Response from Holland and Portes

This post was written by

Dawn and Jonathan have been kind enough to reply to the post below.   Many thanks to regular commenter David O’Donnell for bringing the post to their attention. 

We are grateful to John McHale (and others on this site ) for these very thoughtful comments.

First, we should emphasise that NIESR does not have the detailed specific expertise on the Irish economy of many of those commenting here: given that NiGEM is a global macroeconometric model, the Irish economy component is inevitably quite stylised, and can’t take account of some of the specific features of the Irish economy which John and other commenters have rightly highlighted. The fact that our calculations suggest that fiscal consolidation is less damaging in Ireland than in other countries reflects relatively low estimated multipliers, even in current circumstances. But the NiGEM multipliers may well overstate the extent of import leakages, given the specific structure of Irish trade, so actual multipliers might be higher than our model estimates suggest. We should also note that the fact that, in contrast to other countries, our estimates suggest fiscal consolidation has in fact reduced debt-GDP ratios in Ireland does not any measure imply that we think it was the optimal policy (see below).

There are two important general points John makes.

First, he points out that while our simulations show that debt-GDP ratios will be higher in 2013 (in all countries except Ireland!) than they would have been without fiscal consolidation, primary deficits will be lower, and in the long run the binding solvency constraint is the intertemporal government budget constraint. This is absolutely correct. Postponing fiscal consolidation doesn’t mean that it isn’t ultimately necessary in EU countries – almost all of them – that have significant structural primary deficits. The main point of the paper is that the negative impact on GDP, and hence on the amount of consolidation required, is much larger if you frontload consolidation during a period when multipliers are much larger. Later consolidation could have been both smaller and less damaging. We have not attempted to illustrate such an alternative path (and of course the “optimal” path depends on future economic developments) but certainly delaying would have been better. This is also true for Ireland.

Second, he notes that we omit any analysis or discussion of hysteresis. We agree entirely that this is a very important issue when considering the impact and timing of consolidation. In an earlier paper, Bagaria et al (see Vox here) we perform a similar, but more detailed, analysis for the UK, incorporating labour market hysteresis effects (but ignoring spillovers). In this (in contrast to Delong and Summers), we do exactly what John suggests, which is to assume that hysteresis effects matter but decay over time. Ideally we would indeed do the same for Ireland and other EU economies, but this is a somewhat more complex exercise.

21 Responses to “Response from Holland and Portes”

  1. grumpy Says:

    Very appropriate thread to start.

    Here’s one I prepared earlier.

    That suggests the earlier thread on this blog should have been more like:

    “Self Defeating Austerity? Not in the Authors’ view – but it might be an idea to finesse the timing, if funding were available Ireland, Apparently”

    So, as you were then.

    I wonder what Portes and Holland would make of the potential multiplier effects ion a situation like Ireland where a certain amount of fiscal consolidation has to be implemented because of external funders’ programmes and the choices are roughly:

    1 Raise taxes
    2 Cut quality and quantity of public sector service provision. but continue to gradually increase public sector pay and keep a near staff veto on redundancies and reform.
    3 Cut PS pay along with services and allow management to impose efficiency enhancing reforms.

    What are the respective multipliers? (Hint, you are not alowed to pretend public services do not have real value to the economy and therefore can be cut with a multiplier set to zero).

  2. Eureka Says:

    Well thank God all that unemployment and general misery is paying off..! Not

    http://www.rte.ie/news/2012/1102/exchequer-records-2-9bn-deficit-in-october-business.html

    Does anybody know what the trend in the amount of interest repaid has been over the past few months and what it is likely to look like in the next few months?

  3. David O'Donnell Says:

    @All Economists around here

    ‘Spose there is only one real challenge: REPLICATE the analysis of Dawn Holland/Jonathan Portes for Ireland:

    First run: Use Irish GNP rather than GDP.

    Should be a doddle – not as complex as writing a theoretical justification for Angela’s Fiscal Korset which appears to have stumped all Irish economists!.

    Then maybe onto multipliers etc but I’m most interested in the results from using GNP rather than GDP.

  4. Fiatluxjnr Says:

    @Eureka
    “Does anybody know what the trend in the amount of interest repaid has been over the past few months and what it is likely to look like in the next few months?”

