5/4/21: The Coming Wave of Financial Repression

 

In a recent article for The Currency, I covered the topic of the forthcoming wave of financial repression, as Governments worldwide pursue non-conventional fiscal tightening in years to come: Make no mistake, financial repression is coming in the US: https://thecurrency.news/articles/36547/make-no-mistake-financial-repression-is-coming-in-the-us/. 

26/5/20: Franco-German Eurobonds: A First Step on the Road to Federalism

My recent article on the Franco-German proposal for Euro bonds for The Currency: https://www.thecurrency.news/articles/17392/france-and-germany-have-proposed-a-e500m-fund-to-shield-european-economy-what-does-it-mean-for-ireland.

27/5/19: Which part of the Federal spending poses a greater fiscal threat?

An interesting chart via Cato on the number of Federal state aid programs in the U.S.

The grand total of these programs in terms of annual spending is roughly US$697 billion. The issue here is that these programs are continuing to increase in scale and scope despite the so-called 'strongest economy, ever' (excluding the recent changes under the Trump Administration that propose significant cuts to some of these programs on the social welfare, public health and education sides for Budget 2020) .

Here is the summary of the main program headlines and outlays:

Source for both charts: https://object.cato.org/sites/cato.org/files/pubs/pdf/pa868.pdf

Nonetheless, whether or not the state supports and welfare entitlement programs can be afforded into the future (yes, demographics of ageing are driving up the demand for many of these programs, while also making them more politically feasible with older voters, yet reducing the capacity of the economy to carry these increases), the major issue that is left un-addressed by the American analysts is the overall composition of the U.S. Federal spending.

As discussed in this article: https://bit.ly/2VU39Hj, current 2020 budgetary outlook envisions a massive increases in military spending, offset by the reductions in assistance to the low income families, education and public health. Here is the summary slide on this from my new course slides on the subject of the Twin Secular Stagnations:

The key quote from the above: "In fact, the proposed FY2020 military and war budget makes up $989 billion of the Federal Government’s $1,426 billion Discretionary Budget. This represents a staggering 69 percent of the total Federal Discretionary Budget for FY2020!"

No matter how concerned we might be with the sustainability of the Federal fiscal policies, transfers to the States from Washington are, de facto, a form of local monetization of the Fed monetary policies, some of which is being cycled into state-level investments in public infrastructure and education, as well as public health. Pentagon's spending, in contrast, carries virtually no investment-like benefit for the rest of the society, and much of the 'securing our nation' argument in favor of spending almost a trillion dollars on weaponry and military personnel is bogus as well (unless you still, for some unfathomable reason, believe that demolishing Libya or Syria are of some benefit to the actual American society or that the likes of Iraq and Iran pose a truly existential threat to America).

5/4/19: Does Government Debt Matter? The Reality of Fiscal Multipliers

There has always been a lot of debate in economics about the effects of debt (especially sovereign debt) on growth and fiscal dynamics. And, despite numerous papers on the subject, the debate is far from settled.

Here is an interesting new study that looks at the effect high levels of government indebtedness have on the effectiveness of fiscal policy stimulus. The reason this topic is important is simple: fiscal policy can and is used to offset or smooth out recessionary shocks. The extent to which fiscal policy is effective in doing so (the impact expansionary fiscal policy may have on unemployment and output) can be varied across different economies and under different crises conditions. But, does this extent vary under different debt conditions?

In theory, the debt levels carried by a given sovereign can impact the size of fiscal multipliers (the effectiveness of fiscal policy) through two main channels:

1. The so-called Ricardian channel: a government with a weak fiscal position (high debt) deploying fiscal stimulus (an increase in public spending) can cause households to expect future tax increases. The result is that in economies with high public debt levels, deploying fiscal stimulus can trigger increased savings by households, reducing consumption, and lowering the size of fiscal policy multiplier.
2. An interest rate channel: when the government debt is high, so that the government fiscal position is weak, fiscal stimulus can increase concerns about sovereign credit risk amongst government bond holders and buyers. This can increase bond yields, raise borrowing costs, lower liquidity of bonds for the sovereign, but also increase cost of capital across the private sector. The result is the crowding out effect, whereby public spending crowds out private investment and credit-finance consumption.

In theory, both channels imply that fiscal policy is less effective when fiscal stimulus is implemented from a weak initial fiscal position (position of high starting government debt levels).

A new World Bank paper, authored by Huidrom, Raju and Kose, M. Ayhan and Lim, Jamus Jerome and Ohnsorge, Franziska, and titled "Why Do Fiscal Multipliers Depend on Fiscal Positions?" (March 2019, World Bank Policy Research Working Paper No. 8784: https://ssrn.com/abstract=3360142) considers the two theoretical channels operating simultaneously. Using data for 34 countries (19 advanced economies and 15 developing economies),  over 1Q 1980 through 1Q 2014, the authors show that "the fiscal position helps determine the size of the fiscal multipliers: estimated multipliers are systematically smaller when the fiscal position is weak (i.e. government debt is high).

Looking at the longer run panel in the chart above, fiscal multipliers rapidly reach into negative territory as Government debt rises to around 37-40 percent of GDP. Over a medium term horizon, of 2 years, multipliers hit negative values for debt levels above 75 percent of GDP.

Similar dynamics are confirmed in the chart below:

The authors subsequently "show that when a government with weak public finances conducts expansionary fiscal policy, the private sector scales back on consumption in anticipation of future tax pressures (Ricardian channel) and risk premia rise on mounting concerns about sovereign risk (interest rate channel)." In other words, high starting debt position does trigger both theoretical effects to reinforce each other.

This is an unpleasant arithmetic for uber-Keynesians who hold that fiscal policy is always effective in stimulating economic growth during periods of economic crises. The findings also support the view that the 'fiscal policy space' is indeed bounded by the reality of pre-crisis fiscal policy paths: there is no free lunch when it comes even to sovereign financing.

11/9/18: Slow Recoveries & Unemployment Traps: Hysteresis and/or Secular Stagnation

The twin secular stagnations hypothesis (TSSH, first postulated on this blog) that combines supply-side (technological cyclicality) and demand-side (demographic cyclicality) arguments for why the world economy may have settled on a lower growth trajectory than the one prevailing before 2007 has been a recurrent feature of a number of my posts on this blog, and has entered several of my policy and academic research papers. Throughout my usual discourse on the subject, I have persistently argued that the TSSH accommodates the view that the Global Financial Crisis and the associated Great Recession and the Euro Area Sovereign Crisis of 2007-2014 have significantly accelerated the onset of the TSSH. In other words, TSSH is not a displacement of the arguments that attribute current economic dynamics (slow productivity growth, slower growth in the real economy, reallocation of returns from labour and human capital to technological capital and, more significantly, the financial capital) to the aftermath of the structural crises we experienced in the recent past. The two sets of arguments are, in my view, somewhat complementary.

