Category: Economic growth

More on Savings Rates in Ireland.

Seamus’ excellent post today reminded me to post something I looked at some weeks ago. The September Budgetary and Economic Statistics from the Department of Finance carried some really useful information in Table 25 on investment, Gross National income, and gross and net savings. The figure below shows the evolution of gross and net national saving and the gross total available for investment from 1995 to 2010.

We can see clearly from the figure that the spike in net national savings in 2007 is rapidly diminished, with only 21 million euros put aside, so to speak, in 2009, and 1951 million euros in 2010. Occasionally the notion gets floated that there is a load of money somewhere in a bank account to be taxed. This should be dispelled rather quickly, as households don’t seem to be saving their way through the crisis much at all. In addition, the total available for investment seems to have dropped off, with no rebound in sight, which is a worry.

Census 2011 – Preliminary Results

The preliminary results of last April’s Population Census are available here.

They show continued strong population growth, averaging 1.6% a year over the last five years.

The CSO is to be complimented on the timely production of this very informative release.

Seamus Coffey on the Savings Rate

One of the point that has been made repeatedly about the Irish economy over the past year or so is that weak domestic demand is connected with a high savings rate. (Admittedly, the actual national income data on personal savings rates are only available with a long lag but the slow pace of consumption spending is consistent with this story). Many, including now Minister Noonan, put this increase in the savings rate down to discretionary precautionary savings and believe that once people relax about their future, domestic demand will take off again.

I’ve always been pretty skeptical of this argument. My take on spending patterns has been that the increase in the savings rate may be more connected to people who had previously been able to live beyond their means having to pay back debt because of the change in financial market conditions, while others who have always saved continue to do so.

The implications of this story for the future evolution of the savings rate are quite different. There is little reason to think those who have been saving all along (e.g. for retirement) will reduce their propensity to do so. Indeed, if they were reliant on their funds invested in Irish property or in Irish pension funds now subject to the new levy, then the opposite would be the case. And those who are apparently saving because they are re-paying debt are, in practice, feeling as if every euro they earn is earmarked for either debt repayment or managing to keep going. These people are also unlikely to suddenly start spending if the economy stabilises.

Anyway, I’ve meant to make that point on this blog loads of times but didn’t. Then Seamus Coffey wrote this excellent post and, in comment speak, I want to say “What he said.”

Poor Economics

One of the most important economics books aimed at wider audiences to emerge in the last few years is Poor Economics by Abhijit Banerjee and Esther Duflo. Banerjee and Duflo are two of the leading economists of their generation and are particularly associated with the use of randomised controlled trials in development economics. However, this book is broader in its scope and tackles a wide range of issues in the economics of poverty, development economics and the economics of the family. The book has ten chapters and two major sections, one dealing with individual behaviour among the poor and the second dealing with the role of institutions. Like the best popular economics works, each chapter deals with very big issues backed with the recent literature but presented in a punchy and readable fashion. It is a cracking read. The first section deals with nutrition, public health interventions, education interventions and fertility. The second section looks at insurance for the poor, microcredit, savings and entrepeneurship. Chapter 10 sets their argument in the overall context of development debates raging between people like Sachs and Easterly.

The book pushes strongly for the continued development of experimental approaches to economic development that attempt to find workable solutions that large-scale philantrophic and government funding initiatives could be aimed toward. It is important reading for anyone working in microeconometrics and development economics broadly defined and also would be great reading for anyone in Ireland working around the area of foreign aid policy. I open up this thread for anyone who wants to debate aspects of the book or the surrounding issues. From an irisheconomy perspective, it is worth thinking about how the ideas in the book might influence how the Irish government directs the overseas aid budget.

Why we should hope fiscal multipliers are large

One of the frustrating things about doing macroeconomics during the crisis is that it is so hard to pin down key empirical parameters.    The size of fiscal multipliers is probably the main case in point.   The combination of short time series and a wide range of conditioning factors – confidence effects, the state of credit markets, import leakages, etc. – make it hard to identify the causal impacts of changes in taxes and government spending.  

While there is a widespread view that Irish fiscal multipliers are small (mainly due to the openness of the economy), I have always believed this is exaggerated given offsetting factors such binding credit constraints, an almost completely accommodating monetary policy and a large negative output gap.  At a time when I thought Ireland could retain its creditworthiness, this led me to believe we should pursue as gradual a fiscal adjustment as the State creditworthiness constraint would allow.    But with creditworthiness proving more fragile than expected, there is now little choice but to move expeditiously to close the deficit. 

With significantly more fiscal adjustment to come – probably at a minimum the €9 billion planned for in the EU/IMF programme – there is an obvious reason to hope fiscal multipliers are small.   But there is also a reason to hope they are large.   With the IMF reducing its growth estimate for 2011 and the exchequer returns hinting at a weaker than expected recovery, we would be better off if the fiscal adjustment is a significant source of the observed weakness in domestic demand.  

It is the underlying rate of potential output growth that really matters for Ireland’s debt sustainability.   Uncertainty about this rate is a significant part of our creditworthiness problem.    As others have pointed out, there are competing narratives about Ireland’s medium-term growth potential.   On the positive side is the strong growth in net exports (which added about 3.5 percentage points to Ireland’s real GDP growth in 2010).  On the negative side is the combined impact of the fiscal austerity and the drag from impaired balance sheets (which subtracted about 4.5 percentage points from growth in 2010).  

While unfortunately we are in for a good deal more austerity, it will eventually end; the more of the current drag on domestic demand that is coming from the austerity, the higher is the implied underlying potential growth rate.   Even if the fiscal adjustment is making less headway now in reducing the deficit due to relatively high multipliers, the large changes in taxes and social welfare rates should allow for a rapid improvement in the deficit once the austerity ends and decent overall growth returns.    The hoped for growth narrative – which I think we have good reason to believe is true – is that Ireland has an economy with a strong underlying export-driven growth potential that is being temporarily held back by unavoidable fiscal adjustment.