Percent versus Percentage Points

I’ve been trying to gather my thoughts about this treaty and am currently undecided. Am I right in saying that, like Colm McCarthy said in the Sindo Recently, that we should ratify the treaty because it doesn’t really change anything from the Stability and growth pact, even though it’s what one of my lecturers this morning called a “farcical treaty” (incalculable structural deficit etc)?

It is disappointing to see quotes like this from one of the largest political parties in the State.

[QUOTE]Article 4 strengthens the existing 5 per cent per year debt reduction target for member states whose debt to gross domestic product (GDP) ratio is above 60 per cent. This means states will have to reduce the excess debt by 5 per cent annually until they are within the 60 per cent ceiling. [/QUOTE]

@Seamus Coffey

You can add “There are almost half a million citizens unemployed…” to that. He most likely wrote that yesterday, the day QNHS data were released.

@ Dan,

I decided to glaze over that one. The CSO will be revising their aggregate data based on the final results of Census 2011 in the next few months. Yesterday the based on QNHS the CSO reported that there are an estimated 302,000 people in the official measurement of unemployment.

When asked to self-assess their Principal Economic Status the CSO gives an estimated total of 358,800 who classify themselves as unemployed.

I understand that a good number of users of the site would be in a similar position to John O’Hagan (in the employment of the state) and most of us would have concerns about how a funding crisis would affect the country but the simple fact of the matter is that if you put all of the currently available information to a bright-eyed penniless 12 year old, you would more than likely find they would oppose this treaty. The fact that the ESM agreement wording was changed to reference the Fiscal Pact would be basis alone to reject this, never mind the enormous economic arguments against it.

Outside of access to ESM funding, there is little to gain from this treaty – jobs and growth don’t come into it and it wouldn’t have prevented Charlie McCreevy from running amuck had it been in place. An obvious difference between the Fiscal Compact and G&S is that G&S wasn’t properly enforced…so not only is our situation drastically different, the consequences are too.

There is no denying that we are being played for fools here – fear is the only bone in the “yes” argument. It says a lot that our elected representatives would put us in this position and it says a whole lot more about what we are signing up for, and with whom.

Are economists not expected to make every effort to detach political and personal biases? Consider a longer term view?

You can make the point that we would have to consider the immediate fallout of a “no” outcome, but could also go further and consider how cosmetically damaging it would be for the EU to not assist Ireland under the circumstances – game theory and all that. Is our fear actually rational? It would be nice to see this discussed openly and rationally.

Thanks.

UL student: I was also arguing that, SGP or no SGP, countries cannot run large deficits indefinitely, starting from where we are, unless they can find someone to lend. The structural deficit is not so much ‘incalculable’ as certain to be disputed – it is a useful macro concept where there is a worthwhile choice about fiscal policy, but incapable of unambiguous measurement. Plus the treaty did not address the weaknesses in the design of the currency union. Notwithstanding, what is the gain for Ireland in voting against it?

“* And much more serious, why risk in any way whatsoever the calamitous consequences of not being able to fund day-to-day State expenditure from 2013?”

If that is the only reason to support the treaty it is a poor one.
Sooner rather than later Ireland will have to face reality and live within its (substantial) means.

In some way Mr O’Hagan and Adams are using the same justification to make opposing arguments.
Adams: We should vote no, because cannot reduce expenditure.
O’Hagan: We should vote yes because we may need to keep spending beyond our means.

@ Colm
In itself it might not do much but here’s an idea:
1: If we vote against it we don’t get the ESM bailout (liklihood 85%)
2: Then everybody panics. (100%).
3: if we don’t get the bailout from Europe then we either default or get money from IMF or both

Unknowns in the no scenario are membership of the Euro and the overall ripple effect across Europe.

Along with percent vs. percentage points (one of my pet peeves), can we add the misuse of “to beg the question”? Several posters to this board use the phrase as a synonym for “to raise the question.” It is no such thing. “To beg the question” is a logical error in which one assumes the truth of the proposition to be proven. Given that economists must come across this logical error in arguments, it behoves them both to know what it is and to preserve the distinction between begging the question and raising the question.