From this later point of view, a research paper, "Slow Recoveries & Unemployment Traps: Monetary Policy in a Time of Hysteresis" by Sushant Acharya, Julien Bengui, Keshav Dogra, and Shu Lin Wee (August 2018 https://sushantacharya.github.io/sushantacharya.github.io/pdfs/hysteresis.pdf) offers an interesting read.

The paper starts with the - relatively common in the literature - superficial (in my opinion) dichotomy between the secular stagnation hypothesis and the "alternative explanation" of the slowdown in the economy, namely "that large, temporary downturns can themselves permanently damage an economy’s productive capacity." The latter is the so-called 'hysteresis hypothesis', "according to which changes in current aggregate demand can have a significant effect on future aggregate supply" which dates back to the 1980s. The superficiality of this dichotomy relates to the causal chains involved, and to the impact of the two hypotheses.

However, as the authors note, correctly: "While the two sets of explanations may be observationally similar, they have very different normative implications. If exogenous structural factors drive slow growth, countercyclical policy may be unable to resist or reverse this trend. In contrast, if temporary downturns themselves lead to persistently or permanently slower growth, then countercyclical policy, by limiting the severity of downturns, may have a role to play to avert such adverse developments."

The authors develop a model in which countercyclical monetary policy can "moderate" the impact of the sudden, but temporary large downturns, i.e. in the presence of hysteresis. How does this work?

The authors first describe the source of the deep adverse shock capable of shifting the economy toward long-term lower growth rates: "in our model, hysteresis can arise because workers lose human capital whilst unemployed and unskilled workers are costly to retrain". This is not new and goes back to the 1990s work on hysteresis. The problem is explaining why exactly such deep depreciation takes place. Long unemployment spells do reduce human capital stock for workers, but long unemployment spells are feature of less skilled workforce, so there is less human capital to depreciate there in the first place. Retraining low skilled workers is not more expensive than retraining higher skilled workers. In fact, low skilled workers seek low skilled jobs and these require only basic training. It is quite possible that low skilled workers losing their jobs today are of certain demographic (e.g. older workers) that reduces the effectiveness of retraining programs, but that is the TSSH domain, not the hysteresis domain.

One thing that does help this paper's hypothesis is the historical trend of growing duration of unemployment, e.g. discussed here: http://trueeconomics.blogspot.com/2017/07/27717-us-labor-markets-are-not-in-rude.html and the associated trend of low labour force participation rates, e.g. discussed here: http://trueeconomics.blogspot.com/2018/06/8618-human-capital-twin-secular.html. I do agree that unskilled workers are costly to retrain, especially in the presence of demographic constraints (which are consistent with the secular stagnation on the demand side).

But, back to the authors: "... large adverse fundamental shocks can cause recessions whose legacy is persistent or permanent unemployment... Accommodative policy early in a recession can prevent hysteresis from taking root and enable swift a recovery. In contrast, delayed monetary policy interventions may be powerless to bring the economy back to full employment."

"As in Pissarides (1992), these features [of long unemployment-induced loss of human capital, sticky wages that prevent wages from falling significantly during the downturns, costly search for new jobs, and costly retraining of workers] generate multiple steady states. One steady state is a high pressure economy: job finding rates are high, unemployment is low and job-seekers are highly skilled. While tight labor markets - by improving workers’ outside options - cause wages to be high, firms still find job creation attractive, as higher wages are offset by low average training costs when job-seekers are mostly highly skilled." Note: the same holds when highly skilled workers labour productivity rises to outpace sticky wages, so one needs to also account for the reasons why labour productivity slacks or does not keep up with wages growth during the downturn, especially when the downturn results in selective layoffs of workers who are less productive ahead of those more productive. Hysteresis hypothesis alone is not enough to do that. We need fundamental reasons for structural changes in labour productivity that go beyond simple depreciation of human capital (or, put differently, we need something similar to the TSSH).

"The economy, however, can also be trapped in a low pressure steady state. In this steady state, job finding rates are low, unemployment is high, and many job-seekers are unskilled as long unemployment spells have eroded their human capital. Slack labor markets lower the outside options of workers and drive wages down, but hiring is still limited as firms find it costly to retrain these workers." Once again, I am not entirely convinced we are facing higher costs of retraining low skilled workers (as argued above), and I am not entirely convinced we are seeing the problem arising amongst the low skilled workers to begin with. Post-2008 recovery has been associated with more jobs creation in lower skilled categories of jobs, e.g. hospitality sector, restaurants, bars, other basic services. These are low skilled jobs which require minimal training. And, yet, we are seeing continued trend toward lower labour force participation rates. Something is missing in the argument that hysteresis is triggered by cost of retraining workers.

Back to the paper: "Importantly, the transition to an unemployment trap following a large severe shock can be avoided. If monetary policy commits to temporarily higher inflation after the liquidity trap has ended, it can mitigate both the initial rise in unemployment, and its persistent (or permanent)
negative consequences. Monetary policy, however, is only effective if it is implemented early in the downturn, before the recession has left substantial scars... [otherwise] ...fiscal policy, in the form of hiring or training subsidies, is necessary to engineer a swift recovery."

The paper tests the model in the empirical setting. And the results seem to be plausible: "allowing for a realistic degree of skill depreciation and training costs... is sufficient to generate multiple steady states.... this multiplicity is essential in explaining why the unemployment rate in the U.S. took 7 years to return to its pre-crisis level. In contrast, the standard search model without skill depreciation and/or training costs predicts that the U.S. economy should have fully recovered by 2011. ...the model indicates that had monetary policy been less accommodative or timely during the crisis, leading to a peak unemployment rate higher than 11 percent, the economy might have been permanently scarred and stuck in an unemployment trap. Furthermore, our model suggests that the persistently high proportion of long-term unemployed in the European periphery countries may reflect a lack of timely monetary accommodation by the European Central Bank."

Fraction of Long-term unemployed (>27 weeks) in select countries. 

The figure plots five quarter moving averages of quarterly data. 

The dashed-line indicates the timing of Draghi’s “whatever it takes” speech. 

Source: Eurostat and FRED.

This seems quite plausible, even though it does not explain why eventual 'retraining' of low skilled workers is still not triggering substantial increases in labour productivity growth rates in Europe and the U.S.

