Krugman and Layard on a manifesto for economic sense

Paul Krugman and Richard Layard put forward a case for a coherent and evidence based approach to the crisis. Essentially they argue that a strategy of focusing on the reduction of public debt levels exclusively in order to regain market confidence makes no sense, and has been falsified empirically. They also argue that structural imbalances shouldn’t prevent the use of discretionary fiscal policy for stabilization purposes when it is available.

This chart of the drop in domestic demand from the recent Nevin Institute quarterly report (page 4) is particularly striking as a motivating factor in discussing Krugman and Layard’s piece.

Final Domestic Demand

Krugman and Layard have a manifesto you can sign up to (I did).

There are lots of things in this piece I agree with, but two big ones are:

1. Placing the blame for the crisis at governments’ feet makes no sense. The crisis didn’t start in the public finances, it began in the private sector(s).
2. The confidence argument and its attendant strategy is completely wrong headed at this juncture, Ireland in particular shouldn’t be held up by anyone as the role model for austerity, either in the 1980s or today.

There are also aspects I don’t see as pertinent to the Irish case.

Krugman and Layard write:

A second argument against expanding demand is that output is in fact constrained on the supply side – by structural imbalances. If this theory were right, however, at least some parts of our economies ought to be at full stretch, and so should some occupations.

But in Ireland, in the IT sector for example, and especially in really high end tech jobs like online video gaming and such, they can’t get people. (Obviously in other sectors like services and construction their argument holds.) There are other examples but I think in a small open economy like Ireland this argument isn’t that important.

The key question from an Irish point of view is: to what extent is the Krugman-Layard prescription possible in a country with so little fiscal room for maneuver? Translating the argument down a bit, if Ireland is somewhere between Greece and Spain in terms of it’s problems, even if Enda Kenny et al bought the Krugman/Layard prescription lock stock and two smoking barrels, given where we are right now, are our options severely limited in any event? I’d welcome your thoughts on this.

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

69 thoughts on “Krugman and Layard on a manifesto for economic sense”

  1. Not being able to get people in the tech industry is a function of several things:

    1) The education system needs to better prepare students.
    2) High paid and intelligent professionals expect a competent and professional public service – a good health system, functional public transit and a good education system for their children.

    In Ireland there is room for improvement there. In part we need more investment, in part we need reform of those services. In the past much of the reform has landed on the front-line workers, but I think reforming management in public services is long, long overdue. Most front-line staff would give better service if they got some level of support from management.

  2. Ireland’s options are severely limited. Contrary to what some of Krugman’s readers seem to think, he has never suggested that a small open economy can do much with fiscal policy. It can soften demand shocks just a little if it has the borrowing capacity, but that’s about all. Absent a Eurozone breakup we’re stuck with the gruesome process of internal devaluation, despite the fact that it doesn’t work at all well.

    I’ll happily sign if they have no objection to people who belong to no organization. It’s worthwhile to try to persuade policy-makers in the larger economies to take off their Camerkozy-austerian blinkers. A revival in world demand is our best hope. Only the likes of the Fed, the ECB and the economic great powers can deliver that.

  3. @KL

    Not being facetitious here but how bad is the public health system in Ireland relatively speaking? My experience anywhere in the world is that everyone thinks their health system is terrible. I am fortunate enough that i’ve never really relied on the Irish health system for anything other than a broken leg about 10 years ago and everything went pretty smoothly for me that time after maybe a 5 hour wait on admission. Is there any quantitative or qualititative international benchmarking reports to see comparators.

    I notice a lot of people I hear saying Ireland’s health system is a disgrace often don’t have much first hand knowledge themselves….but there is always a story of someone they know who knows someone.

    btw, i’m not defending the system, maybe its horrendous and apologies if this is off topic but it was raised in the first post.

  4. “Placing the blame for the crisis at governments’ feet makes no sense. ”

    It makes a lot of sense in terms of power dynamics. The Republican strategy of reducing the influence of the government in favour of the private sector has been going on since 1980. Keeping the focus on governments means nobody asks questions about all the money the corporate sector is hoarding. The key issue is demand- get that money out and allocate it to people who will spend it.

    Pillorying government takes the heat off the banking sector which is resistant to meaningful reform.

    In the Irish case the Sindo would be lost without its weekly government bash.

  5. But in Ireland, in the IT sector for example, and especially in really high end tech jobs like online video gaming and such, they can’t get people.

    Isn’t this the worm in the apple of knowledge economy policies that in general never gets an airing?

    A huge sum of money has been devoted to the the computer and engineering ends of thing, as various Ministers have been only to happy to prattle on about, but leaving certs with high points are still swayed by the incentives derived from entrenched Victorian professional mores.

    Moreover, as Minister Quinn highlighted a few months back Irish secondary school students are only scoring mid-table on many subjects relative to the OECD peers.

    There is only so much cream in a pint of milk. Trying to build an economy on contrary assumptions is cargo cult thinking.

  6. Nice graph, but I’d like to see it over a longer period – say from 1990 on. Given the bubble, the 2007 starting point isn’t exactly the sustainable point.

    On “it’s a Private debt not Public debt problem” – it’s important to recognise that the government took a very big slice of private borrowings through taxes (indirect tax element is sometimes overlooked_. And then went on a spending binge, vastly increasing the running costs of the country.

  7. BTW: Reuters carried a piece yesterday (author not in memory) suggestion the the euro could be ‘saved’ if the creditor countries built up a pot of money to simply meet the interest repayments on debt as auctions come online.

    Presumably, as the months wear on and wear everyone down the enthusiasm for amend and extend deals by bondholders is petering out.

  8. @V Barrett
    So far as highly-paid professionals are concerned, the only problem with the Irish healthcare system is that you pay for it three times: with your taxes, your hefty annual VHI premium and finally, when you need the service, you’ll find that neither the state nor the VHI covers all costs. Some things you have to pay for yourself. But really, for the well-off, Ireland is better than most places.

