Unpleasant Stimulus Arithmetic

ei.sdraob

Some Krugmanites here on forum keep harping on about reversing cuts and a stimulus (ignoring the 25-20 billion a year stimulus we are already clocking up..)

Karl Wheelan over at irisheconomy.ie site has an interesting article

to summarize
A stimulus in an economy as open and small as Ireland would be like pouring water into a pot with large holes in it
and the bond market is already jittery about Ireland

Laminations

Doesn't it depend on the stimulus? Starting some large capital projects would provide jobs and maybe start some money circulating. Can't really see how money spent building schools or on major rail projects could vanish out of the country

ei.sdraob

Laminations wrote: »

Doesn't it depend on the stimulus? Starting some large capital projects would provide jobs and maybe start some money circulating. Can't really see how money spent building schools or on major rail projects could vanish out of the country

Is there anywhere in Ireland that produces rails anymore or produces fuel that would be required for construction vehicles? there's your answer and point 1 made by Karl, alot of stuff gets imported here and that money will go straight out, the car scrapage scheme is an good example with money going straight to foreign automakers with Bill Cullen getting a cut.

You completely ignored point 2 about bondholders being jittery and afraid to lend at low interest.

If we take a loan of lets say 10 billion at 5% over 10 years, whatever the money goes into building better a provide a return of more than 5% in that time-frame or you just pissed money away at a bad time

Construction was 25% of our economy at one stage, what will happen when stimulus money runs out (assuming someone would be willing to lend money for one in first place at low interest)? yep back to square one

dan_d

That's a good theory...but exactly what is suggested that we should do (haven't had time to read the link)?

Do we just sit back and wait for our turns in the line to leave to other, not-so-open economy countries??

ei.sdraob

dan_d wrote: »

That's a good theory...but exactly what is suggested that we should do (haven't had time to read the link)?

Maybe you should read it first and you would get the answer

short version:

Continue with the cuts (This article is a response to Krugmans blog post which itself is a response to ESRI report)
Cutting the fat that buildup due to an unsustainable property bubble
Current PS and Welfare spend is still based on levels of income expected of an economy that is no longer running on property speculation steroids

dan_d wrote: »

Do we just sit back and wait

We have no choice but to let this mess created by a property bubble unravel
Preventing this from happening via measures such as NAMA
will only prolong the pain, and instead of a short sharp recession making a decade long depression

whatawaster

ei.sdraob wrote: »

Maybe you should read it first and you would get the answer

short version:

Continue with the cuts (This article is a response to Krugmans blog post which itself is a response to ESRI report)
Cutting the fat that buildup due to an unsustainable property bubble
Current PS and Welfare spend is still based on levels of income expected of an economy that is no longer running on property speculation steroids




We have no choice but to let this mess created by a property bubble unravel
Preventing this from happening via measures such as NAMA
will only prolong the pain, and instead of a short sharp recession making a decade long depression

I can't for the life of me remember where i read this, but i remember an economist writing that there were no (or maybe only 1) examples he could find in history of an economy cutting and taxing its way succesfully out of a recession.

That the viable options were 1) depreciating currency or 2) fiscal stimulus, or both.

Now I know the currency option is not open to us, and we probably don’t have the resources left for a stimulus, but isn’t hard to see the path we are going down (taxes and cuts) doing anything other than prolonging our pain. Less and less money going into the economy surely will mean fewer and fewer jobs, less tax receipts and the problem getting worse.

danbohan

ei.sdraob wrote: »

Maybe you should read it first and you would get the answer

short version:

Continue with the cuts (This article is a response to Krugmans blog post which itself is a response to ESRI report)
Cutting the fat that buildup due to an unsustainable property bubble
Current PS and Welfare spend is still based on levels of income expected of an economy that is no longer running on property speculation steroids




We have no choice but to let this mess created by a property bubble unravel
Preventing this from happening via measures such as NAMA
will only prolong the pain, and instead of a short sharp recession making a decade long depression

a decade long depression

it might be lot longer than that !

ei.sdraob

whatawaster wrote: »

I can't for the life of me remember where i read this, but i remember an economist writing that there were no (or maybe only 1) examples he could find in history of an economy cutting and taxing its way succesfully out of a recession.

That the viable options were 1) depreciating currency or 2) fiscal stimulus, or both.

