Three things all serious people know are true

The empirical evidence remains pretty clear that debt to GDP of 90%+ has an appreciable and negative correlation with growth – in the order of 1% – even the UMass paper that supposedly debunked the R&R analysis showed that (http://www.bloomberg.com/news/2013-04-28/refereeing-the-reinhart-rogoff-debate.html).

There are also papers from the ECB and the BIS that came to exactly the same conclusion and found turning points around the 85-100% debt to GDP mark. (The google-able papers are The Impact of High and Growing Government Debt on Economic Growth, An Empirical Investigation for The Euro Area by Checherita and Rother and also The Real Effects of Debt by Cecchetti, Mohanty and Zampolli).

While I don’t think its useful to be prescriptive about about whether an economy might start to spiral out of control 80% or 100% debt to GDP, the empirical evidence remains crystal clear that high levels of debt to GDP are associated with lower growth and this has been supported by more than just one line in one table in the R&R paper.

@ Edward v2.0

That is the common sense conclusion which most would arrive at even if they were unaware of the data that backs it up.

What is also being overlooked is that Draghi almost certainly had the unfortunate experience of Monti in mind in relation to Italy and his decision to go the taxation increases rather than cutting expenditure route.

Furthermore, it is difficult to see how cutting wasteful state expenditure is ultimately harmful in the long term even if it has an obvious contractionary impact in the short term. This is being increasingly recognised in the return to the old-fashioned emphasis on borrowing only for productive purposes where the investment can carry the cost of it.

So we can solve our debt and growth problems by raising taxes? Why don’t we simply use a Harry Potter spell?

Reducio!

The third ‘nostrum’, that expenditure cuts are less contractionary than tax increases, is regrettably an idiotic statement by Draghi.

In simple terms, a person earning €300pw must of necessity spend every cent to survive whereas a person earning €3000 per week saves a considerable portion of their income. That saving, at present, is of no help whatever to the general economy but definitely helps to lower the interest rate of bunds etc or sits in bank deposit accounts or even under mattresses.
As for the idea that high taxes discourage investment, I would be rather sceptical. The biggest factor discouraging investment if fear of losing the investment, an outcome virtually guaranteed by the continuance of austerity by the recessionistas.

Again the question must be asked. Who benefits from the proposition. Clearly the better off benefit and the people making the policy and promoting are clearly the better off.
For five years now, policy has been dominated by the interests of banks and creditors. A creditors agenda. The euro has become, and is being forced to remain, a gold standard for creditors.

The idiocy of a creditors dominated policy is perfectly visible every day in SMEs. Any business owner will tell you that it is better to have a continuing business and high and some doubtful debts than to have all your customers close. Maybe you get the debts collected, but in the end that’s it; you shut down too.

Accepted nostrum’s often see to fit the agenda and pockets or the promoters. The doctrine of cui bono should be rigorously applied to all such ‘nostrums’.

Draghi, after a wonderful start, appears to have lost direction. He now looks drawn and haggard. He proposes that he will do what it takes, but he has been fought at every turn by Germany.
Whatever moral standing he had, he lost it in Cyprus. He facilitated the Schaeuble Plan to destroy that country.

The ECB was a rouge institution before he arrived. Apparently it did not have a mandate to do what should be done. Yet, it seems to abrogate for itself a mandate to change governments, to save certain favoured creditors and allocate those creditor losses to countries, to determine within countries how those debts should be spread amongst the population.

Draghi, for all his undoubted ability, has failed to change the rouge ECB. The question is does he want to change it.

@Joseph Ryan

“In simple terms, a person earning €300pw must of necessity spend every cent to survive whereas a person earning €3000 per week saves a considerable portion of their income.”

1. CP II is another way to do this – targets highest paid PS workers who presumably have the option of saving.
2. We have already had large tax increases on high earners in Ireland. The proportion of income over 100k that is retained by the State is well north of 50% at this stage. This is income ie related to effort – should be the very last thing that is touched given the amount of freeloading that still hasn’t been dealt with.
3. How many people earn more than 3k a week in Ireland and how much money would a tax hike on these people raise?
4. People don’t want tax rises. We still live in a democracy although most economists would prefer if tax and spending decisions were made by their models.

If there is to be any let up in ‘austerity’ (although how a country can run a deficit of 7.5% and pretend there is austerity is beyond me – it’s other people’s money we are spending) it should be by eliminating the USC. This would have a dramatic effect on domestic demand. How to pay for it? Deal, for once and for all, with the remaining sacred cows in public procurement. The non-salary component of State spending is full of waste directed towards professionals and other insiders – it’s ripe for attack.

The US Fed has a dual mandate to keep inflation below around 2 percent and try to encourage full employment.

So the ECB has a singular mandate just to fight inflation? Why is that? Because Germany doesn’t give a **** about periphery countries? If my central bank said they didn’t care at all about unemployment I’d be heading to the exits.

@ MH

Not to mention the off-on-off history of the residential property tax in Italy.

http://www.kilkennypeople.ie/community/local-businesses/irish-italians-now-share-property-tax-pain-1-4591149

@Edward

re Debt /GDP

I am given to understand that Japan has a Debt/GDP of approx 200%.
I am not clear what the Japanese growth rate is like, but their unemployment rate is 4.3%.
See how their unemployment rate compares with EU rate on chart EC link posted on previous thread.

http://ec.europa.eu/economy_finance/eu/forecasts/2013_spring/overvieuw_en.pdf.

Still in Europe, for whatever reason, debt reduction is taking absolute priority over everything, up to and including the stability of the EU itself. Why?

@Johnny Foreigner

I have no problem with cutting back on excess expenditure or excess incomes. The damage to individuals, the economy or society would be miniscule. In fact there would be many political and societal benefits.

That brings me back once again to the tribunal lawyers. Five years into the Great Recession is the State still filling their golden coffers? I suspect it is. Contracts must be honoured, legitimate expectation etc etc.