    The predicament of the poor sucker who can’t afford VHI cover is another matter. A broken leg will be treated of course, but you could be waiting an awfully long time for a hip-replacement. However that’s straying off-topic and there’s generally too much of that around here.

  9. Our options are severely limited and Kenny & Co. would be well advised to think twice before accepting any part of this manifesto, bar one element – reinstituting full employment as the central objective of our society.

    The notion that excessive deficits are a consequence of the crisis, not its cause is an oversimplification. The burgeoning deficits relate to the instability of previous revenue sources that went unrecognized by government or were wilfully ignored. In our own case, there is evidence that, for political purposes, warnings about the overreliance on property based taxation went unheeded for years on end. All the major political factions in Ireland are implicated – a cursory read of their manifestoes for the 2002 and 2007 general elections is all that is required to support this contention. This political failure was compounded by adminstrative failure and also by the failure of the media to perform its critical democratic function.

    More generally, I feel there is an assumption underlying the Krugman manifesto that somehow the ‘free market’ is some naturally occuring phenomenon, which it isn’t. It’s as much a political construction as parliamentary institutions. How market forces are regulated and governed is also a key function of democratic politics.

    The notion that stimulating spending will somehow cure this crisis strikes me as misguided. There is a crisis of personal indebtedness which will impede spending for some time to come, is there not? Further, is it not the case that much of the personal boom time spending was based on maxed out credit card ‘feel-good’ spending, or overpriced property purchase on which there now exists a significant debt overhang that citizens in our newly impoverished state may find unsustainable?

    It may not be a popular thing to say, but is it not possible that there is no quick fix solution to the mess that neo-liberalist values in their various forms of deployment have created for western world economies? That the cycle of ‘recovery’ may take just as long to work through as the cycle of (false) prosperity that preceded it?

    My impression is that our own political class, and many of those advising them, are playing the same old game to which they’ve grown accustomed when the rules of that game have fundamentally changed or simply no longer apply. The manifesto I’d like to sign up is one which restates the principles of social democracy and puts employment creation at its core. I think I’d happily be reconciled to austerity measures and reforms, locally and at EU level, that were designed to give real effect to a well-thought out principled vision of the kind of society we should strive to create out of the current disaster.

  10. I see that the Finnish PM is proposing covered bonds for the PIIGS, linked to revenue streams, as the Finns used in the early 1990s.

    Wonder what would the attitude of the Irish be if we had been as prudent as them?

    We should keep in mind that very few hurlers on the ditch have been really able to play when handed the sliothar.

    Of course a rise in public funding would help and in the US, federal taxes as a ratio of GDP at 15% are at the lowest since 1950.

    The reality is that you can be a beneficiary of Medicare [for over 65s] and believe that Obama is a communist.

    In Japan, Krugman’s advice was taken too much and while it has the best infrastructure in the world, piling up public debt in the process, it failed to address other big problems.

    So while America’s fiscal problem is mainly a political one, Japan has simply run out of road.

    Next on the horizon is China — the world’s second biggest economy.

    Its investment spending in the past decade has exceeded 40% of GDP and in 2009, it had a stimulus program of almost $490bn. However, now it’s trying to increase consumption but that’s a tricky business where a typical middle class couple have to support both sets of parents, a mortgage and the health service is poor compared with for example Malaysia.

    The US like Japan raises the majority of its debt funding locally.

    A country like France has to depend on foreigners to buy two-thirds of its debt.

    As with Ireland, foreign holders of debt tend to panic at the first sign of trouble and they are not subject to political pressure.

    The Bank of England benchmark rate is at the lowest since 1694.

    Confidence would be a good thing and Daniel Gros made the point recently that in the mid 1990s, there were similar concerns about growth in Europe as there are today.

    The southern peripherals failed to rise to the new challenge of Eastern European countries after 1989. The region grew by 3% in 2011 and is expected to manage 2.5% this year according to the World Bank.

    So if Europe doesn’t address issues such as youth unemployment in coming years, there will be even more pressure as emerging market companies directly challenge MNCs in their home markets.

    As regards the shortage of IT skills in Ireland, at a company level that isn’t a problem.

    There are are lots of young people with the competence and command of English in places like Malaysia who would love to experience the cold, rain and grey clouds in Europe.

  11. A minor point, but I can’t replicate that NERI graph. There was a small uptick in domestic demand in Q4 of last year, regardless of whether you look at current or constant prices, seasonally adjusted or not, or whether you use the CSO’s Final Domestic Demand variable or manually add C+I+G.

  12. @veronica

    The notion that excessive deficits are a consequence of the crisis, not its cause is an oversimplification.

    Simplified? Certainly. Correct – definitely.

    If you are coming from the left in Europe the thing that has to be relentlessly hammered on is that the the European component of the global financial crisis is the result of a huge market failure enabled by wongheaded neoliberal dogma, dogma that is now throughly embedded in the institutions of the EU and the political culture of the EU’s most powerful state.

    Any analysis of the crisis that does not acknowledge it is essentially one of the private sector made unamanageable by EMU is flawed to the point of wothlessness, and quite often it is also mendacious lobbying by the agents and sympathisers of those on the right and in the financial sector who enabled the crisis.

    The notion that stimulating spending will somehow cure this crisis strikes me as misguided. There is a crisis of personal indebtedness which will impede spending for some time to come, is there not?

    That is probably why the manifesto advocates that the state makes up for the fall in demand in the private sector, right?

  13. @MH

    “As regards the shortage of IT skills in Ireland, at a company level that isn’t a problem.

    There are are lots of young people with the competence and command of English in places like Malaysia who would love to experience the cold, rain and grey clouds in Europe.”

    That’s correct. In Dublin, you can hire good IT staff from Spain, Italy, East Europe. Meanwhile you need all your customers to be foreign.