One interesting extension presented in the paper is that of segmented labour markets, or the markets where "employers might be able to discern whether a worker requires training or not based on observable characteristics - in particular, their duration of unemployment... [so that, if] skilled and unskilled workers searched in separate markets, the economy would still be characterized by hysteresis, but it would take a different form. There are two possibilities to consider. [If] ... the firm’s share of the surplus from hiring an unskilled worker, net of training costs, is large enough to compensate firms for posting vacancies in the unskilled labor market, ...after a temporary recession which increases the fraction of unskilled job-seekers, it can take a long time for these workers to be reabsorbed into employment. Firms prefer to post vacancies in the market for skilled job-seekers rather than the market for unskilled job-seekers in order to avoid paying a training cost. With fewer vacancies posted for them, unskilled job-seekers face a lower job-finding rate and thus, the outflow from the pool of unskilled job-seekers is low. In contrast, the skilled unemployment rate recovers rapidly - in fact, faster than in the baseline model with a single labor market... [Alternatively], the segmented labor markets economy could experience permanent stagnation, rather than a slow recovery, [if] unskilled workers are unemployable, since firms are unwilling to pay the cost of hiring and training these workers. Thus unskilled workers effectively drop out of the labor force."

We do observe some of the elements of both such regimes in the advanced economies today, with simultaneous increasing jobs creation drift toward lower-skilled, slack in supply of skills as younger, educated workers are forced to compete for lower skilled jobs, and a dropout rate acceleration for labour force participation. Which suggests that demographics (the TSSH component, not hysteresis component) is at play at least in part in the equation.


In summary, a very interesting paper that, in my opinion, adds to the TSSH arguments a new dimensions: deterioration in skills due to severity of a demand shock and productivity shock. It does not, however, contradict the TSSH and does not invalidate the key arguments of the TSSH. As per effectiveness of monetary or monetary-fiscal policies in combatting the long-term nature of the adverse economic equilibrium, the book remains open in my opinion, even under the hysteresis hypothesis: if hysteresis is accompanied by a permanent loss of skills twinned with a loss of productivity (e.g. due to technological progress), adverse demographics (older age cohorts of workers losing their jobs) will not be resolved by a training push. You simply cannot attain a catch up for the displaced workers using training schemes in the presence of younger generation of workers competing for the scarce jobs in a hysteresis environment.

And the Zero-Lower Bound on monetary policy still matters: the duration of the hysteresis shock will undoubtedly create large scale mismatch between the sovereign capacity to fund future liabilities (deficits) and the longer-run inflationary dynamics implied by the extremely aggressive and prolonged monetary intervention. In other words, large enough hysteresis shock will require Japanification of the economy, and as we have seen in the case of Japan, such a scenario does not lead to the economy escaping the TSSH or hysteresis (or both) trap even after two decades of aggressive monetary and fiscal stimuli.

31/7/18: 65 years of profligacy and few more yet to come: U.S. Government Deficits

The history and the future of the U.S. Federal Government deficits in one chart:

Which shows, amongst other things, that

1. The post-2000 regime of deficits has shifted to a completely new trend of massively accelerating excessive spending relative to receipts;
2. The legacy of the Global Financial Crisis and the Great Recession far exceeds traditional cyclical increases in deficits;
3. The more recent vintage of the Obama Administration deficits has been more moderate compared to the peak crises years;
4. The ongoing trend in the Trump Administration deficits is dynamically exactly matching the worst years of Obama Administration deficits, despite the fact that the underlying economic conditions today are much more benign than they were during the peak crises period under the Obama Administration; and
5. Based on the most current projections, by the end of the year 2023, the U.S. is on track to increase cumulated deficit from USD 12.227 trillion at the end of 2016 to USD 20.466 trillion.  This would imply an average annual uplift of USD 1.177 trillion, which is significantly higher than the average annual increase in deficits of USD 838.3 billion recorded over the 2009-2016 period.

The good news is, fiscally responsible,  financially conservative, taxpayer interests-focused Republican Party has given full support to the Trump Administration on what in fact amounts to a restoration of the peak crises period trends in deficits accumulation.

21/7/17: What Irish Civil Service is Good For?..

Recently released data on 2011-2016 Irish Government financial metrics shows that despite all the reports concerning the adverse impact of austerity on Irish Government employees, there is hardly any evidence of such an effect at the pay level data.

Specifically, in 2011, total compensation bill for the Irish Government employees stood at EUR 19.389 billion. This 5.39% between 2011 and the lowest point in the cycle (2014 at EUR18.344 billion), before rising once again by 2016 to EUR 19.354 billion. Total savings achieved during 2012-2016 period compared to 2011 levels of expenditure amounted to EUR2.759 billion on the aggregate, or 2.85% (annualized rate of savings averaged less than 0.57% per annum.

Statistically, there simply is no evidence of any material savings delivered by the 'austerity' measures relating to Government compensation bills.

But, statistically, there is a clear evidence of Irish public sector employment poor performance. Oxford University's 2017 International Civil Service Effectiveness Index, http://www.bsg.ox.ac.uk/international-civil-service-effectiveness-index, ranked Ireland's Civil Service effectiveness below average when compared across 31 countries covered in the report.

Spider chart below shows clearly two 'outlier' areas of competencies and KPIs in which Irish Civil Service excels: Tax Administration and Human Resource Management. Rest of the metrics: mediocre, to poor, to outright awful.

In fact, Ireland ranks 20th in terms of overall Civil Service Effectiveness assessment, just below Mexico and a notch above Poland. Within index components, Ireland ranked:

• 16th out of 31 countries in terms of Civil Service Integrity and Policy Making
• 26th in terms of Openness (bottom 10)
• 20th in terms of Capabilities, and Fiscal and Financial Management
• 13th in terms of Inclusiveness
• 22nd in terms of Attributes (bottom 10)
• 28th in terms of Regulation (bottom 5)
• 8th in terms of Crisis Risk Management
• 1st in terms of Human Resource Management (aka, working conditions and practices)
• 4th in terms of Tax Administration
• 31st in terms of Social Security Administration (dead last)
• 21st in Digital Services and in terms of Functions (bottom 10)

So while managing to score at the top of the league of countries surveyed in terms of pay, perks, hiring and promotion, Irish Civil Service ranked within bottom 10 countries in terms of areas of key performance indicators, relevant to actual service delivery, with exception of one: Tax Collection. May be we shall call it Pay, perks & Tax Collection Service?

But, hey, know the meme: it's all because of severe austerity-driven underfunding... right?.. 