@ MH

The really interesting figure is, of course, that in respect of Germany, the economy supposedly powering ahead.

Germany, however, having built up enormous credits abroad, and continuing to do so, while the periphery did the opposite, remains the key player in rectifying the crisis in the euro. Derek Scally has a good summary of their situation in today’s IT under the heading “Germany has made many concessions” which, indeed, she has. He concludes, as most reasonable observers do, that some element of mutual liability will have to ultimately be accepted if the euro is to survive. The real fly in the ointment is the incapacity of France under Hollande to deliver its side of the required “grand bargain” cf. The Economist.

http://www.economist.com/news/europe/21577100-european-union-fretting-over-widening-gulf-between-two-partners-have-always

The fact that France has now been cut some considerable slack by the Commission with regard to the pace with which the deficit is reduced suggests that something is cooking. What, exactly, remains to be seen.

….interview

@ DOCM

There is a palpable sense of excitement in downtown Kuala Lumpur tonight about Sunday’s general election. I have a regular companion with me, my iPad. Chickens of course should only be counted after they have been hatched!

I wrote in 2011 on what was for me the most striking German statistic in recent years and the article below is presented in full as it is behind a paywall online.

The evidence from the former Soviet-controlled East Germany suggests that Communism is toxic for sex!

Germany reported last August that 13.1m minor children (up to 14 years of age) were living in German households in 2010. Ten years earlier – – in 2000 – – this number was 2.1m higher, amounting to 15.2m. The plunge of almost 14% is a vivid illustration of ageing and likely reflects another example of risk aversion among the population, similar to the experience of the Japanese.

This and other results on the living conditions of children in Germany were presented by Roderich Egeler, president of Destatis, the federal statistics office, at a press conference, where he stressed that in the former West Germany, the number of children dropped by about 10% to 11.0m between 2000 and 2010, whereas the drop was much bigger in the former communist East Germany. “Even more dramatic was the decline in Eastern Germany where the number of children fell by just under 29% in the ten-year period to 2010,” said Roderich Egeler.

Deutsche Bank Research said that some of the reasons, such as insufficient childcare facilities, are currently being addressed by politicians. However, the Germans’ generally low propensity to take risks probably plays an important role as well.

Stefan Schneider and Jonas Sobott, economists at DBR said that the realisation that there are too few children in Germany, i.e. that the population is ageing and shrinking, is not exactly new. Nonetheless, every new indication of this fact almost automatically triggers a debate about the reasons.

According to Destatis, 33% of all single-parent families rely on government transfers as their main source of income. Hence, these families – – or more precisely, the children – – have an above-average risk of living in poverty. Given that almost 40% of all marriages end in divorce, this could be a relevant factor when couples consider whether or not to have children.

However, the economists say that people frequently fall victim to the “over-confidence effect”, which in this case would be a “better-than-average” effect. This means people grant their own marriage a much better chance of success than suggested by the statistical average. True, Germany’s divorce ratio has risen noticeably over the past decade. In a European comparison, though, Germany still has one of the lowest risks of child poverty. This suggests that other factors, such as availability of childcare or the compatibility of kids and careers, seem to play a more important part.

However, the decision to have children – – as most parents are likely to agree – – is one that is subject to considerable uncertainty which goes way beyond any probability of divorce. So, it is quite possible that a society’s general propensity to take risks plays a part as well.

Schneider and Sobott say that anecdotal evidence such as the Germans‘ reluctance to move – – from either their job or their home – – as well as the large significance attached to formal qualifications in the hiring of staff points to a general risk aversion (if one disregards some serious and wrongful deviations from this general trend in Germany’s history). The rather extreme reaction in Germany – – at least compared with the rest of the world – – to the Japanese nuclear catastrophe in Fukushima also points in this direction.

However, the economists say that there are also proxies for the degree of risk appetite which allow an international comparison despite some methodological reservations. Ownership of equities, for instance, can indicate a degree of risk appetite.

In a group of 9 OECD countries, Germany boasts a share of direct shareholders (shareholder ratio) of only 5.6%, compared with a ratio of roughly 25% in the English-speaking countries. The correlation between the shareholder ratio and the fertility rate comes to 0.39 (the deviation from the mean, respectively). If Japan, which has an extraordinarily high shareholder ratio because of its institutional peculiarities, is excluded from the analysis, the correlation rises to 0.65.

Schneider and Sobott say national risk preferences are a topic addressed in the World Values Survey which asks almost identical representative questions to participants from more than fifty countries. Among other things, people are asked to compare themselves with a person “to whom adventure and taking risks are important.” For 18 OECD countries, the answers to this question (ranging from “very much like me” to “not at all like me”) show a correlation of 0.65 with the fertility rate (respective deviation from the mean)

Japan and Germany show the lowest propensity by far to take risks and also come in at the lower end of the fertility scale, together with Russia.

Of course, such monocausal explanations can only capture half the truth, the economists say. Nonetheless, they confirm the assumption that 1) Germans are highly risk-averse in an international comparison — and are unlikely to identify with the “no risk, no fun” concept – and that 2) their strong aversion to risk at least contributes to the low fertility rate. Hence, the slogan could run “no risk, no fun – no kids” and then even be turned into “no kids, no fun” – – given the rather gloomy prospects of an ageing society.

Yes, next Saturday at 9. Gavin and Philip coming in for a chat. 3rd guest TBC but looking forward to it.

That name above was generated by the iPad of its own volition. Is this thing getting clever as well as useful?

Let’s raise taxes so that:

(a) we can give more money to the HSE and have a world class health service;

(b) we can give more money to R&D so that we have world class research facilities and researchers working in Ireland;

(c) we can give more money to Enterprise Ireland and the IDA as they are doing brilliantly creating jobs;

(d) we can give more money to FAS who spend their money very carefully and created a world class apprenticeship system.