    With 50% foreign staff and 100% foreign customers, there needs to be a compelling reason to base in Ireland. The fact that we are culturally midway between New York, London, and Europe is a very significant advantage in my experience. (Irish people are able to market products in the US and in Europe – I have seen them do it). But is it enough?

  14. @Stephen Kinsella

    You must be having an off-day

    [1]Placing the blame for the crisis at governments’ feet makes no sense. The crisis didn’t start in the public finances, it began in the private sector(s).

    NO. The framework conditions which allowed the insanity to prevail emerged from the Progressive Democrat neo-liberal IDEOLOGICAL influence on Fianna Fail which triggered the latent TACA gene in FF and the runawaw jury led by Mary Harney, Michael McDowell, Charles McCreevy and Bertie Ahern …. with their fellow travellers in the wider upper-echelon insider inbred gouging governance class – the latter being still in position. The 2002-2007 PD/FF administration deserves the epitaph as the most reckless in history (blind biddy would go stronger but I’ll let your ‘sensitive’ nature figure it out (-;)

    [2]in Ireland, in the IT sector for example, and especially in really high end tech jobs like online video gaming and such, they can’t get people. (Obviously in other sectors like services and construction their argument holds.) There are other examples but I think in a small open economy like Ireland this argument isn’t that important. ”

    No. This is a serious anomaly/gap in the Irish Labour Market. @2000 high end jobs pa are not being filled internally – 3rd level sector, notwitstanding significant investment, is FAILING to attract the requisite number of students. This stems from (i) weaknessess at 2nd leves SET and (ii) the professional bias in the middle classes (iii) weird perceptions on the ICT sect since 2000 dot.bom amongst parents ….. There are also difficulties with (iv)visa applications from those outside EU … nor are we educting enough Manufacturing/Production engineers etc … Look around your own Patch ….

  15. This is a welcome call to apply some rationality to getting out of the mess rather than lectures in economic morality which appear to making the situation worse on a daily basis.

    Such moralising was evident in response to the NERI report. The argument did not matter. The people making the argument were on the wrong side to be right on anything.

    Hopefully this will increase pressure on the moralists to look at the issues rationally.

    @Cormac O’Sullivan

    “A minor point, but I can’t replicate that NERI graph. There was a small uptick in domestic demand in Q4 of last year,”

    Whatever about the last quarter of 2011, the situation in the domestic economy has deteriorated significantly in 2012. I am surprised that some of the numbers coming out are not worse.

  16. @ All

    It’s a market failure but why didn’t this market failure engulf Finland? or Germany? This mess was 100% within our power to prevent.

    Then when it occured it was mostly within our power to contain. How did we use the power, with glacial reaction speeds culminating in the Bank Gaurantee. One of the biggest failures of parlimentary democracy anywhere ever.

    In short all of the blame lies with our government for allowing the market to fail within it’s borders and most of the blame lies with them for not letting the market react to it’s own failure when the time came.

    That’s no reason not to try and reduce or debt burden, but that burden is our own fault, not Germanys. The one problem with the constant drawn out national talk of reducing the debt is that it draws attention away from our poor system of government, it’s failures and the many reforms that need attention and towards the evil foreigners who are someone to blame because they wont gaurantee our gaurantee. Imagine if the roles were reveresed!!!!

    I also see the best stimulation for our economy as closing the deficit and paying down debt asap, and hope others stimulate theres. We have little choice.

    Regarding ICT/Engineering/Software etc… Not enough training in Maths/Science and general medicority in our schooling. This extends to our lack of any kind of language strategy. Have a look at the amount of sales/marketing jobs out there at the moment for professionals with a 2nd language. We’re basically importing other Europeans to do what would be described as ‘high value’ jobs here.

    There’s also the big pull factor from the state supported Gravy train professions. Why work for a living when you can sit back and live the risk free high life?

  17. @Stephen K

    “But in Ireland, in the IT sector for example, and especially in really high end tech jobs like online video gaming and such, they can’t get people. ”

    How many students are forced to study ‘the Irish language’ until the age of 18 and take exams in it last year. Its compulsory isn’t it, what percentage of a student’s time between 16 and 18 is spent studying Irish? Does it count towards ‘points’ for university entrance? Do some highly numerically and logically talented students sometimes struggle with both talent and motivation to learn a largely unused language? Do they potentially miss out on their chosen university course as a result?

    What is size of the global market for Irish language online games?

    Can structural reforms ever compete with the B&B voting constituency in the rent seeking Irish-speaking areas that ambitious students visit to improve their Irish language skills?

    How about a new concept – Conditional Keynesianism – which acknowledges the tendency for Keynesian stimulus to be misused to prolong and entrench the forces that oppose that structural reform that makes sense.

    How politically realistic (or appropriate) is it for low-paid Germans to make transfers to prevent structural reform for highly paid counterparts in Ireland?

    Keynesianism is a noble thing when it prevents genuine poverty and facilitates public investment in economically sensible projects. The Irish plan is for a bit of that, but a lot more of something else.

  18. @ Cormac,

    The NERI graphs uses Total Domestic Demand which includes the effect of inventory changes. You are right though that C + I + G, however measured rose in Q4 2011.

    As for the graph itself it must be remembered that the bulk of the drop is because the household sector stopped buying new dwellings. In 2009 prices quarterly Final Domestic Demand has fallen from €41 billion in Q4 2007 to €31 billion in Q4 2011, a drop of €10 billion. Over the same period quarterly Investment has fallen from €10 billion to €4 billion with the bulk of that explained by the collapse in investment by the household sector.

    The crisis did not start with government finances but the inability to respond to it did. There may not have been “irresponsible government borrowing” in the run-up to the crisis but that does not mean there wasn’t irresponsible government expenditure.