Now I know the currency option is not open to us, and we probably don’t have the resources left for a stimulus, but isn’t hard to see the path we are going down (taxes and cuts) doing anything other than prolonging our pain. Less and less money going into the economy surely will mean fewer and fewer jobs, less tax receipts and the problem getting worse.

You are missing the big picture

Irish recession is caused by a huge property bubble and made worse by public finances that grew dependant on once off receipts based on this bubble

The money is already gone, actually most of it wasnt there in first place and was based on lending tied to clearly overvalued assets

The expenditure we are cutting now is not being paid by from taxable receipts but from borrowing at high interest

and there my friend is the big difference

if the budget was in any way balanced then you might have a point but we are like a drug addict now who blew all his savings on heroin now borrowing money from the dealer himself to buy more drugs

you dont get out of debt by getting into more debt

whatawaster

ei.sdraob wrote: »

You are missing the big picture

Irish recession is caused by a huge property bubble and made worse by public finances that grew dependant on once off receipts based on this bubble

The money is already gone, actually most of it wasnt there in first place and was based on lending tied to clearly overvalued assets

The expenditure we are cutting now is not being paid by from taxable receipts but from borrowing at high interest

and there my friend is the big difference

if the budget was in any way balanced then you might have a point but we are like a drug addict now who blew all his savings on heroin now borrowing money from the dealer himself to buy more drugs

you dont get out of debt by getting into more debt

I agree that cuts, particularly in the public sector and social welfare, need to be made. Long term, we can’t go on as we have been.

However, my point still remains – I can’t see any way that this course of action is going to do anything to ease or end this recession. Spending is going to continue dropping and job creation is going to remain difficult. Our expenditure is going to be reduced with these cuts, but so are our tax receipts, particularly VAT.

ei.sdraob

whatawaster wrote: »

I agree that cuts, particularly in the public sector and social welfare, need to be made. Long term, we can’t go on as we have been.

However, my point still remains – I can’t see any way that this course of action is going to do anything to ease or end this recession. Spending is going to continue dropping and job creation is going to remain difficult. Our expenditure is going to be reduced with these cuts, but so are our tax receipts, particularly VAT.

I made a thread last year (and will update whenever new stats come along)

That clearly shows the effects of the bubble on the expenditure side and income, there was also graphs by others in a thread before which illustrated how dependant the income side was on once off property receipts

You might view this as a "recession" but I view the last 2 years as a long overdue correction and a return to "normal"

Yes it is sad and yes people are loosing jobs (mostly in construction as per CSO stats) but short of of burying head in sand and wishing for another bubble we are not getting back to the bubble days

The country is alot poorer (tho we have clocked up debt privately and are now racking up debt publicly) but not because it suddenly became poorer but because we thought we were rich based on overvalued property/land valuations and spend accordingly.

Sleepy

whatawaster wrote: »

I agree that cuts, particularly in the public sector and social welfare, need to be made. Long term, we can’t go on as we have been.

However, my point still remains – I can’t see any way that this course of action is going to do anything to ease or end this recession. Spending is going to continue dropping and job creation is going to remain difficult. Our expenditure is going to be reduced with these cuts, but so are our tax receipts, particularly VAT.

Quite simply, cutting spending won't end the recession, exporting goods and services is our only real way out of it. Cutting costs means that we don't borrow our way into a default, that we don't borrow so much that the cost of repayment completely cripples the economy via the need for high taxation and that there's the potential left in our country for businesses to operate successfully.

Cutting government spending will bring the states income and expenditure closer together (the latter should never exceed the former without an expected return on the investment higher than the cost of the borrowing imho). Yes, tax receipts will drop correspondingly to cuts in expenditure but crucially: not by the same amounts.

If John Q. Public Sector Worker earns €100 less that he would have otherwise spent on a VAT liable good that's about €17 in VAT lost to the government. Follow the provision of the good down the value chain and some of that initial €100 will be lost to the economy but a sizeable chunk of it will no doubt leave the country at some point given that we're such a small and open economy.

This will lead to less borrowing, which leads to lower debt servicing bills for the state in the coming years. Lower future bills for the country means lower tax levels can be imposed (to promote entrepeneurial activity) or more of our tax revenues can be spent on necessary services and capital projects than we could otherwise afford.

George Orwell 1982

It would be nice if we could do stimulus and you probably could target the investment so more of the spill over benefits stayed within the country. However Ireland just doesn't have that room to manouvre. We can't bail out the banks, reduce the deficit and do stimulus. Something would have to give. In fact we may not even be able to bailout the banks and reduce the deficit, never mind stimulus.

