IMF says it got Irish austerity wrong

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http://www.irishexaminer.com/ireland/imf-we-got-effect-of-austerity-wrong-210285.html

IMF: We got effect of austerity wrong
By Ann Cahill, Europe Correspondent
Tuesday, October 09, 2012
The IMF has admitted it completely underestimated the effects of austerity on the Irish economy and believed the tax increases and spending cuts would not have cost so many jobs.
The revelation comes in three pages of academic analysis tucked away in the body’s annual report being released in Tokyo today where the IMF and the World Bank are holding their annual congress.

The report says the IMF believed that for every €100 of austerity through higher taxes and spending cuts, the effect on economic growth and unemployment would be the equivalent of €50.

But in reality the effect has been between double and three times that — stripping the economy of €90 to €150 for every €100 taken out in budgets agreed with the troika.

<snip>

Lambsbread

I wonder will this mean we will get any "bailout" from the EU/IMF? My understanding so far is that no debt has been written off for Ireland, only low interest loans given.

Scofflaw

There's an element of over-egging the pudding here, in respect of the write-up. The IMF has not "admitted" anything, let alone in the format suggested by Tasc.

Instead, there is a technical box-out on pages 41-43 of the report, which carries some analysis done by two IMF authors (and attributed specifically to them) which suggests that the "Short-Term Fiscal Multipliers" used in forecasting the effects of "fiscal consolidation" (aka austerity) may be in the range 0.9 to 1.7 rather than the 0.5 which is implicitly used in existing forecasts.

Tasc are correct in saying that this means that the contractionary effects of €100 of austerity could be €90-170 rather than €50, but it's much too strong to say the IMF have "admitted" this - the work is a technical analysis which suggests it might be the case, and which ends with "more work on how fiscal multipliers depend on time and economic conditions is warranted."

As such, the most likely outcome of this work is a modification in IMF forecasts of the effects of austerity policies, rather than any kind of "we got it wrong" U-turn as suggested by the article. That the analysis has been published in the IMF report suggests the IMF will use it, that it is attributed specifically to named authors suggests that the IMF won't be "admitting it got austerity wrong".

cordially,
Scofflaw

ParkRunner

I don't see how they thought austerity would improve the situation with personal debt, mortgage repayments, stealth taxes and the growing cost of living putting so much pressure on consumers while at the same time making it possible to live a relatively comfortable life on social welfare.

With such little domestic consumer confidence and the banks not properly supporting businesses it does not bode well for Ireland's short-medium term economic if the government continues down the same road of austerity, where the domestic economy is barely alive and our trading partners also struggling

roro2

Pity the Irish Examiner put a pdf of a document that doesn't mention anything about austerity in Ireland into the middle of the article - makes it a bit difficult to find the material that they are supposedly quoting and put their extract into context.

Anyone have a link? The "Annual Report 2012" on the IMF website doesn't go into detail on Ireland while the pdf in the article is an extract from the IMF's "World Economic Outlook" that also doesn't contain the quoted figures.

roro2

I see Scofflaw's response now which sums things up. There I was looking for any references to Ireland - the lack of quotation marks in the Irish Examiner article should have raised a few warning signs.

Godge

Scofflaw wrote: »

There's an element of over-egging the pudding here, in respect of the write-up. The IMF has not "admitted" anything, let alone in the format suggested by Tasc.

Instead, there is a technical box-out on pages 41-43 of the report, which carries some analysis done by two IMF authors (and attributed specifically to them) which suggests that the "Short-Term Fiscal Multipliers" used in forecasting the effects of "fiscal consolidation" (aka austerity) may be in the range 0.9 to 1.7 rather than the 0.5 which is implicitly used in existing forecasts.

Tasc are correct in saying that this means that the contractionary effects of €100 of austerity could be €90-170 rather than €50, but it's much too strong to say the IMF have "admitted" this - the work is a technical analysis which suggests it might be the case, and which ends with "more work on how fiscal multipliers depend on time and economic conditions is warranted."

As such, the most likely outcome of this work is a modification in IMF forecasts of the effects of austerity policies, rather than any kind of "we got it wrong" U-turn as suggested by the article. That the analysis has been published in the IMF report suggests the IMF will use it, that it is attributed specifically to named authors suggests that the IMF won't be "admitting it got austerity wrong".

cordially,
Scofflaw

The other point missing from this debate is the effect of the alternative.

It doesn't matter how much damage austerity does to the economy if the alternative of doing little or nothing (ala Greece) does more damage to the economy.

ardmacha

Ireland might have done OK if we were the only place cutting back. Since we are not we cannot greatly increase exports to compensate for lack of demand internally.

Farmer Pudsey

Most countries that have an IMF program have a currency option. They can devalue there currency so that imports get more expensive so that consumers use local products/services and you exports get more compeditive which boosts your national income.

This was not an option in Ireland as we were tied to the Euro also if the debt is unstainable the IMF seeks write downs of national debt (a default) while our national debt was sustainable our banking debt was not. The IMF proposed that bondholders in Irish bank suffer a writedown this was opposed by the EU/ECB as well as US treasury.

A devaluation would have allowed us to reduce welfare/public sector/ Irish service sector wages and costs without directy cutting them. In reality only the Irish services sector suffered. We also did not get the exports boosts that we would have got with a devaluation.

Just an example pre devaulation holiday in Ireland and France costs 2K euro's. After devaluation it cost 2K Irish pounds and 2K euro's in France (2.5K irish pounds assuming a 20 devaluation) in all probability more Irish people holidat at home.

An Audi cost 40K euro's before and cost 50K irish pounds after so people either keep the car longer which boost's the Economy as more spend on maintenance and move down a scale of car which leaves more money in the nation economy.

Exported products such as food/tourism would have been given a lift so Agricuture, food companies and tourism would have benifited and direct payments would have incresed by the amount of the devaulation. Yes car fuel would have incresed substancially however as exports would have incresed in value firms involved in export would havebeen able to compensate there workers by rising there wages. Government could have contained it costs which may have led to less cuts in services.