Sweet Jesus.
Europe is a soccer game – this from a Trinity professor ?

“Thus, for example, Ireland could not argue that, should we qualify for the next soccer World Cup, we should be allowed a one-goal advantage in every match because living on a wind-swept island with a temperate climate we would not be used to the heat of Brazil. Such a request would be seen as ludicrous”
Not that I want a US of America in Europe but Alaska has a few long term fiscal transfers
en.wikipedia.org/wiki/Eielson_Air_Force_Base
If you want a better historical analogy then a football game – think of locals in Castletownbere who have a market for their goods all of a sudden because the RN has a new base in town.
Its called fiscal transfers and countries with disparate areas of remoteness cannot work without such money.

Here’s another beauty
“You cannot continue for years to consume/spend more than you earn and expect to be able to borrow to do so, especially where the “insurance” of euro zone support no longer applies”
From a fiscal point of view we did not borrow during the boom years.
However A trinity professor clearly does not know what bank credit is !!! amazing.
Bank consumer credit is all about consuming more then you earn ,what else is it ? – is he arguing for a full money monetory system ? – I doubt it but he should come out and state he is if he makes such a statement.
Germanys wealth / deposits is based on us consuming more then we earn – this is the primary reason why Europe is failing – Germays exports subtract wealth over the longer term.
i.e I spend 60,000 on a BMW when all I may need is 15,000 for a Skoda – that 45,000 euros is wasted capital expenditure that could be used more productively elsewhere.

This from Steve of Virgina
“Here is the old international finance ‘in and out’, the inevitable outcome of a country not in possession of the instruments of organic credit creation within its own borders. Easy finance capital flows into a country from elsewhere promising citizens cheap progress. As soon as the new capital is deployed and the country is dependent upon it, the capital flows out again! The outflow strands the citizens and all of their fabulous ‘investments’. Funds to service or retire external debts cannot be had, the country becomes an effective colony of the lenders.”

” German coal consumption has steadily declined over the past decades but coal available in German coal-fields has declined much faster. To obtain coal the Germans BORROW AGAINST THE ACCOUNTS OF THEIR TRADING PARTNERS. The question is: for how long will the Germans be able to do so?”

The above Irish times piece by this professor is a disgrace – I do not wish to be treated in such as contemptuous fashion , neither do many other Irishmen.

It’s a disgrace that the IT should juxtapose the arguments of a TCD economist with Gerry Adams. I’m looking forward to the day when Joseph Stiglitz debates Bertie Ahern on the issue.

That said, John O’Hagan’s argument is very, very poor and if it is indicative of the quality of the debate that is to come, then the Yes side is going to get trounced.

A simple answer to his question concerning post 2013 funding is the IMF. We have a legal right to IMF funds if we live up to our side of the current bailout, do we not?

In any case, if the current bailout fails, what are the chances the next one will be a success. Under what circumstances would accepting a second bailout be a good idea?

@ Colm
Rather basic question here but… what is the practical significance of the ambiguity around the structural deficit criterion, since IRL will certainly be in breach of the debt to GDP ratio rule for the foreseeable future? Is it not a moot point as far as we are concerned?

Most of the comment I’ve come across has majored on this point, but it may have limited application in our case?

Further to my last post, I’m getting a bit sick of economists (e.g. Karl Whelan, Colm McCarthy) saying things like “the macroeconomics of this treaty are awful, but we should accept it anyway beacuse of x,y and z”.

If the economics are bad, then say so and leave it at that. Anything else is a political argument. If you want to get involved in politics, that’s fine, but don’t make political statements with your economist’s hat on. It is misleading and disingenuous.

@Seamus and Dan

From SF:

[QUOTE]Article 4 strengthens the existing 5 per cent per year debt reduction target for member states whose debt to gross domestic product (GDP) ratio is above 60 per cent. This means states will have to reduce the excess debt by 5 per cent annually until they are within the 60 per cent ceiling. [/QUOTE]

What has he said that is incorrect? I am probably showing myself up here but it seems ambiguous to me and that he actually could have meant:

{Current Debt Ratio – 60%} X 0.05

Bazza, there is a non-political point also, namely the economic consequences of rejecting the treaty. Are there economic costs/benefits and what is the balance?

