Here‘s an article I wrote for today’s Irish Times which outlines a plan for dealing with the problems at our two major banks.
Author: Karl Whelan
The retail motor trade is lobbying hard to get the government to introduce a car scrappage scheme, which would encourage people to scrap cars that are older than ten years and purchase new ones: See these pieces in yesterday’s Irish Times and the Morning Ireland interview with Alan Nolan, director of the Society of the Irish Motor Industry.
Willem Buiter discusses the plans of this sort that have been introduced in Germany, France, Italy and Spain. He doesn’t like them—“This artificial shortening of the economic life of a car seems nuts. It’s worse than getting paid to dig holes and fill them again.” The case for these measures in Ireland is even weaker. Unlike the countries listed above, we do not have car manufacturing, so this measure is largely aimed at helping a thin-margin wholesale and retail motor trade sector.
To be fair, Alan Nolan did put the case for the scrappage scheme articulately, arguing that the scheme would pay for itself by inducing new purchases and VAT revenue. Economists, however, are always wary of claims about tax cuts and subsidies being self-financing. In particular, schemes like this suffer from very serious “deadweight loss” problems: The government ends up subsidising lots of people who would be making the purchases anyway.
Mr. Nolan argued that since the scheme is limited to cars over 10 years old, the owners of these cars were unlikely to be in the market without this measure. I think this could go either way. Some people are happy to drive old cars but there is also the fact that old cars are far more likely to irretrievably break down, so their owners have no choice but to buy a new one (or take the bus …)
Beyond this small issue, there is an important general point that the government needs to be very wary of allocating increasingly scarce fiscal resources on this kind of special interest group subsidy.
Sarah Carey’s article in today’s Times raises a useful point. While figures for average levels of debt are available—and show a huge increase in debt-to-income ratios since the turn of the decade—this average ratio isn’t very useful for informing us about median debt burdens or, more importantly, about the fraction of households close to financial distress. Sarah is correct that, as of now, these statistics are not being collected in Ireland. Surveys are being used to provide estimates of these figures for Italy, Spain and the US and a survey of this type would be very useful here. I’d like to add a couple of observations about this issue.
Today’s release shows that the standardised unemployment rate, which is based on the Live Register, rose to 11% in March from 10.4% in February. Over the past three months, the unemployment rate has risen by 2.4%, compared with an increase of 1.4% over the previous three months.
In terms of projecting GDP for the year, these figures suggest to me that the current “consensus” figure of something like a 6 percent (average-over-average) decline for 2009 is highly optimistic. It is hard to see this huge jump in unemployment as consistent with anything other than a substantial contraction in output in first quarter. With output having fallen by around 7 percent on a Q4-over-Q4 basis last year (whether measured on a GDP or GNP basis) the cumulative loss in output from peak has perhaps already reached 10 percent as we speak.
Once you factor in the contractionary effect of the upcoming budget, it is hard to see the economy producing a quick turnaround after the first quarter. Working through the various scenarios along the lines of my post from last week, it’s very hard to see an average-over-average growth rate better than -8% this year and very easy to imagine scenarios that are worse.
The Irish media has referred a lot in recent days to the Fine Gael stimulus plan, so I decided to go take a look at it. A one-sentence summary of the plan is that it would see the government borrowing an additional €11 billion over the period 2010-2013 and spending this on a set of energy, environmental and communications projects.
The plan is, to put it mildly, puzzling. The main source of funds is the Pension Reserve Fund, which our politicians (untrained in the sophisticated distinction between gross and net debt) apparently view as free money. In addition, the investments will be financed by a special bond issued to “the Irish public” and to “pension funds and international markets”. The plan states that the NPRF will be “replenished” with dividends from state companies carrying out these investments and from the sale of some state assets (of course, these state assets could be sold even without borrowing €11 billion).
I do not claim to be an expert in the microeconomics of Irish energy or communications markets, but it seems pretty far-fetched to think that these investments would pay back to the taxpayer at anything other than a very long horizon. I’d be interested to know what others think on this.
Next week’s budget will see the government raising taxes and cutting expenditure on front-line services, with painful adjustments totalling €4 to €6 billion likely to occur. However, few doubt that this adjustment is necessary. Against that background, the opposition’s plan to borrow an extra €11 billion to spend on a bunch of energy projects just seems to me to be very strange.