However this was not an option within the euro. Because of this austerity was much more severe especially as the EU insisted on dumping the bank debt on us.

There is a perception that it was all the Irish bank regulator fault by not policing/insisting banks did not borrow as much European (mostly German)money and lend it within the economy but where wsas the German regulator insisting to its banks to accept only 2% off the ECB rather than 2.25% from Ireland, Spain and Italy (only French banks were stupid enough to lend to Greece generally).

Ireland was caught in a perfect storm and all the cost of it is being dumped onto Irish people. There is an old saying ''neither a lender nor a borrower be'' we have being saddled with the first half but germany has not being saddled with the second part because the ECB/US Treasury protected the bondholders.

martomcg

Farmer Pudsey wrote: »

Most countries that have an IMF program have a currency option. They can devalue there currency so that imports get more expensive so that consumers use local products/services and you exports get more compeditive which boosts your national income.

This was not an option in Ireland as we were tied to the Euro also if the debt is unstainable the IMF seeks write downs of national debt (a default) while our national debt was sustainable our banking debt was not. The IMF proposed that bondholders in Irish bank suffer a writedown this was opposed by the EU/ECB as well as US treasury.

A devaluation would have allowed us to reduce welfare/public sector/ Irish service sector wages and costs without directy cutting them. In reality only the Irish services sector suffered. We also did not get the exports boosts that we would have got with a devaluation.

Just an example pre devaulation holiday in Ireland and France costs 2K euro's. After devaluation it cost 2K Irish pounds and 2K euro's in France (2.5K irish pounds assuming a 20 devaluation) in all probability more Irish people holidat at home.

An Audi cost 40K euro's before and cost 50K irish pounds after so people either keep the car longer which boost's the Economy as more spend on maintenance and move down a scale of car which leaves more money in the nation economy.

Exported products such as food/tourism would have been given a lift so Agricuture, food companies and tourism would have benifited and direct payments would have incresed by the amount of the devaulation. Yes car fuel would have incresed substancially however as exports would have incresed in value firms involved in export would havebeen able to compensate there workers by rising there wages. Government could have contained it costs which may have led to less cuts in services.

However this was not an option within the euro. Because of this austerity was much more severe especially as the EU insisted on dumping the bank debt on us.

There is a perception that it was all the Irish bank regulator fault by not policing/insisting banks did not borrow as much European (mostly German)money and lend it within the economy but where wsas the German regulator insisting to its banks to accept only 2% off the ECB rather than 2.25% from Ireland, Spain and Italy (only French banks were stupid enough to lend to Greece generally).

Ireland was caught in a perfect storm and all the cost of it is being dumped onto Irish people. There is an old saying ''neither a lender nor a borrower be'' we have being saddled with the first half but germany has not being saddled with the second part because the ECB/US Treasury protected the bondholders.

Seriously?

This is farmer economics.

An Audi cost 40K euro's before and cost 50K irish pounds after so people either keep the car longer which boost's the Economy as more spend on maintenance and move down a scale of car which leaves more money in the nation economy.

This is ridiculous. So people shouldnt buy new items and just re-use/repair old ones? How exactly will this help the economy?

Farmer Pudsey

martomcg wrote: »

Seriously?

This is farmer economics.



This is ridiculous. So people shouldnt buy new items and just re-use/repair old ones? How exactly will this help the economy?

Because any item that is reused is maintained within the economy if you import a car costing X and tax and sell it for X+Y then Xmoney leaves the country and only Y remains within the economy. If X amount of money is not spend on a car there is more of a liklyhood that it will be spend within the economy. People will not continue to re-use/repair they will also downsize as I mentioned which will mean less imports.

Up until Ireland the IMF gennerally was in countries that had a currency option in Ireland this was not available.

Economic is fairly simple so I wonder why all the economist from the banks during the boom were predicting a soft landing when a lot of ordinary people smelled a rat.

poeticseraphim

Farmer Pudsey wrote: »

Most countries that have an IMF program have a currency option. They can devalue there currency so that imports get more expensive so that consumers use local products/services and you exports get more compeditive which boosts your national income.

This was not an option in Ireland as we were tied to the Euro also if the debt is unstainable the IMF seeks write downs of national debt (a default) while our national debt was sustainable our banking debt was not. The IMF proposed that bondholders in Irish bank suffer a writedown this was opposed by the EU/ECB as well as US treasury.

A devaluation would have allowed us to reduce welfare/public sector/ Irish service sector wages and costs without directy cutting them. In reality only the Irish services sector suffered. We also did not get the exports boosts that we would have got with a devaluation.

Just an example pre devaulation holiday in Ireland and France costs 2K euro's. After devaluation it cost 2K Irish pounds and 2K euro's in France (2.5K irish pounds assuming a 20 devaluation) in all probability more Irish people holidat at home.

An Audi cost 40K euro's before and cost 50K irish pounds after so people either keep the car longer which boost's the Economy as more spend on maintenance and move down a scale of car which leaves more money in the nation economy.

Exported products such as food/tourism would have been given a lift so Agricuture, food companies and tourism would have benifited and direct payments would have incresed by the amount of the devaulation. Yes car fuel would have incresed substancially however as exports would have incresed in value firms involved in export would havebeen able to compensate there workers by rising there wages. Government could have contained it costs which may have led to less cuts in services.

However this was not an option within the euro. Because of this austerity was much more severe especially as the EU insisted on dumping the bank debt on us.

There is a perception that it was all the Irish bank regulator fault by not policing/insisting banks did not borrow as much European (mostly German)money and lend it within the economy but where wsas the German regulator insisting to its banks to accept only 2% off the ECB rather than 2.25% from Ireland, Spain and Italy (only French banks were stupid enough to lend to Greece generally).

Ireland was caught in a perfect storm and all the cost of it is being dumped onto Irish people. There is an old saying ''neither a lender nor a borrower be'' we have being saddled with the first half but germany has not being saddled with the second part because the ECB/US Treasury protected the bondholders.