Update:

In response to my post, the Press Office at Dept. of Public Expenditure and Reform posted the following, quite insightful comments on the LinkedIn, that I am reproducing verbatim here:

Secretary General Robert Watt: I was interested in reading this comment – and in particular the data on civil service performance.  There are methodological issues with the Study quoted.  Nevertheless readers might be interested in other data about the effectiveness of the Irish civil and public service which might give a more balanced assessment of performance. Important to consider the evidence before we reach conclusions.  Also, important to note difference between Civil Service (36,000 staff) and wider public service (320,000 staff)

Public Service performance

Over a range of international rankings, the IPA’s annual public service trends publication shows the Irish public service performing above average on many indicators.

The IPA’s Public Sector Trends, 2016

• Ireland is ranked 1st in the EU as the most professional and least politicised public administration in the Europe;
• Ireland is ranked 5th for quality of public administration in the EU;
• Ireland is ranked 6th in the EU for maintenance of traditional public service values (integrity); 
• Ireland is ranked 4th in the EU for perception of the effectiveness of government decisions;
• Ireland is ranked 2nd in the EU for encouraging competition and a supportive regulatory environment;
• Ireland is ranked 4th in the EU for regulatory quality;
• Ireland is ranked 3rd in the EU in comparison of how bureaucracy can hinder business;
• Business update of eGovernment services is higher than most of Europe with Ireland ranked 1st for highest update of electronic procurement in Europe;
• According to the World Bank, Ireland is ranked well above average for Government Effectiveness (although individual rankings are not available);
• Ireland is ranked 5th in Europe in the competitive advantage provided by the education system; 
• Ireland ranks 10th for life expectancy at birth and 8th for consumer health outcomes, but slightly below average for the cost-effectiveness of health spending;

The OECD’s Government at a Glance, published in July 2017 shows Ireland ranking strongly across a range of metrics although healthcare is a notable exception:

• Ireland is ranked 2nd in terms of citizen satisfaction with the education system and schools;
• Ireland is ranked 6th for citizen satisfaction with the judicial system and the courts and is also in the top 4 best improved countries in the last decade;
• Ireland is ranked 26th for citizen satisfaction with the healthcare system (slightly below average).

Recent customer satisfaction surveys of the Irish civil service show it delivering its highest customer satisfaction ratings to date. Satisfaction with both the outcome and the service delivered was rated over 80% which is close to the credible maximum.
General Public Civil Service Satisfaction Survey, conducted Q1 2017:      

• 83% are satisfied with the service they received (up from 77% in 2015);
• 82% are satisfied with the outcome of their customer service experience (up from 76% in 2015);
• 46% would speak highly of the civil service (up from 39% in 2015);
• 87% of customers claim that service levels received either met or exceeded expectations (up from 83% in 2015).

Business Customers Civil Service Satisfaction Survey, conducted, Q4 2016:

• 82% are satisfied with the service they received (up from 71% in 2009);
• 82% are satisfied with the outcome of the service received (up from 70% in 2009);
• 61% felt that the service provided has improved in the last 5 years.

Lots done but more to do!



My reply to the Department comment:

Thanks for the comments on this, Press Office at Dept. of Public Expenditure and Reform. I got similar methodological comments regarding the robustness of the Oxford study via Facebook as well and, as I noted, in the technical analysis part of the paper, Oxford centre does show improved metrics for Irish civil service performance in the later data, which is heartening. Also, noted the apparent dispersion of scores and ranks across countries, with what we might expect as potentially stronger performers being ranked extremely low. Also, noted the issue of data on Social Welfare for Ireland being skewed out of OECD range and impacted by 2011 legacy issues (although it is unclear to me how spending via health budget on social welfare is treated in the OECD and Oxford data). I will post your comments on the blog to make sure these are not lost to the readers.


I agree: lots done and certainly more to do, still. 

13/6/17: Four Months of the Invisible Fiscal Discipline

U.S Treasury latest figures (through May 2017) for Federal Government’s fiscal (I’m)balance are an interesting read this year for a number of reasons. One of these is the promise of fiscal responsibility and cutting of public spending and deficits made by President Trump and the Republicans during last year’s campaigns. The promise that remains, unfortunately, unfulfilled.

In May 2017, cumulative fiscal year-to-date Federal Government receipts amounted to $2.169 trillion, which is $30 billion higher than over the same period of 2016. However, Federal Government’s gross outlays in the first 8 months of this fiscal year stood at $2.602 trillion, of $57.345 billion above the same period of last year.As a result, Federal deficit in the first 8 months of FY 2017 rose to $432.853 billion, up 6.77% y/y or $27.44 billion.

Given that 4 out of the 8 months of FY 2017 were under the Obama Presidency tenure, the above comparatives are incomplete. So consider the four months starting February and ending May. Over that period of 2017, Federal deficit stood at $274.274 billion, up 11.17% or $27.569 billion on February-May for FY 2016. In this period, in 2017, Trump Administration managed to spend $51.9 billion more than his predecessor’s presidency.

You can see more detailed breakdown of expenditures and receipts here: https://www.fiscal.treasury.gov/fsreports/rpt/mthTreasStmt/mts0517.pdf but the bottom line is simple: so far, four months into his presidency, Mr. Trump is yet to start showing any signs of fiscal discipline. Which raises the question about his cheerleaders in Congress: having spent Obama White House years banging on about the need for responsible financial management in Washington, the Republicans are hardly in a rush to start balancing the books now that their party is in control of both legislative and, with some hefty caveats, the executive branches.

2/2/16: Irish Examiner on Electioneering and Fiscal Policy Space

Irish Examiner article on fiscal policy space entertained by various political parties with a couple of comments of my own: http://www.irishexaminer.com/ireland/opposition-claims-fine-gael-and-labour-figures-on-the-economy-just-dont-add-up-379637.html.

3/8/15: Secular Stagnation: Some [Still] Ask if It is Monetary or Technological...

So, is "Secular Stagnation" a Monetary-Financial Problem or a Fundamental-Technological Problem? asks Brad DeLong in his post for Washington Center for Equitable Growth http://equitablegrowth.org/2015/08/01/secular-stagnation-monetary-financial-problem-fundamental-technological-problem/ @equitablegrowth.

Of course, I already tried to answer that question and it is... both. Read here: http://trueeconomics.blogspot.ie/2015/07/7615-secular-stagnation-double-threat.html.

