Proposals are still being accepted for the DEW conference in Galway on October 12-14 next. Topics in any area of economic policy will be considered and proposals should be emailed to colm.mccarthy@ucd.ie
Daivid Laidler (University of Western Ontario) will be the keynote speaker and the programme, with booking details, will be issued early in September.
In a series of informative comments across recent threads, Michael Hennigan has raised important questions relating to the reliability of the recorded growth in key macroeconomic aggregates, and also the employment performance of internationally traded sector in general and the foreign-sector in particular. (See here for a useful summary from his Finfacts website). Although Michael watches these figures much more closely than I do, and so I hesitate to contradict him, I find it hard to share some of his concerns.
First a point of agreement: At roughly 100 percent of GDP, Irish exports are strongly influenced by the activities of multinationals operating in Ireland, and the numbers tell us little about value added and incomes in Ireland. Where I have difficulty following Michael is in his concerns about the reliability of Irish GNP and GDP figures. GNP excludes the profits of multinationals (and not just repatriated profits), and so should be immune from concerns over tax-driven transfer pricing. GDP excludes imports (including intermediate imports and royalties). Michael says the Irish exports are overstated by one third. If he has a chance, he might explain this in more detail, and also how he sees it affecting measured GNP and GDP given the exclusions just noted.
Michael also notes that employment in the foreign-owned sector has fallen from 166,000 in 2000 to 144,000 in 2011. This fall is certainly very regrettable. But it occurred during a massive bubble-driven, structural mal-adjustment of the economy. Given the extent to which the bubble affected the allocation of resources, I am surprised the damage done to the traded sector was not much greater. Part of the answer would appear to be the highly elastic labour supply response – notably through immigration – which allowed the construction and other non-internationally traded sectors to expand, while limiting the damage to the traded sector.
I do share Michael’s concern over risks around the projected return to robust growth after 2013. But my main concern is a prolonged “balance-sheet recession”—and not just in Ireland. While Michael’s description of the nature of much multinational activity in Ireland seems accurate, I find it hard to share his concerns about its implications for measured Irish growth performance. I am ready to be corrected.
Jerry Caprio makes a TED-style presentation here.
Have the Troika’s 2014 targets on jobs numbers have already been met? This new working paper by UCD’s Niamh Hardiman and the IPA’s Muiris MacCarthaigh seems to suggest it has. The 2014 target is here on page 64 of the national recovery plan.
From a recent Dail question:
The numbers working in the public service have continued to fall, with the provisional outturn for the end of last year now standing at 296,900, which means we are now at close to the 2005 staffing levels. This is a year-on-year reduction from the end of 2010 of more than 8,500. The employment control framework ceiling for the public service in 2011 was 301,000. To exceed this target by more than 4,000 is impressive.
The authors make good use of the new department of public expenditure and reform’s databank in their work, and it produces this figure.
Michael Hennigan noted fairly enough that my previous post was a bit on the arcane side. I’m afraid he will see this one as no better.
I think it is worthwhile to take a step back and think about how ECB bond buying could have positive effect, and to think about the effectiveness of past and possible future bond-buying programmes in that light. A useful starting point is to recognise that the willingness to pay for a bond with a given face value and coupon rate depends on the “risk free rate” and the perception of default risk. If everyone agreed on the default risk, then the demand curve for bonds would be perfectly flat. If a bond buying programme did not actually change the perception of default risk, then bond buying would have no effect on secondary market price and thus on yields. (A useful way of thinking about official bond buying is that it shifts the market supply curve leftwards; if the market demand curve is horizontal, then there will be no change in price (and thus yields)).
However, if there are varying perceptions of default risk, then – even if the bond buying programme itself does not change anyone’s perception of default risk – the programme will raise bond prices (and reduce yields), as the market moves up along a downward sloping demand curve. (The differing perceptions of default risk is what makes the demand curve downward sloping, given the resulting variation in willingness to pay.) My sense is that this is what broadly happened in the first phase of bond buying. The weak commitment to the programme did little to change actual perceptions of default risk. Thus, while purchases were somewhat effective in reducing yields, the positive impact was very limited, as ultimate default risks were left largely unchanged. The programme ended up in failure.
It seems Mario Draghi is well aware of this, and he wants any future to operate quite differently. The key is to provide a credible commitment to keep yields down and ensure that expectations of a “bad expectational equilibrium” do not take hold. But there is understandable concern over moral hazard. Although some European policy makers seem to have a difficult time giving up on market discipline (even after Deauville), I don’t see how we can pull out of the crisis unless the perception of default risk is kept low. This leaves “conditionality” as the only feasible disciplining device. But I don’t see how the ECB would be in a position to make a credible commitment to do what it takes unless this alternative disciplining device is in place, which explains the requirement that benefiting countries enter a programme.
The goal should be to take risk of sovereign debt restructuring off the table as far as possible in any future programme. (The example of Greece shows that the possibility of restructuring cannot be completely removed; and it did the credibility of the Trichet-led ECB no good to make ludicrous statements that restructuring was impossible.) Mr. Draghi’s (vague) commitment to revisit ECB seniority can be viewed as backing up this approach, so that even in the low probability event that there is a restructuring, the losses would be shared with official creditors.
(As an aside, I think that a major factor behind the fall in Irish yields is the that, even if there is need for a second programme, the risk of a debt restructuring being part of that programme has fallen significantly.)
Overall, Mr. Draghi seems to moving in the right direction. Let’s hope he can deliver.