Being in the EU and the euro was considered strict enough regulation and criteria because of the criteria countries must meet to enter. Increasingly eu legislation forced the relying on private credit rating firms like moody's who protected their interests.

The Irish regulator was particularly poor you can't make a comparison.But the eu and euro has and had serious sign flaws none of which has changed.Not all of Irelands debt is external...a good portion are Irish bondolders.

I agree we are noot totally to blame but the govt could have prevented it easily and been better able to deal with the world crisis.

The Irish import export business is not as straight forward as you think. A lot of what we export we imported first from outside the EU. Or we partially make things then export them and they are partially finished elsewhere then we import them then export them. It is cheaper and often we don't have the equipment or skills here. This bilateral trade will always affect our inflation etc. For example all cheese (grated...weird example i know) made in Ireland is then exported to Britain to b commercially grated then imported back here to be sold as export. We do not have the equipment here.


There are similar systems for the pharmacutical and tech or IT industries. And obviously the economies in other countries effect the costs of all this.

Idbatterim

This is ridiculous. So people shouldnt buy new items and just re-use/repair old ones? How exactly will this help the economy?

where do you think the vast majority of the money goes when we buy new cars?

Scofflaw

Farmer Pudsey wrote:

There is a perception that it was all the Irish bank regulator fault by not policing/insisting banks did not borrow as much European (mostly German)money and lend it within the economy but where wsas the German regulator insisting to its banks to accept only 2% off the ECB rather than 2.25% from Ireland, Spain and Italy (only French banks were stupid enough to lend to Greece generally).

No, the Irish banks borrowed primarily on the US and UK markets not the eurozone. It's there in black and white in their balance sheets, which are available from the Central Bank.

It would be better to base your arguments on proven facts rather than common gossip.

cordially,
Scofflaw

Scofflaw

I see Philip Lane has been commenting on this over at the Irish Economy blog:

The dataset underlying the empirical exercise is available here.

The general message that the IMF on average underestimated the impact of fiscal austerity on output growth is plausible; it is also important to acknowledge that the cross-country correlation between the scale of fiscal austerity during 2010-2011 and growth forecast errors is far from perfect.

Of the 9 countries with expected fiscal tightening of greater than 1 percent of GDP in 2010-2011, there was certainly overoptimism about Greece, Romania, UK, Slovenia and Portugal (growth undershoots of 7.1 percent, 5.2 percent, 1.1 percent, 2.0 percent and 1.1 percent respectively). The growth undershoot for Ireland was 0.1 percent (ie close to zero), while Spain had a slight overshoot (+0.2 percent) and Belgium a larger overshoot (+1.7 percent).

The empirical exercise is linear so the results are also influenced by the nature of growth forecast errors in countries experiencing fiscal relaxation. Of the 5 countries with expected fiscal relaxation above 1 percent of GDP in 2010-2011, there were positive growth surprises for 4 countries (Finland +3.2 percent; Austria +2.4 percent; Cyprus +0.4 percent; Germany +3.7 percent) while Denmark had a small growth undershoot (-0.4 percent).

(All numbers rounded to 1 decimal place.)

It will be interesting to see updates of this work in relation to fiscal adjustment and growth performance in 2012.

Regrettably, I'm not a journalist or a Tasc expert, so I can't reduce that to something headline-grabbing, but what it seems to me to say is that Ireland's growth forecasts were in fact in line with the out-turn, which means that if the IMF have been underestimating their multipliers, it has made no difference to their growth forecasts for us.

cordially,
Scofflaw

Godge

Farmer Pudsey wrote: »

Most countries that have an IMF program have a currency option. They can devalue there currency so that imports get more expensive so that consumers use local products/services and you exports get more compeditive which boosts your national income.

This was not an option in Ireland as we were tied to the Euro also if the debt is unstainable the IMF seeks write downs of national debt (a default) while our national debt was sustainable our banking debt was not. The IMF proposed that bondholders in Irish bank suffer a writedown this was opposed by the EU/ECB as well as US treasury.

A devaluation would have allowed us to reduce welfare/public sector/ Irish service sector wages and costs without directy cutting them. In reality only the Irish services sector suffered. We also did not get the exports boosts that we would have got with a devaluation.

Just an example pre devaulation holiday in Ireland and France costs 2K euro's. After devaluation it cost 2K Irish pounds and 2K euro's in France (2.5K irish pounds assuming a 20 devaluation) in all probability more Irish people holidat at home.

An Audi cost 40K euro's before and cost 50K irish pounds after so people either keep the car longer which boost's the Economy as more spend on maintenance and move down a scale of car which leaves more money in the nation economy.

Exported products such as food/tourism would have been given a lift so Agricuture, food companies and tourism would have benifited and direct payments would have incresed by the amount of the devaulation. Yes car fuel would have incresed substancially however as exports would have incresed in value firms involved in export would havebeen able to compensate there workers by rising there wages. Government could have contained it costs which may have led to less cuts in services.

However this was not an option within the euro. Because of this austerity was much more severe especially as the EU insisted on dumping the bank debt on us.

There is a perception that it was all the Irish bank regulator fault by not policing/insisting banks did not borrow as much European (mostly German)money and lend it within the economy but where wsas the German regulator insisting to its banks to accept only 2% off the ECB rather than 2.25% from Ireland, Spain and Italy (only French banks were stupid enough to lend to Greece generally).

Ireland was caught in a perfect storm and all the cost of it is being dumped onto Irish people. There is an old saying ''neither a lender nor a borrower be'' we have being saddled with the first half but germany has not being saddled with the second part because the ECB/US Treasury protected the bondholders.

We are not "most countries". We are one of the most trade-dependent countries in the world. That is our means of earning a living. One of the most crucial factors in our economy is therefore a stable currency. Leave the euro and we lose that. The euro is probably worth more to us as a currency than any other country.

Canvasser

Scofflaw wrote: »

There's an element of over-egging the pudding here, in respect of the write-up. The IMF has not "admitted" anything, let alone in the format suggested by Tasc.