The reason why this makes things uncomfortable for normal economists is that admitting that the problem is two-sided makes it impossible to suggest a solution for dealing with it, except a default one of "let the time heal". And the problem with that is the pesky, nagging suspicion that time can both heal and hurt: if (or when) the next recession, however mild, strikes, in the dual demand- and supply-side secular stagnation scenario, there won't be any bullets left in the Central Banks and fiscal authorities policy 'guns' to fire at the approaching bear. The perceived omnipotence of either 'borrow to spend', 'borrow to invest' and 'print to stimulate' schools of economic thought will be going nowhere.

29/12/2014: Historical Evidence on the Size of Fiscal Adjustments

A recent IMF paper looked at the historical precedents of large scale fiscal adjustments across advanced and emerging economies in the aftermath of the major fiscal crises. Escolano, Julio and Mulas-Granados, Carlos and Terrier, G. and Jaramillo, Laura paper titled "How Much is a Lot? Historical Evidence on the Size of Fiscal Adjustments" (IMF Working Paper No. 14/179. http://ssrn.com/abstract=2519005) argue that "the sizeable fiscal consolidation required to stabilize the debt-to-GDP ratios in several countries in the aftermath of the global crisis raises a crucial question on its feasibility."

To answer this question, the authors look at historical evidence "from a sample of 91 adjustment episodes of countries during 1945-2012 that needed and wanted to adjust in order to stabilize debt to GDP."

"We find that in most cases fiscal adjustment is sizeable and the debt-to-GDP ratio stabilizes by the end of the episode, albeit at higher levels. In at least half of the episodes, countries managed to improve their primary balance by 5.4 percent of GDP (4.8 percent of GDP in cyclically adjusted terms). The sample distributions of the levels and changes in the primary balance (actual and cyclically adjusted) show that, while there are significant differences across advanced and developing countries in terms of the levels of primary balances achieved, the changes in primary balances are comparable across the two groups."

"The fiscal adjustment implemented was enough to close the primary gap in two-thirds of the episodes. This implies that debt stabilized, and in most cases was put on a downward trend." Given the hope-inspiring dynamics above, however, the follow-up is less impressive: "This does not however imply that debt returned to initial levels. While countries kept primary balances well above those observed before the adjustment episode, they did not sustain primary balances at the highest levels for prolonged periods of time. This suggests that countries make substantial efforts to stabilize debt but, once this is achieved, they see room to ease primary balances and do not necessarily seek to get back to the lower initial debt-toGDP ratio."

 "We find that consolidations tended to be larger when the initial deficit was high and adjustment efforts were sustained over time." In addition, "Several factors are found to be significantly associated with the size of fiscal adjustments. …The results also show that fiscal adjustment tended to be higher when accompanied by an easing of monetary conditions (as measured through a reduction in short-term interest rates) and, to a lesser extent, an improvement of credit conditions (measured as the change in credit to the private sector as a percent of GDP), especially in advanced economies."

Couple of figures. In the below,
CAPB: cyclically adjusted primary balance as a percent of potential GDP;
CAB: cyclically adjusted balance as a percent of potential GDP

Note the following interesting facts:

• Ireland's fiscal adjustment post-2009 has been shallower than its adjustment post-1986. 
• The cause of this shallower adjustment was the collapse of the credit markets in Ireland plus the on-going deleveraging of the real economy, not present in 1986 crisis. Also, the factors not accounted for in the list presented in the chart. In 1986 episode such factors were positively contributing to fiscal adjustment. In 2009 episode - they had negative impact. We can only speculate what these factors might have been, but clearly they are not related to external trade, or FDI. Which suggests they were domestic.
• Ireland's adjustment was longer in the 1986 episode than in 2009 episode, but that is because the paper does not go beyond 2012. And the adjustment post-2009 episode is not completed still, even in 2014.
• CAPB is the main driver of adjustment in 2009 episode, and is much larger than in 1986 episode. 
• Ireland's fiscal adjustment since 2009 has been shallower than that of Greece since 2008, Portugal since 2010 and Spain since 2009, although it has been longer running that in Portugal and as long running as in Spain. In fact, the UK - a country that lent funds to Ireland for adjustment - is running similar magnitude fiscal adjustment as Ireland since 2009. A bit rich for us to be claiming to have taken most of fiscal pain in this crisis.

So what does the above tell us about Euro area peripherals' adjustments? IMF paper says that things tend to go well when:

1. adjustment efforts were sustained over time, which suggests we are in for a much longer run than the Government's 'free from IMF' meme suggests;
2. there is an an accompanying easing of monetary conditions, which we do have, courtesy of the ECB, except it is unclear how does this relate to the cases similar to the current crisis where monetary accommodation is simply fuelling asset bubbles and temporarily relieving mortgages pain, while doing nothing for growth; and
3. to a lesser extent, by an improvement in credit conditions, which is yet to materialise, 5 years since 2009.

Not that any of the above will pause the IMF public statements about sustainability of adjustments everywhere and anywhere.

24/10/2013: Fiscal Policy: To Bail Directly or Via Project Finance?

New paper "Macro Fiscal Policy in Economic Unions: States as Agents" by Gerald Carlino, and Robert P. Inman (NBER Working Paper No. 19559 published October 2013) argues that ARRA (the American Recovery and Reinvestment Act) was the US government’s fiscal policy (as opposed to monetary policy QEs programmes) response to the Great Recession. "An important component of ARRA’s $796 billion proposed budget was $318 billion in fiscal assistance to state and local governments."

The study "reaches three conclusions.

1. "First, aggregate federal transfers to state and local governments are less stimulative than are transfers to households and firms. It is important to evaluate the two policies separately." Note: I have argued that in the current extreme case of debt overhang on household side, monetary policy can act directly to monetize debt (effectively cover household debt write downs) instead of attempting tod sliver support for deleveraging via traditional channels (banks --> firms & households, or government --> firms & households).
2. "Second, within intergovernmental transfers, matching (price) transfers for welfare spending are more effective for stimulating GDP growth than are unconstrained (income) transfers for project spending. Matching aid is fully spent on welfare services or middle-class tax relief; half of project aid is saved and only slowly spent in future years." Again, direct injections to households will work better than indirect stimulus via 'infrastructure projects' or neo-Keynesian 'digging of the trenches'… However, this effect for the US is obviously linked to the less open nature of the US economy than say in the case of smaller economies of Europe.
3. "Third, simulations using the SVAR specification suggest ARRA assistance would have been 30 percent more effective in stimulating GDP growth had the share spent on government purchases and project aid been fully allocated to private sector tax relief and to matching aid to states for lower-income support."

From the paper: Federal Aid, Federal Purchases, and Federal Net Revenue: 1947 - 2010*
(Per Capita, 2005 Dollars)

Now, look at the above and give a thought to the fact that Paul Krugman still thinks there was not enough stimulus...

