"Permanent drop" in output? How is that even possible?

hatrickpatrick

The ESRI is looking more ridiculous to me every day...
How is it possible that any country could have a "permanent" drop in output? The economy either grows or shrinks every year. We've already seen that the 10% growth over the last few years was absolutely not permanent, but how could a future 10% drop be? If the economy shrinks by 10%, but then grows by 3% over the following 4 years, would that not mean that we have eventually regained the lost output and added 1%?

Sounds like an incredibly pessimistic way of describing what can only possibly be a temporary problem to me...

DarkJager

Doom merchants and nothing more. Great way to raise the spirits of a country by telling them they are basically ****ed.

Économiste Monétaire

They're not saying that there will be permanent negative growth. They're referring to the long-run potential growth in real GDP, and a fall in that means a "permanent loss" in what could have been achieved.

In considering the likely growth path of the economy in the medium term a crucial issue is the potential growth rate of the economy over the relevant period. Potential output is itself a function of the endowment of physical and human capital in the economy. In turn, these vary over time driven by developments in the world economy. The measurement of the potential output of the economy is not straightforward and some of the commonly adopted approaches are described in Appendix 1.

The combination of the bursting of the property market bubble and the world financial crisis has had a substantial impact on the endowment of labour and capital in Ireland. This has served to permanently reduce the potential output of the economy. This reduction has been driven by four factors:

• A significant part of the capital stock has been rendered obsolete through the closure of many businesses. While new investment will take place in the recovery phase, it will take much longer to put in place this new investment than it has taken to write off the investment due to the closure of existing businesses.
• The dramatic increase in government indebtedness will result in a major increase in the burden of taxes, especially of taxes on labour. The deadweight effects of the increased tax burden will adversely affect the economy’s productive capacity.
• The rise in the risk premium on borrowing has not only raised the cost of borrowing for the government but it has also affected the cost of capital for all borrowers. In turn, this means that the optimal level of the capital stock has been reduced and, with it, the potential output of the economy.
• Finally, these factors are also affecting the wider world economy and, as discussed in Section 4 below, there has been a once-off reduction in the potential output of the world economy.

The combined effect of these four factors is that while the Medium-Term Review 2008-2015 (MTR) published in Spring 2008 suggested that the potential output growth rate for the Irish economy over the period 2005-20 was around 3.6 per cent a year, today we feel that it is closer to 3.0 per cent a year. The impact of this reduction in the rate of growth in potential output of the economy is illustrated in Figure 1. This shows the reduction in the expected output of the economy today compared to what was expected as little as a year ago. So for example, we estimate that by 2010, the depth of the current recession will imply that GDP will be almost 20 per cent below the level estimated in the Spring 2008 MTR. This gap narrows over subsequent years as the bounce-back from such a deep recession involves higher annual growth rates in the recovery phase. Nevertheless, even ten years later, these estimates suggest that GDP will be 10 per cent lower. The extreme nature of the recession being experienced, operating through the four mechanisms discussed above, may have resulted in a permanent loss of output relative to previous potential of around 10 percentage points.

http://www.esri.ie/UserFiles/publications/20090513115638/RS007.pdf

Tricity Bendix

DarkJager wrote: »

Doom merchants and nothing more. Great way to raise the spirits of a country by telling them they are basically ****ed.

It's not their job to make us feel better.

eamonnm79

Makes sence to me.

In the same way finding huge deposits of oil and nationalising it would give a perminent increase.

Even though trying to predict economic growth as far out as 2020 in current times of unprecidented uncertainty seems about as reliable as tea leaves.
I guess this means the government projections in Aprils budget shoud be reworked to allow for this and they should try come up with a more updated figure for our level of national debt (as a % of GDP) in five years time.
This is important as all the people and political parties deserve the best possible data before this NAMA thing gets started.

Ronando

What they mean is what has happened to Finland since the early 1990s - see page 18 here:
http://www.irisheconomy.ie/May20th/FitzgeraldMay20th.pdf
You can see the gap between their 1976-1991 economy and their 1991-2006 economy.

For an example of an economy that didn't suffer that fate, check the next slide on the link above (Sweden).

nesf

hatrickpatrick wrote: »

The ESRI is looking more ridiculous to me every day...
How is it possible that any country could have a "permanent" drop in output? The economy either grows or shrinks every year. We've already seen that the 10% growth over the last few years was absolutely not permanent, but how could a future 10% drop be? If the economy shrinks by 10%, but then grows by 3% over the following 4 years, would that not mean that we have eventually regained the lost output and added 1%?