Instead, there is a technical box-out on pages 41-43 of the report, which carries some analysis done by two IMF authors (and attributed specifically to them) which suggests that the "Short-Term Fiscal Multipliers" used in forecasting the effects of "fiscal consolidation" (aka austerity) may be in the range 0.9 to 1.7 rather than the 0.5 which is implicitly used in existing forecasts.

Tasc are correct in saying that this means that the contractionary effects of €100 of austerity could be €90-170 rather than €50, but it's much too strong to say the IMF have "admitted" this - the work is a technical analysis which suggests it might be the case, and which ends with "more work on how fiscal multipliers depend on time and economic conditions is warranted."

As such, the most likely outcome of this work is a modification in IMF forecasts of the effects of austerity policies, rather than any kind of "we got it wrong" U-turn as suggested by the article. That the analysis has been published in the IMF report suggests the IMF will use it, that it is attributed specifically to named authors suggests that the IMF won't be "admitting it got austerity wrong".

cordially,
Scofflaw

Trust you to defend the establishment:rolleyes:

Canvasser

Godge wrote: »

The other point missing from this debate is the effect of the alternative.

It doesn't matter how much damage austerity does to the economy if the alternative of doing little or nothing (ala Greece) does more damage to the economy.

You're very confused. Greece is in crisis because of austerity and because it followed the EU/IMF plan. Ireland and Span are now on that course.

murphaph

Canvasser wrote: »

You're very confused. Greece is in crisis because of austerity and because it followed the EU/IMF plan. Ireland and Span are now on that course.

What was Greece's alternative again?

K-9

Canvasser wrote: »

Trust you to defend the establishment:rolleyes:

Trust you to add nothing to the discussion but insults. Take 3 months off.

Bits_n_Bobs

Scofflaw wrote: »

I see Philip Lane has been commenting on this over at the Irish Economy blog:



Regrettably, I'm not a journalist or a Tasc expert, so I can't reduce that to something headline-grabbing, but what it seems to me to say is that Ireland's growth forecasts were in fact in line with the out-turn, which means that if the IMF have been underestimating their multipliers, it has made no difference to their growth forecasts for us.

cordially,
Scofflaw

Can someone explain what "fiscal relaxation" is please? Google is polluted with lots of differing options on what it means from what I can see

Has anyone explained the lack of (apparent) effect of these multipliers on the forecasts?

Scofflaw

Bits_n_Bobs wrote: »

Can someone explain what "fiscal relaxation" is please? Google is polluted with lots of differing options on what it means from what I can see

Seems to be the opposite of "fiscal consolidation", and more or less translates to "running a bigger deficit" as opposed to reducing the deficit.

Bits_n_Bobs wrote: »

Has anyone explained the lack of (apparent) effect of these multipliers on the forecasts?

On our forecasts? Because the data backing the conclusion that the multipliers in use were wrong is the disparity between forecast and out-turn.

That there's not really any such disparity in our case hasn't been specifically explained as yet, as far as I can see.

cordially,
Scofflaw

maninasia

murphaph wrote: »

What was Greece's alternative again?

It doesn't matter if they underestimated the effects of austerity or not. If you don't have the money, you can't keep borrowing until you are bankrupt. These are simple concepts people.
Austerity means cutting back spending. There is absolutely no choice in the matter.
In fact Ireland Inc. has not even cut spending if you look at the figures!

hatrickpatrick

K-9 wrote: »

Trust you to add nothing to the discussion but insults. Take 3 months off.

That wasn't an insult, it was a legitimate observation.
Some posters here seem hellbent on defending the establishment in absolutely any context whatsoever, even when it is very clearly being totally unreasonable.

hatrickpatrick

murphaph wrote: »

What was Greece's alternative again?

A sensible alternative would have been to come up with a short term economic stimulus, followed by a correction when the economy was in a better shape to handle it.
The bailouts should have been used for short term economic stimulus, and then later deficit cutting. There is absolutely no way to increase growthy while sucking the blood out of the economy.

To use an analogy, it's like the age old question about bodybuilding - people who want to gain muscle and also lose fat. It is almost impossible to do both simultaneously, as fat loss requires a caloric deficit while muscle gain requires a surplus. But if you concentrate on packing on the muscle first, you can then afford to cut back your calories later to lose weight, and it costs you less in terms of health and is also a lot faster.

Nobody is suggesting never paying back public debt (banking debt is a different matter which I won't get into here), but what is being suggested is prioritizing growth now and then dealing with the deficit problem afterwards, when doing so will not literally flatline the country.

K-9

hatrickpatrick wrote: »

That wasn't an insult, it was a legitimate observation.
Some posters here seem hellbent on defending the establishment in absolutely any context whatsoever, even when it is very clearly being totally unreasonable.

And some will attack the establishment no matter what, that doesn't give any poster the right to repetitively post snarky one liners adding nothing to the forum. Any other questions pm me, you're here long enough to know the score.

Scofflaw

hatrickpatrick wrote: »

That wasn't an insult, it was a legitimate observation.
Some posters here seem hellbent on defending the establishment in absolutely any context whatsoever, even when it is very clearly being totally unreasonable.

There's no question of "defending the establishment" here, though. The observations in the IMF report were badly over-interpreted, and in particular don't appear to apply to Ireland, since there's no discrepancy between forecast based on such fiscal multipliers and the factual out-turn. That observation isn't a defence of austerity, as should be obvious to anyone putting thought rather than reflex into play.

Facts are facts, however unwelcome - and it's a sad observation that they need defending from both old and new media misinterpretations.

cordially,
Scofflaw

Bits_n_Bobs

I think the fact is that expected outcomes are not as bad as the (newly updated with new multipliers) IMF model says they should be. Which as facts go is slightly confusing and in my opinion lessens the credibility of the IMF i.e.

- the old modeling was wrong as it was using the wrong multipliers.
- the new modeling (with the new multipliers) is also wrong. The fact that it's beneficially wrong for Ireland does not lessen the fact that it's still incorrect.