Having lived abroad and seen the advantages of high taxes and efficiently-spent public funds there’s no doubt I would be a socialist if I lived in Sweden or Norway (for example). But, living in Ireland and working in the HSE …

One more thing of those „all serious people know are true”,

Is that the income distribution is unjust, inequality is rising, and the Americans are one of the worst.

which is also important to some general discussions we have, not only here, so often.

When people look on income distribution, “social inequality”, many look at the Gini coefficient, like https://www.cia.gov/library/publications/the-world-factbook/fields/2172.html

Then the 2 countries I know in general in quite some detail, Germany with 27 looks so much better than the US with 45, Ireland 34, Finland 27.

We Germans oh so good, and those heartless Americans, stern indignation warranted : – )

Many of these numbers are generated from (pre) tax return statistics. When you take a look at net numbers, after tax and all government transfers, I think there is actually a pretty universal and remarkably stable picture:

The lower 10th percentile has 0.5 of the median, and the 90th 2.0 twice.

And you can interpolate that pretty well on a log linear plot, often up to the 95th percentile as well. Some 10 – 20 % of the total income go to the upper 1 -3 %.

What net income the lowest 10 – 15% really get, that becomes somewhat murky in most countries and especially in comparisons.

This pattern is actually pretty constant across the nations, I looked on, especially US and DE, over the last 100 years, and I do even have data from ancient Rome, where that looks the same, within the significant error bars of these estimates.

And when you look at what happens for the upper 1 %, the data after WWII for Germany are at constant 11%, and the US rising from 13 – 15% pre Reagan to 23% now (from the top of my head).

But beware the details!

Are we a treasure island or a captured state.

http://treasureislands.org/the-capture-of-tax-haven-ireland-the-bankers-hedge-funds-got-virtually-everything-they-wanted/

In France, public expenses are 56.2% of GNP ,taxes 48.5% .In that particular case ,it seems to me that lowering public expenses is vastly preferable to increasing taxes ! I understand that the problems of the peripherals are very different but it seems to me that going from 7.5% to a primary surplus in the case of Ireland , only with taxes ,would entail such an enormous tax increase relatively to the very low level of taxation (in comparison to the rest of Europe) that it does not seem politically possible ,regardless of the effects on growth (which are bound to be extremely negative in all cases). Mr. Draghi or Madame Laguarde opinions do not come from particularly astute economists, they should stay within their mandates.

It appears to me that that the loopholes provided have already substantially eroded the tax take.

Tax Justice Network

http://www.secrecyjurisdictions.com/PDF/Ireland.pdf

My own take on low taxes is that it is like competing by lowering prices which in business is seen as the product of a bankruptcy of ideas. Any eejit can lower taxes leading to competing cuts leading to the bottom. At the bottom lies chaos.

We are in the company of many responsible countries that do not resort to short term, self defeating tax gimmicks. We got our level playing field and immediately we resorted to sleazy tilt tactics. Time we decided to play the game honestly so as we can enjoy the kind of life enjoyed by the Irish living in responsibly governed countries.
Haughey ideas are alive and well and still thriving in Ireland of 2013.

Truth be told we wait with bated breath for the next gimmick to emerge from Kildare Street.

@ rf

I agree! The interview could be qualified as a tour de force especially in terms of (i) the historic record with regard to the divisions on the left in a variety of countries and (ii) the inability of trade unions to represent labour, broadly defined, as against the narrow interests of their often divided membership. (The three main unions in France held separate May Day demonstrations).

@ Mickey Hickey

On the subject of taxation and all that, objective and unbiased coverage like that to which you linked is just what we need at this juncture!

For a more balanced view cf.

http://www.european-council.europa.eu/council-meetings?meeting=4aa156c3-db37-4231-9b32-a90114a48bce&tab=Agenda&lang=en

Shocking Income Statistics from Richest End of Private Sector
In reply to Johnny Foreigner who said:

@Joseph Ryan
“In simple terms, a person earning €300pw must of necessity spend every cent to survive whereas a person earning €3000 per week saves a considerable portion of their income.”
1. CP II is another way to do this – targets highest paid PS workers who presumably have the option of saving.
From Minister Noonan’s Reply to PQ from Roisín Shortall, May 2,2013
http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2013050200055?opendocument#WRH00850
The reply shows that in 2012, 751 earners had a gross income of 1.36 billion or 1.8 million each
The number earning over 1 million increased from 723 in 2011 to 751 in 2012
The 751 earners paid 374 million in income tax- Effective Tax Rate 27.5%
The 9,352 personal tax units(individuals or jointly taxed couples) earning over 300,000 had a gross income of 5.358 Billion Euro or an average annual income of 573,000 each
There are almost no public sector employees in this group. (Salary Cap in public Sector is 200,000 Euro per annum)
As incomes in “private sector” extend from c 12,000 euro pa(USC threshold) to over2 millionEuro per annum, counter position of private sector as a whole to public sector as a whole is at best meaningless and at worst mischevious.
Arguably there is no part of the private sector which is as productive as the education system. From primary teachers to supervisors of PhD students, teachers produce the most productive “commodity” of all–educated and skilled human beings. An effective health service and garda force is essential to ensuring an effective work force. This is in addition to ensuring a discerning, healthy, and law abiding citizenry which is even more important to all our existences as human beings.
Joe Ryan is clearly correct. The extraction of a sizeable sum from the 5.38 billion Euro per annum of the top 9,352 earners would provide a significant increase in demand while cutting low and middle incomes in the private or public sector would further depress the economy.

TBH super mario with his infallible economic logic is very like Cardinal Brady and his theories about women. Real human relationships are messy. So is economic life in the real world. Denmark is back in recession. France is headed there in q4. The ECB is not Ronseal.