Laminations

ei.sdraob wrote: »

You might view this as a "recession" but I view the last 2 years as a long overdue correction and a return to "normal"

The property Market has stagnated, the jobs Market has stagnated, lending (even to viable SMEs) has stagnated. What part of that sounds like a 'normal' economy? I understand what you are saying about a correction and I'd phrase is that we need to improve our competitiveness and become more 'low cost' across the board, but to say this is not a recession is putting your head in the sand, and cuts alone will only dig the hole further so your head can fit in deeper. Any money we spend in this country, part of it goes abroad. And yes the materials/manufacturing side of the capital projects would not be a stimulus here but the jobs creation side and the infrastructure creation side would maybe produce some confidence and stimulate spending?

ei.sdraob

Sleepy wrote: »

exporting goods and services is our only real way out of it.

Yes spot on, selling products/services that the rest of the world needs and wants (since our internal market is too small) is the way forward

The way out of this mess is a combination of cutting the fat / broadening the taxbase / and doing everything to encourage exports

FF (to their credit) have a no corporation tax for a year for new companies with under ~120K turnover or so, thats a good move
This should be expanded to attract more companies from abroad, low corporation tax is the only thing Ireland has going for it and we should play on this before other countries follow (@Scofflaw had a thread on falling corpo taxes across the EU)

Tho I remain negative about homegrown companies despite owning/running one since so many got involved in property

George Orwell 1982 wrote: »

It would be nice if we could do stimulus and you probably could target the investment so more of the spill over benefits stayed within the country. However Ireland just doesn't have that room to manouvre. We can't bail out the banks, reduce the deficit and do stimulus. Something would have to give. In fact we may not even be able to bailout the banks and reduce the deficit, never mind stimulus.

Agree, certain "banks" (yes with commas) should have been allowed to sink, its a mistake that's going to cost dearly down road

But dont forget we already have a stimulus

Our welfare budget this year is north of 22 billion our deficit financed by high interest borrowing is about 20 billion

That money gets given directly to the people who spend it in local economy

I dont think Krugman recognises the above as a stimulus when it very clearly is.

ei.sdraob

Laminations wrote: »

The property Market has stagnated, the jobs Market has stagnated, lending (even to viable SMEs) has stagnated. What part of that sounds like a 'normal' economy? I understand what you are saying about a correction and I'd phrase is that we need to improve our competitiveness and become more 'low cost' across the board, but to say this is not a recession is putting your head in the sand, and cuts alone will only dig the hole further so your head can fit in deeper. Any money we spend in this country, part of it goes abroad. And yes the materials/manufacturing side of the capital projects would not be a stimulus here but the jobs creation side and the infrastructure creation side would maybe produce some confidence and stimulate spending?

What happens when the stimulus money for lets say rail building runs out?

the whole property bubble was one big stimulus, look where that led to

and companies that didnt not get involved in property bubble or were reliant on it are doing quite ok as shown by CSO export stats

As for small companies not getting credit, the story is much deeper than that
1. when we had credit it was wasted > http://boards.ie/vbulletin/showthread.php?t=2055980235 and not used by small companies to grow
2. alot of companies got involved in property and banks rightly would not lend to them again, we dont need more loose lending
3. small companies that are well run, stayed clear of property, and have good plans dont have much hassle getting credit, i still have managers offering my company credit which continue to refuse

Laminations

ei.sdraob wrote: »

What happens when the stimulus money for lets say rail building runs out?

In 5 or so years we'll hopefully have some infrastructure that will attract companies and start ups and by then we'll have had people employed and spending as well as five budgets all making necessary cuts so we would be trimmer with something to show for it. How does cuts cuts cuts stimulate a stagnant economy?

ei.sdraob

Laminations wrote: »

In 5 or so years we'll hopefully have some infrastructure that will attract companies and start ups and by then we'll have had people employed and spending as well as five budgets all making necessary cuts so we would be trimmer with something to show for it. How does cuts cuts cuts stimulate a stagnant economy?