The Irish government is shaping budgets at the behest of the Troika based on these incorrect models. Factually this does not inspire confidence

Scofflaw

Bits_n_Bobs wrote: »

I think the fact is that expected outcomes are not as bad as the (newly updated with new multipliers) IMF model says they should be. Which as facts go is slightly confusing and in my opinion lessens the credibility of the IMF i.e.

- the old modeling was wrong as it was using the wrong multipliers.
- the new modeling (with the new multipliers) is also wrong. The fact that it's beneficially wrong for Ireland does not lessen the fact that it's still incorrect.

The Irish government is shaping budgets at the behest of the Troika based on these incorrect models. Factually this does not inspire confidence

Or, alternatively, the old multiplier is roughly right for Ireland, but is not for most of the other countries studied. After all, a range from 0.9 to 1.7 is a large range for a multiplier - extending that range downwards to 0.5 is not much of a stretch.

That's the problem with extrapolating from research like this - unless you know that the conclusions are fully applicable to your country of interest, you're really building bridges over nothing.

Mind you, there's an element of that in their use in the first place, too.

cordially,
Scofflaw

Godge

Canvasser wrote: »

You're very confused. Greece is in crisis because of austerity and because it followed the EU/IMF plan. Ireland and Span are now on that course.

hatrickpatrick wrote: »

A sensible alternative would have been to come up with a short term economic stimulus, followed by a correction when the economy was in a better shape to handle it.
The bailouts should have been used for short term economic stimulus, and then later deficit cutting. There is absolutely no way to increase growthy while sucking the blood out of the economy.

To use an analogy, it's like the age old question about bodybuilding - people who want to gain muscle and also lose fat. It is almost impossible to do both simultaneously, as fat loss requires a caloric deficit while muscle gain requires a surplus. But if you concentrate on packing on the muscle first, you can then afford to cut back your calories later to lose weight, and it costs you less in terms of health and is also a lot faster.

Nobody is suggesting never paying back public debt (banking debt is a different matter which I won't get into here), but what is being suggested is prioritizing growth now and then dealing with the deficit problem afterwards, when doing so will not literally flatline the country.

I think my points are quite valid. The IMF has found that in general its multiplier was too low for the effects of austerity and that in general the negative effects of austerity were greater than expected. This would, at first glance, lend support to your belief that there should have been stimulus.

However, and this is a huge but, Ireland is different. The multiplier in Ireland was low as predicted. This means that austerity has less of a negative effect in Ireland on the economy than austerity in other economies. The corollary of that is that you would therefore expect that fiscal expansion would have less of a postive effect in Ireland than in other countries.

This makes sense in a small open economy with a lot of imported goods. Look at what people did when they had money in the 2000s, they bought luxury televisions from Japan and Korea, they bought cars from Germany, the US and the Far East, they bought villas in Bulgaria, Spain and Florida, they went on holidays everywhere. When we stimulate the economy the money flows out.

When austerity happend, those were the things we cut back on. Yes, we all feel less well-off than before because we don't have those things but the effect on the domestic economy is less than in other countries. Think of the US as the opposite example. Austerity in the US means Americans buy less American cars, go less often to Florida, California and New york on holidays, buy less American TVs etc. So the effect of US austerity on the US economy is greater than the effect of Irish austerity on the Irish economy.

I have always believed that austerity has less of an effect on the domestic economy in Ireland than elsewhere which meant our economy could bear it better than others (e.g. Greece or Spain). The IMF's figures seem to support my argument.

Solair

I think we can safely assume at this stage that nobody has a clue what they're doing and they're all making it up as they go along!

hatrickpatrick

Godge wrote: »

I think my points are quite valid. The IMF has found that in general its multiplier was too low for the effects of austerity and that in general the negative effects of austerity were greater than expected. This would, at first glance, lend support to your belief that there should have been stimulus.

However, and this is a huge but, Ireland is different. The multiplier in Ireland was low as predicted. This means that austerity has less of a negative effect in Ireland on the economy than austerity in other economies. The corollary of that is that you would therefore expect that fiscal expansion would have less of a postive effect in Ireland than in other countries.

This makes sense in a small open economy with a lot of imported goods. Look at what people did when they had money in the 2000s, they bought luxury televisions from Japan and Korea, they bought cars from Germany, the US and the Far East, they bought villas in Bulgaria, Spain and Florida, they went on holidays everywhere. When we stimulate the economy the money flows out.

When austerity happend, those were the things we cut back on. Yes, we all feel less well-off than before because we don't have those things but the effect on the domestic economy is less than in other countries. Think of the US as the opposite example. Austerity in the US means Americans buy less American cars, go less often to Florida, California and New york on holidays, buy less American TVs etc. So the effect of US austerity on the US economy is greater than the effect of Irish austerity on the Irish economy.

I have always believed that austerity has less of an effect on the domestic economy in Ireland than elsewhere which meant our economy could bear it better than others (e.g. Greece or Spain). The IMF's figures seem to support my argument.

See this is the problem, we go on about figures, statistics and maths in massive circles on this forum, rather than real life issues such as sick people no longer having a local A&E unit and the quality of public education declining rapidly because of rising pupil/teacher ratios, etc.

My point is that had we increased growth first and THEN tackled the debt problems, we might have been able to tackle them without scraping the bottom of the barrel in terms of cuts to services. For example, it's possible we could have afforded to increase more taxes if more people were doing well than are now. Again, see my analogy about muscle building vs fat loss - doing one first and then the other is well documented as a faster, healthier and easier option.

Again, I am not arguing that public debt shouldn't be repaid or that the deficit shouldn't be cut, I am simply arguing that it would have been far smarter to get the economy moving again and then cut when people would have been better placed to absorb the cuts. When the country could have tolerated austerity instead of falling apart under it.

Godge

hatrickpatrick wrote: »

See this is the problem, we go on about figures, statistics and maths in massive circles on this forum, rather than real life issues such as sick people no longer having a local A&E unit and the quality of public education declining rapidly because of rising pupil/teacher ratios, etc.

