Free riding

Nice article in the Irish Times today by Jim O’Leary. I particularly liked the following unusually honest section:

The case for borrowing more to fund an attempted stimulus package would be more difficult to rebut if there was a high probability of it being successful, but fiscal stimulus is notoriously difficult to effect in a very open economy like Ireland. The reason is that a high proportion of any increase in demand leaks out through imports.

From our point of view, the best sort of stimulus package are those put in place by our trading partners since these boost demand for our exports without costing us anything. And here, the good news is that most of our main trading partners have announced reflationary fiscal measures of one sort or another in recent weeks/months. What we need to do is ensure that we are well-positioned to avail of the opportunities that will flow from these and what that means, first and foremost, is reducing our production costs to competitive levels.

It is hard to disagree with the logic. If the amazingly profligate government we have had over the past decade had listened to people like JOL on issues like benchmarking, then we might have tried to pull our weight as part of a Europe-wide reflationary package, but as things stand, we are going to have try to free ride. Not very glorious (and rebalancing the books will obviously make a bad recession worse) but there you are.

But let’s hope that too many others don’t also take a similar view! The thing about free riding is that what is individually rational can be collectively disastrous. Dani Rodrik is gloomy here.

CSO release: Institutional Sector Accounts: Financial 2001 – 2007 (Revised)

The Central Statistics Office, Financial Accounts Division, National Accounts has released “Institutional Sector Accounts: Financial 2001 – 2007 (Revised)”.

An e-copy of the release is available on the CSO Website.

An Excel version of the tables from the release is also available on the CSO Website.

St Stephen’s Day entertainment

In case you can’t wait for blogger PH’s rivetting radio lecture: “The Financial Crisis: Ireland and The World” (recorded yesterday before a live audience but not being transmitted until St Stephens Day), you can get the text here.

It’s mostly an interpretation of the causes of — and policy reaction to — the global crisis, and corrects several common fallacies or half-truths.

The Ireland-relevant take-away: Our banking problems were caused by globalization…but not in the way you may think.

It was the fall in interest rates on euro adoption that triggered much of the bubble; easy access to international funding that fuelled it.

(Irish banks’ net foreign borrowing 2003-7 amounted to 50 per cent of GDP; Icelandic banks didn’t do any net foreign borrowing!).

On Deficits and Debt

Colm McCarthy provides an interesting analysis in the Irish Times today (December 3rd 2008) about the poor November tax returns.  A key issue raised by Colm is the market’s appetite for sovereign bonds, in view of the projected rapid increase in issuance across the advanced economies. Since there is a general increase in risk aversion, it will be important to ensure that Ireland is perceived as a low-risk sovereign. To this end, it is important for the government to establish a new multi-year fiscal programme that shows how the growth in public debt will be managed, with a clear plan to return the debt to a sustainable path once economic recovery takes hold.

Fiscal Policy for a Slowing Economy

The general budget balance for Ireland has sharply declined, with a surplus in 2007 being transformed into a deficit of at least 5.5 percent of GDP in 2008 and a target deficit of 6.5 percent of GDP in 2009.

The appropriate fiscal balance for Ireland was the subject of a panel discussion at the ESRI Budget Perspectives 2009 Seminar in October 2008.  Papers and/or presentations by Ray Barrell, Joe Durkan, Patrick Honohan and Philip Lane are available here.

There is also a relevant paper by Philip Lane from the ESRI Budget Perspectives 2008 Seminar, held in October 2007:  ”Fiscal Policy for a Slowing Economy” .

More generally, the appropriate fiscal policy for a small open economy that is a member of EMU is the subject of an IRCHSS-funded research project that is led by Philip Lane. You can learn more about this project here.

A New Policy Angle on Resolving the Financial Crisis

The Wall Street Journal (December 1st 2008) has an interesting article on how Latvia is dealing with pessimistic economic commentators. Click here for the article.

How to Combat a Banking Crisis: First, Round Up the Pessimists
Latvian Agents Detain a Gloomy Economist; ‘It Is a Form of Deterrence’

RIGA, Latvia — Hammered by economic woe, this former Soviet republic recently took a novel step to contain the crisis. Its counterespionage agency busted an economist for being too downbeat.

“All I did was say what everyone knows,” says Dmitrijs Smirnovs, a 32-year-old university lecturer detained by Latvia’s Security Police. The force is responsible for hunting down spies, terrorists and other threats to this Baltic nation of 2.3 million people and 26 banks.

Now free after two days of questioning, Mr. Smirnovs hasn’t been charged. But he is still under investigation for bad-mouthing the stability of Latvia’s banks and the national currency, the lat. Investigators suspect him of spreading “untruthful information.” They’ve ordered him not to leave the country and seized his computer.