2/10/2013: Euro area sovereign crisis: predictable and reasonably priced?

• Can a model-based credit ratings system be used to predict future fiscal distress? Answer seems to be: yes.
• And have the fiscal downgrades of the euro area peripheral states been predictable in advance? Answer seems to be: yes.
• In other words, are the downgrades warranted by the actual pre-crisis dynamics in the economies? Answer seems to be: yes.
• Lastly, were there useful signals of stress build up that could have been considered by the policymakers prior to the onset of the crisis to alleviate or prevent the collapse of euro area peripherals? Answer seems to be: yes.

A new paper from CEPR (DP9665) titled "Sovereign credit ratings in the European Union: a model-based fiscal analysis" and authored by Vito Polito and Michael R. Wickens (September 2013: http://www.cepr.org/pubs/dps/DP9665) presents "a model-based measure of sovereign credit ratings derived solely from the fiscal position of a country: a forecast of its future debt liabilities, and its potential to use tax policy to repay these." [emphasis is mine]

The authors "use this measure to calculate credit ratings for fourteen European countries over the period 1995-2012. This measure identifies a European sovereign debt crisis almost two years before the official ratings of the credit rating agencies."

Ouch!

Now, the fourteen European (EU14) countries in the model-based calculations are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden and the U.K.

So the main findings are: "…The model-based credit ratings:

1. Anticipate the downgrades of Ireland, Spain, Portugal and the U.K. that occurred from the end of the 2010s; 
2. Downgrade Greece to the lowest rating (coinciding with its highest default probability) from at least mid 2000; 
3. Suggest that the Italian sovereign credit rating has been overstated. 
4. For all other countries, the model-based credit ratings are similar, but not identical, to the credit ratings provided by the CRAs 

"An implication of these results is that the cross-section distribution of the model-based sovereign credit rating is no longer concentrated within the investment grade prior 2010 and it starts changing significantly from 2008. This suggests that a model-based credit rating would have identified and signalled to market participants signs of the impending European sovereign debt crisis well before 2010, when the CRAs first reacted to the crisis."

And the kicker: "A by-product of the methodology proposed in this paper is the quantification of a country's debt limit (measured as its maximum borrowing capacity) and how this changes over time. The numerical analysis suggests that for most EU14 countries the scope for increasing borrowing capacity by increasing taxation is limited as actual tax revenues are similar to tax revenues maximized with respect to tax rates."

In other words, we've run out of the road for taxing our way out of the crisis.

"Our findings suggest that EU14 countries are more likely to be able to raise debt limits and achieve fiscal consolidation by reducing their expenditures than by increasing taxes."

Any wonder? Ok, check out the first link here: http://trueeconomics.blogspot.ie/2013/10/2102013-low-tax-free-market-economy.html

21/8/2013: Ireland's Potemkin Village (Knowledge) Economy

This is an unedited version of my Sunday Times article for August 18, 2013.


This week two news items offered significant implications for the framing of the budgetary policy direction for 2014-2015 and beyond.

First there was the revelation that the Revenue Commissioners are setting up a specialist unit to monitor the use of R&D tax credits by Irish and international firms. The second item was the publication of the Times Higher Education league tables ranking universities on their ability to attract corporate research funding. Both items are linked to the flagship of Irish economic policy that aims to establish R&D and innovation as the drivers of our future economic growth. Both touch upon our sacrosanct Potemkin village: the knowledge economy.


Since the Finance Act 2004, and throughout the crisis, governments have been keen on expanding Irish R&D activities amongst the indigenous enterprises and within the MNCs-dominated sectors. Over the last ten years, the main mechanism for doing so has been through the tax credits that allow the firms to claim R&D related spending. In Budgets 2012 and 2013, the current government significantly broadened the scope and the size of the scheme, and allowed new tax relief for key employees engaged in R&D activities.

Major consultancy firms providing supports for inward FDI, our state development agencies and business lobbyists – all have heralded these tax credits as visionary and imperative to making Ireland an attractive location for R&D.  Such framing of the policy debate makes this week’s news from the Revenue Commissioners significant. In truth, R&D tax credits are long overdue some serious scrutiny. The little evidence we do have suggests that the policy has failed to foster a pro-innovation culture in Irish economy after a decade long application of the scheme.

Firstly, tax credits-supported R&D activities remain too small to make any significant difference at the economy level. In 2004-2010 use of credits rose from EUR80 million to EUR225 million and at their peak, the credits amounted to less than one sixth of one percent of the Irish economy.

This is hardly a result of the scheme being too restrictive. In Ireland, firms are allowed to claim up to 25 percent of their R&D expenditure in credit. In the UK, the maximum is set at just 10 percent for the SMEs. The UK scheme is even more restrictive for larger enterprises. Furthermore, the UK applies strict criteria for SMEs that can qualify for such credits. Yet, UK R&D tax credits cover five times the share of GDP compared to Ireland.

Secondly, our tax credits scheme, along with the rest of the existent R&D and innovation support systems have failed to deliver any serious uplift in the R&D and innovation activities. Instead, these support systems have become a magnet for tax arbitrage by the multinationals and business cost optimization by Irish SMEs.

Take a look at the latest data on private sector R&D spend. Total R&D Expenditure by all enterprises in Ireland in 2012 stood at just EUR1.96 billion or 1.5 percent of our GNP. Between 2009 and 2012 this share of GNP has barely increased, rising only one percentage point, despite the large-scale increases in tax credits and other supports. The miracle of our 'knowledge economy' is, put frankly, quite feeble.

The achievements of 'Innovation Ireland' programmes are even less impressive when we consider what types of activities the R&D investments are being backed by tax credits. In 2007-2012 labour costs and current expenditures associated with R&D activities went up 29-31 percent, just as the economy was undergoing the alleged 'internal devaluation' normally associated with declines in these costs. In 2009-2012, costs associated with Payments for Licenses on Intellectual Property rose 357%. Total capital spending on R&D activities has fallen 30 percent over the same period. All in, CSO data shows that there might be significant cost shifting taking place via R&D tax credits being used to fund companies labour expenditures, as well as to optimise transfer pricing.


From economy's point of view, tax credits are one of the least efficient tools for stimulating investment in R&D and innovation. Research from the EU, published in February this year, examined the effectiveness of special tax allowances, tax credits and reduced income tax rates on R&D output. In assessing the quality of R&D projects, the authors looked at the R&D innovativeness and revenue potential. Using data on corporate patent applications to the European patent office, the authors found that a low tax rate on patent income is instrumental in attracting high quality innovative projects. In contrast, R&D tax credits and tax allowances were not found to have a significant impact on project quality.