My point is that had we increased growth first and THEN tackled the debt problems, we might have been able to tackle them without scraping the bottom of the barrel in terms of cuts to services. For example, it's possible we could have afforded to increase more taxes if more people were doing well than are now. Again, see my analogy about muscle building vs fat loss - doing one first and then the other is well documented as a faster, healthier and easier option.

Again, I am not arguing that public debt shouldn't be repaid or that the deficit shouldn't be cut, I am simply arguing that it would have been far smarter to get the economy moving again and then cut when people would have been better placed to absorb the cuts. When the country could have tolerated austerity instead of falling apart under it.

You are missing the point by not reading and understanding the stats.

We couldn't have got our economy moving but we might have been able to save the Greeks if we had all gone on holiday there. The point is the IMF original figure works for us because our economy leaks in and out. Our growth is dependent on what others do. Stimulus measures have less of a positive effect than elsewhere and austerity has less of a negative effect than elsewhere. In such circumstances, the rational policy is austerity and hunker down until the world economy improves.

Scofflaw

Solair wrote: »

I think we can safely assume at this stage that nobody has a clue what they're doing and they're all making it up as they go along!

In some senses it's kind of unlikely there was going to be a play book - I'm not sure how many financial and fiscal crises in multinational common currencies there have been to derive a play book from.

That doesn't detract from the ridiculousness of apparently not having even tried to have a strategy, as opposed to running around like headless hens.

cordially,
Scofflaw

Farmer Pudsey

Godge wrote: »

We are not "most countries". We are one of the most trade-dependent countries in the world. That is our means of earning a living. One of the most crucial factors in our economy is therefore a stable currency. Leave the euro and we lose that. The euro is probably worth more to us as a currency than any other country.

I do not know how you can equate the Euro as stable it has varied from USD 0.9-1.6 in it short lifetime. With sterling it has varied from nearly parity to about 65 pence. There is no reason why a new Irish pound could not be stable as political interference would be limited by the possible effect of the market. However that was not the point I was makin I was pointing out that the IMF had generally worked in countries where they had a currency option.

I think Scof made the point that the money was raised on the US/UK markets yes this is true however most bonds are raised on these markets as NY and Londan are the biggest finiancial trade markets in the world. However it was the availibility of a low intrest euro that allowed us access a cheap bomd market. It also protected from the markets as it was only when other economies in Europe had issues as well that the market could attack us and it was vunerability accross the Euro that was the issue. If we had our own currency our bank would have never been allowed to borrow so much and if they had we would have had to do as Iceland did.

Scofflaw

Farmer Pudsey wrote: »

I do not know how you can equate the Euro as stable it has varied from USD 0.9-1.6 in it short lifetime. With sterling it has varied from nearly parity to about 65 pence. There is no reason why a new Irish pound could not be stable as political interference would be limited by the possible effect of the market. However that was not the point I was makin I was pointing out that the IMF had generally worked in countries where they had a currency option.

Er, are you really ascribing all the movement in one currency against others to deficiencies in that currency, as if neither the UK nor the US had any sources of volatility?

Farmer Pudsey wrote: »

I think Scof made the point that the money was raised on the US/UK markets yes this is true however most bonds are raised on these markets as NY and Londan are the biggest finiancial trade markets in the world. However it was the availibility of a low intrest euro that allowed us access a cheap bomd market. It also protected from the markets as it was only when other economies in Europe had issues as well that the market could attack us and it was vunerability accross the Euro that was the issue. If we had our own currency our bank would have never been allowed to borrow so much and if they had we would have had to do as Iceland did.

I don't think that's the case, since it applied globally - a point you've ironically drawn attention to by pointing out Iceland, which wasn't part of the euro, didn't have low interest rates, and yet grew its banks to 10 times its GDP. The key point of the last 20 years has been financial deregulation and the belief on the part of the financial industry (and their convincing everyone else) that the use of complex derivatives and quantitative modelling had effectively eliminated risk - the two obviously go together, since the main reason for regulating the financial industry is precisely the potential for enormous risks, as it is for, for example, the nuclear industry. Eliminating risk, of course, meant lower interest rates.

As we now know, the trade in risk and risk-related derivatives, far from eliminating risk, instead spread risk around in complex and opaque ways which came back to bite everybody in the credit crunch (including the Irish taxpayer directly, because the triggering of an unknown sized heap of CDS was one of the reasons for not burning senior bondholders). The Irish banks, who had followed Anglo in their "borrow short-term and wholesale, lend long-term and bespoke" model to different degrees, fell over a cliff of their own making when the short-term funding they relied on dried up entirely, leaving them with only the trickle of returns from their long-term lending to service rapidly-due debt mountains.

There's no real need to look outside the finance industry for the explanation of the financial crisis, although the finance industry have done a startlingly good job of pointing fingers almost everywhere else - helped by, of course, the fact that they're the experts the media turned to for analysis of the crisis. The ancillary political failure is primarily one of failure to regulate, which occurs roughly every second generation.

People like to cite "the euro", which ignores the global scope of the crisis, the global presence of low interest rates, and the way that "the euro" doesn't really explain much anyway. The euro's real failure is nothing to do with the formation of the crisis, but the failure to have any established mechanisms for coping with one - but then, of course, they believed the finance industry had eliminated risk...

cordially,
Scofflaw

Farmer Pudsey

Most of the money Iceland banks borrowed was spend outside the state by Icelandic enterpenure building property empires abroad. This was not the case in Ireland while there was some money from the Irish banking spend abroad it was balanced to a certain extent by other euro/british banks operating in Ireland.

Being in the Euro allowed this to happen to a greater extent that it would otherwise. I do not believe that we would have been able to borrow the amount of money in an Irish pound currency that we borrowed in euro's. If we borrowed in euro's and converted to Irish pounds banks would have to been more careful of the risk factor.