Sounds like an incredibly pessimistic way of describing what can only possibly be a temporary problem to me...

Our previous projected growth "path" was a once off. We are always going to hit a wall and shift into a slower but more sustainable growth path eventually, so not necessarily pessimistic rather it's more realistic.

They are being wholly ridiculous though by [perhaps inadvertently]stating as fact that the Economy will never be the size it was 2 years ago ever again.
So are Lenihan and Cowan.

eamonnm79

Deleted User wrote: »

They are being wholly ridiculous though by [perhaps inadvertently]stating as fact that the Economy will never be the size it was 2 years ago ever again.
So are Lenihan and Cowan.

Actually thats not true. They said it would, in 2021:eek:

Diarmuid

Deleted User wrote: »

stating as fact that the Economy will never be the size it was 2 years ago ever again..

did you read the replies above?

Diarmuid

Diarmuid wrote: »

did you read the replies above?

You mean a permanent loss in what could have been achieved?
Thats a rubbishy wishy washy concept.

nesf

Deleted User wrote: »

They are being wholly ridiculous though by [perhaps inadvertently]stating as fact that the Economy will never be the size it was 2 years ago ever again.
So are Lenihan and Cowan.

The permanent loss isn't in absolute terms, it's more about the speed of expansion of the economy year on year.

I appreciate that,it's the language used thats silly.

Mind you stating that an economy,any economy will never grow at the pace ours was growing at ever again is total nonsense.
Obviously theres a "permanent loss" when it stops growing as we don't have that growth now so can't enjoy it now...
No one can know what the economy will be like in 10 years time.
No one.

nesf

Deleted User wrote: »

I appreciate that,it's the language used thats silly.

It's just the technical term for it. See, the whole problem with the "is the ESRI any use?" debate is that people with no training in the discipline are reading reports that are not written in the "vernacular". They didn't use the term "permanent drop" in order to imply what a lot of people here think it said. I'd agree completely with you if this was the term used by a journalist writing for the man on the street but it wasn't.

As for being silly, in most divisions of technical jargon there are terms whose technical meaning is quite different to what a layperson would infer.

Time Magazine

The ESRI's jargon makes more sense when you consider that what they're saying essentially equates to "The rebound won't make up for everything."

*Cough* I do have a training in Economics

But that aside,what are they doing putting out press releases for the general public wrote in the economic version of legalese then.

Regarding the rebound : My own view is that the lesson is there to be learned [wishfull thinking that it will be learned..?]-theres a model that delivered billions to the tax payer that could have delivered somewhat less to the Economy but something more lasting had it been managed properly.

Micro managed mostly that is.
The people at the front need training and discipline.

nesf

Deleted User wrote: »

But that aside,what are they doing putting out press releases for the general public wrote in the economic version of legalese then.

Press releases from them are aimed at the Economics editors in the media, not your man on the street.

Deleted User wrote: »

Regarding the rebound : My own view is that the lesson is there to be learned [wishfull thinking that it will be learned..?]-theres a model that delivered billions to the tax payer that could have delivered somewhat less to the Economy but something more lasting had it been managed properly.

Micro managed mostly that is.
The people at the front need training and discipline.

Well look at it this way: Economic growth levels in the true Tiger years of the 90's and up to maybe 2002 were extremely high, far higher than is seen in any mature developed country. They were a result of suddenly catching up with the rest of the West and the importation of already existing technologies (be it in terms of machines, training or whatever). From 2002-2007 we had an immigration/property fuelled boom. Economic growth was at normal levels if you "corrected" for population growth over the time (this was only an issue because of the scale of the immigration, Ireland's Labour Force grew from 1.6 to 2.1 million over this period, an increase of 80%).

The former we won't see again unless we spend a decade or so in the doldrums with near zero or negative growth so we fall behind our neighbours again (or a major structural change happens with regard to technology, cheap fusion tech or similar). The latter we could see again, we are small enough for reasonable (on an international scale) influxes of immigrants to massively boost our Labour Force again.

Daithio

nesf wrote: »

Ireland's Labour Force grew from 1.6 to 2.1 million over this period, an increase of 80%).