International evidence shows that in general, all three forms of incentives are effective in raising the R&D activity. Ireland is one exception. Here, spending on R&D did not increase significantly in 2009-2012 period, rising in nominal terms by just EUR93 million for all companies and in real terms by 1.5 percent. The share of indigenous enterprises in total spending remained relatively stagnant at under 29 percent of total R&D spending. Total increase over 2009-2012 period in R&D spending by Irish-owned firms was only EUR14.5 million.

Tax credits are also reducing the overall transparency in the Irish economy when it comes to our firms performance and Government policies. Irish Government routinely references R&D tax credits as an example of pro-growth enterprise-focused policies. Yet there is no evidence directly linking economic growth, employment and enterprise outcomes to the tax credits.

In a welcome departure from our usual group-think, New Morning IP, the intellectual capital consultancy firm, recently published a report that argued that data shows no link between the introduction of the R&D tax credit and increased patenting activity by indigenous Irish companies. New Morning IP went on to state that “in our experience this tax credit has been used as a way of getting 'free money'…" It was a rare moment of truth in Ireland’s policy Byzantium, where interest groups routinely game the system for quick fixes, subsidies and protection, while ritualistically claiming unverified successes for such policies.

More distortions to the assessment of R&D tax credits effectiveness are induced by the fact that more than three quarters of R&D spend in Ireland is carried out by the MNCs. In some international studies, world-wide R&D investments by MNCs-based in Ireland are counted as if they take place here. One good example is the EU Industrial R&D Investment Scoreboard which ranked Ireland in top 10 EU countries for R&D investment in 2012. Per report, Ireland was host to 14 of the top-spending companies for R&D, but 11 of these were foreign companies and these accounted for 88.5 percent of all R&D spending attributed to Ireland.

In contrast to such reports, the European Patent Office data for 2012 put Ireland in 26th place in terms of total number of patent applications and in per-capita indigenous innovation terms, right between New Zealand and Cyprus. Not quite the achievement one finds promoted in Irish Government speeches and promotional brochures extoling the virtues of ‘Innovation Ireland’.


The above data on R&D investments and patenting activities in Ireland, correlates with the poor performance by the country academic institutions in attracting private sector research funding. The two problems are conjoined twins, born out of the lack of real innovation culture in Irish business.

This week's study by the Times Higher Education, ranked Ireland at the bottom of global league table in terms of private sector funding per academic researcher. Irish academics get an average of just over €6,000 from business research grants and general funds, or 12.5 times less than the world leader, South Korea. These numbers, of course, should be taken with a grain of salt. Lower rankings for Ireland, as well as for a number of other countries, can be in part explained by much broader academic research taking place in our universities, as well as in the bias in funding volumes in favour of specific technical disciplines. They are also reflective of the anti-innovation ethos of Ireland’s domestic enterprises. However, it also highlights the simple fact that Irish academics are often lacking policy and regulatory supports necessary to attract larger research grants.

The main point of all the data is that Irish policy supports for these high value-added activities are excessively focused on targeted tax incentives and are insufficiently aligned with the needs of the innovation-intensive sectors, businesses and entrepreneurs. Over-stimulation with targeted tax credits and exemptions is no substitute for the creation of a real culture of entrepreneurship and innovation.

To develop such culture, Ireland needs more flexible, more responsive public policy formation capable of supporting knowledge-intensive and rapidly evolving sectors, such as biotech, stem cells research, content-based ICT, remote medicine, human interface technology, customizable design and development technologies and so on. While we do have a benign corporate taxation regime, we also need a benign income tax regime to attract and anchor professional researchers and investors in innovation. Equally important are active state policies promoting start-ups and early stage enterprises. These require agile state systems for helping enterprises with issues relating to access to markets, IP, legal and regulatory matters and so on. Last, but not least, Ireland requires more streamlined and investor-friendly equity funding systems, tax laws and regulations and more open systems of IP and business ownership.

Box-out:

The latest report on the European construction industry, published this week by the German Ifo Institute shows that the residential construction sector in Europe will remain on course for further cutbacks with activity expected to hit a 20-years low in 2013-2014. The Institute forecasts show no pick up in residential building sector in Europe until 2015 and the market for new construction bottoming out at 45% below the level in 2006. The proverbial silver lining in the report comes in the Ifo forecasts for Ireland. Ifo experts see residential construction sector here switching to a 5.5% growth in 2014, followed by a 10% expansion in 2015. According to the report, “…it is encouraging that Ireland, which also had to overcome a major crisis in residential construction, is no longer a problem child.” Lets put these seemingly rosy forecasts into perspective. Currently, residential construction in Ireland is down 93 percent on peak year activity, marking the largest drop of any country in the EU. If the Ifo projections hold, by the end of 2015 Irish residential construction sector will be returned to the activity last seen in 2011. Not exactly encouraging, is it?

21/7/2012: Sunday Times July 1, 2012 - Not a 'stimulus' again...

An unedited version of my Sunday Times article from July 1.

One of the points of contention in modern economics is the role of fiscal spending shocks on economic growth. Various empirical estimates suggest Irish fiscal multiplier at 0.3-0.4, implying that for every euro of additional Government spending we should get a €1.30-€1.40 in GDP uplift. However, these are based on models that do not take into the account our current conditions. Despite this fact, Irish policymakers continue talking about the need for Government to stimulate the economy, while various think tanks continue to argue that Ireland should abandon fiscal stabilization or more aggressively tax private incomes to deliver a boost to our spending.

International research on this matter is more advanced, although it too leaves much room for a debate.

June 2012 IMF working paper titled “What Determines Government Spending Multipliers?” by Giancarlo Corsetti, Andre Meier and Gernot Muller (June 2012) studied the effects of government spending on the economy under the variety of macroeconomic conditions.

What IMF researchers did find is that the initial conditions for stimulus do matter in determining its effectiveness – an issue generally ignored in the domestic debates about the topic.

Under a pegged exchange rate regime, similar to Ireland’s but still allowing for some exchange rate and interest rates adjustments, trade balance is likely to worsen in response to a fiscal stimulus, while output can be expected to rise. Domestic investment and consumption will decline in response to the positive stimulus shock. These factors are likely to be even more pronounced in the case of Ireland’s currency ‘peg’ that permits no adjustment in real exchange rate except via domestic inflation.