Reuters
Special Report
How Google UK clouds its tax liabilities

http://uk.reuters.com/article/2013/05/01/uk-tax-uk-google-specialreport-idUKBRE94005R20130501

We may run but we can’t hide.

@ Finfacts
Your (rhetorical?) question: “…Why the poor performance despite the costs advantages?

Denmark does well with high costs”

This is perhaps the ‘money question’. For every Dromone Engineering (95% export), Openet (biggest indigenous software company), S3 Group (experienced solutions developer), Combilift (a major indigenous employer in Cavan-Monaghan), Wright Bus, ACT, Design Partners, Creganna, RCSI and TCD (training international students) etc – all generating export income – there are at least ten businesses of similar turnover who subsist on ‘box-shifting’, retailing and local services.
It is not for non-stakeholders to be critical of the business choices people make, but the passion to build ‘mittelstand-style’ businesses who aspire to own their niche globally, does not seem to burn as brightly in Ireland. There are consequences of every decision, and those who are mainly dependent on the local market in Ireland are clearly paying a price. It might seem callous to say this, but one aspect of the fallout of the Irish depression is the recycling of some of the more energetic people out of unsustainable businesses who subsisted in a protected Irish market and into new export focused businesses. Given the step-up in skills, financing and technology needed to do this, and given the strong competition between Ireland, the UK and other states for experienced entrepreneurs, I see features such as the Irish R&D tax credit as very necessary elements.

One world government is here, but not yet announced. The Kleptocrats have achieved their aim.

But, they may not be as evil as they appear… time will tell. A credit boom naturally, inevitably produces malinvestment. Over building of third rate housing for example. Revenues naturally fall once the boom ends. Reinstating revenue to the required level will only encourage stupid policies. Such as banking…

Cutting expenditure and preaching morality is therefore the first stage of restoration. The second is two parent families, one of whom is working outside the home. Much smaller economy, but savings occur naturally and the banking weapon can be properly disposed of by our new masters ….

Interesting article by Dan White on why Irish banks will need at least another 30b of taxpayers money.
Seems Blackrock were too optimistic.

Sorry ..forgot the link
http://www.independent.ie/business/irish/dan-white-taxpayer-beware-irish-banks-need-another-30bn-at-least-29242920.html

@ Fiat

The Dan White article uses some interesting maths. It appears to do some triple counting at times. Also, provisioning 20% against fully current mortgages? Eh, goodbye banking system everywhere. Also, is he aware the banks have chunky capital buffers as is? It’s a hack of an article.

@Paul Quigley
Many thanks for the plug.
Is this distinguished Paul Quigley you?

PAUL QUIGLEY

It is fitting that the University of Limerick should honour Paul Quigley, distinguished public servant, businessman and in a real and practical sense, patriot. In his career, in his public and in his personal life he has always pursued and has created development – at regional, national, and international levels. He has done this on the basis of personal service, commitment, and dedication from himself, and the motivation of idealism and commitment in others.

Paul Quigley was born in 1923 and qualified with an honours degree in Civil Engineering at University College Dublin in 1942 when he was 19. But even before that his sense of service to society and to the nation came to the fore. He interrupted his university studies and enlisted in the Irish Army in 1940. After basis training, he was released to continue his engineering studies; on qualification, he returned to the Army. He was commissioned, assigned to the Corps of Engineers, and posted to the School of Military Engineering.

During his years with the School, he developed a lasting interest in education, an interest which was to manifest itself in various forms throughout his distinguished career.

There followed a series of important appointments which spanned over 40 years and which saw him contribute to corporate, to regional, and to national development in many different ways.

Paul Quigley joined Irish Ropes in 1946 and during the next 7 years pioneered the first applications of both scientific management and work study in Ireland.

In 1953 he became the first Director of the newly formed Irish Management Institute and held this position until 1960. Under his management and direction, the IMI’s position in Irish business life was developed and consolidated. Its premises were acquired, changed, and enhanced; its operational style of annual management conferences and management development courses was created and took shape; its important Management journal was launched. In short, the foundations of the Irish Management Institute were firmly established and the operations of the Institute were launched soundly by his vision, his zeal, and his commitment.

From 1960 to 1985 Paul Quigley devoted his professional career to the Shannon Free Airport Development Company – first and early on as General Services Manager, and then as General Manager for over 24 years. His talents, sense of public service, and sheer professionalism knew no bounds in this role. Innovative development in the Shannon and Mid West Region; targeted developments in tourism and for small, medium, and large industry; the linking of aviation, tourism, and town building; cooperative endeavour for regional development; industrial and clustered industry linkages – all of these and many more were carefully orchestrated by the man, Paul Quigley, who could and did – with seeming consummate ease – operate at the regional, national, and international levels, but always to a clearly focused goal.

Paul Quigley was then, and is, a man of vision, of leadership, and of service. It is not surprising that a man with these qualities was asked to take on other public and international tasks. He served as Chairman of the National Institute for Higher Education, Limerick, as Chairman of AnCO (now FÁS), the Industrial Training Authority, as a member of the Public Service Advisory Council; and he undertook many consultancy assignments for agencies of the United Nations in fields as far apart as Iran, Sri Lanka, Egypt, and Costa Rica. One could give details of the important contribution made by Paul Quigley in each of these roles; suffice it to say that his contribution shaped, for the public good, the destiny of all those activities with which he was associated.

In honouring Paul Quigley today, we honour a man who has contributed much to our society, and to the economic and social well-being and welfare of our country. It is fitting that the University of Limerick should honour this man by awarding him an Honorary Doctorate of Economic Science

Simplistic rules should have no place in economic affairs. The idea that a rule that applies in Japan also applies in Latvia is patent nonsense in any sphere other than economic thought.

So what of the Irish experience? We know the markets closed to us when our debt levels rose about 90%. We know, from the 1980s, that increasing tax rates is not always an approriate response to a deficit. We know that there was growth last year – we are told we had austerity… personally, I think more economists should take lessons in correlation vs causation… or, indeed, figure out what is coincidental.