    All I can tell you is that the trend is relentlessly upward given the ever increasing debt pile as the link shows.
    We will have to wait to see how much we are whacked for next month before we can judge the likely trajectory. Remarkably quite out there on the budget. All kites flown?

  5. DOCM Says:

    @ grumpy

    Indeed!

    Two further items from the real world given that the theoretical one is unlikely to lead to any particular conclusion.

    http://www.independent.ie/opinion/columnists/brendan-keenan/brendan-keenan-merkel-will-help-but-we-have-to-do-our-bit-3280302.html

    http://www.irishtimes.com/newspaper/opinion/2012/1103/1224326088581.html

    I have used in the past the metaphor of an incoming tide raising all boats, including the bloated ones that deserve to remain permanently where they are. It seems unlikely to arrive on this occasion, as it has in past self-inflicted economic disasters, even if, to stretch the metaphor a bit, many have lightened the boat, again as in the past, by emigrating.

    And for two reasons (i) no external economic up-turn is on the horizon and (ii) that advanced by Brendan Keenan.

    That is not say that the economy is not righting itself. It is. But not through any assistance from those nominally in charge of it other than through, perhaps, the paradox of faux austerity, a policy being adopted through weakness and self-interest rather than ability but which may, almost accidentally, be the best policy available. Hence the lavish praise from our creditors.

    As long as the general public are willing to put up with it.

  6. Bond. Eoin Bond... Says:

    @ Eureka

    October Is by far the biggest ‘coupin’ month for Irish government bonds, followed by April. There are no coupon payments due in Nov or Dec that I can see, but I’m not sure about EFSF (complete mix) or IMF (forget which month int falls due), but should be relatively small in comparison.

  7. Shay Begorrah Says:

    @DOCM

    Two further items from the real world given that the theoretical one is unlikely to lead to any particular conclusion.

    The Judge says that though this is a nice attempt to confuse the difference between “theoretical” and “analytical” it is disallowed.

    The recent work on the negative effect that fiscal consolidation is having on the EU is no more theoretical than anthropogenic climate change or the link between smoking and cancer (which was also denied for years by the right).

    The last piece of research by the IMF on the likelihood of fiscal multipliers being above one was the result of statistical analysis and not a new theoretical model at all. It can not be dismissed as theory (though many of the attempts to refute it are just that and many of them invoke the confidence fairy).

    Dawn Holland and Jonathan Portes analysis has a theoretical basis but it is merely a more sophisticated version of the one normally used to justify austerity!

    Holland and Portes make projections from their model that the reality based community already accept – if Eurozone policy is not changed from the existing “neoliberal faith” approach things will get much worse.

    As Holland and Portes note.

    The direct implication is that the policies pursued by EU countries over the recent past have had perverse and damaging effects.

    Our experience in Ireland suggests that Holland and Portes are being too conservative in their analysis but even if Ireland survives the current policy so it can be leeched by Europe’s banks the EU as a whole, which we have an interest in protecting, needs to be purged of the dangerous neoliberal cult that is destroying it.

    That work starts at home and I humbly suggest that the non repayment March’s three billion Euro Anglo repayment be the first step.

  8. brian lucey (@brianmlucey) Says:

    hmm Grumpy
    Rather a partial list there.
    Governemnt can work on the following, and each on their own and in combination will, in theory and practice, have different multipliers. these will also change as whether we “up” or “down” the instrument, and also the magnitudes and even signs will depend on the state of the economy
    a) income tax on workers
    b) income levies on employers
    c) corporation tax
    d) capita tax, stamps and so on
    e) consumption taxes
    f) capital spending
    g) current spending on services
    h) current spendin on wages
    i) non voted capital spending (aka the wretched prom notes)
    j) debt service costs

    and im sure iv missed others

    So, yeah, we have a complex problem.

  9. David O'Donnell Says:

    … a complex problem; and context, time, and timing always matter. This is more like it. Should we bid adieu to the neopositivists penchant for the universal?

    @all bit off thread & @Herr Professor Sinn & The ‘jolly’ local Professor

    TARGET2 as a scapegoat for German errors
    A systemic Eurozone breakup would be the mother of all financial crises. This column – a rejoinder to Hans-Werner Sinn’s recent column – agrees that Germany would lose massively from a breakup, but argues that the ultimate source is the €600 billion current account surpluses it ran with other EZ nations during the good years, not the TARGET2 system. German banks lent vast amounts to peripheral countries without doing a proper credit analysis. No one other than Germany itself is responsible for taking on these risks.

    http://www.voxeu.org/article/target2-scapegoat-german-errors

  10. Brian Woods Snr Says:

    @ DOCM: “That is not say that the economy is not righting itself. It is.”

