Oliver O’Connor interprets the election results for WSJ readers here.
Ireland Revolts for Stability
- Post author By Philip Lane
- Post date February 28, 2011
Category: Economic Performance
Dan O’Brien completes his excellent two-part comparison of the Irish and Icelandic economic crises in the Business section of today’s Irish Times. Today’s instalment is available here; last week’s here.
Update: Paul Krugman responds here.
Some conclusions (it is important to read the articles for full context):
The first conclusion is that the size of the bubbles in the two economies – rather than anything that happened when or after they burst – was the main determinant in explaining the magnitude of the two calamities.
. . .
The second stand-out fact from a comprehensive comparison between the two economies – in this case since the bursting of the bubbles – has been the role of exports in contributing to recovery. . . . [T]here has not been a significant difference in export performance between Ireland and Iceland.
This is not at all what one would have expected. While being part of the euro protected Ireland from even greater instability during the worst of the crisis, the downside of being locked in to a single currency is that devaluation is unavailable as an option to rapidly regain competitiveness and make adjustment to the shock easier to deal with.
Iceland suffered all the downside of having its own currency, but far less of the upside. Iceland’s export performance has been nowhere near as strong as one would have expected following a 50 per cent devaluation, while Ireland’s has been better than could even have been hoped for.
And the absence of an export boost from exchange rate depreciation has not been confined to Iceland alone. Another neighbour has been similarly disappointed, as the chart illustrates. Despite the weakening of sterling, British exports remain below pre-crisis levels.
No currency regime is perfect and all have positives and negatives. Although things may very well change, at this juncture the benefits for Ireland of being part of a much larger single currency have been considerably greater than the benefits to Iceland of having its own currency.
But the most important policy lesson from all this, it would seem, is that policy actors must be far more willing to make calls on whether bubbles exist and to take measures to deflate them if they conclude that they exist. Of course, this is not easy as there is no way of knowing for sure whether growth is sustainable or mere froth. But given all that has happened, the case for pre-emptive pricking of suspected bubbles appears incontestable.
This is an addendum to John McHale’s last post and a response to JTO’s plea for more real data on this site. Below is a consistent series (based on CSO data) for the net migration rate from 1961 to 2010. The net flow has been expressed as a rate per 1,000 average population. The years are to end-April.
We await with great interest the results of the 2011 Census, which will give us a fix on the migration trend for the year ending April 2011 and allow the estimate for 2002 to 2010 to be updated.
Preliminary Census results should become available by the end of the summer.
The twin problems of unemployment and the public deficit make it imperative to search for low-cost schemes that can help to stimulate employment creation. “Marginal employment subsidies” were much discussed in the international literature in the early 1980s and might have a role to play today.
A specific and fairly modest proposal to start with would be to abolish employers’ PRSI contributions for new jobs; i.e. for any increase in a firm’s employment over and above the level recorded at a specific date in the past, e.g. X/X/2010. (The importance of choosing a date in the past is that it would prevent firms gaming the policy by shedding jobs in advance of its introduction). This avoids the extensive deadweight losses associated with e.g. a cut in employers’ payroll costs. There would still be some deadweight loss in tax revenues resulting from jobs that would have been created anyway, but it seems unlikely that there is much new employment creation at present. The proposal would amount to a wage subsidy of over 10% for new jobs. (If it looked like it was starting to have an effect, it could be extended by taking into account some of the resultant savings in social welfare).
Care would need to be taken to prevent firms closing down and establishing under a new name to exploit the scheme, but I assume this could be surmounted.
Many of the existing schemes in place today (details here) might be thought similar to the present proposal. Most are targeted however at particular groups of disadvantaged workers, which make them less likely to succeed, and, as far as I recall, some displacement effects were found. The present proposal avoids these.
The proposed scheme might be gradually wound down as follows: the implicit subsidy to be reduced by Y% for each 50,000 jobs recorded in the economy over and above the level prevailing at X/X/2010.
If the economy were solely cost-constrained, the proposal would raise employment through both the output and substitution effects. The substitution effect will still apply if the economy is purely demand-constrained, and by getting people back to work will have beneficial demand effects.
Examples of the literature from the 1980s include:
Chiarella, C., and A. Steinherr (1982), “Marginal employment subsidies: an effective policy to generate employment”, Commission of the European Communities, Paris, Commission of the European Communities Economic Papers No. 9, November.
Layard, R., and S. Nickell (1980) “The case for subsidizing extra jobs”, Economic Journal, Vol. 90 pp.51-73.
Oswald, A. J. (1984) “Three Theorems on Inflation Taxes and Marginal Employment Subsidies”, Economic Journal, 94, 375.
Whitley, J. D. and R. A. Wilson (1983) “The Macroeconomic Merits of a Marginal Employment Subsidy”, Economic Journal, 93, 1983.
See also:
Snower, D. (1994), “Converting unemployment benefits into employment subsidies”, American Economic Review, Vol. 84 pp.65-70.