That the ECB should keep its trap shut and its nose in its book unless it is prepared to do something about it is uncontestable.

It seems austerity is only dead in France and Spain.
http://www.bloomberg.com/news/2013-05-05/france-declares-austerity-over-after-germany-offers-wiggle-room.html
I suppose it’s because they are too big to bully but Spain being allowed to stall is interesting.

@ gavin

You are too kind, but medicine is a broad church 🙂

http://www.drugfoundation.org.nz/your-turn-to-shout/the-a-and-e-doctor-dr-paul-quigley

@Fiatluxjnr
In Spain the party in power is right wing.
The Prime Minister Mariano Rajoy was born in Santiago De Compostela (Coruna) to a well established Galician family. He is as cute a hoor as our own well educated off spring of political families. The party AP operates at the level FF operated under Haughey.

So, Rajoy declines to accept assistance from the Troika for reasons that appear obvious to me.

Do not blame the EC, ECB, EU for Spain’s continued suffering. That will not change until the Spanish public puts a fire to the governments feet. Why this has not happened yet is one of the great mysteries of the current crisis.

What is going on in France is the usual political posturing. The Socialist Party is maneuvering to get ahead of the members who will hit the streets in time honoured French fashion as soon as austerity starts to bite. Frau Merkel made us do it will not cut it. Hollande has written off Merkel as being part of the solution, if she loses he can deal with her left of centre replacement and if she wins he can play hard ball with her because France will back him whole heartedly.

The havoc that austerity has wreaked on the European periphery is now biting the centre such as France/Nederlands. This is where it ends and if Germany does not like it they can pick up their marbles and go home to Mutter.

Talking about marbles, the 4 year old came home from Deutsche Langschule singing Sexy Lady using suckey lady taught to him by a five year old called Ingrid. Even his mother thinks it was hilarious. The more one is around Germans the more you realise they are unique. The teacher is the wife of a Lutheran Pastor.

Gavin and DOCM

His new book the making of global capitalism is pretty interesting aswell, (if not a political perspective I, personally, generally agree with)

@ Marc E

Can you point me to any evidence-based analysis to support your belief that there is no chain of causation between debt levels and GDP growth? I’ve pointed to four separate papers that have found a correlation using different data sets and have variously identified the transmission mechanisms. I’d be happy to bin them all if you can demonstrate to me that the correlation is spurious through stronger reasoning than “as many economists have argued“.

As an aside, the reason I don’t buy that high debt levels are primarily caused by low growth is because it takes quite a few years of deficits to get debt/gdp to 90%+ (absent large banking bailouts, which have not been prevalent in the data) while recessions have usually lasted maybe 1-2 years so the norm has not been to go from low/medium debt levels to very high levels as the result of one business cycle and you don’t suddenly end up at 90%+ because you’re in a recession (at least not prior to 2007, which the bulk of the analysis applies to). I could be wrong on this point, but again, if you can show a data-based analysis that proves the opposite I’m happy to bin this also.

Angela is not the enforcer of financialism in Europe – it’s the ECB.
Dragging just has to threaten to stop backstopping the bonds of wayward governments and they’ll all snap back into line.
It’s financialism – not austerity

@ All

From the article;

“In future, authors, academic journals and commentators need to devote more effort to replicating significant research results before broadcasting them widely.”

Amen to that!

As to whether there has been a sudden conversion to ending “austerity”, this article by Wolgang Munchau, suggests that appearances can be deceptive, at least as far as Italy is concerned.

http://www.ft.com/intl/cms/s/0/7688de46-b317-11e2-b5a5-00144feabdc0.html#axzz2SUzcc1Oi

His last sentence is as ominous as it is true.

“And it [austerity] will last for as long as the euro exists.”

Of course, it all depends on how you define “austerity”. Is it sensible fiscal consolidation i.e. governments getting control of their budgets a la Merkel or the draconian opposite, and fundamental major policy error, of cutting expenditure at precisely the wrong moment in the economic cycle?

@ Michael H, all

one more thing which deeply scares me about Spain is that they imported 15% of their population in the last 10 years.

In Germany some folks also thought for a while, that mass immigration could be the answer to probably somewhat insufficient birth rates.

But our experience is, that in total you import more problems and needs for social benefits than net contributors, at least with our standards. Did we screw it up, somehow? I don’t really see this, at least as long as we don’t go to some much meaner American “illegal immigrants without benefits” model.

@ seafoid

Kuttner points out correctly, that it was private debt, which triggered the collapse in AD.
There is this guy, Warren Brussee “The Second Great Depression, Begin 2007, Ending 2020” who made this prediction in 2005, based on data until 2003, in comparison to the Japanese data peaking in 1990. The guy is still alive, has some blog.

It is hyper simplified, but I see this aspect as much more important that all these central bank models.

@ Joseph

given the substantial US bond assets Japan has, their net debt is more like 130%, but since they can not really sell the US bonds, what does it mean.

I had once an argument with Paul Krugman about the balance sheet of the Bank of Japan, because he counted the assets differently than the cash flows.

The US had a stock bubble in 2000, a house bubble in 2007, and probably we will see 2014 as the peak of a bond bubble. But one thing at a time, each triggered by the reactions to the bubble before.

I remember the times, when many here admired Japan and his MITI.

But they created one hell of a triple asset bubble in 1990, stocks, real estate, bonds.

Look at the Nikkei 225, that was 40000 in 1990, and at 10000 twenty years later, to get suitably scared

http://finance.yahoo.com/q/bc?s=%5EN225+Basic+Chart&t=my

Some folks call the present abenomics a financial Pearl Harbor decision, a high risk gambling, borne out of deep desperation.

Would you want to go there?