  19. @John Foody

    “Regarding ICT/Engineering/Software etc… Not enough training in Maths/Science and general medicority in our schooling. This extends to our lack of any kind of language strategy. Have a look at the amount of sales/marketing jobs out there at the moment for professionals with a 2nd language. We’re basically importing other Europeans to do what would be described as ‘high value’ jobs here”

    But, but…but what about the multitudes of Irish people tooled up with years of training in the Irish language – that’s a second language (and its how we can tell we aren’t British). Surely you aren’t suggesting that is a dumb misallocation of educational resources?

  20. Not being able to get people in the tech industry is a function of several things:
    1) The education system needs to better prepare students.
    2) High paid and intelligent professionals expect a competent and professional public service – a good health system, functional public transit and a good education system for their children.

    1. There’s been a massive increase in the number of graduates at all levels since 1990, but of course that takes a long time to completely feed through society. It’s somewhat remarkable we have a significant “really high end tech” industry at all.
    2. As far as highly paid professionals with options to be in elsewhere (London, Chicago or Berlin) instead are concerned, perhaps the issue that is mentioned most often is not healthcare or transit in particular, but the widespread low-standards/low-quality-control/anti-process-improvement attitudes throughout the public and private sectors. That gap is being slowly being closed, in my opinion, but remains I think the central issue for this constituency.

  21. Supreme Court upholds Omaba_Care

    Professionalism in Irish Health Service is top notch [personal and extended family experiential] – admin and systems and IT systems etc in HSE need serious work – career structures {labor markets) need work – dual nature of public private creates anomalies etc THE PD privatisation agenda cont etc

    Back to Governance

    Which needs v. serious work …

    http://www.irishtimes.com/newspaper/opinion/2012/0628/1224318886615.html

  22. @ Joseph Ryan

    On the Neri thread, I presented facts rather than morality and so nobody has bothered responding.

    @ All

    Well we are six months to the target of being recognised internationally as a ‘world-class knowledge economy.’ Wonder if fireworks are planned?

    Micheál Martin, a man with a weakness for vacuous superlatives said in 2006 that “Ireland by 2013 will be internationally renowned for the excellence of its research, and will be to the forefront in generating and using new knowledge for economic and social progress, within an innovation driven culture.”

    Remember those times of hubris and delusion?

    The Irish Mind. An abundant supply of that rare commodity you’ll need to bring your business to peak performance. The Irish. Creative. Imaginative. And flexible. Agile minds with a unique capacity to initiate and innovate without being directed. Always thinking on their feet. Adapting and improving. Generating new knowledge and new ideas. Working together to find new ways of getting things done. Better and faster.

    This flexible attitude pervades the ecosystem. Nowhere else will you find such close, frequently informal, links between enterprise, education and research facilities and a pro-business government. Connected by a dynamic information infrastructure. In Ireland, everything works together.

    Below is a response on the FT site to Krugman/Layard.

    A lot of people seem to believe that pre-2008 is going to return. Dream on….”Brother, Can You Spare a Dime?”

    “The problem is that politicians and many economists in the periphery, the US and the UK don’t understand the impact of globalisation on their economies because when globalisation really took off in the naughties, they were having a debt fueled party, while the Germans (and others) had to adjust their economies to stay afloat. The political and economic thinking in Germany is ten years ahead. We understand that we will only maintain our relative position in the world (and by “we” I mean us Europeans) if we manage to adjust our consumption patterns and our productivity to the new world order.

    PS: Part of the Anglosaxon ignorance is probably based on the embarrassing lack of language skills on the other side of the Channel / Atlantic, which make it difficult to follow the more modern and relevant parts of economic and political writing.”

  23. @ David O’Donnell

    Rejoice!

    It has taken a long time.

    On November 19, 1945, only 7 months into his presidency, Harry Truman sent a Presidential message to the United States Congress proposing a new national health care program. In his message, Truman argued that the federal government should play a role in health care, saying “The health of American children, like their education, should be recognized as a definite public responsibility.”

  24. In the Irish context, what Krugman and Layard have to say is is only partially right.

    One the causes … the conditions for crisis were created not just by excessive private sector borrowing and lending, including by over-leveraged banks, but also by irresponsible public spending funded by taxing the activity funded unsustainably by excessive private sector borrowing and lending. The large government deficit we see now is a continuation of this error, and is therefore a major cause of the crisis.

    On the appropriate response … at Eurozone level it may well be right for public policy to act as a stabilizing force, attempting to sustain spending, but at Irish national level we are already at or beyond the limits to public indebtedness that can be sustained. The US and UK can get around this by printing more money. We can’t.

    On the structural issue, the Irish economy is structurally very different to that of the US or of other major economies, with a very much sharper divide between internationally-traded and non-traded sectors. It is not much of an exaggeration to say that:

    1) Activity in traded sectors is driven by overseas demand rather than domestic demand

    2) Activity in non-traded sectors is driven by:
    – A multiplier on activity in traded sectors
    – A multiplier on net new overseas borrowing by Irish households, businesses and government (net both of deleveraging and interest, but plus transfers)

    3) Downward price stickiness makes the non-traded multipliers sticky upwards. It also constrains gains in competitiveness that could otherwise drive exports upwards and improve the share of export value that stays in the local economy.

    With overseas borrowing constrained, and our EU partners cagey about providing transfers, there are important structural rigidities, but they are not primarily about labour supply. They revolve mainly around price stickiness.

  25. @ Seamus Coffey

    “There may not have been “irresponsible government borrowing” in the run-up to the crisis but that does not mean there wasn’t irresponsible government expenditure”.

    Who can possibly dispute this?

    Unfortunately, it raised the general permanent level of salaries and pensions in the public sector and the level of social transfers. The “stickiness” to to which the country is condemned is the political difficulty in clawing back some, at least, of this expenditure. Our “world class” banking bust is, of course, a major problem but also a useful and endless diversion from the actions that we ourselves can and should be undertaking.