    I have grave misgivings about any ‘growthing’ of our economy. We have to wait until this time in 2015 before the situation may be sufficiently stable for us to judge how far we have regressed economically. We have a substantial excavation and the JCBs are still digging!

    If we land up in the mid-1990s we have in effect ‘lost’ 20 years of ‘growth’. That’s not small potatoes. And I doubt we would ever be able to ‘recover’. Then, the entire effort will have to be to prevent any further regression.

    To ‘recover’ we need to increase the number of folk in non-public service full-time employments – especially in manufacturing. We have to create proportionally greater numbers of jobs which have pay rates above the median and this seems somewhat improbable. Creating jobs below the median is welcome, but will do little to arrest our economic regression.

    The banner headlines trumpeting an upturn in US employment need to be treated with all the respect and caution you would give to a piece of unexploded ordanance. Wait until next June – then see. An 8% increase in manufacturing (a key US employment sector) is very modest – and you would have to know which states were benefitting and whether the pay rates were above or below the median for the sector. Caveat lector.

  11. grumpy Says:

    @Brian L

    Indeed it is very incomplete list – but the point is that it is time to acknowledge that there IS a LIST and that multipliers VARY.

    The reason I focused on a fairly short one is because I find it remarkable how some people are attempting to zoom in on the negative effects of potential cuts in public sector pay or increments, while forgetting that protecting these items often requires additional cuts to quantity and quality of service provision – because the overall envelope is externally defined – which have their own set of complex multipliers (but which there aren’t good papers on, so those who don’t need to rely too much on public services often prefer to ignore) .

    It is not edifying to see what might in reality even be right wing ideologues in the public sector latching on to “multipliers” as pretend socialists as a way to defend their own terms and conditions, while implicit in their argument is that the services that will have to be downgraded to facilitate this are of little value to the economy and should be preferentially targeted.

    @ewi

    I didn’t think you would have any idea. Thanks for the confirmation.

  12. brian lucey (@brianmlucey) Says:

    @grumpy
    acknowledging the existence of multipliers and seeking people to work through them is not quite the same as arguing for one or another route. But, in the absence of knowledge about these, then what is one to do?

  13. Michael Hennigan - Finfacts Says:

    @ Eureka

    Interest rates here as % of GDP on page 27:

    http://www.finance.gov.ie/documents/publications/other/spuapr2012.pdf

    The report notes that “it is important to also bear in mind that the GGB estimate for 2013 makes allowance for some €1.9 billion, or over 1% of GDP, in interest on the Promissory Notes.”

    @ All

    The Stability Programme Update 2012 referred to above notes:

    While taxation receipts in 2012 are projected to be just above 2004 levels, the gross voted expenditure of Government Departments and Offices in 2012, at an estimated €56 billon, is projected to be 37% above the level it was in 2004, despite the very significant adjustments to both revenues and expenditure since mid-2008.

    While the gap between the State’s revenues and expenditure is clearly on a downward trajectory, it remains at an elevated level and it will need to continue to be addressed by economic and fiscal policy over the coming years.

    The current estimate of the Exchequer deficit or EBR for 2012 is €18.7 billion, almost exactly in line with the Budget 2012 estimate, notwithstanding some compositional changes (see table 12).

    While US growth has been low compared with post 1945 recoveries from recessions, two macroeconomic forecasts project that the economy will add roughly 215,000 new jobs per month over the next four years.

    The monthly natural growth of the workforce is about 120,000.

    With the latest jobs report, current figures show the total number of payroll jobs at 133.8m up 194,000 from January 2009. Private-sector payrolls are up 759,000 since January 2009. Government jobs are down 565,000 during President Obama’s period in office.

    The US economy will grow moderately in coming years and it does not help that the inflation-adjusted real pay of the American male worker today is at the same level as it was in 1970.

    Growth in emerging economies may well slow and a recent pessimist noted that “historically, flashy countries that grow at five percent or more for a decade — such as Venezuela in the 1950s, Pakistan in the 1960s, or Iraq in the 1970s — are usually tripped up by one threat or another (war, financial crisis, complacency, bad leadership) before they can post a second decade of strong growth.”