Thanks for the clarification Colm. The reason I would lean towards voting against it is because it’s bad economics from what I can see; and from whats been written by various Economists. The only reason anybody has put forth for voting for the treaty is that we are essentially tied by our wish to access the ESM should the need arise. This means that we are voting for it, not because it advocates sound economic policy, but simply because they have us caught by the short hairs?

I think John O’Hagan forgot something when he dreamed up the football analogy

If Irish players want only to play football in Ireland then the rules and regulations can be decided on exclusively by Irish decision-makers

…. the monstrosity that is Gaelic Football…..And we do try to play internationally starting 1 goal up… we play the Aussies but make them use a round ball and tell them if they hit us too hard were taking the ball and going home….

🙂 🙂 🙂

@Colm

The economic consequences of voting against the treaty are not straightforward at all and I daresay that economists do not have much expertise in this area. You and Karl Whelan have said that we should vote for the treaty but your reasoning has been purely political in nature and not based on economic analysis at all.

When Karl attended the Oireachtas committee (or whatever it was) on the treaty, he basically said that from a macro point of view, the treaty amount to poor policy and his views in his VoxEU article were even stronger. Fair enough, I accept his economic analysis.

However, he then ventured to the committee that we should ratify the treaty for a number of reasons that were nothing to do with economic policy, but were along the lines of “we will probably be adhering to the rules anyway” and “the consequences of ratifying the treaty will be fairly benign”, “our funders seeketh and they shall find” etc.

I’m sorry, but Karl Whelan was in front of that committee because he is an economist, not because he has some sort of political crystal ball or is a political advisor. If France or Germany insist that we raise corporate tax as part of a future ESM bailout and a few thousand people lose their jobs, will Karl’s opinion still be the same?

Like I said, economists should voice their opinions on the economics of the treaty rules themselves (as Karl did in his Vox article), but if the same economist tells an Oireachtas committee that we should ratify the treaty, he should qualify that with the fact that that is his personal opinion and not economic policy advice that is the result of scholarly analysis.

Similarily, while your Sindo column is nothing like an Oireachtas committee, I am sure that many readers believe your opinions to be based on sound economic analysis, when they are clearly not.

@Colm Mcc

If Ireland’s economy and finances were such that you were very, very confident that access to the ESM was irrelevant, wouldn’t I be right in assuming that you would think signing up was not really a good idea?

@Seamus Coffey

re Article 4

I do not understand how the quote from the Adams article is incorrect.
I am aware from your blog that the 1/20 rule is not exactly 1/20 but where is the quote wrong in substance.

While I carry no torch for Sinn Fein, the quote does not seem as off the wall as that of a previous finance minister ‘the cheapest bank bailout in the world’.

The proposed Compact is meaningless.
It refers to the ‘structural deficit’ but there is no agreed definition of this as Martin Wolf explains:

http://www.irishtimes.com/newspaper/finance/2012/0307/1224312912841.html

It would seem that the only logical thing to do is to abstain on the Referendum

@ Ernie Balls

Massively off topic – take that to http://www.pedantic_linguists.ie 🙂

@ bazza

I couldn’t believe the condescending and patronising tone of John O’Hagan’s article. It is extremely poor. When I make my mind up to vote yes or no I’ll have to hold my nose for either decision with Gerry Adams on one side and John O’Hagan (as an example) on the other.

@ Ernie

Bravo for highlighting this continual error in the use of ‘to beg the question’. I’m afraid though that this error is so widespread that it has come to mean ‘to raise the question’ and there’s probably nothing can be done about it at this stage. I’m reminded of Blanche DuBois who, apart from being forced to rely on the comfort of strangers, is casting her pearls among swine.

Strange ol times alrite – when there is more economic analysis in an Op-Ed from Gerry Adams than in on Op-Ed from a TCD economist John O’Hagan!