I think one of your numbers may have been a typo here.

Wouldn't it have been better for the ESRI to phrase it as a permanent drop in output growth levels? I think that would make more sense to both the layman and the economist, tbh. It conveys that our absolute GDP levels will be lower than they would had we continued our unrealistic trajectory, without the unfortunate implication for the layman reading the article that we will never reach the absolute GDP level of 2007 again. Or for the really dumb layman that we will never even have positive growth again.

nesf

Daithio wrote: »

I think one of your numbers may have been a typo here.

Indeed, it should read 31% not 80%. I blame tiredness! It's still an incredible expansion of the labour force over such a small time period.

Économiste Monétaire

On the subject of a decline in potential output, see the latest quarterly report on the EuroArea by the European Commission. Link. Page 27/52 is where the report starts on the effect of the 'economic and financial crisis on potential growth'.

Hasschu

Booms create a virtuous feedback loop that usually last for 4 years or so and end in a mild recession. Hyper booms of the type that lasted from 1987 to 2007 in Ireland created a blast furnace fed with pure oxygen that has sucked the country dry. We are now in a serious downturn which has a negative feedback loop and will last for 10-15 years. We are overbuilt, over spent, deeply indebted individually and collectively, over entitled. We are badly governed but we do that to ourselves knowingly with hopes high that the scams will work out for the better. Reality is for people who cannot face alcohol. We are not the first people whose economy has self destructed and we will not be the last. We have good company in all the small countries in Europe who have been through their individual purgatories since WW2. The important thing now is to suck in the gut, keep the chin up and present a brave face to the world. Even more important is to give at least 20 seconds thought to whom you vote for in the next election.

Time Magazine

Hasschu wrote: »

We are now in a serious downturn which has a negative feedback loop and will last for 10-15 years.

Any basis for that?

Hasschu

The negative feedback loop as I see it is well entrenched at this stage. The gov't is running a deficit, the deficit increases as unemployment and poverty spreads payments to the affected increase. Business sales volumes are dropping leading to more lay offs which further exacerbates the problem for business and gov't. A downward spiral is under way in that gov't outlays are increasing as gov't revenue is declining. The gov't credit rating is declining thus increasing the cost of borrowing, there are covenants in existing gov't debt that trigger interest rate increases if they are not adhered to. Normally the gov't would be able to borrow to provide stimulus to the economy but the gov't has boxed itself into guaranteeing all bank losses (depositors and bondholders) which will cripple the gov't for the next 10 years at least. What will the ECB or IMF advise the gov't to do in these circumstances. Find new sources of tax revenue that are more reliable than VAT, development fees, corporate taxes and so on. Specifically they will suggest property taxes be extended to all types of property, raise corporate taxes to 20%, and fiddle around the margins of other tax opportunities. Reduce gov't expenditures, a whole raft of opportunities there, all painful. Stimulus is required to refloat the economy but the gov't and country have to survive. Can the gov't spend more when it must now pull money out of the economy to keep itself afloat. Jean-Claude Trichet and his management team have been more than fair to Ireland so far. Will the ECB give Ireland tens of billions without conditions attached, not likely. Will the electorate vote intelligently in the Autumn, maybe. Are the political and economic risks increasing in Ireland I would say yes. The labour climate is doing nothing to assuage the doubts of our creditors. When I see turmoil on the streets as being probable I would like to think it has some basis in reality.

asdasd

It's not their job to make us feel better.

They did their best during the boom, to be fair.

Hasschu's points are good but the whole thing depends on the ridiculous guarantees to the banks. Morgan Kellys ideas of handing it to the bond holders would solve that problem, and allow the government to get on with everything else.

The one bright spark is Ireland's actual exports are increasing. Thats an increase in the percentage of world exports we produce, since world trade is in freefall. If the world economy grows, and the Irish percentage remains the same, exporting industry will need more employees to meet that demand, and each manufacturing job creates many down the line.

graw

The answer to the question being asked by the original poster is...Hysteresis. Is this theory not covered in ECON101? :-/

The Recliner

graw wrote: »

The answer to the question being asked by the original poster is...Hysteresis. Is this theory not covered in ECON101? :-/

Do they not teach you to read the dates of threads you are replying to in ECON101?

The thread is almost a year pld, please don't drag up old threads as the info or discussion is out of date and the posters who started it may no longer be around