2. No GDP growth to be expected

The Herengracht folks were certainly of the farm, the wife probably contributed some to the business, my gut feelings are that there life expectation was 55 +/- 5, at least around 1800, and the effective school years 8 +/- 2, I didn’t look it up so far. If anybody has any information, especially to the contrary, I love to hear it!

This explains most of the difference between Herengracht and Gordon or McCloskey / Maddison.

The difference between the Factor 100 (e.g. Rosling / Gapminder) and the 13 / 16 is the technical productivity increase of 0.75%/year, and the different hedonistic inflation accounting.

Soo, where does this lead us?

The EU fertility is 1.55 vs 2.07 for “stable” in the most simple calculations. Over 30 years -1.0%/a change of population, longer effective work life + 0.4%, some immigration + 0.2%, makes for minus 0.4% of hours worked. Getting some folks back from 35 to 40 hours/week, as in Portugal now, and in the near future in France, obviously helps somewhat : – )

Extremely simplistic, linear, rough estimates, mostly just mentioning relevant factors, I know!

The bottomline is, there is NO significant increase in GDP to be expected.
And we have some likely deteriorating factors:

In the past, 300 mio western Europeans, 300 other anglo sphere, 100 Japanese provided most of the manufactured goods. Now we got some 1000 mio Chinese and , lets say effectively 300 Mio Indians, and 200 mio others competing in most areas for the same exchange in commodities/energy.

That worsens our competitive position, factor 3 in people. I see some 0.5% in long term yearly price declines as very realistic.

3. / 4. Debt must be paid down, or fiasco

I don’t believe in any magic 90% or 120% debt / GDP thresholds. It all depends on a lot more factors and circumstances.

But I am only aware of 3 documented instances in written history, where debt beyond 120% was paid down orderly. Some 250% for the UK, after the Napoleon wars and 1945, and 120% for the US after 1945.

In these 3 cases, the debt was run up for winning wars, and not for peace time consumption, the debtor was in a unique, ruling, and producing situation. And there were no alternatives to take your money to, really.

From my perspective a clear, visible, credible, systematic path to some pay down is detrimental for the one central factor: creditors believe / trust.
For quite some time Italy /Belgium argued, that their > 100% public debt are covered by much larger private assets.

Belgium did pay down 23% over the 7 years, after 2000. Italy not. And now it becomes crunch time.

The 120% are no magic number, what counts is the trajectory, in my view.
And we have a stability pact, with a glide path rule, which is not a black/wide picture, but a clear perspective, what people expect.

A bankruptcy would have in most european cases more severe consequences than for Argentina, and those are now at about 50% of GDP folks formerly considered possible.

ok, my very long sermon is now done. But I didnt see how to make this significantly shorter, and I see this as “very serious”

@Kevin O’Rourke

All of which is very convenient if what you really want to do is shrink the state.

Paul Krugman said sometime in the last two years that the reality based community is not going to win the fight over the mix of monetary and fiscal policy we need to recover from the global financial crisis by appeals to reason because the opposition, the rough alliance of the political right and financial capitalists controlling western economic policy, are fanatical class warriors pursuing a narrow and short sighted vision of their own self interest. For this cohort of neoliberals and political reactionaries the European component of the global financial crisis is an excuse to take radical and democratically unsupported steps in reshaping acceptable economic policy. However the steps were unrelated to the either the cause of the crisis or its resolution – shades of the invasion of Iraq. (one could easily argue that the Eurozone financial crisis is being deliberately extended in order to further German policy goals).

Even with the evidence of the last four years of policy failure (or policy neglect) and the slow conversion of the IMF none of Olli Rehn, Marco Buti, Wolfgang Schauble or even Mario Draghi can be persuaded to change course because it is the course they are politically committed to and it serves their own class interests. None of these people would be in the positions they are without a commitment to a status quo that has utterly failed the European Union.

We will not force policy change without a purge of these individuals (and their remaining supporters in the field of economics) – the dangerous cult of neoliberalism needs to be investigated and broken up and polite dissension will not do it.

@Francis

Perhaps you could consider getting your own blog, expounding on your theories there and then post links here with a short abstract?

They do not seem to be obviously relevant to the opening post.

@ shay

This is the Irish Economy FGS, where posting off-thread is a feature not a bug. Francis is the new Dork, weissen Sie, and he runs some very interesting numbers. If gets dissed in this parish, he’ll take his act to Naked Capitalism or some such. And good luck to him.

I’m inclined to the Russian perspective, which is that our situation is hopeless but not serious. Fow what it’s worth, the issue of debt cannot reasonably be addressed in isolation from the general problems of economic development, employment, social cohesion and social justice. What my kind of people expect is that the various leaderships address those questions. Seriously.

@ joseph ryan

‘The biological clocks of the underemployed and unemployed middle classes has been ticking silently on now, for the last five years, unable to afford to have or rear a new generation.
But who cares.’

It’s a tragedy my friend. Joyce’s Dubliners all over again, without the piety and social snobbery. This time it’s the contradiction between the bright world of Friends and the mucky reality of negative equity and rotten job opportunities. Art and literature matters, because the human drama has only so many themes.

@shay try here….
http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/c3.pdf

@ Joseph Ryan

The conclusion that I draw from that is that the Japanese put a higher value on the necessity and dignity of work for people than they do on the imbalanced output statistic.

It is the wrong conclusion.

As permanent public sector workers retain their nineteenth century era state guarantee of employment in many countries, the number of temporary workers or ‘temps’ as they are often called has been rising in several countries over the past decade. The resultant dual workforce in Spain for example, has seen tens of thousands of temps, usually young, lose their jobs while older members of trade unions in permanent positions have been protected by very high severance pay and a long appeal process.

The rise of the temp has been particularly evident in Japan where about 35% of the wokrforce are in this category. They have few rights and high-profile companies such as Toyota, pay them less than the Irish minimum wage of €8.65 ($11.60) in a high cost economy.