And O’Hagan’s fear-mongering on ‘having to leave the Euro’ reminds me of a nightmare I had on sunday night …. was watching great rugby on Sunday and dabbling in the so called fiscal compact or fiscal ‘corset’ (as Der Spiegel puts it) debate and dozed off on the couch afterwards …

… woke up in a cold sweat and could swear that I was watching Eamonn Ryan wearing nothing, absolutely nothing but a top of the range mini fiscal corset reinforced with real whalebone running up and down the pitch in Landsdowne Road waving his hands in the air and screaming at the fans WE’LL HAVE TO LEAVE THE EURO WE’LL HAVE TO LEAVE THE EURO WE’LL HAVE TO LEAVE THE EURO …. I tell you – took me a while to calm down ..

Now let’s continue the debate …. wonder has John O’Hagan read The Owl and the Pussycat? Wonder has Gerry Adams read it? The blog is open gentlemen …

@ Joseph,

The emphasis on debt reduction in the quote is designed to indicate that the debt rule will force debt repayments. This is not true and in the space of two sentences it mentions two different types of debt reduction. There is mention of a “5 per cent per year debt reduction” and the need “to reduce the excess debt by 5 per cent annually”. Neither of these is correct.

The requirement is to reduce the gap between the existing debt ratio and the 60% of GDP benchmark by approximately 1/20th. The actual rule is not a simple 1/20th rule but is based on average reductions over a three year period. This can either be actual data over the three preceding years or the data for the previous year and the forecasts for the current and following year. Although it is not specified how exactly it is also said that “account shall be taken of the influence of the cycle on the pace of debt reduction”.

Regardless of the minutiae it is very unlikely that this this would ever require an reduction in the nominal amount of debt. The suggestion is that further cuts will be required to meet this debt reduction requirement. The rule is debt brake which is designed to slow down the accumulation of debt rather than force its repayment.

If a country has a debt ratio of 100% of GDP and has nominal GDP growth of just 2% (the ECB’s inflation target) it would need to run a balanced budget for two years and could then begin running small deficits while still satisfying the debt brake. If nominal growth is 4% the country could run continual deficits of around 2% of GDP and continue to meet the requirements of the debt brake rule. If a country has a ‘balanced budget’ the debt brake will not put a significant burden on the country.

The 2% and 4% nominal growth scenarios are shown in this table for a country with a starting debt of 100% of GDP.

With 4% growth the country could increase the nominal amount of debt from 100 in year 0 to more than 160 in year 20. It is very likely that the ‘balanced budget rule’ and the other factors that contribute to the country-specific Medium-Term Budgetary Objectives would actually restrict the level of debt creation below this.

As I’ve said elsewhere the debt brake rule is getting more attention than it deserves. The 0.5% of GDP structural deficit limit will have a far more significant impact on levels of public debt.

@Seamus

Thanks for that.[I see from the time of posting that I may have delayed your beauty sleep]
I think I understand it now. Because the denominator is increasing, the numerator does not have to be reduced to lower the resulting percentage.

@all

Some basic math. If you reduce the excess deficit by 1/20th per annum, you will never, ever eliminate the excess for it will always be 19/20ths of what it was the year before.

Just read Gerry’s offering. He talks of the 5% rule bringing us eventually below 60%. Now following my math point this means Gerry clearly meant 5% of Debt% and not 5% of (Debt% – 60%).

Makes me bite my tongue a bit when I hear Gerry bemoan our exclusion from the bond markets.

O’Hagan’s piece was sheer common sense though his metaphors were a bit clumsy. Though Gerry probably is right, rejecting this Treaty probably does not mean we will be shut off from future bail outs, but in essence what he is arguing is that our threat to bring the whole house of cards tumbling down will always win the day. For a start, it hardly makes great sense to base our international strategy on a continuing blackmail and for seconds our blackmail will be faced down eventually, we are only 1% of this project!

Economics. The only “quantitative” disipline in which people can disagree over the meaning of “percentage”.

Stocks and flows aren’t even the half of it.

29 replies on “Percent versus Percentage Points”