The role of weak public finances in determining the effectiveness of fiscal spending stimulus is also revealing. The study defines fiscally constrained conditions as the gross government debt exceeding 100 percent of GDP and/or government deficit in excess of 6 percent of GDP. Both of these are present in the case of Ireland. On average, the study shows that consumption response to fiscal stimulus is negative-to-zero following the stimulus, but becomes positive in the medium term. Impact on output and investment is negative. The core reasons for the adverse effects of fiscal expenditure on economic performance are losses from stimulus through increased imports of goods and services by the State, internal re-inflation of the economy through inputs prices, plus the expectation from the private sector consumers and producers of higher future taxes required to cover public spending increases.

In the case when financial crisis is present, increase in Government spending results in a positive and strong output expansion, rise in consumption and, with some delay, rise in investment. However, net exports still fall sharply and the stimulus leads to the inflationary loss of external competitiveness in the economy.

The problem with the above results is that the IMF study still does not consider what happens to a fiscal stimulus in a country like Ireland, combining a strict currency peg, exclusive reliance on trade surplus for growth generation and characterized by historically high levels of fiscal imbalances and financial system collapse. In other words, even the IMF research as imprecise as it is, is far from conclusive.

These are non-trivial problems in the case of Ireland. Official estimates for fiscal policy multiplier in this country range between 0.38 (European Commission) and 0.4 (Department of Finance).  These are based on relatively simplistic models and are, therefore, likely to be challenged by the reality of our current conditions. A more recent study from the Deutsche Bank cites Irish fiscal multiplier of 0.3 without specifying the methodology used in deriving it. Either way, no credible estimate known to me puts the fiscal multiplier above 0.4 for Ireland.

In short, Government stimulus is not exactly an effective means for raising output, even at the times when the economy can take such stimulus without demolishing the Exchequer balancesheet. And lacking precision in estimating the fiscal multiplier, the entire argument in favor of fiscal stimulus is an item of faith, not of scientific analysis.

In my opinion, Ireland does not need a Government expenditure boost. Instead we need a policy shift toward stimulating domestic and international investment, plus the public expenditure rebalancing away from current spending toward some additional capital investment.

Quarterly National Accounts clearly show that the problem with the Irish economy is not the fall off in private or public consumption, but a dramatic collapse in private investment. While private consumption expenditure in Ireland has declined 13.6% relative to the economy’s peak in 2007, net expenditure by Government is down 12.0% (including a decline in public investment). However, overall private investment in the economy is down 67%. 2011 full year capital investment was, unadjusted for inflation, at the level last seen in 1997, while consumption is down ‘only’ to 2005-2006 levels and Government spending is running at around 2006 levels. With nominal GDP falling €33.5 billion between 2007 and 2011, our investment declined €32.6 billion over the same period, personal consumption dropped €12.8 billion, while net Government expenditure on goods and services is down a mere €3.4 billion. Between 2007 and 2011, total voted current expenditure by the Government rose 12%, while total net voted capital expenditure fell 44%.

Adding a Government investment stimulus of €2 billion would have an impact of raising net capital expenditure by the Exchequer in 2012-2014 to the levels 22.4% below those in 2007 and will lift our GDP by under 1.8% according to the EU measure of fiscal multiplier. However, factoring in deterioration in the current account as estimated by the IMF, the net effect might be closer to zero. Based on IMF model re-parameterized to our current conditions, the net result can be as low as 0.1% increase in GDP.

Again, the problem here is the effect of capital spending on our imports. As a highly open economy, Ireland imports most of what it consumes. This includes Government and private capital investment goods – machinery, materials and know-how relating to construction, assembly, installation and operation of modern transport systems, energy and ICT, etc. Some of these imports will continue well beyond the period of actual investment. In other words, using fiscal stimulus to finance public capital investment risks providing some short-term supports for lower skilled Irish labour and few professionals with the lion’s share of expenditure going to the multinational companies supplying capital goods and services into Ireland from abroad.

The fiscal cost of such a stimulus, however, would be exceptionally high. Between 2008 and 2011, Irish Government has managed to cut €4.3 billion off the annual capital spending bill while increasing current spending by €662 million. This resulted in total voted spending reduction of only €3.6 billion. A stimulus of €2 billion on capital investment side will throw the state back to 2009 levels of expenditure, erasing two years worth of consolidation, unless it is financed out of cutting current spending and transferring funds to capital programmes. The extra capital spending will lead to further retrenchment in private consumption and investment, as households and businesses will anticipate relatively rapid uplift in tax burdens to recover the momentum to the fiscal consolidation. This, coupled with already committed €8.6 billion in further fiscal adjustments in the next three years, will further reduce growth effects of the stimulus and shorten its positive effects duration.

Overall, the right course of policies to pursue today requires restructuring of the debt burden carried by the real economy, starting with household debts and stimulating, simultaneously domestic and foreign investment into small and medium enterprises and start-ups. Instead of focusing on the less labor-intensive MNCs’ investments, we need to put in place tax and institutional incentives to increase inflow of equity capital, not new debt, to Irish businesses. Such incentives must target two areas of investment: investment into activities associated with new jobs creation by the SMEs, plus investment into strategic repositioning and restructuring of Irish SMEs to put them onto exporting path.

Lastly, if we really do want to have a stimulus debate, the discussion should not be focusing on creating a net increase in the public expenditure, but on the potential for reallocating some of the funds from the current expenditure side of the Exchequer balancesheet to capital investment.

  

Box-out:

The latest Index of Failed States published this week ranks Ireland the 8^th best state in the world. Our overall score in the league table was helped by extremely high performance in some specific indicators. Surprisingly, according to the Index authors, we are having a jolly good time throughout the crisis. Allegedly, Ireland’s problem in terms of emigration is relatively comparable to that found in New Zealand and Germany. Our economy, heavily dominated by MNCs exports in pharma, medical devices and ICT sectors ranks higher in terms of the balance of economic development than majority of the advanced economies that have more diversified and domestically anchored sources of growth. Our ‘balanced development’ model, having led us into the current crisis, is allegedly more sustainable, according to the Index, than that of Canada – a country that escaped the Great Recession. In terms of poverty and economic decline we are better off than France, Japan and New Zealand, which had a much less severe recession than Ireland over the last 5 years. In quality of public services, we are better than Belgium and the UK, and are ranked as highly as Canada. And our elites are less factionalized than those in the vast majority of the states of the Euro area. In short, according to the Foreign Policy, index publisher, Ireland is a veritable safe haven within a tumultuous euro zone, comparable to New Zealand, Luxembourg, Norway and Switzerland. We rank well ahead of Canada, Australia, the UK and the US, as well as all other states that currently receive tens of thousands of Irish emigrants.