I should have elaborated

What will happen to the workers who build this infrastructure (note: i have no problems with infrastructure spending when compared to wasting money on large PS and welfare) once money runs out? yes back to the dole
spend the time instead retraining and for gods sake try to teach people some entrepreneurial skills

until the attitude in the country changes from "aye wheres da jobs handed down on a silver platter" to "i should start a business"
we be doomed to repeat same mistakes of the past

As for attracting startups and companies I already mentioned in this thread how we can do that without resorting to borrowing more money at high interest and also pointed out with a link to parallel thread that despite loose credit conditions of the bubble years native companies did not grow


edit: I have to get back to organising receipts/accounts for the last year which was quite good best yet , but will try to keep up with this thread this evening

Laminations

ei.sdraob wrote: »

3. small companies that are well run, stayed clear of property, and have good plans dont have much hassle getting credit, i still have managers offering my company credit which continue to refuse

Lending works well when you offer companies that need credit a loan and the companies have the ability to pay back with interest. Your example of banks lending is not indicative of a healthy 'normal' system offering money to those that don't need it, it makes me think even mores that bankers have forgotten how to bank.

Can I ask what your company sells? I mean do you manufacture anything? I can't see how we'll recover by selling things to other countries as the majority of this would be services so unless you think it's realistic that we all get jobs in IT or financial services than your one horse pony is as unrealistic as the 'smart economy' itself (i.e. We can't all work in 'smart' jobs, and cutting education reduces the number who could).

We need to diversify and have a balanced export-led economy with healthier manufacturing, agriculture, energy etc sectors. I say export-led because they are no doubt extremely important but you seem to think they are a panacea of sorts as if everyone can 'sell their talent to Europe'

dan_d

Got a bit confused there around the middle ei.sdraob...and I should have been a bit clearer in what I was saying.

I agree with what you're saying about needing cuts, and the ridiculousness of "spending" the way out of the recession. What I was referring to more was that we do need some stimulus. You can't just cut everything, not put anymore money in, then sit back and hope things will sort themselves out. A certain amount does have to be put in - but not to create band aid solutions, to create long term, viable employment. By the way, every country has a certain amount of construction, so while any given construction project has a particular shelf life, there are always going to be a certain amount of people working on sites on and off. Our problem was, as you rightly say, that we allowed construction to become our economy. Which any idiot (and I'm no financial expert) will tell you is unsustainable and just downright stupid.

On another point - I don't think you can "teach" people entrepreneurial skills. You can teach them business skills, and encourage them to come up with ideas for businesses, but there are few among us who are actually true entrepreneurs (and I don't count Bill Cullen). There's an amount of luck involved aswell.

Any chance your receipts and accounts from last year are so good you might now need the services of an unemployed engineer???I make great coffee!!;):D

Laminations

I have to say I'm quite pleased with FFs €39 bn capital investment plan, its about time. So they have the plastic bag levy, the smoking ban, and their infrastructure plan that I agree with. I always liked Transport 21 even though I thought it prioritised roads over public transport. This €39 bn will create 30,000 jobs, jobs that are not here now but may be in 5-6 years time, it creates a bridging and like I said may stimulate spending.

Its also true that all stimulus packages do not need upfront investment - a stimulus package may have just an opportunity cost, like a tax reduction or removal of employers PRSI for new posts. Its just as mad to say that we can cut our way out of recession then to say we can spend our way out. And I agree with dan_d, we can't all be entrepreneurial job creators - thats libertarian fantasy land stuff

daithicarr

Laminations wrote: »

I have to say I'm quite pleased with FFs €39 bn capital investment plan, its about time. So they have the plastic bag levy, the smoking ban, and their infrastructure plan that I agree with. I always liked Transport 21 even though I thought it prioritised roads over public transport. This €39 bn will create 30,000 jobs, jobs that are not here now but may be in 5-6 years time, it creates a bridging and like I said may stimulate spending.

Its also true that all stimulus packages do not need upfront investment - a stimulus package may have just an opportunity cost, like a tax reduction or removal of employers PRSI for new posts. Its just as mad to say that we can cut our way out of recession then to say we can spend our way out. And I agree with dan_d, we can't all be entrepreneurial job creators - thats libertarian fantasy land stuff

I could be wrong here but this so called stimulus is just the normal capital spending a state would engage in over this perios to maintain its basic level of services, for example the 70,000 new school places have to be built as there is an increase in the number of children.
It only works out at 6.5 billion a year, this is by no means an extra stimulus to the economy , and according to some is actualy a good bit below their earlier commitments
http://www.irishtimes.com/newspaper/breaking/2010/0726/breaking47.html?via=rel

they are just rebranding it as a extra stimulus to the economy.