Greg Mankiw provides a useful overview of recent research on fiscal policy.
Author: John McHale
The FT has a provocative editorial on Ireland in today’s edition. While making some valid points, it continues to treat Ireland as an ultra-open freak to which completely different rules apply. I think it would be news to most Irish businesses that “domestic demand is unimportant.”
Table 2.1 of the OECD’s recent survey of the Irish economy provides a sobering statistic: when the anticipated adjustment in the December budget is included, the total discretionary fiscal adjustment for 2010 implemented this year will add up to 6.4 percent of GDP. This is an extremely pro-cyclical fiscal policy by any standard. It is also occurring while other industrialised economies are applying discretionary fiscal stimulus. Unnerved as we all are by the escalation in debt and the rise in the risk premium, there seems to be broad agreement among academic and financial-sector economists that Ireland is different and has really no choice but to pursue this fiscal course. Maybe it is my unhealthy suspicion of too much consensus, but I think it is worth asking if the Irish case is really that different.
It is good to see the fiscal policy debate ramping up in advance of the December budget. One aspect of the debate that has received a good deal of attention – not least from the Minister for Finance himself – is the problem of compounding debt service costs. This concern is understandable given the scary arithmetic involved. But it is not something usually emphasised by economists and I think is distorting the debate.
In his comment on Kevin’s vertical disintegration post, John Fitzgearld drew attention to the strong linkage between Irish exports and imports. This got me thinking about Ireland’s marginal propensity to import and its association with, for the want of a better term, multiplier pessimism. On the face of it, there are certainly grounds for pessimism: in recent years imports have been averaging about 80% of GNP! But this tells us little about how much of an increase in domestic demand would leak out in increased imports.