In April 2011, a month after the devastating earthquake and tsunami in Japan with the resultant nuclear fallout at the Fukushima Daiichi plant, The New York Times reported that of roughly 83,000 workers at Japan’s 18 commercial nuclear power plants, 88% were contract workers in the year that ended in March 2010, the nuclear agency said. At the Fukushima Daiichi plant 89% of the 10,303 workers during that period were contractors.

In the year before the nuclear disaster, the contractors were exposed to levels of radiation about 16 times as high as the levels faced by direct employees of Tokyo Electric, according to Japan’s Nuclear and Industrial Safety Agency.

@Edward v2.0

No one can prove there is not any kind of positive correlation between a high debt to GDP ratio and low growth, just as no one can prove there is not some link between chewing tobacco and being hit by lightening. Proving something is not true, outside of formal logic/maths, is not what science aspires to. It looks for a theory flexible enough to fit all the existing data and that makes testable predictions, if the theory can not be expressed in a simpler way then it is what passes for “truth” in science.

Which is to say you can present ten papers from the ECB arguing that debt and not austerity is the reason that the European component of the global financial crisis has gone on for so long and I can just laugh at you. Sneer even.

As a layperson you no more need to disprove that the ECB’s position on debt is false than you need to disprove some conspiracy freak’s theory that the moon landing was faked. You can simply say the ECB has a poor record on economic forecasting and is in disagreement on the issue of debt/gdp ratios and growth with other individuals and institutions who have a much better record (the IMF, politically attached as they are to neoliberalism, are not as willing to search for an out in the evidence as the ECB/DG ECFIN have been).

In short, the ECB does not need to be taken seriously, not by me, not by anyone. Anyone who takes the ECB seriously on the issue of the role of debt in the European component of the global financial crisis where it differs from the wider consensus places themselves firmly among the cranks.

You must understand this on some level – that deficit hawks are not taken seriously because they promised and threatened things that did not happen.

@John Gallaher

Thank you for that, I tried to read the WEO</a. before and found it heavy going. However the conclusion conformed to the general analysis outside the ordoliberal swamp of EU policy making. Debt is a symptom and not a cause of low growth, it is slow to drop even when well below 80%, deflationary policies have a bad record in dealing with economic crises where large debts are a factor.

What happened to the EU?

@me

As a layperson you no more need to disprove that the ECB’s position on debt is false is true….

Duh. I made a real Rehn of myself there.

I will try (LOL) keep the length of my postings here down, at least for a while : – )
Especially when I look at the frequence of typos and ellipses, I gotta be more careful again.

@ paul Quigley

I know naked capitalism. There is a lot of word hurling like “neo liberalism” and often downright hate mongering against Germany.

Shay should love it : – )

@ John Gallagher

Thanks for your kind words.

I actually try to use more often simple, real world words, and refer less to macroeconomic concept names, because with people like Blanchard and his multipliers I have the very serious impression, that these folks have long lost contact to the real world, and just think in very questionable models, especially always thinking things from the US / UK perspective, who can get away with things, nobody else can.

The Hausmann paper points into that direction as well, and I am nowadays much more open to folks like him, or LuLa from Brazil, talking on the last metal worker union conference, putting a lot more weight towards the endogenous growth factors than the simplistic exogenous views of Goldman-Sachs and the likes. Not that I wouldn’t know the vocabulary and the models behind them : – )

When I remember this Osborne and his “blood bath budget”, and 4 years later they still run a 8 % government deficit, I am getting the creeps. Buth are apparently very afraid of more Tottenham riots.
There were a number of papers at that time, arguing that you get the revolution, when the consumption cuts go beyond 25%, and what other factors might be important.

Thanks for the zerohedge link ! I am gonna enjoy it.

@Gavin

For the net Japan numbers I can point you to
http://www.tradingeconomics.com/japan/general-government-net-debt-in-percent-of-gdp-imf-data.html

@ zhou_enlai

With respect to work schemes ( Beschäftigungsprogramme) I actually want to point out, why we are so skeptical in Germany. Not because of ideological rigidity, but we basically tried already everything extensively and expensively.

Wiki Zweiter_Arbeitsmarkt, with no translation into other languages. Always interesting.

Switzerland (!) : http://www.snf.ch/D/NewsPool/Seiten/mm_09jul07.aspx

What we avoided at least this time was stupid things like wiki/Smoot–Hawley_Tariff_Act. Please see the Figure 16.9 in “This time is different” for the death spiral of collapse of world trade

Probably most of you know the 1930ties Autobahnen argument. Hoover Dam, TSA, … But that was at a time, where there was a lot more manual labor and therefore wages involved. And that was new and useful infrastructure.

The GIPSI countries should now already have all kinds of roads and infrastructure, thanks to many years of EU programmes for that.

In the 1980ties a lot of German communities also went on a spending spree to built public pools, city halls, ice skating rinks, etc. , to “make ourselves attractive”, just to find out, that you later on also have to pay for the upkeep, and that there are not that many cultural highlights to host in every little town.

When Michael Hennigan pointed towards: what kind of real jobs could be created, I was tempted to say, lets do a MBA like SWOT analysis, and you can do it 2 ways:

a) defining a goal, where you want to be in 10 to 20 years, what jobs, education system, …, or

b) what kind of unemployed do you have now, and what can you do with them

But I think you have plenty of MBAs in Ireland, and don’t need me for the discussion structure.

One last thing, I want to say:

Sweden and especially Finland also went through deep structural changes in the 1990ties. Small countries, at the periphery. It should be really worth to look in detail at them.

@francis

Sweden and Finland had their crises when the rest of the western world was doing much better than it is now. The IMF pointed out a number of years ago that the idea that all western countries could export their way to recovery was foolhardy nonsense. They were correct.

