Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

Potential output from a euro-area perspective

This ECB working paper is worth going through. The potential output calculation is very important for policy makers, because deviations from the economy’s potential output tend to form a large part of the evaluation of macroeconomic performance used by the European Commission and others. Two recent Central Bank working papers discuss the impact on the Irish economy of these measure. See here and here. The estimates have been, shall we say, fairly far off the mark. The chart below shows this. Understanding the potential output calculation is therefore really important when we talk about policy responses to changes in fiscal policy, especially at the EU level.

 

Unicef’s Report Card

Worth going through, here are the highlights, download the whole report here (.pdf).

  • Ireland ranks 37th of 41 OECD countries, ahead of Croatia, Latvia, Greece and Iceland in a league table measuring relative changes in child poverty.
  • The recession has hit 15-24 year olds especially hard. Ireland ranks 14th out of 41 countries in a league table measuring the change in NEET. The NEET league table refers to young people who are “Not in Education, Employment or Training” increased by one point to 16.1%.
  • In a Gallup poll surveying people’s perceptions of how their lives have changed Ireland ranks 38th out of 41 countries across the OECD, ahead of Turkey, Cyprus and Greece. Irish families are experiencing additional stress and have a lower overall satisfaction with life. The data further shows that people do not believe children in Ireland have the opportunity to learn and grow every day.
  • 18 OECD countries recorded a reduction in child poverty during the same period, including Chile, Australia and Poland, which saw a reduction of 7.9%.

I found the charts on pages 8 and 9 very interesting as well.

Hair of the Dog?

Michael O’Sullivan’s latest Dublin Review of Books piece is here, and it is well worth reading.

Ireland

Micheál Collins of the Nevin Institute is out with a new paper looking at the burden of taxation by income decile by tax-type, and the results are very interesting. From the piece:

Using data from the most recent Household Budget Survey, this paper estimates both the direct and indirect taxation contributions of households. The paper examines, individually and collectively, the direct and indirect tax paid by households across the income deciles, alongside the overall average household contributions. The data is presented at the households and equivalised adult level.

This chart summarises the findings nicely.

Update: Micheál has responded to many of the main points raised in the thread here.

Insidious Ireland

IMF Economists Bas B. Bakker and Leslie Lipschitz propose a taxonomy of balance-sheet crises in a new IMF working paper (.pdf). The basic distinction is between ‘Conventional’ and ‘Insidious’ balance sheet crises.

A conventional balance sheet crisis happens because of external imbalances, typically large gross flows into or out of the country, causing balance sheet vulnerabilities, typically in non financial corporate sectors, which then blow up the economy. The insidious balance sheet crises have the conventional crisis features plus way off-balance expectations and really off portfolio effects.

The authors find Ireland and Japan insidious. Fair play to them.

From the paper:

Conventional and Insidious Macroeconomic Balance-Sheet Crises; by Bas B. Bakker and Leslie Lipschitz; IMF Working Paper No. 14/160; August 1, 2014

This sort of crisis would usually be preceded by a long period of excellent economic results—rapid growth led by exports, sound policies, and strong external accounts—that gives rise to an enduring positive perception of the economic prospects. The difficulties arise when a normal, equilibrating shift in relative prices—an increase in the prices of nontraded goods and assets relative to those of traded goods—gets built into investor expectations and elicits a rapid, and eventually excessive, reallocation of credit and domestic real resources.

The paper is excellent and worth reading as a narrative of a series of crises, but it’s not clear what Bertie et al would have done in 2004 in Ireland, had we had this paper to guide them, because the conventional vs. insidious distinction isn’t clean-cut. The discussion on pages 29-31 of the paper on China are fascinating. A deeper dig into financial history might help get more salient case studies to iron out the distinctions.