“No recovery here”

One of the really interesting outcomes of the last election was the rejection by voters of the Fine Gael strap line: let’s keep the recovery going. As measured by GDP growth, Ireland was rebounding from its period of austerity very strongly, with the fastest GDP growth in Europe.

A household sector which had just received an income tax cut, child benefit increases, pension increases, social welfare increases, public sector pay increases (or restorations, whatever), threw the main party’s ‘recovery’ line back in its face at the doorsteps–what recovery, they asked. No recovery here.

This was taken to mean that there was no recovery outside of Dublin. Dan O’Brien’s series of columns have dispelled that myth. There is a recovery in rural Ireland, it’s just not happening as quickly as in the capital, where employment levels are now 96% of their 2008 peak. In the Mid-West employment levels are at 88% of their peak.

Source: CSO.ie
Source: CSO.ie

Then a long and rambling discussion on the corporate tax element of Ireland’s apparent rebound took place, largely on twitter. The volatility of the corporate tax take in Ireland is exceptional.

Yet another strand of the argument is given by thinking about Ireland in relation to Europe. Philip Connolly of the times in Ireland showed me these data of GDP per capita in purchasing power parity adjusted euros compare it with an actual income for consumption measure. The graph below is from Eurostat and shows the difference in the two measures  with Ireland and Luxemburg showing a very large difference between these two measures of household welfare. Using the AIC measure, Irish households are closer to Italian than Danish levels of welfare.

Source: Eurostat
Source: Eurostat

This may give a clue as to why we see such large differences between official rhetoric and the popular reaction to that rhetoric.

 

 

 

Report of the Fiscal Council

Is here (.pdf). A few days late to this, so apologies, but just one thought:

Think how far our budgetary institutions have evolved. From Charlie McCreevy getting up on Budget Day in the early 2000s and announcing measures his own cabinet hadn’t heard of, to today’s fiscal council reports, Spring Statements, National Economic Dialogues, to the design of new structures like the Budget Oversight Committee, reviews of the process of national budgeting (.pdf), a Parliamentary Budget Office to cost the figures independently, and an agreed spending envelope by the public, a lot has changed in 15 years.

Despite the annoyance it generated during the election, the ‘fiscal space’ is a well recognized academic idea dating back to the 1990s, and the fact that the entire debate took place using broad parameters everyone serious agreed upon is a very good thing. We actually had a debate in Ireland, messy and all as it was, on whether to spend more on services, or give back more in tax cuts. Thus informed, the public chose the former in large numbers. They want a recovery in services.

Teaching macro after the crisis

Olivier Blanchard, pound for pound one of the best macroeconomists out there, is revising his famous textbook. His experience at the IMF has forced him to reconsider the basic short- to medium-term models we teach.

In particular Blanchard wants to keep the ‘IS’ curve, which relates savings to investment, and mostly dump the ‘LM’ curve, which supposedly connects the demand for real balances to the interest rate via the money supply. He also wants to ditch the aggregate supply and demand model, which relates changes in aggregate demand and supply to employment and expectations over the medium term.

Blanchard wants to scrap this and connect the IS curve to an older idea, the Philips Curve, which will be paired with a new curve, called the MP curve in many formulations. Karl Whelan, formerly of this parish, has a nice exposition of the whole IS-MP-PC system here (.pdf). This should replace the older IS-LM and AS-AD formulations over time, but for that to happen, lecturers will need to update their notes, and textbook authors will need to update their offerings. We know Blanchard is doing his bit. What about our Irish colleagues?

A while ago Brian Lucey and I looked at how much the teaching of economics had changed in Ireland since the crisis. Not much, was the short answer. The presentation of our initial results is here (.ppt).

The next thing to do is to change how economists are taught about finance. I have quite a few thoughts on this, perhaps best expressed in my own teaching about financial economics, but Blanchard’s suggestions around the introduction of more than one interest rate reminds me a lot of this classic paper by Jack Treynor, and maybe that can be worked in, in a sensible way.

Either way, Blanchard’s textbook will be top of my recommended reading list when it comes out.

Four thoughts on the reformed budgetary process

The new budgetary process announced last week includes an oversight committee within the Oireachtas and a series of stepping stone documents en route to the formal Budget Day announcement speech in October.

These processes are the Spring Statement, to set the tax and spend parameters for the coming 12 months, the National Economic Dialogue, to bring what used to be called the ‘social partners’ together to discuss spending priorities en bloc with Ministers, an expenditure report in early July and the tax strategy papers being circulated by late July.

First thought: A lot of this is happening already, and has been happening for years if not decades.

Think about the process. About half way through the year, a rough spending envelope is envisaged. Lobby groups try to convince Ministers to spend more on their thing, whatever that is, and within the walls of Merrion St., the boffins figure out various tax and spend combinations, which then gets presented to the Minister for her or his sign off on budget day. The same people performing the same processes will be working on the new budgetary processes.

The big difference in today’s formulation is how open and transparent it could be. It may not be. The simple way to make it less transparent is to under-fund the budget oversight committee’s secretariat, plunge them into a sea of unsearchable .pdfs, ignore any requests for raw data by saying something like ‘commercial sensitivity’ or something else, and go to the pub.

Second thought: Assuming everyone engages with an open heart, the big wins may still not be transparent. This is because really stupid ideas like Decentralisation won’t even make it to the floor of the Committee.

The process will have a hard time establishing its importance without additional reports on the distributional impacts or gender impacts of new policies, new models, or an open data framework. Unpopular but necessary fiscal elements (say increasing the local property tax at some point) may well get stymied by a committee afraid to make an voter-unfriendly decision.

Third thought: None of this will avoid last minute dot com political flyers. We may still see weird little subsidies for greyhounds or taxidermists or endangered snails or whatever still creeping in at the last minute, because that’s the way our politics works.

Fourth thought: This is the start of a longer conversation about fiscal oversight and control, vote by vote, within the Oireachtas and within the Government. It is going to be fascinating.