  26. If tech heads wanted more grads, they could pay more. The big firms make big profits. However, they really care about low costs, not full offices, so they make do with what they have. European free labour movement means Irish education is not a binding constraint on labour supply for tech firms. Of course they would like more choice in new hires, but who wouldn’t?

  27. @Michael Hennigan on some German poster at the FT

    PS: Part of the Anglosaxon ignorance is probably based on the embarrassing lack of language skills on the other side of the Channel / Atlantic, which make it difficult to follow the more modern and relevant parts of economic and political writing.

    This is crazy talk. The dominant school in German economic thinking is still neoliberalsim with a faintly paternalistic Teutonic twist, take off the gloss about globalization and you have Austrian gold bugs trying to stay loyal to laissez faire capitalism by ruthlessly pursuing wage deflation.

    Of course while this has saved Germany’s economy from the worsts effects of the destructive logic of global wage competition it has been at the expense of most of their European neighbours. Germany’s dream of becoming the Eurozone’s exporting industrialists paradise necessarily has to be some other Eurozone countries loss.

    I can not wait until we have made ourselves as wage competitive as Somalia, perhaps then we can enjoy their standard of living,

  28. On the previous thread I responded to a comment thanking me for seeking to clarify the costly dysfunction in the ESB’s structure, financing and allocation of investment. The gist of my response is also relevant here.
    http://www.irisheconomy.ie/index.php/2012/06/27/electricity-gas-prices-in-ireland/#comment-302332

    If enough people in ireland believe that it is right to maintain pay and welfare transfers to sustain a cost of living that is 15% above the Euro Area average, then economic recovery will be a long way off.

  29. @MH

    “The Irish Mind. An abundant supply of that rare commodity you’ll need to bring your business to peak performance. The Irish. Creative. Imaginative. And flexible. Agile minds with a unique capacity to initiate and innovate without being directed. Always thinking on their feet. Adapting and improving. Generating new knowledge and new ideas. Working together to find new ways of getting things done. Better and faster.

    This flexible attitude pervades the ecosystem. Nowhere else will you find such close, frequently informal, links between enterprise, education and research facilities and a pro-business government. Connected by a dynamic information infrastructure. In Ireland, everything works together.”

    Yep. Aired seemingly ceaslessly on CNBC for one. Utterly cringeworthy – and revealing.

  30. @Michael H

    Indeed, delusions and fantasy are difficult to dispel.

    The latest from Aesop growth tales much loved by politicians involves a hero known as EIB. With a bit of cash in the back pocket, EIB can build a footbridge to the moon.

  31. Shay, to be fair, some twerp commenting on the FT site isn’t representative of anything. I’m a bit more perturbed that people in Germany seem to take Hans-Werner Sinn seriously. As to languages spoken by US economists, what do such people imagine Olivier Blanchard’s first language is? Where do they think MIT got Rudiger Dornbusch from?

  32. The “skills gap” is a myth: why are businesses expecting the educational system to give them *exactly* what they want? There was a time when companies used to invest in people, and were prepared to take people on based on potential and provide training. Now, if you look at job ads here, companies expect you to be already doing *exactly* what they want, or don’t bother applying.

    They’re also “front-loading” job ads with extra skills to reduce the numbers of applications they get, even if such skills could be easily picked up. (I saw one the other day that required years of experience in Netscape Navigator!). Companies are spoiled rotten …

  33. Krugman’s plan amounts to yet another scheme for the western world to grow its way out of debt. But the true genius of his plan is that if it fails, it leads automatically to the other way out: inflation.

  34. @grumpy,

    What is truly galling is that, while the bumph you quoted is pretty characteristic of most of those who work in the more exposed sectors, the attributes, characteristics and processes described are employed in the sheltered sectors to obfuscate, to justify the unjustifiable, to attempt to suspend disbelief indefinitely, to project and sustain optical illusions and to protect existing power relations.

    It really is a tale of two Irelands. The latter, for all its whimsy and charm, is destroying the former.

  35. @MH
    re: On the Neri thread, I presented facts rather than morality and so nobody has bothered responding.

    My comment was aimed at the following remarks on that thread:

    @ Tullmcadoo “The main conclusions are please leave our egregious public sector rents alone..” and

    @ Paul Hunt
    “These reports were flagged up on the Progressive Economy blog – which seems to b the natural home for stuff like this – under the heading “Invest and do not further harm”.
    Rather than your won comment which I happen to largely agree with

    “It’s five years since the music should have stopped at Ireland’s ecstasy party. It has devastatingly for some but the status quo remains intact and another two years on the fiscal consolidation program would even slow the baby-steps towards reality that have been made. ”

    But it is quite possible to follow the Krugman or Neri approaches without borrowing large amount of money.
    Top level public service pay should be cut drastically in my mind and the money saved should be used to fund labour intensive infrastructural projects.
    The real disappointment of the NERI report was that this approach was not put on the agenda. It certainly will not be put on the agenda by policy makers. When it comes to cuts, there are some cuts about to happen that will affect mostly private sector employees.
    These are the new pension arrangements that come into place in Sept of this year and of course Joe Duffy’s 49ers ie., who would have got the State Pension (Transition) paid at 65 but from Jan 1st 2014 this will no longer be paid. They will have to live until 66 to get the State Pension (Contributory) and if born after Jan 1st 1955 will have to live until 67 to get the State Pension (Contributory).

    All of these people are by and large private sector people and frankly the are being scréwed over, while CPA etc rides on.

    Now imagine that being taken from our dear elected representatives or Secretaries -General.

    As to the pension cuts coming in Sept of this year:
    http://www.citizensinformation.ie/en/social_welfare/social_welfare_payments/older_and_retired_people/state_pension_contributory.htm

  36. @Kevin Donoghue

    Shay, to be fair, some twerp commenting on the FT site isn’t representative of anything

    That sounds more stern than fair and I take your point. Anonymous poster full of dung shocker.