    Ireland has no obvious jobs engine with jobs in the FDI sector at a 12-year low.

    Excluding the bubble, there was effectively NO growth in the past decade.

    Officially, the ‘knowledge economy’ project is a success but as during the years of delusion, the so-called ecosystem comprises: political leaders relying on faith rather than evidence; vested interests in the public and private sectors; an Oireachtas (parliament) incapable of holding to account the beneficiaries of science spending of €23bn (at constant prices) in the past decade and strikingly, a media where most Irish journalists that cover the area, show symptoms of Stockholm Syndrome.

    This is why real competitiveness gains, not fake productivity rises based on the likes of Google booking sales in countries such as the UK and France as Irish output, are achieved.

    However, the insider beggars on horseback retain their privileges while it’s rare at best to have the challenge of addressing long-term unemployment of 188,000 people.

    Burning bondholders and maybe private sector workers with pensions can set the heart racing but wonder at the lack of outrage when the scrounging is close at hand?

  14. grumpy Says:

    @Brian l

    One is to:

    1. Help public and politicians understand that the exitatance of larger multipliers than many official sector economists had wrongly brainwashed them to believe in does not translate as “the IMF now implicitly support high public sector pay and don’t think it appropriate to reduce it” .

    2. Help them understand that unless the external budget constraints imposed on programme countries are altered by external creditors, then there os no option to opt out of contractionary contraction, and that it is not reasonable to assume cutting quality or quantity of public service rather than pay is always the right choice because there is a negative multiplier effect from pay cuts, but there isn’t one from service reductions.

    The contractionary policies are going to be implemented and the prioritisation of PS pay over service provision is neither economically imperative nor socially just.

  15. Brian Woods Snr Says:

    @ grumpy: Sometimes a little reading sheds some illumination. This from Veblen (1921).

    “Doubtless the underlying population (the Irish sheeple) can be counted on stolidly to put up with what they are so well used to: more particularly so long as they are not in the habit of thinking about these things (the change from industrial production in favour of financialization).”

    Those dastardly Multipliers are a load of crap! The basic measurement metrics G*Ps are unreliable (the std devs of the Base-line (noise) measurements overlap with the std devs of the Decision-limit measurements). Very useful if your a politician or a member of a vested-interest group: otherwise useless. “But sure what the hell: use the b*****s anyway!” The sheeple are grazing contentedly! Just yet!

  16. DOCM Says:

    @ BWS

    You may be right. But, from simple observation in my neck of the woods, there is a palpable change in mood.

    While I canot claim to understand the technical niceties of the various exchanges (although I do agree with the central point being made by grumpy), the most striking element in the expert contributions seems to me to be the following;

    “The main point of the paper is that the negative impact on GDP, and hence on the amount of consolidation required, is much larger if you frontload consolidation during a period when multipliers are much larger. Later consolidation could have been both smaller and less damaging. We have not attempted to illustrate such an alternative path (and of course the “optimal” path depends on future economic developments) but certainly delaying would have been better. This is also true for Ireland.”

    I think that, in fact, the delay referred to has occurred.

    Incidentally, Merkel has just told a party meeting that it will take five years to correct the causes of the crisis i.e. a convenient period which would see her in office from her re-election in September 2013. However, the downturn will be biting even more strongly in Germany during the pre-election period and the next German government will IMHO be a coalition of the CDU/CSU and the Greens or another grand coalition (CDU/CSU and SPD). (There is a certain predictability about this to the extent that traffic light variations are used to describe the changes in the composition of government. The interests of Germany are so tied up with the rest of Europe that it has become a kind regional metropole where the interests that keep the parties together far outweighs anything that might divide them).

    I wonder what the “multiplier” for Ireland might be in the event of the UK departing the EU!

    http://www.ft.com/intl/cms/s/0/2e9eb33e-241b-11e2-94d0-00144feabdc0.html#axzz2AxTShVHC

    @ MH

    Not a good parallel as regards Irish journalists! I would suggest a sporting parallel instead; of a mediocre corps of press marking an equally mediocre political class. Michael McDowell has remarked on the myopia of the Irish media in general as far as developments in Europe are concerned. (There are, of course, some very significant exceptions, two of which I have linked to above).