Here in Ireland we are acutely aware that the economic policy prescription adopted for the EU as a whole will have way more impact on us than any policies our own Government seeks to implement. That is why our President, our politicians and our most reputable commentariat have their eyes firmly fixed on EU and ECB policies ahead of domestic policy.

Karl Whelan as a target of wrath?! It’s like declaring war on Luxembourg.

Gavin,

it is for the discussion here not relevant.

I understand your curiousity very well, and I wondered this afternoon a little bit, how to satisfy it. But you will not hear one more word from me in this matter : -)

@Gavin Kostick

Exposing people’s credulity is a distinctly queasy, thankless and unsatisfying experience, but it needs doing.

@shay like Ed did above to you..perhaps some commentators use different “handles” or require anonymity oh like say shay!

1800 Act of Union

Soros v Sinn..
“His accusation that Germany is imposing austerity is unfair. Austerity is imposed by the markets, not by those countries providing the funds to mitigate the crisis. By now the overall sum of credit via intergovernmental rescue operations and the ECB has reached €1.185 trillion (€707 billion in GIPSIC Target liabilities minus GIPSIC claims from under-proportional banknote issuance, €349 billion in intergovernmental rescue funds, including those from the IMF, and €128 billion in GIPSIC government bond purchases by non-GIPSIC national central banks; see http://www.cesifo.org), not counting the unlimited guarantees the ECB has given to the states of southern Europe through its OMT programme at the expense, and to the risk, of the taxpayers of Europe’s still-sound economies.”
http://www.project-syndicate.org/commentary/soros-versus-sinn–the-german-question

@francis

Matching population growth to GDP does not tell the tale. The productive population has grown more than the simple growth. We are competing with far more people. It is a bogus analysis.

Lots of countries go bust. The UK has gone bust, Germany has gone bust. The reason we are in the EU is to avoid beggar thy neighbour policies, which Germany suffered form terribly in the past, and also to try and preserve European political stability, which has collapsed in Germany in the past after it was the victim of beggar thy neighbour policies, particularly on the part of France.

Monarchs of Money

With particular attention to B of E and Mark Carney

@paul quigley don’t forget the peddlers of property porn….and the “experts”

“One way to illustrate this claim is simply to count the number of references in the press to the notion of a ‘bubble’ in the housing market before and after the crash. The figure below shows this for the Irish Times, Ireland’s newspaper of record. It can be seen that before 2008-2009, there were comparatively few articles that even mentioned that the market might be in bubble territory. On average, the newspaper had 5.5 times more articles on the bubble per year in 2008–2011 than in 1996–2007. For the newspapers Irish Independent and Sunday Independent, which boast a high readership, it was even worse: they had on average 12.5 times more articles mentioning the bubble in 2008–2011 than in 1999–2007. And that doesn’t mean that such articles published before the crash warned of a bubble—very, very few did, and many only talked about it to attempt to reassure readers that in fact, it didn’t exist.”
http://www.social-europe.eu/2013/04/the-role-of-the-media-in-propping-up-irelands-housing-bubble/

@paul g tks for the Charlie Feathers link,more a Neil fan myself but enjoyed it.
Not only the hacks that were bedazzled,quite a few leading economists in the US were too….Ireland?
The zerohedge piece is worth a read,there has been som discussion stateside over this,not sure if any work done in Ireland.
Aplos to KOR milles off topic.
https://mises.org/etexts/intellectuals.asp
http://www.huffingtonpost.com/mobileweb/2009/09/07/priceless-how-the-federal_n_278805.html

@francis I found the soros v sinn exchange-link above-fascinating with good well argued points from both sides…
This comment from Sinn on Ireland,does it reflect the “view” in Germany on Ireland ?
” Soros points to Japan’s unsuccessful attempts to solve its problems by monetary austerity of the German kind, and warns against repeating that experiment. Japan clearly did not choose austerity after its banks collapsed in 1997. The BoJ has kept the rate of interest at close to zero since then, while the government debt-to-GDP ratio has increased from 99% (1996) to 237% (2012) because of permanent Keynesian deficit spending. Apart from that, the ineffectiveness of austerity in a country with a flexible exchange rate does not apply to the situation of a country in a currency union. While the flexible exchange rate would sterilise all attempts at increasing competitiveness via deflation, price cuts in a currency union do work wonders, as the Irish example has shown. Ireland has cut its prices relative to the rest of the eurozone by 15% since 2006, and it succeeded in saving its economy.”

We had here recently a TV contribution with 6 former Shin Bet Directors talking about Israel’s history and various crucial decisions taken, and one of them came up with the picture that he always believed that there would be one old man in a room at the end of the aisle, who looks at everything and ponders it, [my comment: maybe a little like Vernon Walters] and talks with some people.

“And one day I went there and opened the door, and I found the room empty”. And it is silly, but it shook me.

For Germany you know the names Schäuble and Merkel, maybe one day Weidmann and Asmussen growing into that.

I vaguely believe I know some more, but in the past these folks had a tendency to be assassinated (Beckurts, Herrhausen, Rohwedder, …) , so I will not share names.

And I now believe that in many euro countries there are none of that caliber, thinking in many decades and centuries.

john, paul, tony, zhou, and all

I also enjoyed it, a lot. This blog is pretty inspiring.

I am sure we will have more new topics, where I can contribute something useful to the discussion.

I looked around for swiss economic blog today, and all I found was

http://www.swisseconomic.ch/home/blog

There is more excitement on the Wiener Zentralfriedhof – Depeche Ambros

http://www.youtube.com/watch?v=LKwl4u2NG30

John, closing, to your last link:

I ll kept my wallet walking Harlem at 3 am alone, and Cuban market places.
So now Mr Buiter thinks he could have a shot at it?

This Buiter will probably even on his death bed ask for the key to the money printing press,

and I will answer him:

From my cold dead hands : – )