    That having been said, and hoping not to come over like the moustache, but I had the distinctly uncomfortable experience of sitting near a young German man on a train recently who spent at least an hour explaining to a passenger trapped by him the importance of confidence and discipline in economics and how the feckless Southern European’s had it coming. He held out some hope for Ireland as we had the benefit of being a former colony of the UK and hence had had the right attitude towards authority properly inculcated into us at a crucial stage of cultural development.

    He seemed well spoken, reasonable and well educated but he was clearly a market fundamentalist on what would have been considered the far right just a few years ago and he seemed more than a little short on human empathy.,

    The European political atmosphere is toxic now, the idea of the “undeserving poor” is being rehabilitated and as responses in the thread show the right remains convinced that the states let down the markets down and need to be punished.

  37. @SB

    The return of the undeserving poor is desperate. It’s really marked in the UK. Meanwhile How to Spend it magazine goes from strength to strength. Totally unrelated, of course.

  38. JR,
    re-allocating expnediture from the top end of the PS and some hold over L’Oreal projects in the current capital budget to do labour intensive projects is a good idea. There might even be a few of Dorl’s beloved light railways worth looking at.

    BTW did you see Mr Sneaky Howlin’s amendment y/day. Up to know the former Oireachtas royalty were in receipt of two pensions-TD/Senator plus Minister-both exempt from USC on the first 12k of each. This is now one combined pension. It is not much but it is a start. Carry on Minister.

    PS, the German Chancellor is now called the 999 Fraulein in the best circles.

  39. @V Barrett

    As an American the Irish health service is pretty good. But those from Europe find it less impressive.

    @brian t

    That’s partially true. There are places that want a checklist of specific skills – good places to avoid working I’d note. But finding people who have experimented and hacked around on things is hard to find and doesn’t seem to be encouraged. Look at the reaction to the drones a week or so ago.

  40. Stephen Kinsella wrote,

    There are lots of things in this piece I agree with, but two big ones are:

    1. Placing the blame for the crisis at governments’ feet makes no sense. The crisis didn’t start in the public finances, it began in the private sector(s).

    Not at all Stephen. Wrong, wrong, wrong, wrong.

    At least, not in Ireland’s case. In Ireland’s case, the government being deprived of its access to levers which could be used to manipulate its own local part of the European union, from an economic perspective – were encouraged to experiment with other, more dangerous types of levers – for which there was no instruction manual and very little authoritative experiences available.

    I always get back to the notion of the controlled market in the former USSR. When you take the ‘market’ out of the equation entirely, the figurehead at the top, is mandated by their elector still to demonstrate their potency and virility – to put on the display so to speak. Therefore, rather than announce incremental changes to base interest rates, in the USSR, the grain harvest numbers from the Ukraine served much the same function – from a public relations point of view – in terms of showing off the ‘strong leader’.

    In the absence of local monetary policy adjustments in the Irish economy, the Irish government began to become much more vocal on aspects of local economic policy, that they had ever been before.

    Hence why you could witness a ‘strong leader’ making strong pronouncements in relation to assets like property. Those who argued the numbers were encouraged to slit their throats. The numbers of residential units produced within the Irish economy, because the same as the Ukrainian grain harvest numbers within the former USSR.

    In terms of the budget policy announcements, we witnessed a similar raising of the ante from our ‘strong leaders’. When you take away from the Irish government, an ability to adjust monetary policy, you force their hands to wander over some of the more un-predictable and dangerous knobs and levers on the economic control panel.

    The minister for finance announced that, when I have I will spend it.

    This was to compensate, for the loss of virility and potency on foot of loss of localised monetary policy control. There had to be extra chest thumping and fist pounding in other areas of economic policy PR, to compensate. It is akin to having a really bad set of audio speakers, which can’t quite make the base tones, so you have to turn up the ‘volume’ in order to compensate. That is what we witnessed with the Irish government.

    Of course, by pushing property, and by fuelling the flame through the budget, the government was effectively borrowing through the increased consumption rates of its citizenry. I agree with Lautenschläger & co., at the Bundesbank. Their analysis is extremely well on the mark. BOH.

    Speaking at a Bundesbank conference in Frankfurt, she said banking union without fiscal union would, in particular, benefit banks in weaker economies with higher refinancing costs. If those banks then bought more of their own countries’ sovereign bonds, they would, in effect, pass on cheaper refinancing costs to their domestic governments, Ms Lautenschläger said.

    http://www.irisheconomy.ie/index.php/2012/06/12/bundesbank-on-banking-union/

  41. @ Stephen Kinsella,

    By the way, the more impressive the grain harvest numbers (output of residential construction) became as the time progressed, the further and further away the ordinary joe soaps began to feel from being ever able to afford a loaf of bread off the shelves (a two up, two down). BOH.

  42. @Bryan T

    +1 I heard a software exec admit exactly that to me last year. – they are just too tight to pay for grads and train them up.

    He also complained about all those girls getting their 27 A’s in the leaving cert and then doing law instead of computer science.

  43. The NERI Chart does indeed refer to total domestic demand and not final demand. There can be considerable fluctuation in the value of stocks from Q to Q. The pattern since late 2007 is clear. Next week will tell a story for Q1 of 2012. Of course the existing 2011 quarterly estimates may be revised. The overall trend is not supportive of an EFC hypothesis. is there space for a stimulus here and what about import leakage? further empirical evidence is needed. however, the assumption low multiplier values for all types of spending in all sectors of the economy is not robust. I-O tables are suggestive but significant …

  44. @Shay: “That sounds more stern than fair and I take your point. Anonymous poster full of dung shocker.”

    Ouch. Didn’t mean to be sanctimonious. Always enough of that around here! Elsewhere on the casual empiricism front, I noticed some anti-German feeling in the pub during the soccer. Italy 2, Germany 1 was considered satisfactory, but there was a feeling that 3-0 would have been better.

