for example. You’re using the term ‘deregulation’ in a very loose manner, to my mind. Traditionally the term refers to something like the UK’s Big Bang, or America’s repeal of the Glass-Steagall Act. It’s not about problems of cronyism or the like, which nobody denies were rife in Ireland during the bubble years.

@ RichardFedigan

No, I do NOT mean sending them as a voluntary act

I am still puzzled as to what you exactly suggest then if such a change would not be voluntarily.

@Gray

I mean, come on , would you folks simply subsidize the Greeks

Thanks for the Kitkat, but I do not eat junk, and you simply don’t get it, as your statement clearly shows.

@Georg R. Baumann

OK Georg. I’m not being clear enough (and I’m not sure this is the right thread for this idea.)

Briefly, I’m talking about money for WORK, as opposed to the massive amounts of money being disbursed from the public purse in many Western economies, which don’t have the money in the first place, so they’re being forced to borrow more, if they can, or introduce swingeing cuts, or increase taxes, all of this for NOT working

These unemployment disbursements, in some jurisdictions, are sometimes conditional on taking re-training or re-skilling courses, only some of which are, particularly in countries where exports are critical, ( like Ireland) or uncompetitive and inadequate ( like France) NOT exposing those being retrained to the realities, languages, business methods and cultures of the markets they need to be learning about.

In the case of China and India, markets Ireland exports nothing to, entrepreneurs and young qualified people are moving up the value chain, exporting themselves, and the companies they’re working for are winning “export” market share ( and buying companies) in the very target markets we need to be winners in if we’re to have any chance of the growth we need to pay our debts and generate the employment that causes the unemployment disbursements in Ireland ( and elsewhere) in the first place.

Ireland can partner with Indian and Chinese companies in ways that enable us to pay ( some of) this money to unemployed Irish people for working in India and China ( and gaining real in-market experience and contacts instead of sending them on courses in Dublin or Limerick or Cork.

This could be cost neutral at least in the sense that it would cost no more than existing disbursements and might even attract contributions from “host” companies and countries for targeted, ” temporarily exported” people

This is also something that, certainly in the case of China, and possibly in India could be negotiated at top political level, thereby enabling government to say it’s doing something other than trying to be optimistic and peddling hope!

I’ll come back to this another time.

@Richard,

Can you just clarify how you would propose such an exchange when you do not consider this to be a voluntary act by the unemployed in question?

Don’t get me wrong, I travelled around the globe a couple of times in my life, I certainly do not suffer from cultural myopia, on the contrary, I know how beneficial and enriching such experiences can be.

However, just to be clear, there simply can not be any legitimation to forcefully tell people to leave and go work in China or India etc.

@ Georg R Baumann

OK Georg, although I still can’t help feeling that the the tone of your parting shot ” forcefully tell people to leave and go work in China or India” remains negative and culturally pejorative in a way that betrays:

1.) entrenched, outdated historic and emotional Irish attitudes to ” the tragedy of emigration” ( cue plaintive tin whistle music or ” it’s lonely ’round the fields of Athenry”!) and

2.) a lack of recognition of the extraordinary opportunity and learning experience available in many very dynamic, highly sophisticated Chinese and Indian cities

These, mainly cities, are nothing less than the social and economic laboratories of the future, massive markets for ( possible) future Irish exports and, by and large, we know nothing about them.

My thesis is based on two planks:

1.) If I’m not mistaken, previous OECD reports have laid heavy emphasis on what I think are called market activation policies and the Hartz IV laws and policies in Germany, for example, have been relatively successful in keeping unemployment disbursements under control while maintaining employment levels and competitiveness.

2.) Although some Irish graduates have taken part in Erasmus programmes in Europe, we have generally not succeeded in diversifying our growth-generating exports beyond the US and Europe and indeed indigenous exports beyond the UK.

I’m contending that this is because our educational system teaches us virtually nothing about “new” cultures and markets and our training/retraining schemes and programmes are also all focused on “legacy” cultures and markets

I believe that if paid ( as opposed to “voluntary”) work/training/retraining schemes were made available in China & India, thousands of young people, and not only graduates, would jump at the chance.

And the experience gained over time, and the networks established, would help us to become more familiar with the booming cultures and markets we currently know almost nothing about.

@Kevin The same report makes it rather clear (on the folowing pages) that it was the restructuring of the regulation agency in 2003 which led to the sloppy regulation. The common policy at the new integrated agency was that detailed supervision of the fincnial sector was unnecessary as long as the structures of the institutes seemed up to the job (I nkow, it’s mindboggling, but that’s what the official report says). That’s what I call deregulation, when a change in the regulating authority results in a “laissez faire” stance. It seems this consequence wasn’t necessarily intended, but the ugly results are the same.

Well Richard, you read too much between the lines, as I said already, if such schemes would be available on a scale worth mentioning, it remains to be seen what percentage would be willing to go to India or China when given the options Canada and Australia as well.

For many it will be a simple matter of cultural identity and ease of change.

Btw. this safety valve of exporting people is no solution to the underlying and permanent system inherent and deliberate flaws that caused us to be where we are at now.

You enthusiasm on cultural and work exchange programs is commendable, but I am afraid, taking global economic realities into account, it might be too optimistic. China’s motivation and attitude for example can be described by the history exchange of the past 15 years pretty well. It is a little complex to be honest, but certainly they have enough people to worry about, and their aggressive shopping strategies of late are evidence for their well thought out plans, which finds it’s climax in a their 5-year planning, probably one of the most advanced plans on the planet.

While I agree with the benefits of exchange programs, I do not see them as a solution to the ever increasing income disparities which are also described as a dangerous gap by the OECD report.

In any case, thank for your clarifications, I was puzzled what you meant by not voluntary and I think misunderstood you here initially.

That’s what I call deregulation, when a change in the regulating authority results in a “laissez faire” stance.

That’s what I call the Humpty-Dumpty approach to language: “Words mean what I say they mean, no more and no less.” It’s not a good approach.

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