  17. Joseph Ryan Says:

    Re: Colm McCarthy (Sun Ind Nov 4th)

    http://www.independent.ie/opinion/analysis/colm-mccarthy-lets-write-off-monetary-union-and-start-afresh-3281706.html

    A Walter Cronkite watershed statement perhaps?

  18. DOCM Says:

    @ Joseph Ryan

    I rather doubt it. There is a difference between being “special” and “unique”. The import of the joint Merkel-Kenny statement, clearly evident from other statements by German leaders, is that Germany is willing to assist, which is light years away from any perception that it will be an obstacle. How Germany will assist remains to be established but the direction is clear.

    Coincidentally, I came across this perceptive article by the Brussels corrrespondent of the French newspaper La Tribune, on the broader context and the “Merkel method”. (Google Translate provides a decipherable translation).

    http://www.latribune.fr/actualites/economie/international/20121102trib000728683/angela-merkel-une-tsarine-et-ses-generaux.html

    Merkel is to make a general statement on European policy before the European Parliament on Wednesday. She is setting the European agenda and time-table. It would seem wise to take some note of the fact.

  19. Shay Begorrah Says:

    @Joseph Ryan on Colm McCarthy’s slow but inevitable integration into the reality based community.

    A Walter Cronkite watelshed statement perhaps?

    Lets hope so.

    It is a terrible shame that in our time of need most of Ireland’s published journalists and pundits are basically neoliberal schills (Ireland Outside the Euro anyone?). Colm’s conversion is welcome – if a bit late (before the Fiscal Compact would have helped).

    The crucial thing for us now is not to be distracted by talk of politics, mood and favours in the imperial court but to take action based on principle and national self interest. We are in a struggle for independence again. We know, beyond a shadow of a doubt, that Germany’s economic thinking is fundamentally flawed, that the the major EU institutions share it and that EMU as it stands now leaves Ireland with responsibility to the German bloc and the ECB but effectively no power over them.

    We can not be good Europeans given that the current “Europe” is not good (Surely the fifty Euro note’s imaginary architecture should be the Bridge on the River Kwai)

    The Eurozone is simply not a survivable environment for the smaller nations not bordering Germany- wur future is as vassal states and economic dumping grounds for the reactionary and right wing self styled core EU.

    Euro-Panglossians should remember that the next ECB head could be less pragmatic that Draghi or that Draghi himself (ex Goldman Sachs and impeccably conservative) could ally himself even further with Berlin. Schaeuble is still there and the CDUs brutal and brainless fiscal blockade of the peripheral states has only made Merkel more popular at home (she really is the EU’s Thatcher and the effect she will have on the periphery will be every bit as awful as the effect the Iron Lady had on the UK’s industrial north – there are no CDU voters in Limerick or Porto). Despite all the recent debunking of the case for austerity in the EU its supporters remain unapologetic – these are fanatics.

    There have to be few people left now who are not lobbyists, Germans or the extreme right wing who would suggest that things would not be better of we had confronted Germany and the ECB earlier but we did not.

    So the question is “Are we ready to end the failed policy of German/ECB appeasement and confront its supporters here?”

  20. Fiatluxjnr Says:

    “Any settlement of the European debt crisis will have to include writedowns, as well as transfers of liabilities from individual countries to the eurozone as a whole. Ms Merkel finds this distasteful, and she’s right.

    She may indeed accept that Ireland is a “special case”. But any ultimate settlement for Ireland will come with severe conditions. So here’s a question: will Germany, or any nation, be more kindly disposed towards a country that is making a determined effort to govern itself rationally or one that is irredeemably misgoverned as well as bankrupt?

    I have a horrible feeling that this question has not even occurred to the present keepers of the “organisational zoo”.”
    http://www.independent.ie/opinion/analysis/keepers-of-this-organisational-zoo-are-blinkered-by-faint-praise-3281079.html

    Says it all.

  21. DOCM Says:

    @ FLJ

    The actual quotation from the OECD report (courtesy Google) is as follows;

    “It is impossible to assess whether or not the size of the agency sector resembles that of other OECD countries. This is due to, not only to the lack of data in Ireland and across OECD countries, but also to the organisational “zoo” constituted by the agency sector across OECD countries that makes it difficult to compare sets of like institutions”.

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