However that is getting away from my main point in countries that the IMF help out (although this is open to debate) up until the euro countries there was always a currency option to help take costs out of the economy and improve export compeditivness.

As for currency stability would an irish pound have been any more variable that a euro. The euro is dominated by the huge economy of Germany and it is often considered that what is good for Germany is good enough for the rest of us.

djpbarry

Farmer Pudsey wrote: »

Most of the money Iceland banks borrowed was spend outside the state by Icelandic enterpenure building property empires abroad. This was not the case in Ireland...

Based on what exactly? Ireland’s balance of payments went from about €600 million at the end of the 90’s to about €-10 billion 10 years later.

Scofflaw

Farmer Pudsey wrote: »

Most of the money Iceland banks borrowed was spend outside the state by Icelandic enterpenure building property empires abroad. This was not the case in Ireland while there was some money from the Irish banking spend abroad it was balanced to a certain extent by other euro/british banks operating in Ireland.

I'm not sure that's the case - have you proof? And what would it mean anyway?

Farmer Pudsey wrote: »

Being in the Euro allowed this to happen to a greater extent that it would otherwise. I do not believe that we would have been able to borrow the amount of money in an Irish pound currency that we borrowed in euro's. If we borrowed in euro's and converted to Irish pounds banks would have to been more careful of the risk factor.

I don't think that holds any water, because, again, banks in places like Iceland were very well able to borrow, and most of the Irish banks' borrowing was not done in the eurozone, but in the US and UK, which are not in the euro area.

Farmer Pudsey wrote: »

However that is getting away from my main point in countries that the IMF help out (although this is open to debate) up until the euro countries there was always a currency option to help take costs out of the economy and improve export compeditivness.

It's not a good option, though - it's a quick-fix solution of limited effect on the real problem and with a large number of side-effects. People like the sound of it because it sounds like a magic bullet.

Farmer Pudsey wrote: »

As for currency stability would an irish pound have been any more variable that a euro. The euro is dominated by the huge economy of Germany and it is often considered that what is good for Germany is good enough for the rest of us.

Those two points appear to be unrelated. With respect to a freely floating punt, who knows? The punt hasn't ever been a free floating currency, it's always been pegged to another currency or currency band.

As to "what's good enough for Germany is good enough for the rest" - do you really believe the French would accept that situation, and why does Germany currently need rock bottom interest rates?

cordially,
Scofflaw

KyussBishop

Scofflaw wrote: »

People like to cite "the euro", which ignores the global scope of the crisis, the global presence of low interest rates, and the way that "the euro" doesn't really explain much anyway. The euro's real failure is nothing to do with the formation of the crisis, but the failure to have any established mechanisms for coping with one - but then, of course, they believed the finance industry had eliminated risk...

Good post, dead on in general, I'm just curious; would adopting the Euro not have played a part in the property bubble here, to a significant extent?

I'm not certain either way myself, that is just the impression I get.

antoobrien

KyussBishop wrote: »

Good post, dead on in general, I'm just curious; would adopting the Euro not have played a part in the property bubble here, to a significant extent?

I'm not certain either way myself, that is just the impression I get.

I get the impression that no it wasn't a significant factor - or at least not as significant as some people try to make out.

A good frame of reference for us is Iceland, similar economys in the last decade or so (heavily reliant on one industry), both with a property boom. They got the cash the same way we did, money being poured into the country through deposits and short term finance, had the same lax regulation we had, the same lending practices (not doing proper credit assessments and using short term money to finance long term lending).

The only thing that the Euro did was bring a few more people into the mix by having interest rates a couple of % lower than they would otherwise have been.

Scofflaw

antoobrien wrote: »

I get the impression that no it wasn't a significant factor - or at least not as significant as some people try to make out.

A good frame of reference for us is Iceland, similar economys in the last decade or so (heavily reliant on one industry), both with a property boom. They got the cash the same way we did, money being poured into the country through deposits and short term finance, had the same lax regulation we had, the same lending practices (not doing proper credit assessments and using short term money to finance long term lending).

The only thing that the Euro did was bring a few more people into the mix by having interest rates a couple of % lower than they would otherwise have been.

Sure - again, I'd say it all comes down to risk. The point of the bubble was that you couldn't lose - houses were only going up, so interest rates were more or less irrelevant, and would have had to have been absolutely punitive before they would have slowed the housing bubble, which would have made things even harder on the rest of the economy than the suction of all available lending into the bubble already made it. The public sentiment was that you were a mug if you weren't buying property, because it was a sure bet. Bankers and politicians, we sometimes forget, are part of the public.

And the banks lent hand over fist for exactly the same reason - lending is how they make their money, and risk-free lending is to be jumped at no matter how low the interest rates. The banks made up for the low interest they were charging on individual mortgages by going for volume and leveraging heavily, which of course had the effect of pumping yet more money into the bubble.

In retrospect, of course, the idea that the Irish property market was risk-free looks so absolutely ridiculous that most people prefer to seek a sane and mechanical explanation in terms of external factors - which rather ignores the fact that bubbles are a characteristic feature of economic history, and occur regularly on the back of booms. Unfortunately, mainstream economics ignores them, or, rather, seeks a completely individual explanation for each one, because, again, if one accepts that bubbles are an outcome of human psychology, then all of Economics' neat little graphs and diagrams showing it to be a "hard" and "mathematical" science like physics (and eighteenth-century physics at that) begin to seem a little contrived.

cordially,
Scofflaw

mike65

Being discussed on RTE radio now.

Scofflaw

mike65 wrote: »

Being discussed on RTE radio now.

With any accuracy, or is it a load of premature extrapolation?

cordially,
Scofflaw

GCU Flexible Demeanour

Scofflaw wrote: »

.... I don't think that's the case, since it applied globally - a point you've ironically drawn attention to by pointing out Iceland, which wasn't part of the euro, didn't have low interest rates, and yet grew its banks to 10 times its GDP. The key point of the last 20 years has been financial deregulation and the belief on the part of the financial industry (and their convincing everyone else) that the use of complex derivatives and quantitative modelling had effectively eliminated risk...

