Author: Kevin O’Rourke

Ireland vs Iceland

There were a couple of mentions of Iceland on tonight’s Prime Time. One chap in a vox pop said they were living off food parcels while we were drinking pints. Brian Lenihan stressed that defaulting on seniors would lead to a fate worse than (paying back) debt, namely what Iceland has experienced.

So out of curiosity I went to the OECD’s statistical website to see what the quarterly accounts of the two countries have to say on the subject. I looked up the stats for quarterly GDP, seasonally adjusted, volume index, expenditure approach.

The relative declines of the two economies depend on the quarter you start from. Ireland peaked in 2007:4. Relative to that quarter, Ireland’s GDP in 2010:2 had declined by 13.4%. Iceland’s had declined by 11.8%.

But, to be fair to Ireland, you might also want to compare movements since the Icelandic peak, in 2007:3. Relative to that date, Iceland’s GDP in 2010:2 was down by 16.3%, while Ireland’s was down by 10.5%.

There is a twist in the tail, however. As we all know, GNP and GDP are very different in Ireland (and our GDP data have traditionally been regarded as unreliable because of transfer pricing). Taking Irish figures for GNP (seasonally adjusted, constant market prices) from www.cso.ie, you find that between 2007:3 and 2010:2, Ireland’s GNP fell by 17.0%, slightly more than the decline in Icelandic GDP during the same period.

If you are of the view that we should only be interested in developments since 2008:4, then the declines since then are: Iceland (GDP): 11.6%; Ireland (GNP): 9.9%.

And of course, if you regard GNP as the more reliable indicator in the Irish context, then it is important to note that Irish GNP has been continuously declining since this crisis started. Call me old-fashioned, but I am one of those fuddy duddy types who thinks in order for a recovery to count as a recovery, GNP should actually stop falling. Once again, Iceland and Ireland are not quite as different as the Minister made out during his interview.

As for unemployment, according to the OECD the harmonised unemployment rate for Iceland in 2010:2 was 6.8%. Our rate in July 2010 was 13.6%. I actually think that unemployment is important.

The Minister got very agitated about people suggesting that Irish taxpayers should not in fact pay back senior bondholders everything our rotten banks owed them. An increasing number of these rabble rousers are foreign, it should be noted. For example, the Roubini crowd said today that “we think it unconscionable that bondholders are protected at the expense of taxpayers”. There have been many such sentiments expressed in the international media in the last while. But the bogeyman used to shoot down any such suggestions when they are made in Ireland is invariably Iceland.

It is not such a slam dunk argument as the Government appears to think.

Politics in hard times

The FT is full of depressing news stories this morning, none of which are surprising.

In the US, a Tea Party candidate won the Republican nomination for the Senate elections in Delaware.

In France, Sarkozy suggested that Luxembourg (home of the Commissioner who sharply criticized him for the Roma expulsions) would do well to welcome a few Roma itself.

In Sweden, the Sweden Democrats, a party with roots in the neo-Nazi movement, may be on the brink of an electoral breakthrough that might see it hold the balance of power after the elections there.

And the Japanese decision to weaken the yen is provoking tension with Europeans and Americans.

Lots of zero sum thinking out there this morning: history rhyming.

The fiscal multiplier varies over the business cycle

Alan Auerbach and Yurij Gorodnichenko have a nice piece over at Vox which reports empirical evidence that the size of the fiscal multiplier in the US is not constant over time, but varies over the business cycle. During good times, it is small — between 0 and 0.5 — while during recessions it is high — between 1 and 1.5. (During depressions it is even higher.) This is of course exactly what we teach our undergrads in standard macro courses (at least, I think of them as standard macro courses, but I guess not everyone agrees nowadays): here is more evidence consistent with those models.

Recessions are not a good time to have to cut government expenditure. They’re an even worse time to cut expenditure if you don’t have to.

The political impact of the Great Recession

Dan O’Brien has an optimistic piece in today’s IT on why the political effects of the crisis have not been as noxious as the impact of the Great Depression. He lists three reasons: incomes have declined, but from a much higher base; there are no credible political alternatives, such as were offered by communism and fascism in the 1930s; and we are more tolerant and less nationalistic today.

I am surprised that he doesn’t mention a rather obvious fourth candidate: the size of the economic collapse has been much less this time around (except in a few unimportant countries such as our own). The duration has been shorter, also, and I think that is very important: after 1929 some economies continued to contract until 1932 or 1933. And this crucial difference is due to different policy responses:  much more aggressive monetary policies, fiscal stimuli, and much more important automatic stabilisers.

The extent to which Europeans have become more tolerant can be exaggerated. In 1928, the Nazis only got 2.6% of the German vote. Contrast this to the 13.9% received by the anti-immigration Dansk Folkeparti in 2007, before our crisis started, or the 5.9% achieved by Geert Wilders’ revolting party in 2006. Since 2008, the political extremes have benefitted, just as Hitler did (the Nazis’ share of the vote jumped to 18.3% in 1930).  Wilders’ party received 15.5% of the vote in 2010, while the terrifying Jobbik got 16.7% of the vote in the first round in Hungary. Sarkozy has been actively courting the xenophobic vote in France this summer. There are probably a few other examples around which people could point to.

Severe recessions can still bring out the worst in people, it seeems.

FT article on German growth

This FT article is well worth reading. It asks a question I had been idly wondering about: is German growth just a reflection of Chinese growth? If so, then the issue of whether Chinese (or more broadly, perhaps, Asian) growth can become self-sustaining, or will continue to largely depend on sales to over-indebted American households, is a question with major implications for the European economy.

Update: I have just come across this piece by David McWilliams on similar themes. I guess the hope for Germany is that their growth is based on more, ultimately, than Chinese exports to the likes of us.