    All in all, I think the break-up of the Eurozone, if and when it comes, will be better for EU harmony (once the dust settles after a very destructive bang). Better that each nation takes reponsibility for its own currency and its own economic destiny, for better or worse.

  45. I think this thread has a useful example of the displacement activity going on in place of actual analysis in the minds of the right.

    Krugman and Layard have a solid case expressed in a very short document and even if Ireland can not engage in a stimulus it still serves as a useful corrective to the increasingly convoluted narrative of the right (and by implication Europhiles ) about how the financial crisis started and how it might it be mitigated.

    Which brings me to:

    @John Foody

    It’s a market failure but why didn’t this market failure engulf Finland? or Germany? This mess was 100% within our power to prevent.

    Germany is the largest economy in Europe and most powerful player in European politics, it is not in trouble because the monetary and economic policy of the EU is much more closely matched to its needs than to the economic requirements of other countries (the 1.1 billion of unsecured bank debt Ireland paid yesterday is a testament to this). This is Germany’s EMU, we just bleed in it.

    Finland is a more interesting case, perhaps their economic stability is a result of their high levels of unionization or taxation or their formerly close relationship with the Soviets?

    Anyway after we remove Germany and (reluctantly) Finland from the mix we come to the other countries badly affected by the market failures of the global financial crisis. Spain, Italy, Cyprus, Greece, Portugal. Did they all make the same mistakes as Ireland or is it just a really unfortunate coincidence that the Eurozone countries not bordering Germany are in serious trouble? Spain seems to be in a very similar bind to us, yet as Martin Wolf noted in the FT is it difficult to see how they sinned or what they could have done differently.

    If Spain could not escape the effects of the European component of the global financial crisis why do you imagine Ireland could? If its not their fault why is it ours?

    Then when it occured it was mostly within our power to contain. How did we use the power, with glacial reaction speeds culminating in the Bank Guarantee. One of the biggest failures of parlimentary democracy anywhere ever.

    If I have got the logic right here the efficient financial markets were let down by the stressed banks who were let down by the weak government who were led astray by the selfish voters and the global financial crisis is really the fault of the voter (or the politician who failed to ignore them).

    In short all of the blame lies with our government for allowing the market to fail within it’s borders and most of the blame lies with them for not letting the market react to it’s own failure when the time came.

    Oh did the poor liitle markets get let down by the government after years of intense and successful lobbying for less regulation? Evil government. Poor poor market.

    Unfortunately John Foody is not alone in this thread, the right of the political spectrum in Europe is getting every bit as crazy as the one in US.

  46. @ Shay Begorrah

    Another day and more revisionism to fit a particular view.

    The factors behind big economic changes cannot be reduces to soundbites.
    Some day, there will be eejits in pubs promoting Ahern, Harney and McCreevy as victims who vainly tried to overcome foreign tsunamis.

    As has been said recently, both Spain and Italy have had youth unemployment problems for 40 years; Spain’s record unemployment rate in recent decades was in 1994, five years before the launch of the euro.
    Italy, Spain and Greece have had trade deficits with Germany since at least 1980 — 20 years before the euro launch. The International Monetary Fund (IMF) says the euro is a continuation rather than a structural break and the Fund’s statistics show that since 1999, Germany’s trade surplus with the rest of the world has grown faster than its surplus with the other Eurozone countries — and faster still with European nations that have not adopted the euro.

    Italy’s unemployment was higher thin 1996 than it is now.

    Deregulation in the financial sector should not be confused with globalisation or ending monopolies in other sectors.

  47. John foody
    I think the argument is that Massive unimpeded flows of capital brought the crisis on. All things considered it’d be a bit strange for Irish and Spanish capital to be flooding in Germany , Finland & holland in search of a quick buck .

    And of course when the music stops then countries are left with a load of debt in a foreign currency . It’s similar enough I believe to the experience of Latin america in the 80s and Asia in the 90s.

  48. The big issue with the Krugman argument has been neatly identified by Ahura Mazda already.

    Whether fueled by public or private borrowing, the level of economic activity in Ireland was (i) unrealistically high (ii) consisted of loss-making construction investment (iii) took place at inflated prices, thus distorting the overall picture.

    It may not be sensible to try to view a return to that level of activity. Even more pertinent, it’s almost certainly hugely destructive to try to do it by borrowing money.

    Meantime, Ireland’s state is still spending money as if it was 2007. It’s not.

  49. “1. Placing the blame for the crisis at governments’ feet makes no sense. The crisis didn’t start in the public finances, it began in the private sector(s).”

    The government was pump-priming the property sector (because corrupt politicians got in bed with construction sector buddies) creating a boom fueled by cheap currency which was a political project with many economic flaws as we can see today. All the time the national and the EU regulators fast asleep for various reasons. Then when the trouble begun, rather than letting private banks fail and foreign banks fill in the gap, the national politicians stupidly (and most likely talked into this move by EU) transferred the vast bad debt on to the taxpayer’s back. The EU sealed the deal making it irreversible and insisting (to the dismay of many) that all debt be repaid. So tell me, Mr. Kinsella (and by extension Mr. Krugman) where is the blame?

  50. “Supreme Court upholds Omaba_Care”

    Thankfully at the same time preventing the state making it mandatory for all to purchase the insurance and also making the Congress fund this program from tax rather than some fudge proposed by B. Obama. So now let’s see the Democrats defending tax rises.

  51. Its the economic Model-in-Use is the problem. Sure, some of the components are dodgey and some of the operators incompetent but when an economic system as complex and tightly coupled as ours is goes awry its behaviour becomes chaotic and ‘normal’ responses are either too late or more usually inappropriate. In effect they make things worse.

    I have mentioned this several times before about the nature of the current economic Model-in-Use known as Permagrowth. This model has two versions, the real one and the virtual one. The former is controlled by the laws of physics, chemistry and finite resources. The latter is based on the rules and logic of maths. This is the model in the heads of pseudo-economists. It cannot fail. But the real model is emedded in a physical and finite setting and will fail and it is failing. Real economists have been warning about this eventuality for five decades.