I think the role of the euro does deserve some attention. I think it's too pat to say that Iceland demonstrates that a problem could have existed anyway. (I know you are saying more than that - I just mean generally, when Iceland is invoked as an example). I think, as a country, we walked into the euro without really thinking over the implications of giving up any control over monetary policy. Our euro chageover process seemed mostly to be about telling everyone it was worth about 80 pence.

Now, it could be counter-argued that we never really pursued an independent monetary policy - or, at least, only for a very short period. We didn't even establish the arrangements for proper management of a currency until 1941, when there was a concern over what we'd do if Germany invaded Britain and we really had to operate our own currency.

So, OK, maybe not a simple "it was the euro that done it". But the euro, along with EU financial service legislation allowing banks to operate across borders without a single cross-border EU regulator and (in our case) tax incentives favoring property all played a role. Strategically, the euro was brought in too soon. People who said the European economy had not converged enough to manage a currency and lacked the political institutions to co-ordinate fiscal policy were largely right.

mike65

Scofflaw wrote: »

With any accuracy, or is it a load of premature extrapolation?

cordially,
Scofflaw

I'm not fit to judge, best to listen back on a while.

murphaph

hatrickpatrick wrote: »

A sensible alternative would have been to come up with a short term economic stimulus, followed by a correction when the economy was in a better shape to handle it.
The bailouts should have been used for short term economic stimulus, and then later deficit cutting. There is absolutely no way to increase growthy while sucking the blood out of the economy.

To use an analogy, it's like the age old question about bodybuilding - people who want to gain muscle and also lose fat. It is almost impossible to do both simultaneously, as fat loss requires a caloric deficit while muscle gain requires a surplus. But if you concentrate on packing on the muscle first, you can then afford to cut back your calories later to lose weight, and it costs you less in terms of health and is also a lot faster.

Nobody is suggesting never paying back public debt (banking debt is a different matter which I won't get into here), but what is being suggested is prioritizing growth now and then dealing with the deficit problem afterwards, when doing so will not literally flatline the country.

Greece had a quite large scale short term economic stimulus in the form of the Olympics (lots of public works projects and so on) but it didn't do anything except to pile on the Greek debt, you basically suggest doing more of that.

Greece doesn't really have any real economy (bar tourism) to stimulate. It is fcuked and nothing can be done for it in reality. They need to sort themselves out first. Arguably Greece (amongst others) should never have been admitted to the EEC

Qualitymark

murphaph wrote: »

Greece had a quite large scale short term economic stimulus in the form of the Olympics (lots of public works projects and so on) but it didn't do anything except to pile on the Greek debt, you basically suggest doing more of that.

Greece doesn't really have any real economy (bar tourism) to stimulate. It is fcuked and nothing can be done for it in reality. They need to sort themselves out first. Arguably Greece (amongst others) should never have been admitted to the EEC

Oh, I don't know. If Germany was booted out of the EU, would that sort things out a little?

househero

Qualitymark wrote: »

Oh, I don't know. If Germany was booted out of the EU, would that sort things out a little?

NO!

That is a very old economic solution to a new and different problem.

If Germany exited, the Euro would devalue over night, theoretically good right? Not for the people of Europe, we would have less international spending power, food, oil and consumables would become MUCH more expensive. Just as an example, petrol should actually be over 2euro a litre, the world recession is reducing demand hugely and prices are up to 25% lower than what they should be.

For Ireland a devalued euro may be some benefit as we are an export country, but the cost to us the people would be huge, mortgage rates would triple (anybody remember the 80s?) and our spending power would be greatly eroded. No more cheap holidays, no cheap imported cars and very expensive food.

murphaph

Qualitymark wrote: »

Oh, I don't know. If Germany was booted out of the EU, would that sort things out a little?

Be careful what you wish for. If things go nuclear I could certainly see Germany and the other Nordic states starting the EEC Mk.II and leaving what we now know as the EU. If that was even rumoured to be a realistic prospect, imagine a flight of capital like you've never known from the southern states to the Nordic ones.

Arguably the EU's biggest problem is that it grew too quickly and many of the states that joined weren't mature enough or really ready for it at all. Countries like Ireland and Greece really have no business being in monetary union with countries Germany or Holland (note: the deed is done and I believe we should remain in the Euro and try to sort our core issues out, might be very good for us.... very long term).

If Germany hadn't been such a bold boy 60 years ago, it would be a different story today. The Germans, contrary to what so many peripheral states think, actually feel a debt is still owed to Europe for wrecking it back then, so they suck it up and hand out the dosh to the Greeks who retire in their 50's, while Germans themselves retire at 67 (going up again soon) on modest pensions and are entitled to modest welfare when they lose their jobs and pay hefty taxes throughout their working lives.

I can certainly understand German frustration. Germany's biggest mistake was trusting other countries to do the right thing.

househero

All of this Obama talk about increasing tax is ANTI BUSINESS. If Ireland reduced Tax it would stimulate the private sector and help us out of the hole.

People talk about our 12.5% low corporation tax, but this is mainly only for manufacturing business. The 'New Economy' business including professional services, is actually taxed at 25% + all the additional payroll taxs and the income tax employees have to pay no matter what.


Lower Tax's = New Business's (or business moving from overseas to ire) + New jobs (for us)
Which results in a higher overall tax take for the greedy bloated government.


Economic stimulus is a short term inefficient fix and we can not afford to let the government take more tax from us to fund it, or let them misspend our money for no long term benefit.

If we took the decision to reduce tax, we would have more power when in talks with France & Germany.

Business needs to know what is happening in the future to base decisions on, the government & Europe as a whole is saying we will see in 3 months. Business can not plan anything.

Noonan needs to stand up and say "Irelands Corporation tax has been reduced to 10% for all business and will remain at this level until 2017"

Business will come here & even if the rate is increased before then, Noonan will look like a liar (whats new) but who cares because the business has come here, jobs were created and Ireland is in a much stronger position.