Property tax – understanding cause and effect

This is my first post on Irisheconomy.ie, having served my time as apprentice in the Keyboard Warrior army with my own blog, so hopefully it’s useful to set out how I envisage using this site. My research interests are urban economics (including property markets) and economic history. When it comes to the Irish economy, my interests are probably best categorised as follows (in no particular order):

  • Irish government finances
  • the property market
  • Ireland’s international competitiveness

I had thought that maybe my best option to open my account on this site would be to do a post on each and start a conversation. Fortunately, the Irish policy debate is far too exciting and so this morning we have a story (see for example Charlie Weston’s article in the Independent) that covers all three areas: the property tax.

Krugman and the ESRI

Paul Krugman criticises the ESRI’s Recovery Scenarios paper:

What the careless reader might miss, however, is the fact that the policy conclusions are not, in fact, derived from the analysis — they come out of thin air. The authors simply assert that more austerity now would lead to a lower risk premium and hence higher growth, based on no evidence I can see.

This criticism appears to relate to the paragraph on page 41 of the report starting with “Recent experience ..”

Two aspects of this criticism strike me as unfair.

First, the assertion that Krugman refers to appears to be the following concluding sentence:

It also raises the question as to whether a more rapid fiscal adjustment than currently planned would have a more beneficial outcome for the economy. 

This seems to be pretty far from an assertion. Rather it flags this idea as something to consider. Krugman seems to be jumping on the ESRI for what it is little more than a speculative remark.

Second, in relation to the “based on no evidence that I can see” comment, I’d note that the relevant paragraph contains the following sentence:

This means that action to reduce borrowing, which would otherwise still be deflationary, could actually increase domestic activity if it produced a sufficient reduction in the risk premium (Alesina, 2010).

Now I’m guessing that Krugman has no time for the analysis in Alesina, 2010 (and he may be correct in this assessment) but it’s still worth noting that the ESRI did cite evidence from a Harvard economist when making the supposed assertion.

What seems to be happening here is that the ESRI-bashing is just a small element in Krugman’s greater campaign of opposing austerity in the US and Germany (with which I’m sympathetic.)  However, it’s worth recalling that last year, Krugman noted about Ireland that “there isn’t much disagreement about the need for fiscal austerity. As far as responding to the recession goes, Ireland appears to be really, truly without options” and referred to an “Irish-type fiscal straitjacket.”

I’d be surprised if Krugman’s assessment of the bond market’s attitude to Ireland has changed much since then: The spread over bunds of the Irish ten-year bond was 282 basis points yesterday versus 293 the day Krugman’s Erin go Broke column was published.

So while kicking around a little research institute his readers have never heard of may seem to provide a nice example-de-jour of crazy people advocating Herbert Hoover economics, in truth it’s likely that even Paul Krugman doesn’t really believe Ireland is in a position to abandon austerity.