    The Manifesto is a dopey document. Reads well, but analyses poorly. Its nice to see both the Rectal Right and the Looney Left being equally wrong – for quite different reasons. “Its yer model lads! Yer model!”

  52. Ahura Mazda: “Given the bubble, the 2007 starting point isn’t exactly the sustainable point.”

    Well, what is the sustainable point then? How do you identify it?

  53. @Seamus

    You correctly note that a large contraction in domestic demand is down to the huge slowdown in the purchase of new houses. There are two other sources I would point to.

    1) Bar sales are down nearly 30% over the same period. As Brendan Walsh has pointed out this is not an unambiguous negative for societal welfare.

    2) Motor sales are also down 35% over the period. This does not mean we are able to drive 35% less or 35% of us have lost our cars. It just means a huge slowdown to the rate of growth in the stock of cars, and not a huge welfare loss per se.

    Still, the collapse in sales of new dwellings, new cars and alcohol has resulted in a huge contraction in employment and tax revenue with pretty severe societal and fiscal consequences.

    But I’m not sure what any potential stimulus package would do here. There are good public health reasons for not encouraging an increase in alcohol consumption. There is an oversupply of houses in most parts of the country. And while the stock of cars will have to be replenished some time soon, they will all be imported.

    @Tom Healy
    I’m surprised that you’re pouring cold water on the hypothesis that the marginal propensity to import in Ireland is comparatively high. I thought this was pretty standard, no? Looking at one’s shopping basket it’s hard to find any goods apart from fresh food and (an increasingly small share of) processed food that is produced in Ireland. Far fewer services are imported of course but many of these have low income elasticities (utilities, insurance, childcare, etc). Hospitality is of course the exception for services with a very small import content however – do you suggest we dine our way to economic recovery?

  54. “Placing the blame for the crisis at governments’ feet makes no sense. The crisis didn’t start in the public finances, it began in the private sector(s).”

    As the most important economic feature of the past decade is the various wars, the lack of a discussion of how they plan to finance an end (win, lose, or draw) for the wars is curious. I will assume that as long as the wars are financed by debt, everything is fine with the manifesto authors. I for one do not think the manifesto can be taken seriously in any respect based solely on this one point.

    In terms of employment in the US the problem is not so much lack of government spending but high healthcare costs, which makes hiring and firing employees difficult.

    Regulations governing how employees can be hired or fired constantly change.

    Even what is or is not legal keeps varying. Can you operate a Medical Marijuana dispensary in the state of California, where it is legal? Who knows, who knows a month from now, a year from now, who knows? That is one controversial business, but the problem exists everywhere. In summary, I think the anemic jobs creation is not because there is not enough money in circulation, I think it is because of unpredictable laws that make it illegal or impossible to operate a business.

    I guess some will consider my marijuana example to be an outlier. US Dentists are in a pitched battle against teeth whitening done by anyone not directly supervised by someone who spent 2 decades in increasingly expensive schools.

    Teeth-whitening and the law
    http://truthonthemarket.com/2011/11/17/teeth-whitening-and-the-law/

    This little example should illustrate why US healthcare spending is so enormous. Just imagine the fuss if teeth cleanings were to be done without a full fledged dentist supervising.

    “Cathy Harding, executive director of the Kansas Association for the Medically Underserved, was disappointed that the task force didn’t endorse allowing registered dental practitioners in Kansas. The practitioners would be trained to work in underserved areas and perform routines services such as cleanings and fillings under the supervision of a dentist.

    Read more here: http://www.kansas.com/2012/06/22/2383083/task-force-suggests-first-kansas.html#storylink=cpy

    Needless to say registered dental practitioners are a form of employment. No amount of Keynesian stimulus will create one registered dental practitioner as it is illegal.

  55. i don’t understand the Krugman petition. Oppose austerity in general terms is fine, but when a government has to borrow from foreigners to fund deficit spending how can it “decide” against austerity? It seem, to me at least, that the list of “non real world” assumptions embedded in the proposition is so long, it is useless. In Europe the petition to oppose austerity is essentially a petition to make Germany spend to support both the public and private sector of bankrupt entities, without any assurances that this money would be repaid. How is that viable?

  56. @Bklyn_rntr: when a government has to borrow from foreigners to fund deficit spending how can it “decide” against austerity?

    It can’t and K+L are well aware of that, not directing comments at bust gov’ts.

  57. but then the whole piece falls down. There is no need to stimulate Germany’s economy because it is doing fine and already there are huge stimulus effort in the US and UK (at least when fiscal deficits are considered). The debate about reducing the deficits, targeting the spending etc etc are not necessarily against stimulus.

  58. @ Kevin O’D

    You ask how to tell which is the sustainable point. As you know, that’s difficult. However there seems to be consensus that 2007 wasn’t it.

    And yet we’re still using it as the index for deciding to borrow lots of money.

  59. UK fiscal deficit expected at 8.3% in 2012 and US deficit at 10% following three years in which deficits were unprecedented with the exception of WWII. We can argue about where the money is going, but it seems peverse to suggest that government is not “stimulating” the economy in the sense that it is supporting growth or reducing contraction.

    The straw man “austerity” is a compelling argument but governments are spending a lot already and those that aren’t are reducing deficits because they can’t borrow. Stimulus in the US, UK Japan and even Germany, is not helping Spain, Greece, Portugal Italy, or Ireland. Yet default by these countries would be disastrous because it would destroy the banks in the large economies (US, UK, Germany and France at least).

    I can see how “stimulus” sounds good, but it is not relevant beyond what is already happening as far as I can tell. The problem today is an excess of unaffordable debt, not a shortfall of animal spirits. In three years, after the debt issue is resolved, the animal spirits problem can be addressed, but not before. Anyway… no doubt time will tell….

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